    [Senate Hearing 115-541]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 115-541

                         FTC STAKEHOLDER PERSPECTIVES:
     REFORM PROPOSALS TO IMPROVE FAIRNESS, INNOVATION, AND CONSUMER WELFARE

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

                                    HEARING

                                   BEFORE THE

                      SUBCOMMITTEE ON CONSUMER PROTECTION,
                           PRODUCT SAFETY, INSURANCE,
                               AND DATA SECURITY

                                     OF THE

                             COMMITTEE ON COMMERCE,
                          SCIENCE, AND TRANSPORTATION
                              UNITED STATES SENATE

                         ONE HUNDRED FIFTEENTH CONGRESS

                                 FIRST SESSION

                                   __________

                               SEPTEMBER 26, 2017

                                   __________

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

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                    Available online: http://www.govinfo.gov

                                   __________

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           SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                         ONE HUNDRED FIFTEENTH CONGRESS

                                 FIRST SESSION

                       JOHN THUNE, South Dakota, Chairman
    ROGER F. WICKER, Mississippi         BILL NELSON, Florida, Ranking
    ROY BLUNT, Missouri                  MARIA CANTWELL, Washington
    TED CRUZ, Texas                      AMY KLOBUCHAR, Minnesota
    DEB FISCHER, Nebraska                RICHARD BLUMENTHAL, Connecticut
    JERRY MORAN, Kansas                  BRIAN SCHATZ, Hawaii
    DAN SULLIVAN, Alaska                 EDWARD MARKEY, Massachusetts
    DEAN HELLER, Nevada                  CORY BOOKER, New Jersey
    JAMES INHOFE, Oklahoma               TOM UDALL, New Mexico
    MIKE LEE, Utah                       GARY PETERS, Michigan
    RON JOHNSON, Wisconsin               TAMMY BALDWIN, Wisconsin
    SHELLEY MOORE CAPITO, West Virginia  TAMMY DUCKWORTH, Illinois
    CORY GARDNER, Colorado               MAGGIE HASSAN, New Hampshire
    TODD YOUNG, Indiana                  CATHERINE CORTEZ MASTO, Nevada
                           Nick Rossi, Staff Director
                     Adrian Arnakis, Deputy Staff Director
                        Jason Van Beek, General Counsel
                     Kim Lipsky, Democratic Staff Director
                  Chris Day, Democratic Deputy Staff Director
                          Renae Black, Senior Counsel

                                    ------

      SUBCOMMITTEE ON CONSUMER PROTECTION, PRODUCT SAFETY, INSURANCE, AND
                                 DATA SECURITY

    JERRY MORAN, Kansas, Chairman        RICHARD BLUMENTHAL, Connecticut,
    ROY BLUNT, Missouri                      Ranking
    TED CRUZ, Texas                      AMY KLOBUCHAR, Minnesota
    DEB FISCHER, Nebraska                EDWARD MARKEY, Massachusetts
    DEAN HELLER, Nevada                  CORY BOOKER, New Jersey
    JAMES INHOFE, Oklahoma               TOM UDALL, New Mexico
    MIKE LEE, Utah                       TAMMY DUCKWORTH, Illinois
    SHELLEY MOORE CAPITO, West Virginia  MAGGIE HASSAN, New Hampshire
    TODD YOUNG, Indiana                  CATHERINE CORTEZ MASTO, Nevada

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on September 26, 2017...............................     1
    Statement of Senator Moran.......................................     1
        Prepared statement...........................................     2
    Statement of Senator Blumenthal..................................     3
        Letter dated September 25, 2017 to Hon. Richard Blumenthal
          from Paul Zurawski, Senior Vice President, External
          Affairs, Equifax...........................................    61
    Statement of Senator Inhofe......................................    63
    Statement of Senator Capito......................................    64
    Statement of Senator Young.......................................    66
    Statement of Senator Hassan......................................    68
    Statement of Senator Klobuchar...................................    70
    Statement of Senator Markey......................................    72
    Statement of Senator Cortez Masto................................    74

                                   Witnesses

    William MacLeod, Partner, Kelley Drye & Warren LLP...............     5
        Prepared statement...........................................     7
    Lydia Parnes, Esq., Partner, Wilson Sonsini Goodrich & Rosati PC.    12
        Prepared statement...........................................    14
    Jessica Rich, Vice President, Consumer Policy and Mobilization,
      Consumer Reports...............................................    18
        Prepared statement...........................................    19
    Berin Szoka, President, TechFreedom..............................    23
        Prepared statement...........................................    25

                                    Appendix

    Joshua D. Wright, Professor, George Mason University School of
      Law and Director, Global Antitrust Institute, prepared
      statement......................................................    79
    Scott Smith, President, Precious Metals Association of North
      America, prepared statement....................................    94
    Report dated May 2016 from Berin Szoka and Geoffrey A. Manne
      entitled, ``The FTC Trade Commission: Restoring Congressional
      Oversight of the Second National Legislature--An Analysis of
      Proposed Legislation...........................................    96
    Presidential Transition Report: The State of Antitrust
      Enforcement dated January 2017 from the American Bar
      Association Section of Antitrust Law...........................   162
    Comments dated September 11, 2017 from Cory L. Andrews and
      Richard A. Samp of the Washington Legal Foundation to the
      Federal Trade Commission concerning Proposed Consent Agreements
      and Request for Public Comments in Zero-VOC Paint Claims Cases.   205
    Letter dated September 26, 2017 to Hon. Jerry Moran and Hon.
      Richard Blumenthal from Marc Rotenberg, EPIC President;
      Caitriona Fitzgerald, EPIC Policy Director; and Christine
      Bannan, EPIC Policy Fellow.....................................   213

                         FTC STAKEHOLDER PERSPECTIVES:
                     REFORM PROPOSALS TO IMPROVE FAIRNESS,
                        INNOVATION, AND CONSUMER WELFARE

                                  ----------

                          TUESDAY, SEPTEMBER 26, 2017

                                   U.S. Senate,
          Subcommittee on Consumer Protection, Product
                  Safety, Insurance, and Data Security,
            Committee on Commerce, Science, and Transportation,
                                                        Washington, DC.
        The Subcommittee met, pursuant to notice, at 2:20 p.m. in
    room SR-253, Russell Senate Office Building, Hon. Jerry Moran,
    Chairman of the Subcommittee, presiding.
        Present: Senators Moran [presiding], Blumenthal, Inhofe,
    Capito, Young, Hassan, Klobuchar, Markey, Cortez Masto, Booker,
    and Fischer.

                OPENING STATEMENT OF HON. JERRY MORAN,
                        U.S. SENATOR FROM KANSAS

        Senator Moran. The hearing will come to order. Good
    afternoon, and welcome to today's hearing on FTC Stakeholder
    Perspectives: Reform Proposals to Improve Fairness, Innovation,
    and Consumer Welfare.
        This is our second attempt at this hearing, and many of our
    panelists have been polite and kind enough to return. In fact,
    last September, the full Committee heard testimony from the
    FTC's three sitting Commissioners at the time: Chairman
    Ramirez, Commissioner Ohlhausen, and Commissioner McSweeny. We
    had planned to convene a Subcommittee hearing on that same day,
    but had to cancel due to scheduling conflicts. The canceled
    hearing would have consisted of a panel of stakeholders
    offering their own perspectives about the Commission.
        Today we will hear from Berin Szoka, President of
    TechFreedom, one of the witnesses who was scheduled to testify
    last September, as well as three former directors of the FTC's
    Bureau of Consumer Protection: William MacLeod, Lydia Parnes,
    and Jessica Rich. We thank these former FTC officials for their
    public service and all the witnesses for appearing today to
    offer their insights on how we can improve the work of the
    Commission.
        For over a century, the FTC has been protecting competition
    and consumers by enforcing the Nation's antitrust laws and
    combating deception and unfairness in a wide variety of
    industries. Through its efforts, the FTC has often helped to
    prevent anticompetitive practices that stifle innovation, lower
    quality, or raise prices. It has also helped to ensure that
    consumers can make informed decisions based on accurate
    advertising and avoid injury from fraud and unfair trade
    practices, such as unauthorized credit card charges.
        Although the FTC's efforts have produced many benefits for
    consumers and the economy, this Committee and others have
    questioned the way it sometimes exercises its authority under
    Section 5 of the FTC Act, which addresses unfair and deceptive
    acts in commerce. Others have argued that the FTC sometimes
    conducts investigations and issues orders that impose
    unnecessary costs, and it does not always provide adequate
    guidance to businesses seeking to comply with the laws the FTC
    enforces.
        These concerns have sparked numerous proposals for
    reforming the FTC. For example, last December, the House Energy
    and Commerce Committee reported H.R. 5510, the FTC Process and
    Transparency Reform Act of 2016, a bill incorporating eight
    separate reform bills designed to clarify the FTC's unfairness
    authority, improve the way the FTC operates, foster greater
    transparency, and reduce unnecessary costs.
        Similarly, in January 2017, earlier this year, the American
    Bar Association Antitrust Section issued a 60-page Presidential
    Transition Report. It makes a number of recommendations for
    improving the FTC's handling of antitrust and consumer
    protection issues, including repeal of the common carrier
    exemption and better coordination on privacy between the FTC
    and other agencies, greater transparency and fairness in the
    enforcement process, and more judicious use of civil
    investigative demands, better communication with investigation
    targets, less burdensome boilerplate order provisions, and
    monetary relief proportional to the injury caused and the
    defendant's culpability.
        The report also urges the FTC to provide additional
    guidance on topics relating to unfair practices, data security,
    monetary remedies, advertising interpretation, and ``clear and
    conspicuous'' disclosure requirements. Other private groups,
    such as TechFreedom, have also proposed various reforms
    designed to address concerns about the FTC.
        The FTC has already taken steps to address some of the
    concerns addressed by the House bill, by the ABA Report, and
    other stakeholders. Specifically, this year, the Commission
    adopted several initiatives to eliminate waste and unnecessary
    regulation, streamline agency information demands, improve
    transparency, and promote economic liberty.
        As we look ahead to the White House's nominations of
    candidates to serve as FTC Commissioners, it is especially
    important for the Committee to provide a forum to address these
    issues.
        We look forward to hearing the testimony of our witnesses
    and to engaging in a dialogue on the best ways to advance
    reforms of the Commission.
        [The prepared statement of Senator Moran follows:]

        Prepared Statement of Hon. Jerry Moran, U.S. Senator from Kansas
        Good afternoon, and welcome to today's hearing on ``FTC Stakeholder
    Perspectives: Reform Proposals to Improve Fairness, Innovation, and
    Consumer Welfare.''
        Last September, the full Committee heard testimony from the FTC's
    three sitting commissioners at the time: Chairman Ramirez, Commissioner
    Ohlhausen (OL'--how--sin), and Commissioner McSweeny. We had planned to
    convene a Subcommittee hearing on the same day, but had to cancel it
    due to scheduling conflicts. The cancelled hearing would have consisted
    of a panel of stakeholders offering their own perspectives about the
    Commission.
        Today we will hear from Berin Szoka, President of TechFreedom, one
    of the witnesses who was scheduled to testify last September, as well
    as three former directors of the FTC's Bureau of Consumer Protection:
    William MacLeod, Lydia Parnes, and Jessica Rich. We thank these former
    FTC officials for their public service and all of the witnesses for
    appearing today to offer their insights on how to improve the
    Commission.
        For over a century, the FTC has been protecting competition and
    consumers by enforcing the Nation's antitrust laws and combatting
    deception and unfairness in a wide variety of industries. Through its
    efforts, the FTC has often helped to prevent anticompetitive practices
    that stifle innovation, lower quality or raise prices. It has also
    helped ensure that consumers can make informed choices based on
    accurate advertising, and avoid injury from fraud and unfair trade
    practices, such as unauthorized credit card charges.
        Although the FTC's efforts have produced many benefits for
    consumers and the economy, this Committee and others have questioned
    the way it sometimes exercises its authority under Section 5 of the FTC
    Act, which addresses unfair and deceptive acts in commerce. Others have
    argued that the FTC sometimes conducts investigations and issues orders
    that impose unnecessary costs, and that it does not always provide
    adequate guidance to businesses seeking to comply with the laws the FTC
    enforces.
        These concerns have sparked numerous proposals regarding how to
    reform the FTC. For example, last December the House Energy and
    Commerce Committee favorably reported H.R. 5510, the FTC Process and
    Transparency Reform Act of 2016, a bill incorporating eight separate
    reform bills designed to clarify the FTC's unfairness authority,
    improve the way the FTC operates, foster greater transparency and
    reduce unnecessary costs.
        Similarly, in January 2017, the American Bar Association Antitrust
    Section issued its 60-page Presidential Transition Report. It makes a
    number of recommendations for improving the FTC's handling of antitrust
    and consumer protection issues, including repeal of the common carrier
    exemption and better coordination on privacy between the FTC and other
    agencies, greater transparency and fairness in the enforcement process,
    more judicious use of civil investigative demands, better communication
    with investigation targets, less burdensome ``boilerplate'' order
    provisions and monetary relief proportional to the injury caused and
    the defendant's culpability.
        The report also urges the FTC to provide additional guidance on
    topics relating to unfair practices, data security, monetary remedies,
    advertising interpretation and ``clear and conspicuous'' disclosure
    requirements. Other private groups, such as TechFreedom, have also
    proposed various reforms designed to address concerns about the FTC.
        The FTC has already taken steps to address some of the concerns
    addressed by the House bill, the ABA Report, and other stakeholders.
    Specifically, this year the Commission adopted several initiatives to
    eliminate waste and unnecessary regulation, streamline agency
    information demands, improve transparency and promote economic liberty.
        As we look ahead to the White House's nominations of candidates to
    serve as FTC commissioners, it is especially important for this
    Committee to provide a forum to address these issues.
        We look forward to hearing the testimony of our witnesses this
    afternoon and to engaging in a dialog on the best ways to advance
    reforms at the Commission.
        With that, I will turn to the Ranking Member, Senator Blumenthal,
    for his opening statement.

        Senator Moran. With that, I turn to the Ranking Member,
    Senator Blumenthal, for his opening statement.

                 STATEMENT OF HON. RICHARD BLUMENTHAL,
                     U.S. SENATOR FROM CONNECTICUT

        Senator Blumenthal. Thank you, Mr. Chairman. Thank you very
    much for holding this hearing.
        This hearing is critical in reviewing and overseeing the
    work of the Federal Trade Commission in today's rapidly
    evolving world and economy. Congress has long empowered and
    directed the FTC to protect consumers from unfair, deceptive
    acts or practices, and unfair methods of competition.
        Since the FTC Act was signed into law exactly 103 years ago
    today, incredibly today, the FTC has proved to be a nimble and
    agile and sometimes aggressive agency with the experience and
    expertise necessary to stand up for consumers and promote
    competitive markets and combat a variety of fraud and other
    deceptive activity. I know from my personal experience during
    my service for many years as attorney general of the State of
    Connecticut how strong and important a partner it can be and
    should be, even more often than it is, because there are times
    that the FTC comes down much too softly on industries it
    oversees, putting the very consumers it is charged with
    protecting at risk and jeopardy from the harms that it has
    responsibility to stop.
        Last December, to give you one example, the FTC finalized a
    profoundly flawed consent order that permits used car dealers
    to advertise that they have rigorously inspected their vehicles
    for safety, including that they are, quote/unquote, certified,
    even if the vehicle has unrepaired safety recalls. The
    settlement had really inadequate and feeble disclosure
    requirements that failed to fully inform and, worse, create a
    kind of safe harbor for unscrupulous dealers. Far from
    protecting consumers, this settlement enables dealers to
    continue selling dangerous cars with, for example, deadly
    Takata airbags to unsuspecting buyers. The sale of any car, any
    car, with an unrepaired safety recall is a threat to public
    safety, not just the driver, not just the owner, but anybody
    out there driving alongside or on the road with such a car.
        The FTC should have simply prohibited the defendants from
    advertising the sale of used cars with unrepaired recalls. The
    courts are clear that the FTC Act empowers the FTC to do more
    than simply admonish defendants to go sin no more, so to speak,
    but to proactively prevent defendants from engaging in similar
    deceptive practices in the future through so-called fencing-in
    provisions.
        I was also dismayed, quite honestly, by the FTC's apparent
    inaction with respect to Google, even as evidence mounts
    suggesting Google has repeatedly and consistently abused
    competition law. This summer, the EU fined Google a record $2.7
    billion for abusing its position as the world's dominant search
    engine by pushing smaller rivals' results down in search
    rankings and manipulating the results to promote its own
    services. The FTC has a duty to investigate and discipline
    Google or any other company for any illegal actions that may
    have unfairly disadvantaged competitors and limited consumer
    choice. Our economy, particularly when it comes to the rapidly
    growing tech sector, needs robust competition to thrive and
    ensure consumer protection, and the FTC ought to be an engine
    and a driver using its muscle to that end.
        Equally important are potential limits to the FTC's
    authority that may constrain its ability to proactively and
    aggressively protect consumers, and that has been made
    painfully clear by Equifax's recent disclosure of a massive
    data breach exposing the personal information of up to 143
    million Americans, including their Social Security, birthdates,
    address histories, and driver license numbers, among other
    sensitive data.
        If the entities that hold our data can't be trusted to
    protect it, then the government needs to have the right tools
    to not only go after the hackers and thieves, but also the
    companies that treat our financial lives with such abandon,
    negligence, and carelessness.
        Let me just say the FTC has brought numerous enforcement
    actions over the years against companies for lax data security
    practices, but this piecemeal, after-the-fact, ad-hoc approach
    would be better served if the Commission had a clear and
    unlimited civil penalty authority and the ability to prescribe
    rules requiring reasonable security practices in the first
    place.
        I will push for a measure that I propose that would provide
    such authority, expanded FTC powers. I also urge that the
    Justice Department proceed vigorously and promptly with a
    criminal investigation, and that any other agency with
    jurisdiction and authority in the Equifax matter seek penalties
    that protect consumers, deter these kinds of negligent and lax
    practices in the future, and send a message that data security
    has to be a number one priority for anybody having our
    information, and any kinds of negligence or lax practices will
    not be tolerated.
        The FTC has demonstrated time and again it knows how to
    play this critical role in today's economy, and I hope that it
    will continue to do so and work with this Committee.
        Thank you, Mr. Chairman.
        Senator Moran. Thank you, Senator Blumenthal.
        Now, again, we welcome our panel of witnesses. And let me
    introduce them. Mr. William MacLeod. He is a partner of Kelley
    Drye and a former Director of the FTC's Bureau of Consumer
    Protection.
        Welcome.
        Ms. Lydia Parnes is a partner with Wilson Sonsini Goodrich
    & Rosati and former Director of the FTC's Bureau of Consumer
    Protection. Ms. Jessica Rich, Vice President, Policy and
    Modernization, Consumer Union, and former Director of the FTC's
    Bureau of Consumer Protection. And Mr. Berin Szoka, President
    of TechFreedom.
        And with that, I will turn to Mr. MacLeod.

                STATEMENT OF WILLIAM MacLEOD, PARTNER,
                        KELLEY DRYE & WARREN LLP

        Mr. MacLeod. Thank you, Mr. Chairman, Ranking Member
    Blumenthal, and members of the Committee. It is a pleasure and
    a privilege to be here today.
        As you mentioned, I am with the law firm of Kelley Drye &
    Warren, but I am speaking today solely in my own capacity. I am
    not representing Kelley Drye or any client of Kelley Drye or
    any other institution for that matter. I'm here today to
    discuss two institutions that are very dear to me: the first is
    the Federal Trade Commission, where I spent 8 years, about 4 of
    which as Director of the Bureau of Consumer Protection; and the
    second is the Antitrust Section of the American Bar
    Association. I had the privilege of chairing that section last
    year, and I was instrumental in assembling the Task Force about
    which the Chairman spoke, and that was the Task Force to report
    on the state of antitrust and consumer protection enforcement
    and make some recommendations. We are here today to talk about
    some of those recommendations.
        But I'd like to start with a story of a case that I handled
    19 years ago for a client whose name I won't mention. It was
    almost exactly 19 years ago when the Federal Trade Commission
    and eight states, not including the State of Connecticut,
    brought an action against my client, and the company had just
    introduced a pesticide product. It was a product that until
    that time was available only through professionals; you had to
    subscribe to an expensive exterminator if you wanted to have
    this product for your home.
        The Federal Trade Commission brought an action against the
    company, not because it alleged anything deceptive in what the
    company had advertised, but, rather, because it believed the
    company did not have substantiation in support of its claims.
    Its claims actually came right off of the label of the product,
    which the Environmental Protection Agency had approved, but the
    Federal Trade Commission staff and the Federal Trade Commission
    ultimately disagreed that the company had enough substantiation
    for those claims, and even though they did not disagree with
    any claim the company made, they did think the company should
    have made more claims, they brought a case, which the company
    ultimately settled.
        That was 19 years ago. That order still exists today. This
    company is under a regulation of the Federal Trade Commission.
    Its competitors aren't under this regulation, but this order of
    about 25 pages, which is now older than some of the voters who
    will be going to the polls this fall in the elections, still
    governs the conduct of the company that simply introduced a
    product to empower consumers. Unless the company mounts an
    expensive petition or a court motion to modify or terminate
    this order, it will be around in 2040 when the children of
    today's new voters are going to the polls the first time.
        I never told this story to the Task Force, the ABA
    Antitrust Section Task Force, but the three lessons I learned
    in that case and that my client learned the hard way are
    exactly the highlights that I want to feature in the report.
    And the first is the age of orders of the Federal Trade
    Commission. It is a growing body of regulation that is
    permanent in the case of court orders, is 20 years long in the
    case of administrative orders, and it is very hard for a
    company to make those go away.
        We propose in our recommendations and report that the FTC
    impose sunsets in all orders. The Antitrust Division of the
    Department of Justice does that. Other agencies of the Federal
    Government do that. They do not have the growing body of
    regulations.
        Second, the story of the disagreement between the
    Environmental Protection Agency and the Federal Trade
    Commission is a story that we see today. It is very difficult
    for a company to organize its affairs and engage in pro-
    competitive activity if it doesn't know the rules, and, most
    importantly, if the referees that govern its conduct disagree
    as to what the rules are.
        And the third point is the importance of guidance from the
    Federal Trade Commission, especially guidance as to the
    boundaries of advertising: What should be illegal and what
    should not be illegal? I'm not talking about messages to the
    con artists; they are not going to pay attention. But the good
    and honest companies want to know what rules they should abide
    by, and the Federal Trade Commission can help them with more
    guidance on how it interprets ads.
        Thank you very much.
        [The prepared statement of Mr. MacLeod follows:]

                prepared statement of William MacLeod, Partner,
                            Kelley Drye & Warren LLP
    Summary
        Thank you for inviting me to testify today. I am William MacLeod, a
    partner in the law firm Kelley Drye & Warren LLP. I will be speaking
    solely in my individual capacity today and not as an official
    representative of any organization.
        It was my honor to serve as Chair of the Section of Antitrust Law
    of the American Bar Association for the 2016-2017 ABA year, and my
    privilege to join my predecessor, Roxann Henry, in appointing a Task
    Force to examine the state of antitrust and consumer protection in the
    United States and to make recommendations to improve enforcement. The
    Section's Presidential Transition Task Force issued a comprehensive
    Report,\1\ which was published in the Antitrust Source \2\ and is
    appended to this Statement. The views expressed in that Report are
    those of the Antitrust Section, and they have not been approved by the
    House of Delegates or the Board of Governors of the American Bar
    Association. Therefore, unless otherwise noted, the Section's views
    expressed in the Report should not be construed as representing the
    position of the Association.
    ---------------------------------------------------------------------------
        \1\ American Bar Association, Section of Antitrust Law,
    Presidential Transition Report: The State of Antitrust Enforcement
    (January 2017), https://www.americanbar.org/content/dam/aba/
    publications/antitrust_law/
    state_of_antitrust_enforcement.authcheckdam.pdf [hereinafter
    ``Report''].
        \2\ Available at: https://www.americanbar.org/content/dam/aba/
    publishing/antitrust_source/jan17_full_source.authcheckdam.pdf
    ---------------------------------------------------------------------------
        The Section of Antitrust law is the leading professional
    organization for the practice of laws pertaining to antitrust and
    competition, trade regulation, consumer protection and economics. Its
    members include attorneys and non-lawyers from private law firms, in-
    house counsel, non-profit organizations, consulting firms, Federal and
    state government agencies, as well as judges, professors and law
    students. The Section's objectives boil down to four words that appear
    on its logo: Promoting Competition/Protecting Consumers. These were the
    objectives that guided the work of the Task Force.
        For the composition of the Task Force, we selected attorneys
    representing defendants and plaintiffs, a member of the Federal
    judiciary, and law and economics scholars from the Nation's leading
    universities. More than half of the members had served in leadership
    positions in the Antitrust Division of the Department of Justice or the
    Federal Trade Commission, including several former Assistant Attorneys
    General and Commissioners as well as officials from every
    administration over the last four decades.\3\
    ---------------------------------------------------------------------------
        \3\ Report at 1. The Task Force was co-chaired by Theodore Voorhees
    and Leah Brannon. Samantha Knox served as the Reporter and Organizer.
    Members included Roxane Busey, Mary Ellen Callahan, Dennis Carlton,
    Michael A. Carrier, Paul T. Denis, Douglas H. Ginsburg, Louis Kaplow,
    Donald C. Klawiter, William Kovacic, Jon Leibowitz, Abbott B. Lipsky,
    Jr., A. Douglas Melamed, Fiona Scott Morton, James H. Mutchnik, Richard
    Parker, Lydia Parnes, James Rill, and Joel Winston. Megan Browdie
    served as the ABA Young Lawyer Division's Representative to the Task
    Force.
    ---------------------------------------------------------------------------
        At the outset, it should be noted that the Task Force found that
    the agencies have been in good hands, and that enforcement should
    remain ``firmly tethered'' to the statutory basis of enforcement.\4\
    Recommending fidelity to the law might seem superfluous, but it was an
    important response to proposals for radical reorientation of
    enforcement policy. Prohibiting ``unfair'' and ``deceptive'' acts,
    practices and methods of competition is essential to consumer welfare,
    but the proscriptions do not have obvious definitions, which makes them
    tempting tools for tinkering with the outcomes of a competitive market.
    Clear and transparent enforcement policy is therefore key to
    distinguishing legal from illegal conduct. By the same token, judicious
    application of that policy in deciding when and where to prosecute is
    critical to obtaining the economic benefits of the Commission's
    interventions. The Report advises the agency to recognize the enormous
    impact a prosecution can have on a company, and to focus its ``limited
    enforcement resources on cases involving significant consumer harm.''
    \5\ This is sound advice. Pursuing minor infractions and challenging
    economic activity outside its statutory authority not only can distract
    an agency from its mission, but can be hazardous to an agency
    itself.\6\
    ---------------------------------------------------------------------------
        \4\ Id. at 2.
        \5\ Id. at 27.
        \6\ In 1969, and again in 1980, the Commission faced intense
    criticism for straying from its mission. An ABA Report on the FTC in
    1969 was instrumental in refocusing the Commission. AM. BAR ASS'N,
    REPORT OF THE ABA COMMISSION TO STUDY THE FEDERAL TRADE COMMISSION
    (1969) (commissioned by President Nixon in response to a critique of
    the FTC by researchers assembled by Ralph Nader, COX, R. FELLMETH & J.
    SCHULZ, THE CONSUMER AND THE FEDERAL TRADE COMMISSION (1969). A decade
    later, President Carter intervened to rescue the Commission from
    Congressional repudiation. See, e.g., MacLeod & Rogowsky, ``Consumer
    Protection under the Reagan Administration,'' in Regulation and the
    Reagan Years, R. Meiners and B. Yandle, eds. (Holmes & Meier, New York,
    1989)
    ---------------------------------------------------------------------------
        The Report's recommendations covered both competition and consumer
    protection, and many of the observations apply to both sides of
    Commission enforcement, but my testimony today will focus on the
    consumer side of the agency. For years, consumer protection has
    consumed more resources, generated more cases, and garnered more public
    attention than the competition mission.\7\ In 2016, for example,
    consumer protection actions and orders outnumbered their competition
    counterparts by more than two to one.\8\ Consumers lodged three million
    complaints last year with the Commission,\9\ and they have registered
    over 226 million phone numbers on the Commission's Do Not Call
    Registry.\10\ From care labels on clothes to disclosures in
    advertisements to privacy and security of personal information,
    consumers encounter the effects of FTC regulations, guidelines and
    enforcement decisions every day.
    ---------------------------------------------------------------------------
        \7\ See, e.g., Report at 24; FTC Annual Reports, collected at
    https://www.ftc.gov/policy/reports/policy-reports/ftc-annual-reports.
        \8\ FTC, 2016 Annual Highlights, available at https://www.ftc.gov/
    node/1205233.
        \9\ Id.
        \10\ FTC, National Do Not Call Registry Data Book for Fiscal Year
    2016, available at https://www.ftc.gov/news-events/press-releases/2016/
    12/ftc-issues-fy-2016-national-do-not-call-registry-data-book
    ---------------------------------------------------------------------------
        The Report covered a broad spectrum of consumer protection. Today I
    will focus on three areas that the Task Force highlighted in its
    Report. First, I will address a growing body of barnacles on the
    economy--aging and perpetual regulations in the form of orders and
    decrees that result from Commission enforcement. Second, I will discuss
    the need for guidance on Commission interpretations of advertising and
    the role of disclosures. Third, I will discuss the growing problem of
    different laws, different agencies and different policies governing the
    same conduct. Uncoordinated and inconsistent standards make consumer
    protection compliance more difficult, and can leave gaps in the very
    protection the rules are intended to provide.
                    A Rising Tide of Unreviewed Regulations
            [S]ince 1996--the past 20 years--the FTC has required companies
            signing administrative orders to agree to an order duration of
            20 years (longer, if there are subsequent violations) and
            Federal court orders that last in perpetuity.. . .Especially in
            areas where technology is rapidly evolving, order provisions
            that make sense when they are entered may no longer be
            appropriate in 10 years, let alone 20 years later, and may
            serve to chill innovative and useful corporate practices.\11\
    ---------------------------------------------------------------------------
        \11\ Report at 29 (footnotes omitted).

        The Commission obtains about 150 consumer protection orders a year
    against corporations and individuals.\12\ Some of the orders keep
    common con artists away from consumers. But many of the defendants and
    respondents include the largest corporations in the world, and the
    orders they must observe can impose extensive regulations--obligations
    that go beyond injunctions against violations of the law. The
    Commission typically will seek ancillary relief in the form of specific
    obligations that make it easier for future enforcers to prove that the
    company violated the terms of the order. For example, a company alleged
    to have made unsubstantiated claims about the efficacy of a dietary
    supplement may face an order that requires prescribed levels of
    substantiation for claims about the health benefits, efficacy, or
    performance of any food, drug, or dietary supplement.\13\ Once under
    order, a company faces the peril of civil penalties or a contempt
    citation for a violation if the FTC alleges that a future advertisement
    made a covered claim, or that the substantiation did not meet the
    specific requirements--even if the claim was truthful and substantiated
    by the standards appropriate at the time it is made.
    ---------------------------------------------------------------------------
        \12\ FTC, Annual Reports, collected at https://www.ftc.gov/policy/
    reports/policy-reports/ftc-annual-reports.
        \13\ Report at 30, n. 94, citing POM Wonderful v. FTC, 777 F.3d
    478, 505 (D.C. Cir. 2015).''
    ---------------------------------------------------------------------------
        Recognizing the potential anticompetitive effects and regulatory
    burdens of perpetual orders, the Commission decided in 1995 to limit
    administrative orders--those entered in the course of the agency's
    internal adjudication--to twenty years duration.\14\ But the agency
    declined to limit Federal court orders, because it said those orders
    primarily addressed fraudulent activity.\15\ To this day, most of those
    orders are perpetual, and they now account for two-thirds of the orders
    the FTC enters. Many of them come from cases that do not allege fraud.
    A failure of a company to produce what the Commission deems to be
    satisfactory substantiation for a claim can result in an order that
    stays on the books indefinitely. Every year, in the ordinary course of
    enforcement, the Commission adds another hundred perpetual regulations
    to the economy, without the periodic reviews typically applicable to
    Federal regulations. It is up to the companies struggling with an order
    provision to do something. The only relief comes in the form of an
    expensive legal proceeding--a motion in court or a petition to the
    FTC--that a company under the orders must commence. The burdens to do
    so are high. Respondents face serious obstacles when they seek to
    modify or terminate Commission orders.\16\ As a result, the typical
    order will follow the company, and any other company that subsequently
    acquires it, for twenty years--or forever.
    ---------------------------------------------------------------------------
        \14\ Report at 30, n. 93.
        \15\ Id.
        \16\ Id. at 31.
    ---------------------------------------------------------------------------
        The Commission's insistence on twenty-year orders and permanent
    decrees stands in contrast to the practice of other agencies. The
    Antitrust Division of the Department of Justice traditionally has
    included ten-year terms in its civil orders, and now sometimes limits
    them to five years.\17\ Indeed, the Commission's practice is
    inconsistent with its own application of the Regulatory Flexibility Act
    (or RFA), in which the agency reviews its guides and regulations every
    ten years.\18\ A bipartisan Congressional mandate, the RFA has been a
    hallmark of responsible Federal regulation for four decades. The
    purpose of the statute was stated eloquently by Acting Chairman Maureen
    Ohlhausen this year, ``Regulations can be important tools in protecting
    consumers, but when they are outdated, excessive, or unnecessary, they
    can create significant burdens on the U.S. economy, with little
    benefit.'' \19\ Unfortunately, regulations that come in the form of FTC
    orders and decrees are not included in RFA reviews, and these
    regulations now count in the thousands, amounting to tens of thousands
    of pages of specific requirements that can handicap a competitor. The
    mandates continue to accumulate with little or no examination after
    their temporary reporting obligations are entered. There is no plan to
    revisit whether the orders' benefits justify their costs. It is time
    for the Commission to follow the lead of the Antitrust Division and
    other agencies that sunset such burdens.
    ---------------------------------------------------------------------------
        \17\ See, e.g., U.S. v. Ebay, Case No. 12-CV-05869-EJD-PSG (2014),
    available at https://www.justice.gov/atr/case-document/file/494626/
    download.
        \18\ See, e.g., FTC, Regulatory Review Schedule, 82 Fed Reg 29259
    (June 28, 2017) (To ensure that its rules and industry guides remain
    relevant and are not unduly burdensome, the Commission reviews them on
    a ten-year schedule. Each year the Commission publishes its review
    schedule, with adjustments made in response to public input, changes in
    the marketplace, and resource demands.)
        \19\ FTC, Release, FTC Announces Regulatory Reform Measures Ranging
    from TVs and Textiles to Energy Labels and E-mail (June 28, 2017),
    available at https://www.ftc.gov/news-events/press-releases/2017/06/
    ftc-announces-regulatory-reform-measures-ranging-tvs-textiles.
    ---------------------------------------------------------------------------
         Divining the Meaning of Messages and the Need for Disclosures
            The agencies have pursued failure to disclose theories and
            imposed ``clear and conspicuous'' disclosure requirements with
            increasing vigor in recent years. This has created considerable
            uncertainty for businesses in determining what information is
            sufficiently important (e.g., material and necessary to prevent
            unfairness or deception) that it must be disclosed and where
            the disclosures must appear (e.g., in advertising or at point
            of sale). The different opinions on claim interpretation and
            disclosure clarity at the Commission in POM Wonderful were not
            reconciled in the decision of the D.C. Circuit, leaving
            additional uncertainty as to whether and what kind of
            substantiation is needed for a claim, what claims trigger a
            disclosure, and how much information should be disclosed. \20\
    ---------------------------------------------------------------------------
        \20\ Report at 33-34, citing POM Wonderful v. Federal Trade
    Commission, 777 F.3d 478 (D.C. Cir. 2015).

        What does an advertisement communicate? How much information must
    an advertisement disclose to prevent deception or injury? How should
    the medium in which an ad appears affect disclosures? These are
    questions that have preoccupied advertising authorities for decades,
    and the answers are more elusive today than they were when TV, radio,
    and print delivered most ads. As long ago as 1992, the Seventh Circuit
    Court of Appeals encouraged the Commission to explain how it
    interpreted advertisements.\21\ As recently as POM Wonderful, the
    Commission was divided on which ads were deceptive. When the agency is
    unsure after years of investigation and adjudication, advertisers are
    hard-pressed to predict with confidence what they can say without
    running afoul of the law.
    ---------------------------------------------------------------------------
        \21\ Kraft, Inc. v. Federal Trade Commission, 970 F.2d 311 (7th
    Cir. 1992)
    ---------------------------------------------------------------------------
        As the Task Force noted, ``Especially in the case of short-form
    broadcast advertising, there simply is not sufficient space to include
    all of the information the agencies have deemed necessary in forms of
    advertising.'' \22\ It is important that regulators demonstrate the
    need for additional or qualifying information, since the cost of the
    qualification could be the loss of other information or the loss of the
    advertisement itself. This is not just responsible regulation, but a
    constitutional mandate. As the courts regularly remind us, the First
    Amendment recognizes the value of commercial information and requires
    regulators to strike the right balance between burdens and benefits of
    communications.\23\ Moreover, in any medium, increasing the amount of
    information that must be disclosed can obscure the most important
    messages, thus creating a tension with the ``clear and conspicuous''
    objectives of the disclosure.
    ---------------------------------------------------------------------------
        \22\ Id.
        \23\ See, e.g., AM. BEVERAGE ASS'N V. CITY & CTY. OF SAN FRANCISCO,
    No. 16-16073 (9th Cir., Sept. 19, 2017) available at http://
    cdn.ca9.uscourts.gov/datastore/opinions/2017/09/19/16-16072.pdf.
    ---------------------------------------------------------------------------
        Not surprisingly, the Task Force also noted uncertainty among
    advertisers as to how the Commission would apply the ``clear and
    conspicuous'' standard in particular fact situations, and recommended
    that the agency look for additional opportunities to clarify its
    expectations in guidance and to give businesses an opportunity to come
    into compliance before the agencies start bringing enforcement actions.
    Citing cases in which the Commission pursued auto dealers for failure
    to disclose terms and conditions of their offers, and suggesting the
    Commission could have offered more warning of the policy it would
    pursue, the Report recommended an exploration of each element of
    disclosure policy--from the representation that could trigger a
    disclosure to the clarity and prominence of the disclosure--and how
    those factors vary across media.\24\
    ---------------------------------------------------------------------------
        \24\ Report at 35.
    ---------------------------------------------------------------------------
        A laudable example of the Commission's efforts to tailor its
    guidance to the advance of technology can be found in the Online
    Disclosure Guidelines (often called the Dot Com Disclosures) in which
    the agency has acknowledged that smaller screens can justify shorter
    disclosures. Nonetheless, the latest revision of the guidance contained
    an ominous warning:

            If a disclosure is needed to prevent an online ad claim from
            being deceptive or unfair, it must be clear and conspicuous.
            Under the new guidance, this means advertisers should ensure
            that the disclosure is clear and conspicuous on all devices and
            platforms that consumers may use to view the ad. The new
            guidance also explains that if an advertisement without a
            disclosure would be deceptive or unfair, or would otherwise
            violate a Commission rule, and the disclosure cannot be made
            clearly and conspicuously on a device or platform, then that
            device or platform should not be used.

        The consequence the Commission contemplates for a disclosure that
    does not fit--disqualifying a medium for a message--emphasizes the
    importance of determining whether a disclosure is necessary in the
    first place (and if so how much is necessary) to cure deception, avoid
    unfairness, or comply with a rule. If a disclosure mandated for other
    media would fill an entire screen of a smartphone, it is worth asking
    whether all the required language is necessary to cure deception. That
    is what the Commission does when it investigates advertising restraints
    that trade associations and professional societies adopt. If a
    restraint is not necessary to cure deception or avoid injury, then the
    agency may prosecute it as an antitrust violation.\25\ The Commission
    has traditionally taken a dim view of private restrictions based on
    speculative harm. Under Section 5 of the FTC Act, deception depends on
    a representation or omission, likely to mislead reasonable consumers,
    to their detriment,\26\ and unfairness turns on the threat of
    substantial injury, not reasonably avoidable by consumers and not
    outweighed by benefits to consumers or competition.\27\ Whether imposed
    by cases, guides or self-regulation, a thorough examination of an
    advertising restraint advances the mission of the Commission. The same
    analysis of a regulation or other mandate addresses the requirements in
    the First Amendment of the Constitution.\28\
    ---------------------------------------------------------------------------
        \25\ See, e.g., Release, Professional Associations Settle FTC
    Charges by Eliminating Rules That Restricted Competition Among Their
    Members, (December 16, 2013), available at https://www.ftc.gov/news-
    events/press-releases/2013/12/professional-associations-settle-ftc-
    charges-eliminating-rules.
        \26\ Fed. Trade Comm'n, FTC Policy Statement on Deception (Oct. 14,
    1983), available at https://www.ftc.gov/system/files/documents/
    public_statements/410531/831014deceptionstmt.pdf.
        \27\ Fed. Trade Comm'n, FTC Policy Statement on Unfairness (Dec.
    17, 1980), available at https://www.ftc.gov/public-statements/1980/12/
    ftc-policy-statement-unfairness, codified at 15 U.S.C. Sec. 45(n).
        \28\ See generally, William MacLeod, Elizabeth Brunins & Anna
    Kertesz, Three Rules and a Constitution: Consumer Protection Finds Its
    Limits in Competition Policy, 72 Antitrust L.J. 943 (2005).
    ---------------------------------------------------------------------------
                Inconsistent Rules Undermine Consumer Protection
            This Report notes numerous initiatives of the FTC . . . that
            have enhanced protection of the Nation's consumers. However,
            the overlapping jurisdictions of the FTC [and other agencies]
            give rise to risks of inconsistent regulatory approaches that
            cause confusion and complicate compliance, particularly with
            respect to privacy protection. Such inconsistencies could
            undermine the objectives the Agencies seek to advance.\29\
    ---------------------------------------------------------------------------
        \29\ Report at 3.

        It is inevitable in an economy as complex as ours that companies
    will face multiple regulatory agencies, and that the standards those
    agencies apply to the same conduct will differ. Those differences can
    stifle economic activity and diminish consumer protection. The examples
    cited in the Report deal with approaches to privacy and definitions of
    unfair and abusive conduct. Inconsistent approaches to privacy have
    contributed not only to inconsistent standards that companies must try
    to follow, but also gaps in coverage that could leave loopholes for
    sectors of the economy without Federal regulation at all. Such a
    prospect loomed when the Federal Communication Commission adopted its
    2015 Open Internet Order and reclassified the provision of Internet
    broadband access as a ``telecommunications service'' under Title II of
    the Telecommunications Act. The Order would have deprived the FTC of
    jurisdiction over Internet Service Providers, potentially even for
    conduct that would not have been subject to FCC regulation.\30\ The
    discordant policies had international repercussions. As the Task Force
    observed:
    ---------------------------------------------------------------------------
        \30\ Report at 25.

            Based in part on its negative perception of the U.S. sectoral
            approach to privacy, the European Court of Justice issued a
            decision in 2015 finding that the EU-U.S. Safe Harbor
            insufficiently protected EU residents' personal data. . . .
            Reducing the ability for U.S. companies to transfer personal
            data effectively and appropriately could impact the U.S.'s
            competitive posture. Although the Section is not advocating for
            an umbrella privacy law at this time, it does observe that the
            inconsistent privacy approaches pose a risk of harm to U.S.
            companies and competition internationally. More consistency
            among the regulatory approaches would likely yield reduced
            compliance costs and promote competitiveness with resulting
    ---------------------------------------------------------------------------
            benefit to consumers.

        History provides many examples of unintended consequences of
    regulations. The lawyers and economists at the FTC have long performed
    a valuable public service by calling attention to regulatory policies
    that may be at odds with the interests of consumers and competition.
    Indeed, the Commission has dedicated a staff, in the Office of Policy
    Planning, to the advocacy of reasonable regulation in the United
    States. Over the years, the Commission has brought attention to the
    value of nutritional claims on labels of foods,\31\ consumer-friendly
    disclosures on financial documents,\32\ and unnecessary restrictions in
    professions and trades.\33\ It is important that the Commission
    continue this advocacy, and that agencies consider whether their
    policies conflict with other regulations that impose duties on
    businesses. A company that answers to multiple authorities, and which
    cannot satisfy one without offending another, is tempted to abandon the
    activity rather than risk prosecution. Consumers deprived of the goods
    and services that the company would have offered under a coordinated
    regulatory policy could suffer the type of injury that competition and
    consumer protection agencies try to prevent.
    ---------------------------------------------------------------------------
        \31\ See, e.g., Comments of the Staff of the Bureau of Consumer
    Protection, the Bureau of Economics and the Office of Policy Planning
    of the Federal Trade Commission In FDA's Request for Comments on
    Nutrient Content Claims (July 27, 2004), available at https://
    www.ftc.gov/sites/default/files/documents/advocacy_documents/ftc-staff-
    comment-food-and-drug-administration-concerning-nutrient-claims/
    v040020.pdf.
        \32\ See, e.g., Lacko & Pappalardo, Improving Consumer Mortgage
    Disclosures/Bureau of Economics Staff Report, June 2007, available at
    https://www.ftc.gov/sites/default/files/attachments/educational-
    materials/p025505mortgagedisclosurereport.pdf.
        \33\ See, e.g., Ohlhausen, ``Advancing Economic Liberty,'' Remarks
    at the George Mason Law Review's 20th Annual Antitrust Symposium,
    February 23, 2017, available at https://www.ftc.gov/system/files/
    documents/public_statements/1098513/ohlhausen_-
    _advancing_economic_liberty_
    2-23-17.pdf
    ---------------------------------------------------------------------------
                            Progress on Transparency
            The Section recommends that the FTC adopt a number of reforms
            to help it deploy its limited enforcement resources in a manner
            that enhances the impact of its actions while, at the same
            time, treating target companies in a way that is fair and
            proportionate to the alleged offenses.\34\
    ---------------------------------------------------------------------------
        \34\ Report at 27.

        At the outset of this testimony, I noted a 1969 ABA Report that was
    credited for sound suggestions on the future of FTC enforcement. The
    Commission heeded many of those suggestions and improved its protection
    of consumers as a result. I am gratified to see the current Commission
    taking the recommendations of our Task Force to heart. This spring,
    Acting Chairman Ohlhausen announced the formation of internal working
    groups to implement process reforms at the agency. The Commission
    revealed the first results of those efforts in July:
        The process reforms announced today address CIDs (Civil
    Investigative Demands) in consumer protection cases, and include:

       Providing plain language descriptions of the CID process and
            developing business education materials to help small
            businesses understand how to comply;

       Adding more detailed descriptions of the scope and purpose
            of investigations to give companies a better understanding of
            the information the agency seeks;

       Where appropriate, limiting the relevant time periods to
            minimize undue burden on companies;

       Where appropriate, significantly reducing the length and
            complexity of CID instructions for providing electronically
            stored data; and

       Where appropriate, increasing response times for CIDs (for
            example, often 21 days to 30 days for targets, and 14 days to
            21 days for third parties) to improve the quality and
            timeliness of compliance by recipients.\35\
    ---------------------------------------------------------------------------
        \35\ Release, Acting FTC Chairman Ohlhausen Announces Internal
    Process Reforms: Reducing Burdens and Improving Transparency in Agency
    Investigations, July 17, 2017, available at https://www.ftc.gov/news-
    events/press-releases/2017/07/acting-ftc-chairman-ohlhausen-announces-
    internal-process-reforms

        I look forward to the FTC building on this progress and adopting
    more of the recommendations in the Task Force's Report.
        And of course, I would be happy to answer any questions the
    Committee might have.

        Senator Moran. Thank you very much.
        Ms. Parnes.

               STATEMENT OF LYDIA PARNES, ESQ., PARTNER,
                  WILSON SONSINI GOODRICH & ROSATI PC

        Ms. Parnes. Thank you, Chairman Moran, Ranking Member
    Blumenthal, distinguished members of the Committee.
        My name is Lydia Parnes. As you mentioned, I am currently a
    partner at Wilson Sonsini Goodrich & Rosati. Before that, I had
    the very clear privilege of working at the FTC for over 27
    years, and served as Director of the FTC's Bureau of Consumer
    Protection for my last 5. Thank you so much for inviting me
    here today to present testimony on FTC reform proposals.
        The views that I express in my written and oral testimony
    reflect recommendations of the ABA Antitrust Section's
    Presidential Task Force Report as well as my own personal
    views.
        Last year, I was a member of that task force that prepared
    the report, an impressive bipartisan group of lawyers,
    professors, economists, and a Federal appellate court judge,
    all with very deep FTC experience. The report sets out the
    Section's recommendations on how to enhance consumer protection
    enforcement efforts, and I want to underscore what the Section
    recognizes.
        The FTC is a highly respected and effective agency, and for
    decades has engaged in vigorous law enforcement activities to
    protect consumers and halt unfair or deceptive acts and
    practices. Of course, there is always room for improvement. And
    I'd like to focus my remarks on two of the areas where the task
    force made process improvement recommendations, improving the
    use of CIDs and clarifying the FTC's legal basis for seeking
    monetary relief.
        CIDs, essentially administrative subpoenas, are an
    important part of an FTC investigation, but responding to a CID
    can be exceptionally costly, burdensome, and confusing.
    Companies also have very limited means to narrow the scope of a
    CID, which is often overly broad. It is true that the FTC staff
    will typically negotiate at least some of these terms, but if
    the staff does not willingly agree to modifications, the
    company faces a dilemma: It can file a petition to quash or
    limit the CID, but these petitions are made public, which
    imposes considerable reputational costs on companies, and for
    smaller companies, these costs can be existential.
        Acting Chairman Ohlhausen recently acknowledged these and
    other procedural issues, and this summer announced CID reforms
    responsive to the Section's recommendations. I would urge the
    Subcommittee and the Commission to consider steps to make these
    reforms permanent and to address other issues raised in the
    report, such as by permitting companies to file confidential
    petitions to challenge overly broad CIDs.
        Let me turn next to monetary relief. In recent years, the
    FTC has sought significant monetary relief in cases that don't
    involve fraud or other tangible consumer injury. This marks a
    departure from the agency's prior practices where it sought
    restitution for injured consumers or disgorgement of ill-gotten
    gains that were traceable to the violations at issue.
        For example, earlier this year, the FTC entered into a
    settlement agreement with Vizio over claims that the company's
    smart TVs were collecting television viewing data without the
    informed consent of customers. The settlement included
    injunctive provisions that you would expect in an order like
    this, but on top of the injunctive provisions, Vizio was
    required to pay $1.5 million to the Commission with no
    explanation offered as to the basis for that monetary relief.
        Congress gave the FTC broad consumer protection authority,
    but more limited authority to obtain money. But the FTC's
    current approach to monetary relief seems to push the limits of
    this authority. To address this issue, the Section recommends,
    first, that the FTC tie monetary relief more closely to the
    nature of the violation, the extent of consumer injury, and the
    culpability of the defendant; and, second, that the FTC issue a
    policy statement setting forth the theories on which it relies
    to justify its demands for money. These recommendations
    appropriately reflect the intent of the FTC Act while also
    providing greater clarity and transparency.
        I very much appreciate your time and will be happy to
    answer questions.
        [The prepared statement of Ms. Parnes follows:]

              Prepared Statement of Lydia Parnes, Esq., Partner,
                      Wilson Sonsini Goodrich & Rosati PC
    Introduction
        Mr. Chairman and Members of the Subcommittee: thank you for the
    opportunity to present testimony on FTC reform proposals. My name is
    Lydia Parnes and I am currently a Partner at Wilson Sonsini Goodrich &
    Rosati. Prior to that, I was the Director of the Bureau of Consumer
    Protection (BCP) at the Federal Trade Commission (FTC or Commission).
        Earlier this year, the Section of Antitrust Law of the American Bar
    Association (the Section) submitted its Presidential Transition
    Report.\1\ I am attaching a copy of this report along with my written
    testimony.\2\ The Section's Presidential Transition Task Force was
    responsible for compiling this report and was comprised of a bi-
    partisan group of lawyers, professors, economists, and a Federal
    appellate court judge with deep knowledge of, and extensive work with,
    the relevant issues and agencies. In fact, over half of the task force
    members have served in a senior leadership position with either the
    Commission or the Antitrust Division of the Department of Justice. As a
    member of this task force, I saw firsthand just how significantly the
    team's diverse backgrounds and experiences contributed to the crafting
    of this report.
    ---------------------------------------------------------------------------
        \1\ American Bar Association, Section of Antitrust Law,
    Presidential Transition Report: The State of Antitrust Enforcement
    (January 2017), https://www.americanbar.org/content/dam/aba/
    publications/antitrust_law/
    state_of_antitrust_enforcement.authcheckdam.pdf [hereinafter Section
    Presidential Transition Report].
        \2\ As stated in the report, the views of the task force members
    were provided in their individual capacities and should not be
    attributed, in any way, to their law firms, clients or academic
    institutions, as applicable. See Section Presidential Transition
    Report, supra note 1, at 1 n.1. This written testimony sets out the
    Task Force recommendations as well as my own personal views.
    ---------------------------------------------------------------------------
        This report presents the Section's views on the current state of
    Federal consumer protection enforcement, as well as its recommendations
    regarding how the new administration could enhance that enforcement. As
    the Section recognizes, the FTC is a highly respected agency and, over
    the last several decades, its vigorous efforts in the area of consumer
    protection have been effective in protecting consumers and in halting
    unfair or deceptive acts or practices. The Section's thoughtful
    recommendations would build upon the FTC's excellent work to further
    refine the FTC's practices and processes. These recommendations are
    based on the task force's comprehensive experience with the agencies--
    and with subjects of FTC investigations--to pinpoint areas of concern
    and to identify practical means for improving results. These are
    important recommendations that deserve serious consideration.
        Today I will highlight four specific areas where the task force
    made recommendations: (1) case selection; (2) civil investigative
    demands (CIDs); (3) information sharing in investigations; and (4)
    order provisions.
    I. Case Selection
        The FTC has broad prosecutorial discretion to select subjects for
    its enforcement actions--including which subjects to initially
    investigate and, subsequently, whether to bring a case or to close that
    investigation. As the Section notes, the FTC also has limited resources
    to conduct such investigations and litigations. Accordingly, the
    Section recommends the FTC focus its efforts on cases where significant
    consumer harm exists. While the Commission does bring many important
    cases involving serious consumer harm, the Section notes that, at
    times, the agency has also prosecuted small companies for technical
    violations where consumer harm was not apparent.\3\ Such cases appear
    to underutilize the FTC's valuable assets, given the lack of meaningful
    consumer harm. They can also have extreme negative effects on small
    businesses that have more limited resources with which to respond to
    and defend such enforcement actions and may, as a result of such
    actions, lose the financing, customers, and business relationships they
    depend upon for their continued viability.
    ---------------------------------------------------------------------------
        \3\ The report mentions In the matter of Nomi Techs., Inc., Docket
    No. C-4538, 2015 WL 5304114 (F.T.C. Aug. 28, 2015), where dissenting
    Commissioners Ohlhausen and Wright criticized the majority's decision
    to bring the case given the technical nature of the violations and the
    absence of evidence of actual consumer harm. See id. at *5, *8.
    ---------------------------------------------------------------------------
    II. Civil Investigative Demands (CIDs)
        A typical FTC investigation begins with the issuance of a civil
    investigative demand (CID), which compels the subject to submit written
    responses, documents, and other information and materials to the
    Commission. CIDs are an important component of the FTC's investigative
    process. Responding to a CID, however, can be exceptionally costly and
    burdensome to a company under investigation. The Section thus
    recommends the Commission act more judiciously in crafting and issuing
    CIDs to companies and individuals to avoid imposing unnecessary costs.
    Specifically, the Section suggests the Commission issue more narrowly
    focused initial CIDs, leaving open the option to issue follow up CIDs
    if needed.
        These recommendations are largely a response to the Commission's
    tendency to issue overly-broad CIDs, which are not tailored to the
    company or conduct under investigation. While the Commission needs some
    leeway in composing CIDs to ensure the necessary information and
    materials are covered--particularly when the Commission is unfamiliar
    with how the company creates and stores its records--the Commission has
    tended to issue CIDs that go beyond merely affording the Commission
    this leeway and leave the subject both confused as to the potential
    theories being investigated and facing a substantial burden in terms of
    its response.\4\ In fact, the legal fees alone, which subjects incur to
    negotiate scope with the Commission and then to make the productions,
    can be prohibitive. These costs are compounded by strict production
    requirements the FTC often imposes. These requirements may vary
    significantly depending on how a subject stores its records in the
    ordinary course, and thus require the subject to retain an expensive
    vendor to make the required production.
    ---------------------------------------------------------------------------
        \4\ As the Section explained, some CIDs demand all information that
    could potentially relate to violations of essentially every consumer
    protection law that could possibly apply. Section Presidential
    Transition Report, supra note 1, at 29 n.91.
    ---------------------------------------------------------------------------
        The trend toward broader CIDs is also problematic because
    respondents have limited means to narrow the scope. If the Commission
    does not willingly agree to modifications, the respondent can file a
    petition to quash or limit a CID. But these petitions are made public,
    which imposes considerable reputational costs on the investigative
    targets. For smaller businesses, in particular, these reputational
    costs can be significant and even life-threatening.
        Acting Chairman Maureen K. Ohlhausen recently acknowledged these
    (and other) procedural issues, and established new internal Working
    Groups on Agency Reform and Efficiency to investigate the causes of
    such issues and to identify potential solutions. This summer, the
    Commission announced process reforms concerning consumer protection
    CIDs, some of which seem directly to respond to the Section's
    recommendations.\5\ For instance, the reforms include ``[a]dding more
    detailed descriptions of the scope and purpose of investigations to
    give companies a better understanding of the information the agency
    seeks,'' and ``[w]here appropriate, significantly reducing the length
    and complexity of CID instructions for providing electronically stored
    data.'' Such procedural changes have the potential to significantly
    reduce the burden of responding to CIDs without negatively impacting
    the FTC's ability to obtain the necessary information. I would urge the
    Subcommittee and the Commission to consider steps to make these reforms
    permanent and to address other issues raised in the report, such as by
    permitting companies to file confidential petitions to challenge overly
    broad CIDs.
    ---------------------------------------------------------------------------
        \5\ Press Release, U.S. Fed. Trade Comm'n, Acting FTC Chairman
    Ohlhausen Announces Internal Process Reforms: Reducing Burdens and
    Improving Transparency in Agency Investigations (July 17, 2017),
    https://www.ftc.gov/news-events/press-releases/2017/07/acting-ftc-
    chairman-ohlhausen-announces-internal-process-reforms.
    ---------------------------------------------------------------------------
    III. Information Sharing in Investigations
        Information sharing is critical in Commission investigations. The
    information shared by a company being investigated helps the FTC to
    discern whether a violation has occurred. At the same time, if the FTC
    shares its concerns, the company can better understand what is being
    investigated and what information and defenses are relevant. The extent
    to which the FTC staff actually reveals its theories and concerns,
    however, varies significantly from case to case.
        In cases where the staff engage in open discussions early on
    regarding what it is investigating, there is more opportunity for both
    sides to explore the issues and test their theories. Open communication
    leads to sounder outcomes, as both sides have real opportunities to
    present evidence and see how that evidence does--or does not--align
    with the Commission's theories of harm. On the flip side, in cases
    where the staff does not disclose its theories to the respondent or
    inform the respondent of what evidence allegedly supports its theories,
    the respondent is left at a serious disadvantage in defending its
    conduct. Moreover, this lack of information sharing can undermine the
    investigative process itself. If the respondent does not know what the
    Commission's legal theory is, it cannot subject this theory to its best
    defenses. Thus, while the goal of the investigative process is to
    analyze the facts to understand whether a violation has occurred, not
    sharing the underlying theory and the evidence allegedly supporting it
    effectively short-circuits a thorough factual and legal analysis.
        Creating open lines of communication begins with the CID's
    issuance, as noted. The clearer the CID is regarding the Commission's
    intent, the more responsive the subject can be from the outset. To this
    end, the Commission's recent process reforms are likely to enhance
    information sharing efforts. But information sharing should not stop
    here. The FTC's theories and concerns are likely to evolve as they
    receive more information. Keeping respondents informed of these changes
    is key to reaching thoughtful outcomes supported by the full set of
    evidence.
        To improve communication between the Commission and parties in a
    consistent fashion, the Section recommends that the FTC adopt internal
    guidelines for staff to follow in communicating with respondents. The
    Section suggests that, beginning as early as possible, the staff should
    be as transparent as possible and encourage open dialogue regarding
    their substantive concerns (absent compelling circumstances suggesting
    otherwise, such as clear bad faith by the respondent). These
    recommendations would both improve the fairness of the process and help
    the Commission reach better supported decisions.
    IV. Order Provisions
        The terms the Commission includes in its consent orders are of
    critical importance. Realistically, a company may not have the
    resources or capacity to litigate, and--to a large extent--the
    Commission relies on consent orders to resolve investigations. Consent
    order terms that are unduly restrictive may do more harm than good and,
    compounding this problem, may gain the mantle of precedent over time,
    making appropriate modifications increasingly unlikely. As such,
    consent orders should be carefully crafted. The Section offers some
    specific proposals to assist in this effort.
        First, the Section recommends reducing the burden of
    ``boilerplate'' provisions. The Commission has established a number of
    administrative provisions that it reuses in the same or substantially
    similar terms in each consent order. While this practice can expedite
    the negotiation process, inappropriately broad terms can impose
    unnecessary costs. For instance, since 1996 the Commission has required
    companies entering consent decrees to agree to administrative orders
    lasting 20 years and Federal court orders lasting in perpetuity.\6\
    This practice does not account for the nature of the underlying market,
    nor for how quickly that market might be changing. Accordingly, it may
    unnecessarily constrain the company's ability to react to competitive
    changes or consumer demands, particularly when coupled with the
    ``fencing in'' provisions and other burdensome affirmative obligations
    that the Commission routinely includes in consent orders.\7\ The
    Section therefore recommends the FTC adopt a sunset period of around 5
    years for both administrative and district court orders, allowing
    upward deviation for extenuating circumstances such as fraud or
    recidivism.
    ---------------------------------------------------------------------------
        \6\ See Press Release, U.S. Fed. Trade Comm'n, FTC Rule
    Incorporating Sunset Policy for Existing Administrative Orders in
    Consumer Protection and Antitrust Cases (Nov. 20, 1995), https://
    www.ftc.gov/news-events/press-releases/1995/11/ftc-rule-incorporating-
    sunset-policy-existing-administrative. The Commission justified keeping
    Federal court orders unlimited because ``many of these orders are
    against defendants involved in hard-core fraud.'' Id.
        \7\ The FTC typically includes ``fencing-in'' relief in its
    consumer protection orders, which is relief that stretches beyond
    violations identified in the Commission's complaint to reach allegedly
    related practices. For instance, in matters involving unsubstantiated
    claims regarding health benefits, the Commission typically imposes a
    term requiring scientific substantiation for any claim about the health
    benefits, efficacy, or performance of any food, drug, or dietary
    supplement. See e.g., POM Wonderful v. FTC, 777 F.3d 478, 505 (D.C.
    Cir. 2015). This often leaves the respondent with much confusion and
    uncertainty regarding which implied claims the Commission might find in
    future advertising or what substantiation it would find sufficient.
    Other burdensome affirmative obligations the FTC requires include, for
    data security matters, expensive biennial security audits. See e.g., In
    the Matter of Snapchat, Inc., Docket No. C-4501, 2014 WL 1993567, at
    *14 (F.T.C. May 8, 2014).
    ---------------------------------------------------------------------------
        Relatedly, the Section recommends the FTC reconsider its standard
    implementation of ``Scofflaw'' provisions, to alleviate their
    burdensome requirements for respondents operating legitimate
    businesses. Scofflaw provisions include requirements such as
    distributing the order to various individuals, keeping records,
    reporting changes (like asset sales, mergers, or bankruptcy), and
    filing compliance reports, that typically last between 3 and 20 years.
    Federal court boilerplate Scofflaw provisions often go beyond the
    Commission's standard ones, including by providing the FTC the right to
    gather information from the respondent in various ways that can be very
    burdensome. Federal court orders, for instance, often allow the
    Commission to contact the respondent directly--not through counsel--
    regarding order-related matters, which contradicts longstanding ethical
    rules prohibiting such conduct.\8\ While such terms were originally
    intended to permit proper oversight when defendants behaved
    fraudulently, the FTC has increasingly filed cases in Federal court in
    non-fraud cases, but continued to incorporate these onerous terms. This
    practice imposes unnecessary costs on respondents and should be
    reconsidered.
    ---------------------------------------------------------------------------
        \8\ See Am. Bar Ass'n, Model Rules of Prof'l Conduct, R. 4.2 (2014)
    (``In representing a client, a lawyer shall not communicate about the
    subject of the representation with a person the lawyer knows to be
    represented by another lawyer in the matter, unless the lawyer has the
    consent of the other lawyer or is authorized to do so by law or a court
    order.'').
    ---------------------------------------------------------------------------
        Second, the Section recommends tying monetary relief more closely
    to critical issues including the nature of the violation, the extent of
    consumer injury, and the culpability of the respondent. In recent
    years, the Commission has increasingly sought significant monetary
    relief, including civil penalties, restitution, and/or disgorgement, in
    Section 5 cases that do not involve fraud or tangible consumer injury.
    This marks a departure from the Commission's prior practices, in which
    it sought restitution or disgorgement tethered to injury or unjust
    enrichment that was traceable to the violation(s). More recently, the
    staff has sought monetary relief even when violations are marginal,
    technical, or unintentional and the injury is minimal or nonexistent--
    and it often seeks the maximum possible amount regardless of the
    underlying facts or litigation risks.
        These changes to FTC practice inappropriately penalize respondents
    beyond what is necessary to deter the same or similar conduct. They
    also create unnecessary uncertainty, as the respondents cannot rely on
    ex ante calculations as to the costs of the conduct at issue to
    estimate likely fines. Consider, for instance, that the public
    perceives larger fines as indicative of more egregious conduct, and
    reasonably judges the respondent according to this perceived level of
    misconduct. By detaching fines from actual wrongdoing, the Commission
    creates a situation in which the public is judging a respondent more
    harshly--potentially significantly so--than is warranted. The Section's
    recommendations would help realign the costs, both monetary and
    reputational, to the misconduct and harm identified. These
    recommendations, moreover, mirror the FTC's prior statement on monetary
    relief, including disgorgement and restitution, in competition cases,
    which was unanimously adopted but is not in effect today.\9\
    ---------------------------------------------------------------------------
        \9\ U.S. Fed. Trade Comm'n, Policy Statement on Monetary Equitable
    Remedies--Including in Particular Disgorgement and Restitution--in
    Federal Trade Commission Competition Cases Addressing Violations of the
    FTC Act, the Clayton Act, or the Hart-Scott-Rodino Act (July 31, 2003),
    https://www.ftc.gov/public-statements/2003/07/policy-statement-
    monetary-equitable-remedies-including-particular. This statement
    established, for instance, that the FTC would seek disgorgement only
    where (1) the underlying violation was clear, and (2) there was a
    reasonable basis for calculating the payment amount, and (3) it would
    take into account the other remedies available, including private
    actions and criminal proceedings. The FTC withdrew this statement less
    than 10 years after unanimously adopting it, finding it ``overly
    restrictive.'' Press Release, U.S. Fed. Trade Comm'n, FTC Withdraws
    Agency's Policy Statement on Monetary Remedies in Competition Cases;
    Will Rely on Existing Law (July 31, 2012), https://www.ftc.gov/news-
    events/press-releases/2012/07/ftc-withdraws-agencys-policy-statement-
    monetary-remedies.
    ---------------------------------------------------------------------------
    Conclusion
        The Section's Presidential Transition Report offers numerous
    recommendations for enhancing the FTC's consumer protection enforcement
    processes and outcomes. These recommendations would alleviate
    unnecessary burdens on businesses while facilitating better FTC
    decisions and outcomes.
        Thank you for your time. I would be happy to answer any questions.

        Senator Moran. Thank you for your testimony.
        Ms. Rich.

    STATEMENT OF JESSICA RICH, VICE PRESIDENT, CONSUMER POLICY AND
                     MOBILIZATION, CONSUMER REPORTS

        Ms. Rich. Chairman Moran, Ranking Member Blumenthal, and
    members of the Subcommittee, thank you for the opportunity to
    be here today on behalf of Consumer Reports and our Policy and
    Mobilization Division, Consumers Union, to discuss the
    important work of the Federal Trade Commission.
        I arrived at Consumers Union in May of this year following
    26, believe me, years in the FTC's Bureau of Consumer
    Protection, the last four as its Director. My tenure at the
    agency spanned several Democratic and Republican
    administrations, and I am equally proud of the work I did under
    all of them.
        Consumers Union has always regarded the FTC as a leader in
    ensuring consumers are protected in the marketplace and that
    they have the accurate information needed to make informed
    choices. Every year, the FTC returns millions of dollars to
    consumers and saves billions more through its law enforcement
    efforts. Every year, it halts ongoing fraud and deception and
    helps legitimate companies that offer consumers valuable
    products and services compete on a level playing field. Every
    year, it educates the public through consumer and business
    education, public workshops, and policy reports, and it does so
    on a shoestring compared with the budgets of many other Federal
    agencies, and without many of the tools and remedies that other
    agencies routinely employ.
        Notably, the FTC pursues its work as a bipartisan group of
    President-appointed and Senate-confirmed Commissioners. All
    cases, rulemakings, and other significant FTC actions require
    formal approval by a majority of them, and despite the
    occasional dissenting or concurring statement, virtually all
    decisions over the years have been unanimous.
        In creating the FTC more than a century ago, Congress
    vested it with broad jurisdiction so it could address a wide
    range of unfair or deceptive practices across the marketplace.
    The breadth and flexibility inherent in the FTC Act has proven
    to be critical to the FTC's effectiveness. Who could have
    anticipated when the FTC Act was passed that there would be
    spyware, spam, massive data breaches, or tech support scams? It
    was 100 years ago. And who knew that cars would someday be able
    to drive themselves, or that your refrigerator or your
    children's toys would connect to a network of computers in your
    home, creating risk to personal data and documents you
    reasonably thought were secure?
        But despite the breadth of the FTC Act, the agency's
    effectiveness is limited by certain restrictions on its
    authority. Notably, for historical reasons that no longer make
    sense, the FTC can't address unfair and deceptive practices by
    common carriers, creating an uneven playing field for
    businesses and consumers alike.
        The FTC also has very limited rulemaking authority, and it
    can only seek penalties for law violations in very specific
    instances. I'm aware of various proposals that would change the
    way the FTC operates, some of which may be discussed here
    today.
        Last year, as was mentioned, the House Energy and Commerce
    Committee considered proposals that would have altered the
    FTC's investigation and enforcement procedures. For example,
    one bill would have capped the length of FTC consent decrees to
    8 years. Another would have enacted select portions of the
    FTC's Unfairness Statement into law, which could limit the
    FTC's ability to address the wide range of harms in today's
    marketplace.
        Earlier this year, the ABA Section of Antitrust Law also
    made some proposals, for example, echoing the call for shorter
    orders and recommending that the FTC lower the monetary relief
    it obtains in non-fraud cases. All of these recommendations
    would weaken an agency that already lacks authority and
    resources in critical areas at a time when consumers need the
    FTC's help the most.
        Today, consumers face enormous challenges navigating the
    marketplace, making it harder than ever for them to avoid
    fraud, deception, and other harms. Every day, they encounter
    24-hour data collection and advertising, phishing attempts,
    imposter scams, massive data breaches, highly sophisticated
    frauds, and confusion about who they can trust. In this
    environment, the FTC needs more authority to protect consumers,
    not less, including stronger laws to protect consumers' privacy
    and security, repeal of the common carrier exemption, strong
    remedies to hold wrongdoers accountable, and more resources.
        My long-time experience at the FTC informs how the
    proposals under consideration would affect the agency's work,
    so I'm very pleased to have been invited here today to assist
    the Subcommittee in its deliberations. Consumers Union stands
    ready to assist staff in evaluating any recommendations that
    the Subcommittee believes may have merit.
        Thanks again for the opportunity to testify.
        [The prepared statement of Ms. Rich follows:]

    Prepared Statement of Jessica Rich, Vice President, Consumer Policy and
                         Mobilization, Consumer Reports
        Chairman Moran, Ranking Member Blumenthal, and Members of the
    Subcommittee, thank you for the opportunity to be here today on behalf
    of Consumer Reports and our policy and mobilization division, Consumers
    Union (hereinafter ``Consumers Union''), to discuss the important work
    of the Federal Trade Commission.\1\ Consumers Union has been a strong
    and longtime supporter of the FTC's work and mission.
    ---------------------------------------------------------------------------
        \1\ Consumers Union is the policy and mobilization division of
    Consumer Reports. Consumers Union is an expert, independent, nonprofit
    organization whose mission is to work for a fair, just, and safe
    marketplace for all consumers and to empower consumers to protect
    themselves. Its work focuses on auto and product safety, financial
    services, healthcare, food safety, privacy and technology, and many
    other areas. Consumer Reports is the world's largest independent
    product-testing organization. Using its more than 50 labs, auto test
    center, and survey research center, the nonprofit organization rates
    thousands of products and services annually. Founded in 1936, Consumer
    Reports has over 7 million subscribers to its magazine, website, and
    other publications.
    ---------------------------------------------------------------------------
        I arrived at Consumers Union in May of this year. Before that, I
    spent 26 years working in the FTC's Bureau of Consumer Protection, the
    last four as its Director of Consumer Protection. My tenure at the FTC
    spanned several Democratic and Republican Administrations, and I am
    equally proud of the work I did under all of them. For me, moving to
    Consumer Reports, a strong, nonpartisan advocate for U.S. consumers,
    was a natural continuation of the work I have pursued throughout my
    professional life.
        We--and I mean ``we'' at Consumers Union--have always regarded the
    FTC as a leader in ensuring that consumers are protected in the
    marketplace, and that they have the accurate information needed to make
    informed decisions. Every year, the FTC returns millions of dollars to
    consumers and saves billions more through its law enforcement efforts.
    Every year, it halts ongoing fraud and deception, and helps legitimate
    companies that offer consumers valuable products and services compete
    on a level playing field. Every year, it educates the public through
    consumer and business education, public workshops, and policy reports.
    And it does so on a shoestring, compared with the budgets of many other
    Federal agencies, and without many of the tools and remedies that other
    agencies routinely employ.
        So that the FTC can continue to perform these important functions,
    the agency needs to be strong and independent, and have the resources
    and authority needed to pursue its vital mission. Indeed, given the
    enormous challenges that consumers face in today's marketplace, the FTC
    needs more authority--not less--to fulfill its fundamental consumer
    protection role.
        Our support for the FTC in recent years has included efforts to
    strengthen its authority in a number of ways. To name just a few:

       We supported the FTC's implementation of the Do Not Call
            Registry, and its continuing work to protect consumers from the
            harassment of unwanted telemarketing calls.

       We supported the FTC's implementation of the Children's
            Online Privacy Protection Act, one of the seminal privacy laws
            passed in this country.

       We supported the clarification and strengthening of consumer
            disclosures required under the Used Car Rule.

       We supported the recently enacted Consumer Review Fairness
            Act, clarifying the FTC's authority to protect consumers
            against being forced to surrender their right to provide others
            with honest reviews about shoddy products, services, and
            treatment in the marketplace.

       We supported enactment of the Contact Lens Rule to ensure
            that consumers get their own copy of the prescription so they
            can shop around for their lenses, as well as the recent
            rulemakings to clarify that rule and its counterpart, the
            Eyeglass Rule.

       And right now, we are supporting efforts to preserve the
            FTC's authority to protect consumers from being victimized by
            deceptive pyramid schemes.

        We also commend the FTC for the many law enforcement actions it has
    successfully pursued to obtain significant benefits for consumers. Some
    examples from the last few years include:

       Cancer Fund of America (halted fraudulent cancer charity
            that bilked over $187 million from consumers).\2\
    ---------------------------------------------------------------------------
        \2\ https://www.ftc.gov/news-events/press-releases/2015/05/ftc-all-
    50-states-dc-charge-four-cancer-charities-bilking-over (with State
    Attorneys General).

       Western Union ($586 million to remedy long-standing use of
            money transfer system to facilitate fraud).\3\
    ---------------------------------------------------------------------------
        \3\ https://www.ftc.gov/news-events/press-releases/2017/01/western-
    union-admits-anti-money-laundering-violations-settles (with Department
    of Justice).

       T-Mobile and AT&T (at least $178 million for consumers who
            had unauthorized third party charges ``crammed'' onto their
            phone bills).\4\
    ---------------------------------------------------------------------------
        \4\ https://www.ftc.gov/news-events/press-releases/2014/12/t-
    mobile-pay-least-90-million-including-full-consu mer-refunds;https://
    www.ftc.gov/news-events/press-releases/2016/12/ftc-providing-over-88-
    million-refunds-att-customers-who-were (with FCC and State Attorneys
    General).

       Herbalife ($200 million for consumers who lost money in
            allegedly deceptive multi-level marketing operation, and
            significant reforms to company operations).\5\
    ---------------------------------------------------------------------------
        \5\ https://www.ftc.gov/news-events/press-releases/2016/07/
    herbalife-will-restructure-its-multi-level-marketing-operations.

       Warner Bros. (barring undisclosed payments to social media
            ``influencers'' for supposedly objective, positive product
            reviews).\6\
    ---------------------------------------------------------------------------
        \6\ https://www.ftc.gov/news-events/press-releases/2016/07/warner-
    bros-settles-ftc-charges-it-failed-adequately-disclose-it.

       Craig Brittain (ban on website operator who posted nude
            images of women online without their consent and tried to
            extract payment to remove them).\7\
    ---------------------------------------------------------------------------
        \7\ https://www.ftc.gov/news-events/press-releases/2015/01/website-
    operator-banned-revenge-porn-business-after-ftc-charges.

       AMG Services ($1.3 billion court judgment against fraudulent
            payday lending scheme that charged consumers multiple
            undisclosed and inflated fees).\8\
    ---------------------------------------------------------------------------
        \8\ https://www.ftc.gov/news-events/press-releases/2016/10/us-
    court-finds-ftcs-favor-imposes-record-13-billion-judgment.

       Ashley Madison ($1.6 million for alleged failure of online
            dating service to provide reasonable protections for highly
            sensitive personal data, and for posting fake member profiles
            to lure in new customers).\9\
    ---------------------------------------------------------------------------
        \9\ https://www.ftc.gov/news-events/press-releases/2016/12/
    operators-ashleymadisoncom-settle-ftc-state-charges-resulting (with
    State Attorneys General).

       Volkswagen (over $11 billion to consumers to remedy
            deceptive sales of cars marketed as ``clean diesel,'' but that
            contained secret software designed to evade pollution emissions
            tests).\10\
    ---------------------------------------------------------------------------
        \10\ https://www.ftc.gov/news-events/press-releases/2017/05/
    federal-judge-approves-ftc-order-owners-certain-volkswagen-audi (with
    Department of Justice and State of California).

        Notably, the FTC brought these actions--which address topics
    ranging from pyramid schemes and charity fraud, to phony reviews and
    data breaches--as a bipartisan group of President-appointed and Senate-
    confirmed Commissioners. These actions, like all significant FTC
    activity, required formal consideration and approval by a majority of
    Commissioners. And while concurring and dissenting statements in some
    FTC cases reveal that the Commissioners disagree on occasion, the vast
    majority of Commission votes over the years have been unanimous. For
    example, when Commissioner Joshua Wright ended his tenure at the FTC,
    he noted that he had dissented on approximately 4 percent of Commission
    votes, and issued a written dissent in just half-a-percent of consumer
    protection motions--all during a period in which he was in the
    minority.\11\
    ---------------------------------------------------------------------------
        \11\ https://twitter.com/ProfWrightGMU/status/634778695727755264.
    ---------------------------------------------------------------------------
        In creating the FTC more than a century ago, Congress vested it
    with broad jurisdiction under the Federal Trade Commission Act so that
    it could reach ``unfair or deceptive'' practices wherever they occur.
    Congress deliberately provided the FTC with broad and flexible
    authority to ensure that it could address a wide range of practices
    across the marketplace,\12\ and that has proven to be a wise decision.
    The FTC is the only ``general purpose'' consumer protection agency at
    the Federal level, so it plays a critical role in promoting fairness
    and truthfulness across many industry sectors. In addition, companies
    introduce many new products, services, and features into the
    marketplace every day, but this progress and growth has also created
    new opportunities for scams and harms that once would have been
    unimaginable.
    ---------------------------------------------------------------------------
        \12\ See, e.g., FTC v. Sperry & Hutchinson Trading Stamp Co., 405
    U.S. 233, 240 (1972), quoting Senate Report No. 597, 63d Cong., 2d
    Sess., (1914), p. 13: ``The committee gave careful consideration to the
    question as to whether it would attempt to define the many and variable
    unfair practices which prevail in commerce and to forbid their
    continuance or whether it would, by a general declaration condemning
    unfair practices, leave it to the Commission to determine what
    practices were unfair. It concluded that the latter course would be the
    better, for the reason, as stated by one of the representatives of the
    Illinois Manufacturers' Association, that there were too many unfair
    practices to define, and, after writing 20 of them into the law, it
    would be quite possible to invent others. . . .'').
    ---------------------------------------------------------------------------
        Who could have anticipated in 1914, when the FTC Act was passed,
    that there would be spyware, spam, massive data breaches, or tech
    support scams? And who knew that cars would someday be able to drive
    themselves, or that your refrigerator or your children's toys would
    connect to a network of computers in your home,creating risks to
    personal data and documents that consumers reasonably believe they are
    storing safely?
        The flexibility in the FTC Act also enables the agency to protect,
    not just individual consumers, but also small businesses that have been
    preyed upon by other companies peddling fraudulent business
    services.\13\
    ---------------------------------------------------------------------------
        \13\ See https://www.ftc.gov/about-ftc/bureaus-offices/bureau-
    consumer-protection/small-business.
    ---------------------------------------------------------------------------
        But despite the breadth of the FTC Act, the agency's effectiveness
    is limited by certain restrictions on its authority. Notably, for
    historical reasons that no longer make sense, the FTC lacks authority
    to address unfair or deceptive practices by ``common carriers'' and
    nonprofit entities. It has very limited rulemaking authority. And it
    can only seek penalties for law violations in very specific instances.
        In my experience, the FTC is very careful about how it pursues its
    mission and how it treats all affected parties. The FTC's Commissioners
    and staff take great pride in being fair and evenhanded and, given the
    agency's relatively small size, have no choice but to focus the FTC's
    resources strategically and deliberately. The agency also takes
    appropriate care not to interfere with or disrupt legitimate business
    activity. This care is taken not only at the Commissioner level, but
    throughout the decision-making process in the Bureaus.
        For example, many companies are given an opportunity to negotiate a
    consent order prior to the staff recommending an enforcement action to
    the Commission. If a company chooses not to enter into a consent, it
    has the opportunity to meet with the Director of the Bureau of Consumer
    Protection and, subsequently, all of the Commissioners prior to any
    decision about whether to issue a complaint.
        In addition, to assist companies seeking to comply with the law,
    the Commission provides online business guidance on a wide range of
    topics, including data security,\14\ endorsements and testimonials,\15\
    environmental claims,\16\ jewelry claims,\17\ native advertising,\18\
    and how to make clear and conspicuous online disclosures.\19\
    ---------------------------------------------------------------------------
        \14\ https://www.ftc.gov/tips-advice/business-center/guidance/
    start-security-guide-business.
        \15\ https://www.ftc.gov/news-events/media-resources/truth-
    advertising/advertisement-endorsements.
        \16\ https://www.ftc.gov/news-events/media-resources/truth-
    advertising/green-guides.
        \17\ https://www.ftc.gov/news-events/media-resources/tools-
    consumers/jewelry-guides.
        \18\ https://www.ftc.gov/tips-advice/business-center/guidance/
    native-advertising-guide-businesses.
        \19\ https://www.ftc.gov/news-events/press-releases/2013/03/ftc-
    staff-revises-online-advertising-disclosure-guidelines.
    ---------------------------------------------------------------------------
        The Commission also regularly holds public workshops, enlisting a
    range of stakeholders from the industry, advocacy, academic, and tech
    communities to discuss emerging issues and possible solutions.\20\ And
    the FTC employs dozens of economists in its Bureau of Economics, whose
    role is to consider the effects of potential Commission actions on
    consumers, businesses, and the marketplace as a whole, and to advise
    the Bureaus and the Commission on whether to take such actions.
    ---------------------------------------------------------------------------
        \20\ https://www.ftc.gov/news-events/audio-video/ftc-events/
    workshops. Recent topics include military consumers, connected cars,
    identity theft, artificial intelligence and blockchain technologies,
    drones, ransomware, charity fraud, and new technologies and research
    affecting privacy (``PrivacyCon'').
    ---------------------------------------------------------------------------
        In addition, the FTC recently created an Office of Technology
    Research and Investigations, and has appointed a series of Chief
    Technologists, to ensure that the Commission thoroughly understands new
    and emerging technologies as it seeks to address consumer protection
    issues in our increasingly connected world.
        Understandably, individuals and companies may not like being the
    focus of an investigation, even in those instances when the
    investigation is ultimately closed without Commission action. However,
    in my experience, the FTC's actions are appropriately measured, well-
    considered, and grounded in the law and in the FTC's fundamental
    mission to protect U.S. consumers. Some in the consumer advocacy
    community, including my organization, have at times wished that the FTC
    could and would do more.\21\ Nevertheless, we consider the agency one
    of our champions.
    ---------------------------------------------------------------------------
        \21\ https://consumersunion.org/research/joint-comments-to-the-ftc-
    on-proposed-settlements-with-used-car-dealers-under-the-carmax-asbury-
    and-west-herr-brands-about-recalled-cars-advertised-as-safe/ (FTC
    should do more to stop dealer deception regarding cars with open
    recalls).
    ---------------------------------------------------------------------------
        Thanks to the FTC, and to Congress' wisdom in establishing it,
    consumers enjoy a far more fair, dependable, and consumer-friendly
    marketplace than otherwise would exist. Moreover, businesses operating
    fairly and honestly are rewarded with a more level playing field, where
    bad actors cannot count on getting away with and profiting off of their
    illegal activity.
        We appreciate the interest in the FTC that this Subcommittee is
    taking as part of its oversight responsibilities. I am aware of a
    number of proposals that have been put forward to change the way the
    FTC operates, some of which may be discussed here today.
        We wrote letters to the House Energy and Commerce Committee last
    year expressing concern about a number of proposals being considered
    there that would have altered, restricted, or encumbered the FTC's
    investigation and enforcement procedures.\22\ Those letters were sent
    before I arrived, but I agree with the concerns they raise. While some
    of the Committee's proposals would have strengthened the FTC's ability
    to protect consumers--and indeed, a couple of them were ultimately
    signed into law\23\--some would have severely hampered the FTC's
    ability to protect consumers in today's exciting, but highly
    challenging consumer marketplace.\24\
    ---------------------------------------------------------------------------
        \22\ https://consumersunion.org/research/consumers-union-and-
    partners-urge-u-s-house-committee-in-letter-to-protect-the-ftc/.
        \23\ See Consumer Review Fairness Act of 2016, https://
    www.congress.gov/bill/114th-congress/house-bill/5111; BOTS Act of 2016,
    https://www.congress.gov/bill/114th-congress/senate-bill/3183.
        \24\ For example, we opposed the proposal to cap the length of FTC
    consent decrees to eight years, and to require the FTC to justify
    continuing non-fraud decrees for more than five years, because such
    requirements would undermine the FTC's ability to prevent repeat
    offenses.
    ---------------------------------------------------------------------------
        I am also aware that this Subcommittee is reviewing January 2017
    recommendations from the American Bar Association (ABA) Section of
    Antitrust Law, some of which address processes and practices related to
    the FTC's consumer protection mission. While we share the goals of the
    ABA and this Subcommittee to ensure fairness, balance, and transparency
    in the FTC's operations, we do not support a number of the
    recommendations as currently framed. Some of them would limit the FTC's
    effectiveness in protecting consumers, which remains--and should always
    remain--the paramount mission of the FTC. And some appear to rely on
    single anecdotes that do not reflect my longtime experience at the FTC.
        Consumers face enormous challenges navigating today's marketplace,
    making it harder than ever to avoid fraud, deception, and other harms.
    Every day, they face 24-hour data collection and advertising, phishing
    attempts, imposter scams, massive data breaches, highly sophisticated
    frauds, and confusion about who they can trust. In this environment,
    the FTC needs more authority to protect consumers, not less, including
    stronger tools to protect consumers from privacy and security threats;
    broader jurisdiction over common carriers and other entities currently
    shielded from liability; stronger remedies to hold wrongdoers
    accountable; and greater resources to address consumer harms across the
    entire marketplace.
        Because my first-hand experience at the FTC informs how the many
    proposals under consideration would affect the FTC's work, I am pleased
    to have been invited here today to assist the Subcommittee in its
    deliberations. Although the FTC is not perfect, my experience is that
    it employs procedures appropriate to its responsibilities, that it uses
    them fairly and evenhandedly, and that it pursues its mission with
    dedication, even as it observes the limits of its authority. I and my
    colleagues at Consumers Union stand ready to assist this Subcommittee
    in evaluating these proposals, and to take a careful look at any other
    recommendations that the Subcommittee believes may have merit.
        Thank you again for the opportunity to testify.

        Senator Moran. Thank you very much.
        Mr. Szoka.

            STATEMENT OF BERIN SZOKA, PRESIDENT, TECHFREEDOM

        Mr. Szoka. Chairman Moran, Ranking Member Blumenthal, thank
    you for inviting me here today. As the only person sitting at
    this table who has not been a Director of the Bureau of
    Consumer Protection, I hope I can at least offer an outside
    perspective.
        I have been studying how the FTC works for nearly a decade,
    since leaving the private practice of law, and have co-chaired
    the FTC Technology and Reform Project, an independent and
    scholarly effort launched in 2013 to study how the Federal
    Trade Commission operates. And I've been referring to the FTC
    for years now as the ``Federal Technology Commission.'' The
    name seems to have stuck; even the former chairwoman has
    embraced it. It's not necessarily good or bad, it's just a
    convenient shorthand for an important truth, which is that more
    than any other government agency in the world, the FTC wrestles
    with a wide range of questions about how to protect consumers
    as technology changes without strangling or stifling
    innovation.
        But as I said in my testimony to this Committee in 2012,
    what the FTC calls its common law of settlements in privacy and
    data security lacks the two key elements of real common law.
    First is the analytical rigor that comes with adversarial
    litigation. Two sides argue their case before a neutral,
    independent judge, and then that judge delivers a written and
    binding decision premised on carefully reasoned analysis of the
    law. Second is that that decision, those decisions over time,
    provide clear and authoritative precedent. Antitrust law offers
    a fine example of how the FTC can be effective, indeed, often
    very aggressive, in protecting consumers without also being the
    judge, jury, and executioner, as it effectively is today.
        There is no reason that consumer protection laws should be
    inconsistent with the fundamentals of the rule of law. I think
    the FTC's Bureau of Consumer Protection can and should work
    more like its Bureau of Competition. I summarize reforms I
    think Congress should consider in my written testimony and
    provide more detail in the attached testimony I coauthored for
    last year's hearing in the House on FTC reform.
        I would break down FTC reform into seven broad categories.
    First, ensuring the FTC has the jurisdiction it needs,
    especially over the non-common carrier services provided by
    common carriers. Second, further codifying the Unfairness
    Policy Statement to ensure that the FTC's assessment of
    unreasonableness, including data security, satisfies the cost-
    benefit test that Congress codified in 1994. Third, codifying
    and further clarifying the 1983 Deception Policy Statement,
    especially to ensure that the FTC uses that power to focus on
    claims that are actually material to consumers. Fourth, to
    increase the role of economists in investigations, complaints,
    settlements, reports, and rulemaking. Fifth, to increase the
    role of Commissioners in overseeing what the Chairman and the
    staff do. Sixth, to remove disincentives against litigation so
    that courts will play more of a role in shaping consumer
    protection law. And, finally, encouraging or requiring the FTC
    to provide clearer and more empirically grounded guidance as to
    what the law means. And these last two reforms are really the
    crucial parts.
        Perhaps the greatest reason that companies have settled
    essentially all data security and privacy cases is, as Lydia
    notes, reputational cost. Consider Equifax's recent data
    breach. Its stock dropped 30 percent, and just today its CEO
    has resigned. That is the reputational market at work. And
    that's a good thing, but it's also something the FTC has
    effectively leveraged. It has used that fact to essentially
    coerce settlements with companies by strong-arming them through
    the very, very burdensome and costly investigative process,
    threatening to go public, or through the administrative
    enforcement process that they have to endure before getting
    into a Federal court.
        I think Congress can modify both of these without hampering
    the FTC's ability to protect consumers, but that would mean
    requiring greater Commissioner oversight of investigations, as
    Lydia notes, keeping investigations confidential until a
    complaint is filed, filing most complaints in Federal court,
    and explaining charges with greater specificity.
        So in the end, consumer protection law probably won't ever
    work quite like antitrust law. Courts will probably always play
    less of a role, but they should play some role. And regardless
    of what Congress does, the FTC itself must provide more and
    better guidance on how companies can comply with the law. This
    will avoid both arbitrary enforcement and also ensure that
    consumers are protected by good data security and fair privacy
    practices.
        Since 2010, the FTC has issued a flurry of reports
    asserting what companies should do, but without really
    substantially analyzing why or how to strike the right balance.
    Acting Commissioner Ohlhausen should be commended for convening
    a workshop this December on how to define informational
    injuries. This is a golden opportunity for the FTC to take a
    more empirically grounded approach to data security and
    privacy, just as it did with environmental marketing claims
    through the Green Guides that the FTC has updated regularly
    since 1992.
        Not since 1994 has Congress made significant reforms. Such
    course corrections should happen every 2 years, but that has
    not happened since 1996. It's time for the FTC to be
    reauthorized and for this Committee to start looking into these
    procedural matters. And I suspect that how the Committee
    handles them, how the FTC handle them, will prove even more
    important in determining what consumer protection looks like in
    2117 than any major enactments between now and then.
        So I look forward to helping this Committee ensure the
    Federal Technology Commission remains focused on serving
    consumers in the century to come.
        [The prepared statement of Mr. Szoka follows:]

     Prepared Statement of Berin Szoka\1\ and Graham Owens,\2\ TechFreedom
    ---------------------------------------------------------------------------
        \1\ Berin Szoka is President of TechFreedom, a nonprofit,
    nonpartisan technology policy think tank. J.D. University of Virginia
    School of Law; B.A. Duke University. He can be reached at
    bszoka@techfreedom.org. With thanks to my dedicated legal staff at
    TechFreedom, and in particular Vinny Sidhu and Sunny Seon Kang.
        \2\ I. Graham Owens is a Legal Fellow with TechFreedom. J.D. George
    Washington University School of Law; B.A. University of Virginia. He
    can be reached at gowens@techfreedom.org.
    ---------------------------------------------------------------------------
                               Table of Contents
    I. Introduction

    Background of FTC Enforcement in the Digital Economy

    II. Summary of Proposed Legislative Reforms

            A. The Common Carrier Exception

            B. More Economic Analysis
            C. Clarification of the FTC's Substantive Standards

            D. Clarifying the FTC's Pleading Standards

            E. Encouraging More Litigation to Engage the Courts in the
            Development of Section 5 Doctrine and Provide More
            Authoritative Guidance

            F. The Civil Investigative Demand Process

            G. Fencing-In Relief

            H. Closing Letters

            I. Re-opening Past Settlements

    III. Reasonable Siblings: Background on Section 5 and Negligence

    IV. Informational Injuries In Practice: Data Security & Privacy
    Enforcement to Date

    V. The Green Guides as Model for Empirically Driven Guidance

            A. The Green Guides (1992-2012)

            B. What the Commission Said in 2012 about Modifying the Guides

    VI. Eroding the Green Guides and their Empirical Approach

            A. Modification of the Green Guides by Policy Statement (2013)

            B. Modification of the Green Guides by Re-Opening Consent
            Decree (2017)

            C. Remember Concerns over Revocation of the Disgorgement
            Policy?

            D. What Re-Opening FTC Settlements Could Mean for Tech
            Companies

    VII.Better Empirical Research & Investigations
            A. What the FTC Does Now

            B. The Paperwork Reduction Act

    VIII. Pleading, Settlement and Merits Standards under Section 5

            A. Pleading & Complaint Standards

                    1. Deception Cases

                    2. Unfairness Cases

            B. Preponderance of the Evidence Standard

    IX. Conclusion
                                     ______

    I. Introduction
        Over the last two decades, use of, and access to, the Internet has
    grown exponentially, connecting people and businesses and improving the
    human condition in ways never before imagined. In 2011, 71.7 percent of
    households reported accessing the Internet, a sharp increase from 18
    percent in 1997 and 54.7 percent in 2003.\3\ This digital growth--from
    a network of computers that only a few consumers could reach, to a
    seemingly infinite marketplace of ideas accessible by almost all
    Americans--has benefited society beyond measure, affording consumers
    the ability to access information, purchase goods and services, and
    interact with each other almost instantaneously without having to leave
    the home.\4\
    ---------------------------------------------------------------------------
        \3\ Thom File, U.S. Census Bureau, Computer and Internet Use in the
    United States 1 (May 2013), https://www.census.gov/prod/2013pubs/p20-
    569.pdf; see also Steve Case, The Complete History of the Internet's
    Boom, Bust, Boom Cycle, Business Insider (Jan. 14, 2011), available at
    http://www.businessinsider.com/what-factors-led-to-the-bursting-of-the-
    internet-bub
    ble-of-the-late-90s-2011-1.
        \4\ See Fed. Trade Comm'n, Privacy Online: Fair Information
    Practices in the Electronic Marketplace: A Report to Congress 1 (2000),
    https://www.ftc.gov/sites/default/files/documents/reports/privacy-
    online-fair-information-practices-electronic-marketplace-federal-trade-
    commission-report/privacy2000.pdf.
    ---------------------------------------------------------------------------
        However, as use and benefits of the Internet has grown, so too has
    the collection of personal data and, consequently, cyber-attacks
    endeavoring to steal that data. Since 2013, the number of companies
    facing data breaches has steadily increased.\5\ In 2016, 52 percent of
    companies reported experiencing a breach--an increase from 49 percent
    in 2015--with 66 percent of those who experienced a breach reporting
    multiple breaches.\6\ Perhaps not surprisingly, not much has changed
    since 2000, where one report revealed that system penetration by
    outsiders grew by 30 percent from 1998 to 1999.\7\ Interestingly,
    despite immense improvements in companies' ability to anticipate and
    prevent cyber-attacks, some of the largest and most sophisticated
    companies in the world, including Sony, Target, eBay, and JPMorgan,
    continue to experience data breaches today,\8\ just as they did in
    2000.\9\ In spite of these statistics, the United States currently has
    no comprehensive legal framework in which to inform companies of the
    best practices to both prevent or respond to cyber-attacks, as well as
    to ensure that they're acting responsibly in the eyes of the
    Government.\10\
    ---------------------------------------------------------------------------
        \5\ Ponemon Inst. LLC, Fourth Annual Study: Is Your Company Ready
    for a Big Data Breach? 1 (2016), http://www.experian.com/assets/data-
    breach/white-papers/2016-experian-
    data-breach-preparedness-study.pdf [hereinafter PONEMON, DATA BREACH].
        \6\ Id.
        \7\ Hope Hamashige, Cybercrime can kill venture, CNN (March 10,
    2000), http://cnnfn.
    cnn.com/2000/03/10/electronic/q_crime/index.htm (reporting the findings
    of the Computer Security Institute at Carnegie Mellon University).
        \8\ Ponemon Inst. LLC, 2014: A Year of Mega Breaches 1 (2015),
    http://www.ponemon.org/
    local/upload/file/
    2014%20The%20Year%20of%20the%20Mega%20Breach%20FINAL3.pdf.
        \9\ Hamashige, Cybercrime (noting that, just as today, in 2000,
    ``[e]ven the biggest Internet companies with the most sophisticated
    technology are vulnerable to hackers, a trend highlighted last month
    when hackers stopped traffic on several popular Internet sites
    including Yahoo!, Amazon.com and eBay.'').
        \10\ See, e.g., Alan Charles Raul, Tasha D Manoranjan & Vivek
    Mohan, The Privacy, Data Protection and Cybersecurity Law Review 268
    (Alan Charles Raul, 1st ed. 2014) (``With certain notable exceptions,
    the U.S. system does not apply a `precautionary principle' to protect
    privacy, but rather, allows injured parties (and government agencies)
    to bring legal action to recover damages for, or enjoin, `unfair or
    deceptive' business practices.'').
    ---------------------------------------------------------------------------
        Absent a comprehensive statutory framework, the Federal Trade
    Commission (``FTC'' or ``Commission'') happily stepped in to police the
    vast number of data security and privacy practices not covered by the
    few Internet privacy and cyber security statutes enacted at the time.
    For two decades, the FTC has grappled with the consumer protection
    issues raised by the Digital Revolution. Armed with vast jurisdiction
    and broad discretion to decide what is unfair and deceptive, the agency
    has dealt with everything from privacy to data security, from online
    purchases to child protection, and much more. The FTC has become the
    Federal Technology Commission--a term we coined,\11\ but which the FTC
    and others have em-braced.\12\
    ---------------------------------------------------------------------------
        \11\ Berin Szoka & Geoffrey Manne, The Second Century of the
    Federal Trade Commission, TECHDIRT (Sept. 26, 2013), available at
    https://www.techdirt.com/blog/innovation/articles/
    20130926/16542624670/secondcentury-federal-trade-commission.shtml; see
    also Consumer Protection & Competition Regulation in a High-Tech World:
    Discussing the Future of the Federal Trade Commission, Report 1.0 of
    the FTC: Technology & Reform Project, 3 (Dec. 2013), available at
    http://docs.techfreedom.org/FTC_Tech_Reform_Report.pdf.
        \12\ Kai Ryssdal, The FTC is Dealing with More High Tech Issues,
    MARKETPLACE (Mar. 7, 2016) (quoting then-Chairman Edith Ramirez),
    available at http://www.marketplace.org/2016/
    03/07/tech/ftc-dealing-more-high-tech-issues.
        See, e.g., Omer Tene, With Ramirez, FTC became the Federal
    Technology Commission, IAPP (Jan. 18, 2017), https://iapp.org/news/a/
    with-ramirez-ftc-became-the-federal-technology-commission/.
    ---------------------------------------------------------------------------
        This was inevitable, given the nature of the FTC's authority.
    Enforcing the promises made by tech companies to consumers forms a
    natural baseline for digital consumer protection. On top of that
    deception power, the FTC has broad power to police other practices,
    without waiting for Congress to catch up. As the FTC said in its 1980
    Unfairness Policy statement:

            The present understanding of the unfairness standard is the
            result of an evolutionary process. The statute was deliberately
            framed in general terms since Congress recognized the
            impossibility of drafting a complete list of unfair trade
            practices that would not quickly become outdated or leave
            loopholes for easy evasion.\13\
    ---------------------------------------------------------------------------
        \13\ Fed. Trade Comm'n, FTC Policy Statement on Unfairness (1980),
    available at https://www.ftc.gov/public-statements/
    1980/12/ftc-policy-statement-unfairness (hereinafter 1980 Unfairness
    Policy Statement).

        The question is not whether the FTC should be the Federal
    Technology Commission, but how it wields its powers. For all that
    academics like to talk about creating a Federal Search Commission \14\
    or a Federal Robotics Commission,\15\ and for all the talk in
    Washington of passing ``comprehensive baseline privacy legislation'' or
    data security legislation, the most important questions turn on the
    FTC's processes, standards, and institutional structure. How the FTC
    and Congress handle these seemingly banal matters could be even more
    important in determining how consumer protection works in 2117 than
    will any major legislative lurches over the next century. Indeed, with
    the costs of cybercrimes expected to reach $2 trillion by 2019,\16\ the
    business community can ill afford to have to anticipate the approaches
    of both hackers and Federal regulators simultaneously, and it would
    seem more practical for the agency to help guide businesses by
    providing best practices to better protect their consumers. Yet, rather
    than promulgate rules or provide any clear guidance, the FTC has
    instead chosen to approach the issue through case-by-case enforcement
    actions, almost always ending in consent decrees, which do not admit
    liability and only focus on prospective requirements of the specific
    defendant in that case.\17\
    ---------------------------------------------------------------------------
        \14\ See, e.g., Oren Bracha & Frank Pasquale, Federal Search
    Commission? Access, Fairness, and Accountability in the Law of Search,
    93 Cornell L. Rev. 1149 (2008), available at http://
    www.lawschool.cornell.edu/research/cornell-law-review/upload/Bracha-
    Pasquale-Final.pdf.
        \15\ See, e.g., Ryan Calo, The case for a Federal robotics
    commission, Brookings Institute (Sept. 15, 2014), available at https://
    www.brookings.edu/research/the-case-for-a-federal-robotics-commission/;
    Nancy Scola, Why the U.S. might just need a Federal Commission on
    Robotics, Washington Post (Sept. 15, 2014), available at https://
    www.washingtonpost.com/news/the-switch/wp/2014/09/15/why-the-u-s-might-
    just-need-a-federal-commission-on-robots/?utm_term
    =.38dfc4bec72e.
        \16\ Steve Morgan, Cyber Crime Costs Projected to Reach $2 Trillion
    by 2019, Forbes (Jan. 17, 2016), available at https://www.forbes.com/
    sites/stevemorgan/2016/01/17/cyber-crime-costs
    -projected-to-reach-2-trillion-by-2019/#6e10063a3a91.
        \17\ See F.T.C. v. Wyndham Worldwide Corp., 799 F.3d 236, 257,
    n.22. (3d Cir. 2015). Notably, this practice is not entirely limited to
    data security and privacy enforcement--though for reasons later
    discussed, the effects on companies are arguably more severe in this
    context--by the Commission, with one study finding that 1,524 of the
    2,092 enforcement action brought by the FTC in either Federal or
    administrative courts have ended in consent decrees without any
    adjudication. This means that almost 73 percent of the FTC's
    enforcement actions have ended in legally enforceable orders, despite
    no impartial judicial guidance as to the factual and legal legitimacy
    of the FTC's claims. See Daniel A. Crane, Debunking Humphrey's
    Executor, 83 Geo. Wash. L. Rev. 1835, 1867 (2015). But in tech-related
    cases its almost 100 percent, meaning the courts have played
    essentially no role at all in disciplining the FTC's use of unfairness
    in ``informational injury'' cases. See infra note 122 (providing list
    of a few cases that did not result in settlement).
    ---------------------------------------------------------------------------
        This approach, and the resulting ambiguity, has left companies
    facing uncertainty in terms of whether their data security and privacy
    practices are not only sufficient to safeguard against an FTC
    enforcement action, but more importantly, whether they're utilizing the
    best practices available to protect their consumers' data and privacy.
        Understandably, this ambiguity has frustrated judges and legal
    commentators alike, even resulting in one company's demise. Such
    frustration was made abundantly clear by the Third Circuit when,
    despite affirming the FTC's authority to regulate cyber security
    practices under the ``unfair practices'' prong of Section 5, the court
    nonetheless questioned the Commission's assertion that its consent
    decrees and ``guidance'' somehow create standards against which
    companies' cyber practices can be tested for ``unfairness.'' \18\ In
    fact, the Third Circuit emphatically agreed with the defendant's claim
    that ``consent orders, which admit no liability and which focus on
    prospective requirements on the defendant, were of little use to it in
    trying to understand the specific requirements imposed by Sec. 45(a).''
    \19\ The court continued:
    ---------------------------------------------------------------------------
        \18\ F.T.C. v. Wyndham Worldwide Corp., 799 F.3d 236, 252-253, 255
    (3d Cir. 2015).
        \19\ Id. at 257 n.22.

            We recognize it may be unfair to expect private parties back in
            2008 to have examined FTC complaints or consent decrees.
            Indeed, these may not be the kinds of legal documents they
            typically consulted. At oral argument we asked how private
            parties in 2008 would have known to consult them. The FTC's
            only answer was that ``if you're a careful general counsel you
            do pay attention to what the FTC is doing, and you do look at
            these things.'' Oral Arg. Tr. at 51. We also asked whether the
            FTC has ``informed the public that it needs to look at
            complaints and consent decrees for guidance,'' and the
            Commission could offer no examples. Id. at 52.\20\
    ---------------------------------------------------------------------------
        \20\ Id. at 257 n.23.

        The court's frustration did not end with the Commission's use of
    consent decrees either, making sure to also address issues with the
    FTC's 2007 guidebook, Protecting Personal Information, A Guide for
    Businesses, which, according the FCC, ``describes a `checklist[  ]' of
    practices that form a `sound data security plan.' ''\21\ Ultimately,
    the court recognized that ``[t]he guidebook does not state that any
    particular practice is required by [Section 5],'' and ``[f]or this
    reason, we agree . . . that the guidebook could not, on its own,
    provide ``ascertainable certainty'' of the FTC's interpretation of what
    specific cybersecurity practices fail [Section 5].'' \22\
    ---------------------------------------------------------------------------
        \21\ Id. at 257.
        \22\ Id. at 257 n.21.
    ---------------------------------------------------------------------------
        Despite being rebuked by practitioners and courts alike, the FTC
    has brushed aside this frustration and continued to rely on consent
    decrees, conclusory guidebooks/reports, and ``blog posts'' to inform
    businesses as to what constitutes reasonable data security and privacy
    practices. By contrast, the FTC has pursued a radically different
    course, providing significantly more thorough guidance in an area not
    considered to be the FTC's primary jurisdiction--environmental
    regulations through ``Green Guides.'' As explained below, these Green
    Guides reflect a sincere and thoughtful effort by the FTC to gather
    relevant data as the basis for analyzing not only ``what'' is required,
    but more significantly ``why'' is it essential and ``how much'' of a
    certain practice is necessary.
        On privacy and data security, the Commission has refused to do such
    empirical work or to issue clear guidance, relying instead on consent
    decrees and conclusory reports and guidebooks that lack any evident
    empirical foundation. This has deprived businesses of the regulatory
    certainty and clarity they need to comply with the law--and deprived
    consumers of better, more consistent data security and privacy
    practices. The Commission has flaunted the warning given it by the D.C.
    Circuit over forty years ago, that ``courts have stressed the
    advantages of efficiency and expedition which inhere in reliance on
    rulemaking instead of adjudication alone,'' including in providing
    businesses with greater certainty as to what business practices are not
    permissible.\23\ Ironically, the D.C. Circuit made that statement in a
    case where the FTC fought vehemently--and the court agreed--for the
    authority to provide the very guidance they refuse to provide to the
    digital economy today. Congress did provide that rulemaking authority a
    year later, with the Magnuson-Moss Act of 1975,\24\ but also found it
    necessary to institute new procedural safeguards in 1980, after the
    FTC's gross abuse of its rulemaking powers in the intervening five
    years,\25\ which culminated in the agency being denounced as the
    ``National Nanny.'' \26\
    ---------------------------------------------------------------------------
        \23\ Nat'l Petroleum Refiners Ass'n v. F.T.C., 482 F.2d 672, 675-76
    (D.C. Cir. 1973), cert. denied, 415 U.S. 951 (1974).
        \24\ The Magnuson-Moss Warranty Federal Trade Commission
    Improvement (Magnuson-Moss) Act, Pub.L. No. 93-637, Sec. 202(a), 88
    Stat. 2193 (1975).
        \25\ The Federal Trade Commission Improvements Act of 1980
    (Improvements Act), Pub.L. No. 96-252, 94 Stat. 374 (1980).
        \26\ Editorial, WASH. POST (Mar. 1, 1978), reprinted in MICHAEL
    PERTSCHUK, REVOLT AGAINST REGULATION, 69-70 (1982); see also J. Howard
    Beales III, Advertising to Kids and the FTC: A Regulatory Retrospective
    that Advises the Present, 8 n.37 (2004), available at https://
    www.ftc.gov/sites/default/files/documents/public_statements/
    advertising-kidsand-ftc-regula
    tory-retrospective-advises-present/040802adstokids.pdf. (``Former FTC
    Chairman Pertschuk characterizes the Post editorial as a turning point
    in the Federal Trade Commission's fortunes.'').
    ---------------------------------------------------------------------------
        With this backdrop in mind, I come before this Committee today with
    two goals. First, to inform this body--through a historical lens--of
    the FTC's ongoing procedural issues, particularly as they pertain to
    data security and privacy practices. Second, to use that historical
    analysis as a framework with which to propose practical process reforms
    that will ensure American businesses and the FTC work together as
    partners, not enemies, to make certain that consumers'--including
    Americans as well as foreign consumers who patronize U.S. businesses--
    data and privacy are afforded the greatest respect and protection
    possible.
        To that end, we herein provide a more indepth historical analysis
    of the FTC's enforcement authority, including an examination of the
    problems that have arisen due to the FTC's current procedural issues.
    We detail how the FTC has utilized data-driven guidance in other
    contexts--namely the aforementioned Green Guides--to guide businesses
    through empirical analysis of available data. Finally, we use that
    historical context to frame ways that Congress can help urge the FTC to
    provide the same types of empirical guidance to the tech industry.
    Finally, I will discuss the underlying issues with the FTC's very low
    pleading standard and ex-amine ways that Congress can address this
    problem.
    Background of FTC Enforcement in the Digital Economy
        While the FTC began studying online privacy issues as early as
    1995,\27\ the FTC truly started dealing with consumer protection issues
    related to the Internet in 1997--settling a series of assorted cases
    before, in 2001, it brought its first data security enforcement action
    premised on deception, settled against Eli Lilly in 2002.\28\ In 2005,
    the FTC brought its first data security action premised on unfairness
    against BJ's Wholesale Club.\29\ According to the FTC's most recent
    Privacy & Data Security Update, the Commission has brought over 60 data
    security cases since 2002, over 40 general privacy cases, and over 130
    spam and spyware cases.\30\ Yet, as discussed, rather than promulgate
    rules or provide any clear guidance, the FTC has instead chosen to
    approach the issue through case-by-case enforcement actions, almost
    always ending in consent decrees, which only focus on prospective
    requirements of the specific defendant in that case.\31\ the FTC truly
    started dealing with consumer protection issues related to the Internet
    in 1997--settling a series of assorted cases before, in 2001, it
    brought its first data security enforcement action premised on
    deception, settled against Eli Lilly in 2002.\32\ In 2005, the FTC
    brought its first data security action premised on unfairness against
    BJ's Wholesale Club.\33\ According to the FTC's most recent Privacy &
    Data Security Update, the Commission has brought over 60 data security
    cases since 2002, over 40 general privacy cases, and over 130 spam and
    spyware cases.\34\ Yet, as discussed, rather than promulgate rules or
    provide any clear guidance, the FTC has instead chosen to approach the
    issue through case-by-case enforcement actions, almost always ending in
    consent decrees, which only focus on prospective requirements of the
    specific defendant in that case.\35\
    ---------------------------------------------------------------------------
        \27\ See Fed. Trade Comm'n, Privacy Online: A Report to Congress 2
    (June 1998), available at https://www.ftc.gov/sites/default/files/
    documents/reports/privacy-online-report-congress/priv-23a.pdf
    [hereinafter 1998 FTC Privacy Report] (``In April 1995, staff held its
    first public workshop on Privacy on the Internet, and in November of
    that year, the Commission held hearings on online privacy as part of
    its extensive hearings on the implications of globalization and
    technological innovation for competition and consumer protection
    issues.''); see also Fed. Trade Comm'n, A Report from the Federal Trade
    Commission Staff: the FTC's First Five Years Protecting Consumers
    Online (Dec. 1999), available at https://www.ftc.gov/sites/default/
    files/documents/reports/protecting-consumers-online/fiveyearreport.pdf.
        \28\ See Press Release, Fed. Trade Comm'n, Eli Lilly Settles FTC
    Charges Concerning Security Breach (Jan. 18, 2002), available at
    https://www.ftc.gov/news-events/press-releases/2002/01/eli-lilly-
    settles-ftc-charges-concerning-security-breach.
        \29\ See Complaint, In re BJ's Wholesale Club, Inc. (F.T.C. Sept.
    20, 2005) (No. C-4-4148), available at https://www.ftc.gov/sites/
    default/files/documents/cases/2005/09/092305comp
    0423160.pdf; see also Michael D. Scott, The FTC, the Unfairness
    Doctrine, and Data Security Breach Litigation: Has the Commission Gone
    Too Far?, 60 Admin. L. Rev. 127, 146 (2008) (discussing BJ's Wholesale
    Club enforcement action and use of unfairness prong).
        \30\ See Fed. Trade Comm'n, 2016 Privacy & Data Security Update
    (Jan. 2017), https://www.ftc.gov/reports/privacy-data-security-update-
    2016 (providing overview of various enforcement actions).
        \31\ F.T.C. v. Wyndham Worldwide Corp., 799 F.3d 236, 257 n.22 (3d
    Cir. 2015).
        \32\ See Press Release, Fed. Trade Comm'n, Eli Lilly Settles FTC
    Charges Concerning Security Breach (Jan. 18, 2002), available at
    https://www.ftc.gov/news-events/press-releases/2002/01/eli-lilly-
    settles-ftc-charges-concerning-security-breach.
        \33\ See Complaint, In re BJ's Wholesale Club, Inc. (F.T.C. Sept.
    20, 2005) (No. C-4-4148), available at https://www.ftc.gov/sites/
    default/files/documents/cases/2005/09/092305comp
    0423160.pdf; see also Michael D. Scott, The FTC, the Unfairness
    Doctrine, and Data Security Breach Litigation: Has the Commission Gone
    Too Far?, 60 Admin. L. Rev. 127, 146 (2008) (discussing BJ's Wholesale
    Club enforcement action and use of unfairness prong).
        \34\ See Fed. Trade Comm'n, 2016 Privacy & Data Security Update
    (Jan. 2017), https://www.ftc.gov/reports/privacy-data-security-update-
    2016 (providing overview of various enforcement actions).
        \35\ F.T.C. v. Wyndham Worldwide Corp., 799 F.3d 236, 257 n.22 (3d
    Cir. 2015).
    ---------------------------------------------------------------------------
        In a speech last week, Acting Chairman Ohlhausen broadly summarized
    the ``various types of consumer injury addressed in our privacy and
    data security cases'' as ``informational injury.'' \36\ It's a useful
    shorthand: one term to describe a cluster of consumer protection
    problems behind a wide range of cases. But for the same reason, it's
    also a dangerous term--one that could, like ``net neutrality,'' take on
    a life its own, and serve to obscure and frustrate analysis rather than
    inform it.\37\ Of course, Chairman Ohlhausen chose her words carefully:
    ---------------------------------------------------------------------------
        \36\ Maureen K. Ohlhausen, Acting Chairman, Fed. Trade Comm'n,
    Painting the Privacy Landscape: Information Injury in FTC Privacy and
    Data Security Cases, Address Before the Federal Communications Bar
    Association (Sept. 19, 2017), https://www.ftc.gov/system/files/
    documents
    /public_statements/1255113/privacy_speech_mkohlhausen.pdf [hereinafter
    Ohlhausen, Informational Injury Speech].
        \37\ Larry Downes, The Tangled Web of Net Neutrality and
    Regulation, Harvard Business Review (March 31, 2017), available at
    https://hbr.org/2017/03/the-tangled-web-of-net-neutrality-and-
    regulation (``Despite being a simple idea, net neutrality has proven
    difficult to translate into U.S. policy. It sits uncomfortably at the
    intersection of highly technical Internet architecture and equally
    complex principles of administrative law. Even the term ``net
    neutrality'' was coined not by an engineer but by a legal academic, in
    2003.''). Gerard Stegmaier, a veteran attorney in the field of data
    security and privacy, explained it as such: ``Words matter. Net
    Neutrality. Deep Packet Inspection. #Privacy. Businesses beware.
    There's a new label in town from the gov't and repeating it could have
    significant unintended consequences. From a speech yesterday the @FTC
    acting chair declared ``informational injuries'' exist. Let that sink
    in.'' Posting of Gerard Stegmaier on LinkedIn.com (Sept. 20, 2017),
    available at https://www.linkedin.com/feed/
    update/urn:li:activity:6316291846356115456 (also on file with author).

            [L]et me also emphasize that this is not a discussion of the
            legal question of what constitutes a ``substantial injury''
            under our unfairness standard. My topic today may inform the
            substantial injury question, but I am speaking more broadly.
            Indeed, many of the cases I will mention are deception cases,
    ---------------------------------------------------------------------------
            or allege both deception and unfairness.

            . . .

            In my review of our privacy and data security cases, I have
            identified at least five different types of consumer
            informational injury. Certain of these types are more common.
            Many of our cases involve multiple types of injury. Courts and
            FTC cases often emphasize measurable injuries from privacy and
            data security incidents, although other injuries may be
            present. And to be clear, not all of these types of injury,
            standing alone, would be sufficient to trigger liability under
            the FTC Act.\38\
    ---------------------------------------------------------------------------
        \38\ Ohlhausen, Informational Injury Speech, supra note 36, at 2-3.

        It is fitting that she should emphasize the word ``measurable''--
    and also caveat it with the word ``often''--because both speak to the
    central question facing the Federal Technology Commission as it
    grapples with an endless, and accelerating, parade of novel consumer
    protection issues: how does the agency determine what the right answer
    is in any particular case and what should be done about it? Ohlhausen
    ---------------------------------------------------------------------------
    defended the FTC's approach to privacy and data security enforcement:

            Case-by-case enforcement focuses on real-world facts and
            specifically alleged behaviors and injuries. As such, each case
            integrates feedback on earlier cases from advocates, the
            marketplace and, importantly, the courts. This ongoing process
            preserves companies' freedom to innovate with data use. And it
            can adapt to new technologies and new causes of injury.\39\
    ---------------------------------------------------------------------------
        \39\ Ohlhausen, Informational Injury Speech, supra note 36, at 2.

        Yes, the courts' ``feedback'' is ``important.'' Indeed, in a reply
    brief the FTC expressly agreed with TechFreedom on this importance of
    courts' guidance when it said it ``agrees that the field would be aided
    by a body of law that includes `Article III court decisions.' '' \40\
    Yet, such assertions of the importance of courts' ``feedback'' by the
    FTC seem empty given there has been precious little of it. Since 1997,
    not counting a handful of cases where the FTC sought injunctive relief
    against absent defendants (generally foreign scammers), the FTC has
    litigated, even partially, only a handful of cases: LabMD,\41\ Wyndham
    Worldwide Corp.,\42\ Amazon.com, Inc.,\43\ and D-Link Systems, Inc.\44\
    Thus, the way the FTC works today is a far cry from what the FTC said
    about how it would operate back in 1980:
    ---------------------------------------------------------------------------
        \40\ Plaintiff's Response In Opposition to the Motion to Dismiss,
    F.T.C. v. Wyndham Worldwide Corp., 10 F. Supp. 3d 602 (D.N.J. 2014),
    aff'd, 799 F.3d 236 (3d Cir. 2015) (No. 2:13-CV-01887-ES-SCM) at 22, n.
    8.
        \41\ LabMD, Inc. v. F.T.C., No. 1:14-CV-00810-WSD, 2014 WL 1908716,
    at *1 (N.D. Ga. May 12, 2014), aff'd, 776 F.3d 1275 (11th Cir. 2015).
        \42\ F.T.C. v. Wyndham Worldwide Corp., 799 F.3d 236, 257 n.22 (3d
    Cir. 2015).
        \43\ F.T.C. v. Amazon.com, Inc., 71 F. Supp. 3d 1158 (W.D. Wash.
    2014).
        \44\ Fed. Trade Comm'n v. D-Link Sys., Inc., No. 3:17-CV-00039-JD,
    2017 WL 4150873, at *1 (N.D. Cal. Sept. 19, 2017).

            The statute was deliberately framed in general terms since
            Congress recognized the impossibility of drafting a complete
            list of unfair trade practices that would not quickly become
            outdated or leave loopholes for easy evasion. The task of
            identifying unfair trade practices was therefore assigned to
            the Commission, subject to judicial review, in the expectation
            that the underlying criteria would evolve and develop over
            time. As the Supreme Court observed as early as 1931, the ban
            on unfairness ``belongs to that class of phrases which do not
            admit of precise definition, but the meaning and application of
            which must be arrived at by what this court elsewhere has
            called `the gradual process of judicial inclusion and
            exclusion.' ''\45\
    ---------------------------------------------------------------------------
        \45\ 1980 Unfairness Policy Statement, supra note 12 (quoting FTC
    v. Raladam Co., 283 U.S. 643, 648 (1931)).

        What former FTC Chairman Tim Muris said of the Commission in 1981
    remains true today: ``Within very broad limits, the agency determines
    what shall be legal. Indeed, the agency has been `lawless' in the sense
    that it has traditionally been beyond judicial control.'' \46\ As he
    noted in his 2010 testimony before a Senate Subcommittee, ``the
    Commission's authority remains extremely broad.'' \47\ What
    Commissioner Wright said of the FTC's competition enforcement--where
    the Commission differs from the DOJ in enforcing (in theory, anyway)
    the same substantive laws--is even more true of consumer protection:
    ---------------------------------------------------------------------------
        \46\ Timothy J. Muris, Judicial Constraints, in THE FEDERAL TRADE
    COMMISSION SINCE 1970: ECONOMIC REGULATION AND BUREAUCRATIC BEHAVIOR,
    35, 49 (Kenneth W. Clarkson & Timothy J. Muris, eds., 1981).
        \47\ Hearing on Financial Services and Products: The Role of the
    Fed. Trade Commission in Protecting Customers, before the Subcomm. on
    Consumer Protection, Product Safety, and Insurance of the S. Comm. on
    Commerce, Science, and Transportation, 111th Cong. 2 (2010) (statement
    of Timothy J. Muris, Former Chairman, Fed. Trade Comm'n) available at
    http://lawpro
    fessors.typepad.com/files/
    muris_senate_testimony_ftc_role_protecting_consumers_3-17-101.pdf.

            The combination of institutional and procedural advantages with
            the vague nature of the Commission's Section 5 authority gives
            the agency the ability, in some cases, to elicit a settlement
            even though the conduct in question very likely may not
            [violate any law or regulation]. This is because firms
            typically prefer to settle a Section 5 claim rather than going
            through lengthy and costly administrative litigation in which
            they are both shooting at a moving target and have the chips
            stacked against them. Significantly, such settlements also
            perpetuate the uncertainty that exists as a result of the
            ambiguity associated with the Commission's [Section 5]
            authority by encouraging a process by which the contours of
            Section 5 are drawn without any meaningful adversarial
            proceeding or substantive analysis of the Commission's
            authority.\48\
    ---------------------------------------------------------------------------
        \48\ Joshua D. Wright, Revisiting Antitrust Institutions: The Case
    for Guidelines to Recalibrate the Federal Trade Commission's Section 5
    Unfair Methods of Competition Authority, 4 Concurrences: Competition
    L.J. 1 at 3 (2013), available at https://www.ftc.gov/sites/default/
    files/documents/public_statements/siting-antitrust-institutions-case-
    guidelines-recalibrate-federal-trade-commissions-section-5-unfair/
    concurrences-4-2013.pdf.

        Without the courts to demand rigor from the FTC in defining
    ``measurable'' harm, what should the Commission do? And what should
    Congress do?
        Chairman Ohlhausen's speech represents a major step in the right
    direction--precisely because it promises to give more analytical rigor
    to the term ``informational injury'' than such generalizations
    generally have. She concludes:

            This analysis raises several important questions. Is this list
            of injuries representative? When do these or other
            informational injuries require government intervention? Perhaps
            most importantly, how does this list map to our statutory
            deception and unfairness authorities?

            These are critical and challenging questions. That's why I am
            announcing today that the FTC will host a workshop on
            informational injury on December 12 of this year. This workshop
            will bring stakeholders together to discuss these issues in
            depth. I have three goals for this workshop: First, better
            identify the qualitatively different types of injury to
            consumers and businesses from privacy and data security
            incidents. Second, explore frameworks for how we might approach
            quantitatively measuring such injuries and estimate the risk of
            their occurrence. And third, better understand how consumers
            and businesses weigh these injuries and risks when evaluating
            the tradeoffs to sharing, collecting, storing, and using
            information. Ultimately, the goal is to inform our case
            selection and enforcement choices going forward.\49\
    ---------------------------------------------------------------------------
        \49\ Ohlhausen, Informational Injury Speech, supra note 36, at 9.

        Amen. This is the kind of workshop the FTC should have held two
    decades ago--and several more times since. The FTC has, in fact,
    conducted such workshops, collected empirical data, and issued
    corresponding guidance based upon rigorous empirical analysis in
    another context: the Green Guides first issued for environmental
    marketing in 1992, and updated three times since then.\50\ As discussed
    below, these offer an excellent model for how the Commission could
    begin to take a more substantive approach to defining informational
    injury, while also providing clearer guidance to industry.
    ---------------------------------------------------------------------------
        \50\ See Fed. Trade Comm'n, Environmental Friendly Products: FTC's
    Green Guides (last visited Sept. 24, 2017), available at https://
    www.ftc.gov/news-events/media-resources/truth-advertising/green-guides
    (``The Green Guides were first issued in 1992 and were revised in 1996,
    1998, and 2012. The guidance they provide includes: (1) general
    principles that apply to all environmental marketing claims; (2) how
    consumers are likely to interpret particular claims and how marketers
    can substantiate these claims; and (3) how marketers can qualify their
    claims to avoid deceiving consumers.'').
    ---------------------------------------------------------------------------
        Congress should support and encourage this effort--by holding the
    FTC to the high standards set by its work on the Green Guides. If this
    effort represents a significant departure with the analytically flimsy,
    ``know-it-when-we-see-it'' approach the FTC has generally taken to
    ``informational injury'' cases thus far, both consumers and companies
    would benefit from clearer, better substantiated guidance. But this
    will not be an easy change to make; it will require a new degree of
    rigor in how the Bureau of Consumer Protection operates, and a new
    closeness in BCP's engagement with the Bureau of Economics.
        At best, this could be the beginnings of a ``law and economics''
    revolution in consumer protection law--of the sort that transformed
    competition law in decades past, has guided the Bureau of Competition
    since, and has informed the courts in their development of antitrust
    case law.
        But at worst, this process could result in blessing the FTC's
    current approach with a veneer of analytical rigor that merely
    validates the status quo. The report that comes out of this process
    could resemble the reports the FTC has produced since the 2012 Privacy
    Report, which make broad recommendations as to what industry best
    practices should be, without any real analysis behind those
    recommendations or how they relate to the Commission's powers under
    Section 5.\51\
    ---------------------------------------------------------------------------
        \51\ See Berin Szoka & Geoffrey A. Manne, The Federal Trade
    Commission: Restoring Congressional Oversight of the Second National
    Legislature 57-60 (2016), available at http://docs.house.gov/meetings/
    IF/IF17/20160524/104976/HHRG-114-IF17-Wstate-ManneG-20160524-SD004.pdf
    [hereinafter White Paper].
    ---------------------------------------------------------------------------
        Chairman Ohlhausen's initial thoughtful framing suggests reason for
    optimism, but everything will depend on how she and whoever becomes
    permanent Chairman (if it is not her) execute on the plan. In any
    event, the Commission's own more recent experience with the Green
    Guides--to say nothing of the last 15 years of experience with data
    security and privacy--suggests that self-restraint is unlikely to prove
    sustainable, on its own, in disciplining the agency. Ultimately, the
    kind of analytical quality that has defined antitrust law, and has
    sustained the law and economics approach there, requires external
    constraints--namely, regular engagement with the courts and oversight
    by Congress.
        To that end, a careful reassessment of the Commission's processes
    is long overdue. The last time Congress seriously reconsidered, and
    revised, the FTC's processes was in 1994.\52\ The agency has not been
    reauthorized since 1996.\53\ Congress should return to its habit--the
    default assumption prior to Ken Starr, Monica Lewinsky, and
    impeachment--of reauthorizing the FTC every two years and, each time,
    re-examining how well the agency is working. Modifications to the
    statute should not be made lightly, but they should also happen more
    often than once in a generation.
    ---------------------------------------------------------------------------
        \52\ Federal Trade Commission Act Amendments of 1994, Pub. L. 103-
    312, 108 Stat. 1691 (Aug. 26, 1994) available at http://
    uscode.house.gov/statutes/pl/103/312.pdf.
        \53\ Federal Trade Commission Reauthorization Act of 1996, Pub. L.
    104-216, 110 Stat. 3019 (Oct. 1, 1996), available at http://
    uscode.house.gov/statutes/pl/104/216.pdf.
    ---------------------------------------------------------------------------
        Last year, the House Committee on Energy and Commerce considered no
    fewer than seventeen bills regarding the FTC. The attached white paper,
    co-authored with Geoffrey Manne, Executive Director of the
    International Center for Law & Economics, surveys those bills and
    provides recommendations to Congress on how to approach them.\54\
    Together, they form a starting point for the Senate Commerce Committee
    to begin its work, but they do not cover many of the most important
    aspects of how the agency works. Given this Committee's extensive
    knowledge and expertise, we hope that this Committee, along with the
    broader Senate, should start its own work on FTC reform legislation
    afresh.
    ---------------------------------------------------------------------------
        \54\ See generally White Paper, supra note 51.
    ---------------------------------------------------------------------------
    II. Summary of Proposed Legislative Reforms
        Rather than repeat the full analysis provided in the aforementioned
    white paper we presented to the House Energy & Commerce Committee last
    year, we have instead provided a short overview of how to consider
    thinking about the main issues we believe need to be addressed through
    legislation.
    A. The Common Carrier Exception
        The FTC Act excludes ``common carriers subject to the Acts to
    regulate commerce.'' \55\ What this provision means will be crucial--
    especially for technology cases in the coming years--and merits
    clarification from Congress.
    ---------------------------------------------------------------------------
        \55\ 15 U.S.C. Sec. 45(a).
    ---------------------------------------------------------------------------
        The Federal Communications Commission has proposed to undo its 2015
    reclassification of broadband providers as common carriers.\56\ Doing
    so will return the controversial issue of ``net neutrality'' to the
    Federal Trade Commission by restoring the FTC's jurisdiction over
    broadband providers--or rather, there should be a seamless transition
    to ensure that consumers remain protected. But a Ninth Circuit panel
    decision last year calls into question whether the FTC's jurisdiction
    will be fully restored,\57\ creating the possibility that a company
    providing broadband service, once that service is no longer considered
    a common carrier service by the FCC, might still remain outside the
    jurisdiction of the FTC either because (1) that particular corporate
    entity also provides a common carrier service such as voice (which will
    remain subject to Title II of the Communications Act even after the
    FCC's proposes re-reclassification of broadband) or (2) another
    corporate entity under common ownership provides such a common carrier
    service. In short, the panel decision rejected the FTC's longstanding
    ``activity-based'' interpretation of the statute in favor of an
    ``entity-based'' interpretation. The Ninth Circuit granted rehearing of
    that decision earlier this year, effectively vacating the panel
    decision.\58\
    ---------------------------------------------------------------------------
        \56\ Notice of Proposed Rulemaking, Restoring Internet Freedom, WC
    Docket No. 17-108, 32 FCC Rcd 4434 (2017), https://apps.fcc.gov/
    edocs_public/attachmatch/FCC-17-60A1_Rcd.pdf.
        \57\ Fed. Trade Comm'n v. AT & T Mobility LLC, 835 F.3d 993 (9th
    Cir. 2016), reh'g en banc granted sub nom., Fed. Trade Comm'n v. AT&T
    Mobility LLC, 864 F.3d 995 (9th Cir. 2017).
        \58\ Fed. Trade Comm'n v. AT&T Mobility LLC, 864 F.3d 995 (9th Cir.
    2017).
    ---------------------------------------------------------------------------
        At oral arguments last week, AT&T stuck by its general arguments
    for an entity-bases interpretation, but clarified two things.\59\
    First, it read the statute to turn on the common carrier or non-common
    carrier status of each specific corporate entity, so that the FTC's
    jurisdiction over Oath, for example, the company formed by the Verizon
    parent company after it acquired AOL and Yahoo! and merged them
    together, would not be affected by the fact that Verizon Wireless
    provides a common carrier voice service. Second, AT&T argued that the
    FCC has plenary jurisdiction to, as it did in the Computer Inquiries,
    mandate such structural separation to ensure that there is no gap in
    consumer protection between the FTC and FCC.\60\
    ---------------------------------------------------------------------------
        \59\ United States Court of Appeals for the Ninth Circuit, Fed.
    Trade Comm'n v. AT&T Mobility LLC, 864 F.3d 995 (2017), Oral Arguments,
    available at https://www.youtube.com/watch?v=Rs8EQU-KIEw.
        \60\ Id. at 13:50.
    ---------------------------------------------------------------------------
        It is impossible to predict how the Ninth Circuit might resolve
    this case, but it is safe to say that if the FCC issues its Third Open
    Internet Order this year, or even early next year, that decision might
    well come out before the Ninth Circuit's decision.
        Congress should not assume that the Ninth Circuit will fully
    restore the FTC's activity-based interpretation of its jurisdiction,
    even though appears to be the most likely result of the case. Congress
    should, instead, consider quickly moving legislation that would codify
    that interpretation. Even if the Ninth Circuit en banc panel accepts
    AT&T's argument and simply narrows the panel decision, that would only
    solve part of the problem raised by the panel decision. Requiring
    structural separation between ``edge'' companies like Oath and
    broadband companies like Verizon might make business sense anyway, but
    it might not--especially given the ongoing push to restrict the sharing
    of consumer data even among corporate affiliates under common
    ownership. Furthermore, AT&T's argument would still raise serious
    questions about which agency will deal with net neutrality and other
    consumer protection concerns about broadband services once they are
    returned to Title I: it is difficult to see how the common carrier
    services provided by these companies, if only telephony, could be
    functionally separated from the broadband service. Would consumers have
    to deal with, and subscribe to, two separate services, each offered by
    a separate corporate entity?
        The Ninth Circuit may, of course, reject AT&T's arguments
    completely, fully reverse the panel decision, and restore the FTC's
    activity-based interpretation completely. But it would be far better
    for Congress to resolve this question before the FCC revises the
    regulatory classification of broadband. It could do so in a one-
    sentence bill.
        Of course, many have argued that the common carrier exception
    should be abolished, and the Protecting Consumers in Commerce Act of
    2016 (H.R. 5239) would have done just that.\61\ Simply restoring the
    activity-based exemption need not be permanent; it could be stop-gap
    measure that allows Congress time to consider whether to maintain the
    exemption.
    ---------------------------------------------------------------------------
        \61\ Protecting Consumers in Commerce Act of 2016, H.R. 5239, 114th
    Cong. (2016), available at https://www.congress.gov/bill/114th-
    congress/house-bill/5239/text.
    ---------------------------------------------------------------------------
    B. More Economic Analysis
        As many commentators have noted, the FTC has frequently failed to
    employ sufficient economic analysis in both its enforcement work and
    policymaking. Former Commissioner Josh Wright summarized the problem
    pointedly in a speech entitled ``The FTC and Privacy Regulation: The
    Missing Role of Economics,'' explaining:

            An economic approach to privacy regulation is guided by the
            tradeoff between the consumer welfare benefits of these new and
            enhanced products and services against the potential harm to
            consumers, both of which arise from the same free flow and
            exchange of data. Unfortunately, government regulators have
            instead been slow, and at times outright reluctant, to embrace
            the flow of data. What I saw during my time at the FTC is what
            appears to be a generalized apprehension about the collection
            and use of data--whether or not the data is actually personally
            identifiable or sensitive--along with a corresponding, and
            arguably crippling, fear about the possible misuse of such
            data.\62\
    ---------------------------------------------------------------------------
        \62\ Remarks of Joshua D. Wright, The FTC and Privacy Regulation:
    The Missing Role of Economics, George Mason University Law and
    Economics Center (Nov. 12, 2015), available at http://masonlec.org/
    site/rte_up-loads/files/Wright_PRIVACYSPEECH_FINALv2_PRINT.pdf.

        As Wright further noted, such an approach would take into account
    the risk of abuses that will cause consumer harm, weighed with as much
    precision as possible. Failing to do so can lead to significant
    problems, including creating disincentives for companies to innovate
    and create benefits for consumers.
        Specifically, Congress or the FTC should require the Bureau of
    Economics to have a role in commenting on consent decrees \63\ and
    proposed rulemaking,\64\ and a greater role in the CID process. But the
    most effective ways to engage economists in the FTC's decisionmaking
    would be to raise the FTC's pleading standards and make reforms to the
    CID process designed to make litigation more likely: in both cases, the
    FTC will have to engage its economists more closely, either in order to
    ensure that its complaints are well-plead or to prevail on the merits
    in Federal court.
    ---------------------------------------------------------------------------
        \63\ See White Paper, supra note 51, at 42-43.
        \64\ See id. at 98-100.
    ---------------------------------------------------------------------------
    C. Clarification of the FTC's Substantive Standards
        The FTC has departed in significant ways from both the letter and
    spirit of the 1980 Unfairness Policy Statement and the 1983 Deception
    Policy Statement. This is mainly due to the FTC essentially having
    complete, unchecked, discretion to interpret these policy statements as
    it sees fit--including the discretion to change course regularly
    without notice. The courts simply have not had the opportunity to
    effectively implement Section 5(n), nor has the FTC ever really chosen
    to constrain its own discretion in meaningful ways (as it has done with
    the Green Guides). Making substantive clarifications to Section 5 will
    not be adequate without process reforms to ensure that these
    clarifications are given effect over time. But that does not mean they
    would be without value.
        In order to clarify the FTC's substantive standards under Section
    5, we would suggest the following key changes:

      1.  Codifying other key aspects of the 1980 Unfairness Policy
            Statement into Section 5 that were not already added by the
            addition of Section 5(n) in 1994;

      2.  Codifying the Deception Policy Statement, just as Congress
            codified the Unfairness Policy Statement in a new Section
            5(n).\65\ This issue is explored in greater depth in my 2015
            joint comments with Geoffrey Manne on the FTC's settlement of
            its enforcement action with Nomi Technologies, Inc.\66\
            Specifically, in codifying the Deception Policy Statement,
            Congress should:
    ---------------------------------------------------------------------------
        \65\ See White Paper, supra note 51, at 21-28.
        \66\ In the Matter of Nomi Technologies, Inc., Comments of the
    International Center for Law & Economics & TechFreedom, File No.
    1323251 (May 26, 2015), https://www.ftc.gov/system/files/documents/
    public_comments/2015/05/00011-96185.pdf.

        a.  Clarify--or require the FTC to propose clarifications of--when
                and how the FTC must establish the materiality of
                statements about products: it made sense to presume that
                all express statements were material in the context of
                traditional advertising: because each such statement was
                calculated to persuade users to buy a product. But the same
                cannot necessarily be said of the myriad other ways that
                companies communicate with users today, such as through
                online help pages or privacy policies (which companies are
    ---------------------------------------------------------------------------
                required to post online, if only by California law).

        b.  Require the FTC to meet the requirements of Section 5(n) when
                bringing enforcement actions based on the
                ``reasonableness'' of a company's practices, such as data
                security.\67\
    ---------------------------------------------------------------------------
        \67\ See infra 69.

      3.  Codify the FTC's 2015 Unfair Methods of Competition Policy
            Statement, with one small modification: the FTC should be
            barred from going beyond antitrust doctrine.\68\
    ---------------------------------------------------------------------------
        \68\ See White Paper, supra note 51, at 28-30; Fed. Trade Comm'n,
    Statement of Enforcement Principles Regarding ``Unfair Methods of
    Competition'' Under Section 5 of the FTC Act (Aug. 13, 2015), available
    at https://www.ftc.gov/system/files/documents/public_statements/735201/
    150
    813section5enforcement.pdf.
    ---------------------------------------------------------------------------
    D. Clarifying the FTC's Pleading Standards
        Several courts have already concluded that the FTC's deception
    enforcement actions must satisfy the heightened pleading standards of
    Section 9(b) of the Federal Rules of Civil Procedure, which applies to
    claims filed in Federal court that ``sound in fraud.'' \69\ As
    explained below, this requirement would not be difficult for the FTC to
    meet, since the agency has broad Civil Investigative powers that are
    not available to normal plaintiffs before filing a complaint.\70\ There
    is no reason the FTC should not have to plead its deception claims with
    specificity.
    ---------------------------------------------------------------------------
        \69\ Rombach v. Chang, 355 F.3d 164, 170 (2d Cir. 2004) (``In
    deciding this issue, several circuits have distinguished between
    allegations of fraud and allegations of negligence, applying Rule 9(b)
    only to claims pleaded under Section 11 and Section 12(a)(2) that sound
    in fraud.'').
        \70\ See infra at 19.
    ---------------------------------------------------------------------------
        The same can be said for unfairness claims, even though they do not
    ``sound in fraud.'' In both cases, getting the FTC to file more
    particularized complaints is critical, given that the FTC's complaint
    is, in essentially all cases, the FTC's last word on the matter,
    supplemented by little more than a press release, and an aid for public
    comment.
        Indeed, the bar should likely be higher, not lower for unfairness
    cases. The attached white paper recommends a preponderance of objective
    standard for unfairness cases.\71\ The critical thing to note is that
    there is no statutory standard for settling FTC enforcement actions--so
    the standard by which the FTC really operates is the very low bar set
    by Section 5(b): ``reason to believe that [a violation may have
    occurred]'' and that ``it shall appear to the Commission that [an
    enforcement action] would be to the interest of the public.'' \72\ In
    addition to the substantive clarifications to the FTC's substantive
    standards, Congress must clarify either the settlement standard or the
    pleading standard, if not both.
    ---------------------------------------------------------------------------
        \71\ See White Paper, supra note 51, at 18-21.
        \72\ 15 U.S.C. Sec. 45(b).
    ---------------------------------------------------------------------------
    E. Encouraging More Litigation to Engage the Courts in the Development
            of Section 5 Doctrine and Provide More Authoritative Guidance
        Litigation is important for two reasons. First, having to prove its
    case before a neutral tribunal forces analytical rigor upon the FTC and
    thus forces it to make better, more informed decisions. Second, court
    decisions will provide guidance to regulated companies on how to comply
    with the law that is necessarily more authoritative (since the FTC
    cannot simply overrule a court decision the way it can change its mind
    about its own enforcement actions or guidance) and also likely (but not
    necessarily) more detailed and better grounded in the FTC's doctrines.
        One major reason companies settle so often across the board is that
    the FTC staff has the discretion to force companies to endure the
    process of litigating through the FTC's own administrative process,
    first before an administrative law judge and then before the Commission
    itself, before ever having the opportunity to go before an independent,
    neutral tribunal. The attached white paper explore three options:\73\
    ---------------------------------------------------------------------------
        \73\ See White Paper, supra note 51, at 82-85.

      1.  ``[E]mpower one or two Commissioners to insist that the
            Commission bring a particular complaint in Federal court. This
            would allow them to steer cases out of Part III either because
            they are doctrinally significant or because the Commissioners
            fear that, unless the case goes to Federal court, the defendant
            will simply settle, thus denying the entire legal system the
            benefits of litigation in building the FTC's doctrines. In
            particular, it would be a way for Commissioners to act on the
            dissenting recommendations of staff, particularly the Bureau of
            Economics, about cases that are problematic from either a legal
            or policy perspective.'' \74\
    ---------------------------------------------------------------------------
        \74\ Id.

      2.  Abolish Part III completely, as former Commissioner Calvani has
            proposed.\75\
    ---------------------------------------------------------------------------
        \75\ See id. at 84-85.

      3.  Require the FTC to litigate in Federal court while potentially
            still preserving Part III for the supervision of the settlement
            process and discovery.\76\ Requiring the FTC to litigate all
            cases in Federal court (as the SMARTER Act would do for
            competition cases \77\) might, in principle, prove problematic
            for the Bureau of Consumer Protection, which handles many
            smaller cases. Retaining Part III but allowing Commissioners to
            object to its use might strike the best balance.
    ---------------------------------------------------------------------------
        \76\ Id.
        \77\ Standard Merger and Acquisition Reviews Through Equal Rules
    Act of 2015, H.R. 2745, 114th Cong. (2015).
    ---------------------------------------------------------------------------
    F. The Civil Investigative Demand Process
        There are many reasons why companies do not litigate privacy and
    data security cases. Some of them are beyond the control of FTC or
    Congress--for example, the extreme sensitivity of these issues for
    companies. Studies by the Ponemon Institute found that ``[d]ata
    breaches are more concerning than product recalls and lawsuits,'' \78\
    with a company's stock price falling an average of 5 percent after a
    data breach is disclosed.\79\ Witness the 30 percent hit Equifax took
    to its stock price upon revelation of its data breach.\80\ Perhaps most
    illustrative of the sensitivity of these issues was the case of LabMD--
    a medical testing company and one of the handful of companies who dared
    litigate against the FTC--which ultimately went out of business due to
    litigation costs and reputational damage, even though the judge
    ultimately found that no consumer was injured.\81\ But a very
    significant, if not the biggest, reason why companies reflexively,
    almost invariably settle their cases is that the process of the FTC's
    investigation can be punishment enough to make settlement seem more
    attractive. After enduring a burdensome investigative process,
    companies (especially start-ups) frequently lack additional resources
    to defend themselves and face an informational asymmetry given the
    intrusiveness inherent in the FTC's current process. Even Chris
    Hoofnagle, who has long advocated that the FTC be far more aggressive
    on privacy and data security, warns, in his new treatise on privacy
    regulation at the agency, that
    ---------------------------------------------------------------------------
        \78\ PONEMON, DATA BREACH, supra note 5, at 6.
        \79\ See Help Net Security, After a data breach is disclosed, stock
    prices fall an average of 5 percent (May 16, 2017), https://
    www.helpnetsecurity.com/2017/05/16/data-breach-stock-price/ (detailing
    a study by Ponemon).
        \80\ Paul R. La Monica, After Equifax apologizes, stock falls
    another 15 percent (Sept. 13, 2017), available at http://money.cnn.com/
    2017/09/13/investing/equifax-stock-mark-warner-ftc-probe/index.html.
        \81\ See, e.g., Cheryl Conner, When The Government Closes Your
    Business, Forbes (Feb. 1, 2014), https://www.forbes.com/sites/
    cherylsnappconner/2014/02/01/when-the-government-closes-your-business/
    #6e7c78971435; Dune Lawrence, A Leak Wounded This Company. Fighting the
    Feds Finished It Off, Bloomberg (April 25, 2016), https://
    www.bloomberg.com/features/2016-labmd-ftc-tiversa/ (``The one company
    that didn't settle with the FTC is LabMD. Daugherty hoped, at first,
    that if he were as cooperative as possible, the FTC would go away. He
    now calls that phase `the stupid zone.' '').

            [T]he FTC's investigatory power is very broad and is akin to an
            inquisitorial body. On its own initiative, it can investigate a
            broad range of businesses without any indication of a predicate
            offense having occurred.\82\
    ---------------------------------------------------------------------------
        \82\ Darren Bush, The Incentive and Ability of the Federal Trade
    Commission to Investigate Real Estate Markets: An Exercise in Political
    Economy, 20-21, available at http://www.antitrustinstitute.org/files/
    517c.pdf.

        This onerous the process inevitably leads to more false-positives
    as FTC staff becomes invested in fishing expeditions and force such
    consent decrees regardless of the actual harms on consumers.\83\ Other
    systemic costs of this process include increased discovery burdens on
    (even blameless) potential defendants, inefficiently large compliance
    expenditures throughout the economy, under experimentation and
    innovation by firms, doctrinally questionable consent orders, and a
    relative scarcity of judicial review of Commission enforcement
    decisions. Ultimately, this phenomena distorts the FTC's consumer
    protection mission because the agency can self-select cases that are
    likely to settle and further its policy goals, rather than choosing
    cases on the basis of stopping the most nefarious actors and truly
    protecting consumers. As even former FTC Commissioner Joshua Wright
    noted, such self-serving personal and agency goals may push agencies to
    pursue cases ``with the best prospect for settlement, cases that will
    consume few investigative resources, settle quickly, and are more
    likely to result in a consent decree that provides a continuing role
    for the agency.'' \84\ Thus, more than any other aspect of the FTC Act
    or the FTC's operations, it is here that reinvigorated congressional
    oversight is needed.
    ---------------------------------------------------------------------------
        \83\ See Geoffrey A. Manne, R. Ben Sperry & Berin Szoka, In the
    Matter of Nomi Technologies, Inc.: The Dark Side of the FTC's Latest
    Feel-Good Case, ICLE Antitrust & Consumer Protection Research Program
    White Paper 2015-1 (2015).
        \84\ D.H. Ginsburg & J.D. Wright, Antitrust Settlements: The
    Culture of Consent, in I. William E. Kovacic: An Antitrust Tribute--
    Liber Amicorum (Charbit et al., eds., February 2013), https://
    www.ftc.gov/sites/default/files/documents/public_statements/antitrust-
    settlements-culture-consent/130228antitruststlmt.pdf.
    ---------------------------------------------------------------------------
        The attached white paper explores this topic in great depth.
    Specifically, we recommend:

      1.  Reporting on how the agency uses CIDs \85\
    ---------------------------------------------------------------------------
        \85\ See White Paper, supra note 51, at 37-40.

      2.  Making CIDs confidential by default and allowing companies to
            move to quash them confidentially.\86\ Today, fighting an FTC
            subpoena means the FTC can make the fight public, which may
            have serious consequences for a company's brand and stock
            price.
    ---------------------------------------------------------------------------
        \86\ Id. at 46-48.

      3.  Requiring a greater role for Commissioners and economists in
            supervising the discovery process.\87\
    ---------------------------------------------------------------------------
        \87\ Id. at 48-53.

        Ultimately, any examination of the FTC's processes should start
    with arguably the most sacred principle in the American judicial
    system: innocent until proven guilty. As the Supreme Court made clear
    in 1895, ``[t]he principle that there is a presumption of innocence in
    favor of the accused is the undoubted law, axiomatic and elementary,
    and its enforcement lies at the foundation of the administration of our
    criminal law.'' \88\ While it is inarguably true that these cases are
    very clearly not criminal, it is also true that these companies and
    their employees face the threat of losing their ``life, liberty, and
    property'' as a result of these actions, as evidenced by LabMD. Despite
    the Administrative Law Judge finding that ``the evidence fails to show
    any computer hack for purpose of committing identity fraud,'' the
    employees of LabMD were nonetheless left without employment simply due
    to ``speculation'' by the FTC--a word that appeared seventeen times in
    the ALJ's decision.\89\
    ---------------------------------------------------------------------------
        \88\ Coffin v. United States, 156 U.S. 432, 453 (1895).
        \89\ LabMD, Inc., No. 9357, 2015 WL 7575033, at *48 (MSNET Nov. 13,
    2015), https://causeofaction.org/wp-content/uploads/2015/11/Docket-
    9357-LabMD-Initial-Decison-electronic-version-pursuant-to-FTC-Rule-3-
    51c21.pdf.
    ---------------------------------------------------------------------------
        Given the sensitive nature of both the type of information involved
    in these cases, including financial and health information, as well as
    consumers' sensitivity to reports that their data may be in jeopardy,
    it is of the utmost importance that Congress ensure that innocent
    businesses' reputations aren't irreparably damaged simply due to
    ``speculation.'' To be clear: this is not to say that parties who are
    guilty of implementing nefarious practices should be protected from the
    court of public opinion. Indeed, as former Commissioner Wright alluded
    to, implementing processes that would, at the very least, require the
    FTC to plead its claims with specificity--and, ideally, subsequently
    prove it on the basis of data-driven standards--prior to dragging a
    companies' name through the mud would actually ensure the FTC was using
    its limited resources to only go after the worst actors, rather than
    merely those most likely to settle.
        Requiring the FTC to first make a showing beyond ``speculation'' of
    harm it alleges before invoking its immensely broad investigatory
    power, would at least provide businesses and its employees with some
    level of protection before being labeled as having unsecure data
    practices and being forced to face the repercussions that inevitably
    come with such a label. In doing so, Congress would ensure one of the
    oldest maxims of law in democratic civilizations continues. As Roman
    Emperor Julian eloquently quipped in response to his fiercest
    adversary's statement that ``Oh, illustrious Caesar! if it is
    sufficient to deny, what hereafter will become of the guilty?'': ``If
    it suffices to accuse, what will become of the innocent?'' \90\
    ---------------------------------------------------------------------------
        \90\ Coffin v. United States, 156 U.S. 432, 455 (1895).
    ---------------------------------------------------------------------------
    G. Fencing-In Relief
        The FTC has broad powers under Section 13(b) to include in consent
    decrees extraordinarily broad behavioral requirements that ``fence in''
    the company in the future.\91\ The courts have been exceedingly
    deferential to the FTC in applying these requirements, though at least
    one circuit court has rebuked the FTC's broad approach, as explained in
    the attached white paper.\92\ Rather than attempting to limit how the
    FTC uses its 13(b) powers, Congress should focus on when Section 13(b)
    applies. As Howard Beales, former director of the Bureau of Consumer
    Protection, has argued, regarding deception:
    ---------------------------------------------------------------------------
        \91\ See, e.g., Kraft, Inc. v. F.T.C., 970 F.2d 311, 326 (7th Cir.
    1992) (``The F.T.C. has discretion to issue multi-product orders, so
    called `fencing-in' orders, that extend beyond violations of the Act to
    prevent violators from engaging in similar deceptive practices in the
    future.'') (citing F.T.C. v. Colgate-Palmolive Co., 380 U.S. 374, 395
    (1965)).
        \92\ See White Paper, supra note 51, at 73-75.

            the Commission's use of Section 13(b) remedies should be
            reevaluated in light of the law's original purpose: [O]ne class
            of cases clearly improper for awarding redress under Section
            13(b): traditional substantiation cases, which typically
            involve established businesses selling products with
            substantial value beyond the claims at issue and disputes over
            scientific details with well-regarded experts on both sides of
            the issue. In such cases, the defendant would not have known ex
            ante that its conduct was ``dishonest or fraudulent.'' Limiting
            the availability of consumer redress under Section 13(b) to
            cases consistent with the Section 19 standard strikes the
            balance Congress thought necessary and ensures that the FTC's
            actions benefit those that it is their mission to protect: the
            general public.\93\
    ---------------------------------------------------------------------------
        \93\ J. Howard Beales III & Timothy J. Muris, Striking the Proper
    Balance: Redress Under Section 13(b) of the FTC Act, 79 Antitrust L. J.
    1, 6-7 (2013).

        The same logic goes for the kind of unfairness cases the FTC is
    bringing against high-tech companies, as Josh Wright noted in his
    ---------------------------------------------------------------------------
    dissent in the Apple product design case:

            The economic consequences of the allegedly unfair act or
            practice in this case--a product design decision that benefits
            some consumers and harms others--also differ significantly from
            those in the Commission's previous unfairness cases. The
            Commission commonly brings unfairness cases alleging failure to
            obtain express informed consent. These cases invariably involve
            conduct where the defendant has intentionally obscured the fact
            that consumers would be billed. Many of these cases involve
            unauthorized billing or cramming--the outright fraudulent use
            of payment information. Other cases involve conduct just shy of
            complete fraud--the consumer may have agreed to one transaction
            but the defendant charges the consumer for additional,
            improperly disclosed items. Under this scenario, the allegedly
            unfair act or practice injures consumers and does not provide
            economic value to consumers or competition. In such cases, the
            requirement to provide ad-equate disclosure itself does not
            cause significant harmful effects and can be satisfied at low
            cost. However, the particular facts of this case differ in
            several respects from the above scenario.\94\
    ---------------------------------------------------------------------------
        \94\ Dissenting Statement of Commissioner Joshua D. Wright, In the
    Matter of Apple, Inc., FTC File No. 1123108, at 3 (Jan. 15, 2014),
    available at https://goo.gl/0RCC9E.

        The key point, as Wright argued, is that the Commission is
    increasingly using unfairness not to punish obviously bad actors or to
    proscribe conduct that merits per se illegality because it is
    inherently bad, but rather, conduct that presents difficult tradeoffs:
    How long should consumers remained logged in to an apps store to
    balance the convenience of the vast majority of users with the
    possibility that some users with children may find that their children
    make unauthorized purchases on the device immediately after the parent
    has logged in? How much, and what kind of, data security is
    ``reasonable?'' And so on. These reflect business decisions that are
    inevitable in the modern economy. The Commission might well be
    justified in declaring that a company has struck the wrong balance, but
    it should not treat them exactly as it would obvious fraudsters, who
    set out to defraud consumers.
        In order to deter the Commission from taking advantage of this
    frequent judicial deference by imposing such disconnected ``fencing-
    in'' remedies in non-fraud cases--which, of course, is compounded by
    the fact that most cases are never reviewed by courts at all--Congress
    should consider imposing some sort of minimal requirement that
    provisions in proposed orders and consent decrees be (i) reasonably
    related to challenged behavior, and (ii) no more onerous than necessary
    to correct or prevent the challenged violation.
    H. Closing Letters
        While consent decrees might help companies understand what the FTC
    will deem illegal on a case-by-case basis, in unique fact patterns,
    closing letters could do the inverse, telling companies what the FTC
    will deem not to be illegal, which is potentially far more useful in
    helping companies plan their conduct. In the past, the FTC issued at
    least a few closing letters with a meaningful degree of analysis of the
    practices at issue under the doctrinal framework of Section 5(n).\95\
    But in recent years, the FTC has markedly changes its approach, issuing
    fewer letters and writing those it did issue at a level of abstraction
    that offers little real guidance and even less analysis.\96\
    ---------------------------------------------------------------------------
        \95\ Id. at 40-43. See, e.g., Letter from Joel Winston, Associate
    Director of Fed. Trade Comm'n to Michael E. Burke, Esq., Counsel to
    Dollar Tree Stores, Inc. (June 5, 2001) available at http://
    www.ftc.gov/sites/default/files/documents/closing_letters/dollar-tree-
    stores-inc./070605doltree
    .pdf.
        \96\ See, e.g., Letter from Maneesha Mithal, Associate Director of
    Fed. Trade Comm'n to Lisa J. Sotto, Counsel to Michael's Stores, Inc.
    (June 5, 2001) available at http://www.ftc.gov/sites/default/files/
    documents/closing_letters/michaels-storesinc./
    120706michaelsstorescltr.pdf.
    ---------------------------------------------------------------------------
        Rep. Brett Guthrie's (R-KY) proposed CLEAR Act (H.R. 5109) would
    require the FTC to report annually to Congress on the status of its
    investigations, including the legal analysis supporting the FTC's
    decision to close some investigations without action. This requirement
    would not require the Commission to identify its targets, thus
    preserving the anonymity of the firms in question.\97\ Most
    importantly, the bill requires:
    ---------------------------------------------------------------------------
        \97\ The Clarifying Legality and Enforcement Action Reasoning Act,
    H.R. 5109, 114th Cong. (2016) [hereinafter CLEAR Act] available at
    https://www.congress.gov/bill/114th-congress/house-bill/5109/text.

      (1)  IN GENERAL.--The Commission shall, on an annual basis, submit a
            report to Congress on investigations with respect to unfair or
            deceptive acts or practices in or affecting commerce (within
    ---------------------------------------------------------------------------
            the meaning of subsection (a)(1)), detailing--

        (A)  the number of such investigations the Commission has
                commenced;

        (B)  the number of such investigations the Commission has closed
                with no official agency action;

        (C)  the disposition of such investigations, if such investigations
                have concluded and resulted in official agency action; and

        (D)  for each such investigation that was closed with no official
                agency action, a description sufficient to indicate the
                legal and economic analysis supporting the Commission's
                decision not to continue such investigation, and the
                industry sectors of the entities subject to each such
                investigation.

        This bill, with our proposed addition noted, would go a long way to
    improving the value of the FTC's guidance. Indeed, such annual
    reporting could form annual addenda to guidance that the FTC issues in
    the guidance it provides on informational injury modeled on the Green
    Guides. Although the Green Guides themselves do not involve such
    reporting, it would make sense in this context, where the FTC is
    regularly confronted with far more novel fact patterns each year.
    I. Re-opening Past Settlements
        The FTC may, under its current rules, re-open past settlements at
    any time--subject only to the Commission's assertion about what the
    ``public interest'' requires and after giving companies an opportunity
    to ``show cause'' why their settlements should not be modified.\98\ By
    contrast, courts require far more for re-opening their orders. The FTC
    has, in fact, proposed to re-open four settlements entered into in 2013
    under the Green Guides. Congress should write a meaningful standard by
    which the FTC should have to justify re-opening past settlements. If
    the Commission continues on its current course, it will be able to use
    its settlements to bypass the procedural safeguards of notice-and-
    comment rulemaking.
    ---------------------------------------------------------------------------
        \98\ 16 C.F.R. 3.72(b).
    ---------------------------------------------------------------------------
    III. Reasonable Siblings: Background on Section 5 and Negligence
        The FTC's enforcement authority is derived from Section 5 of the
    Federal Trade Commission Act (FTC Act), which declares unlawful
    ``[u]nfair methods of competition in or affecting commerce'' and
    ``unfair or deceptive acts or practices in or affecting commerce.''
    \99\ Under the broad terms of Section 5, the FTC challenges ``unfair
    methods of competition'' through their antitrust division and ``unfair
    or deceptive practices'' through their consumer protection
    division.\100\ In pursuing its consumer protection mission there are
    different standards for ``unfair'' and ``deceptive'' practices, with
    its unfairness authority being ``the broadest portion of the
    Commission's statutory authority.'' \101\ Indeed, this ``unfairness''
    authority was initially unrestrained by any statutory definition,\102\
    and remained so until Congress added Section 5(n) in 1994. In addition
    to Section 5 authority, however, the FTC has also asserted violations
    of other statutes in its data security enforcement, most notably the
    Gramm-Leach-Bliley Act (``GLBA''),\103\ Children's Online Privacy
    Protection Act (``COPPA''),\104\ as well as regulations promulgated
    under those statutes.\105\
    ---------------------------------------------------------------------------
        \99\ 15 U.S.C.A. Sec. 45 (West 2017).
        \100\ See generally Justin (Gus) Hurwitz, Data Security and the
    FTC's Uncommon Law, 101 Iowa L. Rev. 955, 964 (2016) (discussing in
    great lengths the FTC's ``common law'' approach) [hereinafter Hurwitz,
    Uncommon Law].
        \101\ Id.
        \102\ See Id.; see also Statement of Basis and Purpose of Trade
    Regulation Rule 408, Unfair or Deceptive Advertising and Labeling of
    Cigarettes in Relation to the Health Hazards of Smoking, 29 Fed. Reg.
    8324, 8355 (July 2, 1964) (setting the three-factor contours of the
    ``unfairness'' prong for the first time through application of Section
    5 to cigarette advertisements).
        \103\ See Gramm-Leach-Bliley Act, 15 U.S.C. Sec. 6801 et seq.
    (2012) (``It is the policy of the Congress that each financial
    institution has an affirmative and continuing obligation to . . .
    protect the security and confidentiality of . . . customers' nonpublic
    personal information.'').
        \104\ The Child Online Privacy Protection Act of 1998, 15 U.S.C.
    Sec. 6501, et seq (1994 & Supp. IV 1998) (making it unlawful under
    Sec. 6502(a)(1) ``for an operator of a website or online service
    directed to children . . . to collect personal information form a child
    in a manner that violates the regulations prescribed under subsection
    (b) of this section.''); see also Melanie L. Hersh, Is Coppa A Cop Out?
    The Child Online Privacy Protection Act As Proof That Parents, Not
    Government, Should Be Protecting Children's Interests on the Internet,
    28 Fordham Urb. L.J. 1831, 1878 (2001) (detailing how the FTC uses
    COPPA to regulate data security for children).
        \105\ See, e.g., FTC Final Rule, 16 C.F.R. Sec. Sec. 313.10-313.12
    (2000); Individual Reference Servs. Grp., Inc. v. F.T.C., 145 F. Supp.
    2d 6, 20 (D.D.C. 2001), aff'd sub nom. Trans Union LLC v. F.T.C., 295
    F.3d 42 (D.C. Cir. 2002) (holding that the FTC's final rule,
    promulgated under the GLBA ``did not contravene plain meaning of Act
    and were permissible construction of that legislation'' and ``agencies'
    action in promulgating final rules was not arbitrary and capricious'').
    ---------------------------------------------------------------------------
        Congress intentionally framed the FTC's authority under Section 5
    in the general terms ``unfair'' and ``deceptive'' to ensure that the
    agency could protect consumers and competition throughout all trade and
    under changing circumstances.\106\ To be sure, this broad authority has
    not been lost on the FTC, who readily acknowledges that ``Congress
    intentionally framed the statute in general terms,'' which the agency
    interprets to mean ``[t]he task of identifying unfair methods of
    competition'' as being ``assigned to the Commission.'' \107\ Despite
    the addition of Section 5(n) to the Act in 1994 to require cost-benefit
    analysis, this lack of clear statutory guidance as to what constitutes
    ``unfair'' proved to be problematic, with at least one Commissioner
    recently recognizing that ``nearly one hundred years after the agency's
    creation, the Commission has still not articulated what constitutes . .
    . unfair . . . leaving many wondering whether the Commission's Section
    5 authority actually has any meaningful limits.'' \108\ Commissioner
    Wright was referring to a lack of clarity around the meaning of
    unfairness in competition cases, but his point holds more generally.
    ---------------------------------------------------------------------------
        \106\ See H.R. REP. NO. 63-1142, at 19 (1914) (Conf. Rep.)
    (observing if Congress ``were to adopt the method of definition, it
    would undertake an endless task'').
        \107\ Joshua D. Wright, Commissioner, Federal Trade Comm'n, Section
    5 Recast: Defining the Federal Trade Commission's Unfair Methods of
    Competition Authority at the Executive Committee Meeting of the New
    York State Bar Association's Antitrust Section, 2 (June 19, 2013),
    available at https://www.ftc.gov/sites/default/files/documents/
    public_statements/section-5-recast-defining-federal-trade-commissions-
    unfair-methods-competition-authority/130619section5re
    cast.pdf.
        \108\ Id.
    ---------------------------------------------------------------------------
        Given the broad nature of Section 5, few industries are beyond the
    FTC's reach and the FTC has met the broad statutory language with an
    equally broad exercise of its authority to enforce Section 5.\109\ The
    FTC has brought data security and privacy actions against advertising
    companies, financial institutions, health care companies, and, perhaps
    most significantly, companies engaged in providing data security
    products and services.\110\ Further, not only are companies responsible
    for safeguarding their own data, but the FTC has also alleged that
    companies are responsible for any data security failings of their
    third-party clients and vendors, too.\111\
    ---------------------------------------------------------------------------
        \109\ See Cho & Caplan, Cybersecurity Lessons; Stuart L. Pardau &
    Blake Edwards, The FTC, the Unfairness Doctrine, and Privacy by Design:
    New Legal Frontiers in Cybersecurity 12 J. Bus. & Tech. L. 227, 232
    (2017) (discussing the FTC's enforcement of ``everything from funeral
    homes, vending machine companies, telemarketing and mail marketing
    schemes, credit reporting, and the healthcare industry.'') [hereinafter
    Pardau & Edwards, New Legal Frontiers].
        \110\ See Fed. Trade Comm'n, 2016 Privacy & Data Security Update
    (Jan. 2017), https://www.ftc.gov/reports/privacy-data-security-update-
    2016 (providing overview of various enforcement actions).
        \111\ See id. (For example, the consent decree agreed to in the
    FTC's enforcement action against Ashley Madison required the defendants
    to implement a comprehensive data-security program, including third-
    party assessments).
    ---------------------------------------------------------------------------
        Companies who are the victims of such cyber-attacks are victims
    themselves. They suffer immense financial losses, stemming largely from
    reputational damage as customers are fearful of remaining loyal to
    companies who can't protect their personal and financial
    information.\112\ According to one study, 76 percent of customers
    surveyed said they ``would move away from companies with a high record
    of data breaches,'' with 90 percent responding that ``there are apps
    and websites that pose risks to the protection and security of their
    personal information.'' \113\ Unquestionably, data security is the
    cornerstone of the digital economy and digitization of the physical
    economy. As Naveen Menon, President of Cisco Systems for Southeast
    Asia, put it ``[s]ecurity is what protects businesses, allowing them to
    innovate, build new products and services.'' \114\
    ---------------------------------------------------------------------------
        \112\ See generally PONEMON, DATA BREACH; see also Data breaches
    cost U.S. businesses an average of $7 million--here's the breakdown,
    Business Insider (April 27, 2017), http://www.businessinsider.com/sc/
    data-breaches-cost-us-businesses-7-million-2017-4 (providing that the
    average cost of a data security breach is $7 million, with 76 percent
    of customers saying they would move away from companies with a high
    record of data breaches).
        \113\ See VansonBourne, Data Breaches and Customer Loyalty Report
    (2015), http://www.vanson-bourne.com/client-research/18091501JD.
        \114\ Naveen Menon, There can be no digital economy without
    security, World Economic Forum (May 8, 2017), https://www.weforum.org/
    agenda/2017/05/there-can-be-no-digital-economy-with
    out-security/.
    ---------------------------------------------------------------------------
        The recent Equifax breach illustrates just how strongly
    reputational forces encourage companies to invest in data security. As
    of the time this testimony was being written, Equifax's post-hack stock
    had plummeted 30 percent.\115\ Given the enormous stakes for companies'
    brands, it is not difficult to understand why--with no clear guidance
    from Congress or the FTC--companies have opted to settle and enter into
    consent decrees rather than risk further reputational damage and
    customer loss through embarrassing and costly litigation.\116\ Out of
    approximately 60 data security enforcement actions, only two defendants
    dared face an FTC armed with near absolute discretion as to the
    interpretation of ``reasonable'' data security practices. This
    hesitation to challenge the FTC in order to gain clarity from the
    courts about what actually constitutes unreasonable practices--in
    addition to the more obvious reason of escaping liability--was only
    reinforced by the LabMD case, where the company's decision to litigate
    against the FTC rather than enter into a consent decree led to its
    demise.\117\
    ---------------------------------------------------------------------------
        \115\ See, e.g., Equifax Plummets After Huge Data Breach, Kroger
    Sinks on Profit drop, American Outdoor Brand Falls, Yahoo Finance,
    Sept. 8, 2017, https://finance.yahoo.com/news/equifax-plummets-huge-
    data-breach-kroger-sinks-profit-drop-american-outdoor-brands-falls-
    144654294
    .html.
        \116\ Id.
        \117\ Id.
    ---------------------------------------------------------------------------
        Data security poses a unique challenge: unlike other unfairness
    cases, the company at issue is both the victim (of data breaches) and
    the culprit (for allegedly having inadequate data security). In such
    circumstances, the FTC should apply unfairness as more of a negligence
    standard than strict liability. Consider both a company that has been
    hacked and a business owner whose business has burned down. In both
    situations, it is very likely that employees and customers lost items
    they consider to be precious--perhaps even irreplaceable. Additionally,
    it is equally likely that neither wanted this unfortunate event to
    occur. Finally, in both situations, prosecutors would investigate the
    accident to determine the cause and assess the damage and costs.
    However, under the FTC's current approach to Section 5 enforcement, how
    each business owner would be judged for liability purposes would vary
    greatly despite these similarities.
        Under the common law of torts, absent some criminal intent (e.g.,
    insurance fraud) the businessman whose office burned down would only be
    held liable if he acted negligent in some way. At common law,
    negligence involves either an act that a reasonable person would know
    creates an unreasonable risk of harm to others.\118\ Should a
    prosecutor or third party bring a lawsuit against the business owner,
    they would be required to put forth expert testimony and a detailed
    analysis showing exactly how and why the owner's negligence caused the
    fire.
    ---------------------------------------------------------------------------
        \118\ See Restatement (Second) of Torts Sec. 284 (1965).
    ---------------------------------------------------------------------------
        Conversely, despite all of the FTC's rhetoric about
    ``reasonableness''--which, as one might ``reasonably'' expect, should
    theoretically resemble a negligence-like framework--the FTC's approach
    to assessing whether a data security practice is unfair under Section 5
    actually more closely resembles a rule of strict liability.\119\
    Indeed, rather than conduct any analysis showing that (1) the company
    owed a duty to consumers and (2) how that the company's breach of that
    duty was the cause of the breach--either directly or proximately--which
    injured the consumer, instead, as one judge noted, the FTC ``kind of
    take them as they come and decide whether somebody's practices were or
    were not within what's permissible from your eyes. . . .'' \120\
    ---------------------------------------------------------------------------
        \119\ See Geoffrey A. Manne & Kristian Stout, When ``Reasonable''
    Isn't: The FTC's Standard-Less Data Security Standard, Journal of Law,
    Economics and Policy, Forthcoming (Aug. 31, 2017), available at https:/
    /papers.ssrn.com/sol3/papers.cfm?abstract_id=3041533.
        \120\ Transcript of Proceedings at 91, 94-95, LabMD, Inc. v. Fed.
    Trade Comm'n, No. 1:14-CV-810-WSD, 2014 WL 1908716 (N.D. Ga. May 7,
    2014).)).
    ---------------------------------------------------------------------------
        There is no level of prudence that can avert every foreseeable
    harm. A crucial underpinning of calculating liability in civil suits is
    that some accidents are unforeseeable, some damages fall out of the
    chain of causation, and mitigation does not always equal complete
    prevention. Thus our civil jurisprudence acknowledges that no amount of
    care can prevent all accidents (fires, car crashes, etc.), or at least
    the standard of care required to achieve an accident rate near zero
    would be wildly disproportionate, paternalistic, and unrealistic to
    real-world applications (e.g., setting the speed limit at 5 mph).
        The chaos theory also applies to the unpredictability of data
    breaches. Thus, if the FTC wants to regulate data security using a
    ``common law'' approach, then it must be willing to accept that certain
    breaches are inevitable and liability should only arise where the
    company was truly negligent. This is not simply a policy argument; it
    is the weighing of costs and benefits that Section 5(n) requires--at
    least in theory. Companies do not want to be hacked any more than
    homeowners want their houses to burn down. The FTC should begin its
    analysis of data security cases with that incentive in mind, and ask
    whether the company has acted as a ``reasonably prudent person'' would.
        This, then, presents the key question: what constitutes
    ``reasonably prudent'' data security and privacy practices for purposes
    of avoiding liability under Section 5? To help inform Congress--and, in
    turn, the FTC--on how to go about answering this question, the
    remainder of this testimony will focus on determining three key
    elements of this question: (1) the types of injuries that should merit
    the FTC's attention, (2) the analytical framework, built upon empirical
    research and investigations, which should determine what constitutes
    ``reasonable,'' and (3) the pleading requirements to determine the
    specificity with which the FTC must state its claim in the first
    instance.
    IV. Informational Injuries In Practice: Data Security & Privacy
            Enforcement to Date
        In 2005, the FTC brought its first data security case premised
    solely on unfairness--against a company (BJ's Warehouse) not for
    violating the promises it had made to consumers, but for the underlying
    adequacy of its data security practices.\121\ Whether this was a proper
    use of Section 5 is not the important question--although it is
    essential to note that BJ's Warehouse was the consent decree that
    launched the FTC's use of unfairness for data security.a thousand''
    more (or closer to ``hundreds'' in the context of privacy and data
    security). Even if one stipulates that the FTC could have, and likely
    would have, prevailed on the merits, had the case gone to trial, the
    important question is this: how might the Commission have changed its
    approach to data security? That question becomes even more salient if
    one tries to project back, asking what the Commission should have done
    then if it had known what we know today: that twelve years later, we
    would still not have a single tech-related unfairness case resolved on
    the merits (and only four that had made it to Federal court).\122\
    ---------------------------------------------------------------------------
        \121\ Fed. Trade Comm'n, BJ's Wholesale Club Settles FTC Charges
    (June 16, 2005), available at https://www.ftc.gov/news-events/press-
    releases/2005/06/bjs-wholesale-club-settles-ftc-charges.
        \122\ See Fed. Trade Comm'n v. D-Link Sys., Inc., No. 3:17-CV-
    00039-JD, 2017 WL 4150873, at *1 (N.D. Cal. Sept. 19, 2017); Fed. Trade
    Comm'n v. Wyndham Worldwide Corp., 799 F.3d 236, 253 (3d Cir. 2015);
    LabMD, Inc. v. F.T.C., No. 1:14-CV-00810-WSD, 2014 WL 1908716, at *1
    (N.D. Ga. May 12, 2014), aff'd, 776 F.3d 1275 (11th Cir. 2015); F.T.C.
    v. Amazon.com, Inc., 71 F. Supp. 3d 1158 (W.D. Wash. 2014).
    ---------------------------------------------------------------------------
        The Commission had, of course, asked Congress for comprehensive
    privacy legislation in 2000.\123\ Besides asking again, what else could
    the Commission have done? It could have begun a rulemaking under the
    Magnusson-Moss Act of 1975, subject to the procedural safeguards
    imposed by Congress in 1980 (after the FTC's abuse of its rulemaking
    powers in the intervening five years). But, as many have noted, it
    would be difficult to craft prescriptive rules for data security or
    privacy in any rulemaking, and the process would have taken several
    years.
    ---------------------------------------------------------------------------
        \123\ Fed. Trade Comm'n, Privacy Online: Fair Information Practices
    in the Electronic Market Place--A Report to Congress (2000)
    [hereinafter Privacy Report].
    ---------------------------------------------------------------------------
        There was a third way: the FTC could have sought public comment on
    the issues of data security and privacy, issued a guidance document,
    then repeated the process every few years to update the agency's
    guidance to reflect current risks, technologies, and trade-offs. In
    short, the Commission could have followed the model established by its
    Green Guides.
    V. The Green Guides as Model for Empirically Driven Guidance
        As the FTC proceeds with Chairman Ohlhausen's plans for a workshop
    on ``informational injuries,'' it should consider its own experience
    with the Green Guides as a model. The parallel is not exact: the Guides
    focus entirely on deception, and primarily on consumer expectations,
    while the FTC's proposed ``informational injuries'' would involve both
    deception and unfairness. However, the Guides do still delve into
    substantiation of environmental marking claims, and, thus, the
    underlying merits of what companies were promising their customers. FTC
    guidance on the meaning of ``informational injuries'' in the context of
    data security and privacy would necessarily cover wider ground,
    ultimately attempting to understand harms as well as ``reasonable''
    industry practices under both deception and unfairness prongs. Still,
    the Guides emphasis on empirical substantiation would serve the FTC
    well in attempting to provide a clearer analytical basis for why a
    practice or action is deemed to have caused ``informational injury'' in
    certain cases, rather than merely stating what practices the FTC has
    determined likely to cause such harm.
        Though court guidance in this context may seem rarer than the birth
    of a giant panda, the Third Circuit nonetheless provided some insight
    into the value of previous FTC guidance--namely the FTC's 2007
    guidebook titled ``Protecting Personal Information: A Guide for
    Business,''--in understanding harms and ``reasonable'' practices that
    constitute violations of Section 5.\124\ Discussing this guidebook,
    which ``describes a `checklist[]' of practices that form a `sound data
    security plan,' '' the court notably found that, because ``[t]he
    guidebook does not state that any particular practice is required by
    [Section 5],'' it, therefore, ``could not, on its own, provide
    `ascertainable' certainty' of the FTC's interpretation of what specific
    cybersecurity practices fail [Section 5].'' \125\ Despite this
    recognition, the court still noted that the guidebook did ``counsel
    against many of the specific practices'' alleged in that specific case,
    and thus, provided sufficient guidance in that very narrow holding to
    inform the defendant of ``what'' conduct was not considered
    reasonable.\126\ Specifically, the court noted that the guidebook
    recommended:
    ---------------------------------------------------------------------------
        \124\ Wyndham, 799 F.3d at 256.
        \125\ Id. at 256 n.21.
        \126\ Id. at 256-57.

            [T]hat companies ``consider encrypting sensitive information
            that is stored on [a] computer network . . . [, c]heck . . .
            software vendors' websites regularly for alerts about new
            vulnerabilities, and implement policies for installing vendor-
            approved patches.'' It recommends using ``a firewall to protect
            [a] computer from hacker attacks while it is connected to the
            Internet,'' deciding ``whether [to] install a `border' firewall
            where [a] network connects to the Internet,'' and setting
            access controls that ``determine who gets through the firewall
            and what they will be allowed to see . . . to allow only
            trusted employees with a legitimate business need to access the
            network.'' It recommends ``requiring that employees use
            `strong' passwords'' and cautions that ``[h]ackers will first
            try words like . . . the software's default password[  ] and
            other easy-to-guess choices.'' And it recommends implementing a
            ``breach response plan,'' id. at 16, which includes
            ``[i]nvestigat[ing] security incidents immediately and tak[ing]
            steps to close off existing vulnerabilities or threats to
            personal information.'' \127\
    ---------------------------------------------------------------------------
        \127\ Id. (internal citations omitted).

        Most notably, nowhere in the court's discussion did it identify a
    single instance of the FTC explaining why a certain practice is
    necessary or reasonable; instead the FTC had merely asserted that
    companies should just accept the FTC's suggestions, without any
    consideration or analysis as to whether the immense costs that might be
    associated with implementing many of these practices are in the
    consumers' best interest. This is far from the weighing of costs and
    benefits that Section 5(n) requires. By comparison, the Green Guides,
    while focused on deception, reflect a deep empiricism about
    substantiation of environmental marketing claims, informed by a notice
    and comment process and distilled into clear guidance accompanied by
    detailed analysis.
        While multi-national corporations such as Wyndham might (arguably)
    possess the resources to blindly implement any and all suggestions the
    FTC makes, and to follow the FTC's pronouncements in each consent
    decree, the economic principle of scarcity will inevitably require
    smaller businesses with vastly fewer resources to make difficult
    decisions as to which practices they should utilize to provide the
    greatest security possible with its limited resources. For example,
    using the list above, would a company with limited resources be acting
    ``reasonable'' if it implemented a ``breach response plan,'' but failed
    to check every software vendors' website regularly for alerts? Further,
    would a company be engaging in ``deceptive'' practices if it failed to
    notify customers that, due to limited resources, it could only
    implement half of the FTC's recommended practices? The answer to these
    questions matter and will undoubtedly have significant consequences on
    how competitive small businesses remain in this country. As mentioned
    earlier, one study suggests that 76 percent of customers ``would move
    away from companies with a high record of data breaches,'' with 90
    percent responding that ``there are apps and websites that pose risks
    to the protection and security of their personal information.'' \128\
    This shows that consumers are understandably concerned about how well a
    company protects their data. If a company is essentially required to
    choose between admitting that it lacks the resources to implement
    advanced security practices on par with large, established businesses,
    or risk an FTC action for ``deception,'' how can any startup or small
    business expect to compete and grow in these polarizing circumstances?
    ---------------------------------------------------------------------------
        \128\ See VansonBourne, Data Breaches and Customer Loyalty Report
    (2015), http://www.vanson-bourne.com/client-research/18091501JD.
    ---------------------------------------------------------------------------
        Under the FTC's current enforcement standards, this all shows how
    easily small businesses may find themselves in a catch-22. On the one
    hand, if the business wishes to pretend it has the resources to
    implement the same data security standards as multi-national
    corporations in order to attract and maintain customers weary of their
    data being hacked, the business will be acting ``deceptively'' in the
    eyes of the FTC, and will be open to the costly litigation,
    reputational damage, and massive fines that come with it. On the other
    hand, if the small business wishes to be open and readily admit that,
    due to resource constraints, its data security practices are anemic
    when compared to multi-national corporations, it will be open to the
    loss of customers and businesses invariably linked to such claims. As
    this illustrates, how can any startup or small business expect to
    compete without the FTC providing guidance as to best practices based
    on empirical research--including economies of scale?
        Thus, to ensure the ability of businesses to compete and make sound
    decisions as to the allocation of their finite resources, it is
    imperative that the FTC not only endeavor to provide guidance as to
    what practices are sound, but also explain why such practices are
    necessary, as well as ``how much'' is necessary, especially in relation
    to a business's size and available resources.
    A. The Green Guides (1992-2012)
        First published in 1992, the Guides represented the Commission's
    attempt to better understand a novel issue before jumping in to case-
    by-case enforcement. By 1991, it was becoming increasingly common for
    companies to tout the environmental benefits of their products. In some
    ways, these claims were no different from traditional marketing claims:
    the FTC's job was to make sure consumers ``got the benefit of the
    bargain.'' But in other ways, it was less clear exactly what that
    ``benefit'' was--such as regarding recycling content, recyclability,
    compostability, biodegradability, refillability, sourcing of products,
    etc. Rather than asserting how much of each of these consumers should
    get, the Commission sought to ground its understanding of these
    concepts in empirical data about what consumers actually expected. As
    the Commission summarized its approach in the Statement of Basis and
    Purpose for the 2012 update:

            The Commission issued the Guides to help marketers avoid making
            deceptive claims under Section 5 of the FTC Act. Under Section
            5, a claim is deceptive if it likely misleads reasonable
            consumers. Because the Guides are based on how consumers
            reasonably interpret claims, consumer perception data provides
            the best evidence upon which to formulate guidance. As EPA
            observed, however, perceptions can change over time. The
            Guides, as administrative interpretations of Section 5, are
            inherently flexible and can accommodate evolving consumer
            perceptions. Thus, if a marketer can substantiate that
            consumers purchasing its product interpret a claim differently
            than what the Guides provide, its claims comply with the
            law.\129\
    ---------------------------------------------------------------------------
        \129\ Fed Trade Comm'n, Statement of Basis and Purpose (2012
    Update), at 24-25, https://www.ftc.gov/sites/default/files/
    attachments/press-releases/ftc-issues-revised-green-guides/green-
    guidesstatement.pdf [hereinafter ``Statement of Basis and Purpose''].

        Of course, as the Deception Policy Statement notes, ``If the
    representation or practice affects or is directed primarily to a
    particular group, the Commission examines reasonableness from the
    perspective of that group.'' \130\ Thus, the Commission immediately
    added the following:
    ---------------------------------------------------------------------------
        \130\ Fed. Trade Comm'n, FTC Policy Statement on Deception (Oct.
    14, 1983), at 1, https://www.ftc.gov/system/files/documents/
    public_statements/410531/831014deceptionstmt.pdf.

            the Green Guides are based on marketing to a general audience.
            However, when a marketer targets a particular segment of
            consumers, such as those who are particularly knowledgeable
            about the environment, the Commission will examine how
            reasonable members of that group interpret the advertisement.
            The Commission adds language in Section 260.1(d) of the Guides
            to emphasize this point. Marketers, nevertheless, should be
            aware that more sophisticated consumers may not view claims
            differently than less sophisticated consumers. In fact, the
            Commission's study yielded comparable results for both
            groups.\131\
    ---------------------------------------------------------------------------
        \131\ See Statement of Basis and Purpose, at 25.

        This bears emphasis because many speak of privacy-sensitive
    consumers as a separate market segment, and argue that we should apply
    deception in privacy cases based upon their expectations. But here,
    unlike in privacy, the Commission actually undertook empirical
    research--which turned not to support an idea that probably seemed
    intuitively obvious: that more environmentally knowledgeable or
    ``conscious'' consumers had different interpretation of environmental
    marketing claims.
        The Commission issued the first Green Guides in August 1992,
    thirteen months after two days of public hearings, including a 90-day
    public comment period in between. The Commission followed this process
    in issuing revised Green Guides in 1996, 1998, and 2012. So detailed
    was the Commission's analysis, across so many different fact patterns,
    that, while the 2012 Guides ran a mere 12 pages in the Federal
    Register,\132\ the Statement of Basis and Purpose for them ran a
    staggering 314 pages.\133\ In each update, the FTC explored how the
    previous version of the Guides addresses each, the FTC's proposal,
    comments received on the proposal and justification for the final rule.
    In short, the FTC was doing something a lot like rulemaking. Except, of
    course, the Guides are not themselves legally binding.
    ---------------------------------------------------------------------------
        \132\ 16 C.F.R. 260 (2012).
        \133\ See generally note 129.
    ---------------------------------------------------------------------------
        The FTC has never done anything even resembling this type of
    comprehensive guide for data security or privacy. Indeed, just this
    year, the FTC touted ``a series of blog posts'' as a grand
    accomplishment in the FTC's ``ongoing efforts to help businesses ensure
    they are taking reasonable steps to protect and secure consumer data.''
    \134\ The FTC has regularly trumpeted its 2012 Privacy Report, but that
    document does something very different. Most notably, the Report calls
    on industry actors to self-police in the most general of terms, making
    statements like ``to the extent that strong privacy codes are
    developed, the Commission will view adherence to such codes favorably
    in connection with its law enforcement work.'' \135\ Unlike the focus
    on substance and comprehensiveness of the Green Guides, the 2012
    Privacy Report speaks in generalities, dictating ``areas where the FTC
    will be active,'' such as in monitoring Do Not Track implementation or
    promoting enforceable self-regulatory codes.\136\ The lack of a
    Statement of Basis and Purpose akin to that issued in updating the
    Green Guides (the 2012 Statement totaled a whopping 314 pages)
    introduces unpredictability into the enforcement process, and chills
    industry action on data security and privacy.
    ---------------------------------------------------------------------------
        \134\ Press Release, Fed. Trade Comm'n, Stick with Security: FTC to
    Provide Additional Insights on Reasonable Data Security Practices (July
    21, 2017), https://www.ftc.gov/news-events/press-releases/2017/07/
    stick-security-ftc-provide-additional-insights-reasonable-data.
        \135\ Fed. Trade Comm'n, Protecting Consumer Privacy in an Era of
    Rapid Change: Recommendations for Businesses and Policymakers (March
    2012), at 73, https://www.ftc.gov/sites/default/files/documents/re-
    ports/federal-trade-commission-report-protecting-consumer-privacy-era-
    rapid-change-recommendations/120326privacyreport.pdf. [hereinafter
    ``2012 Privacy Report''].
        \136\ Id. at 72.
    ---------------------------------------------------------------------------
        In all, the Green Guides offer a clear, workable model for how the
    FTC could provide empirically grounded guidance on data security and
    privacy--even without any action by Congress. The key steps in issuing
    such guidance would be:

      1.  Study current industry practices across a wide range of
            businesses;

      2.  Gather data on consumer expectations, rather than making
            assumptions about consumer preferences;

      3.  Engage the Bureau of Economics and the FTC's growing team of in-
            house technologists in analysis of the costs and benefits of
            practice; and

      4.  Issue (at least) biennial or triennial guidance to reflect the
            changing nature, degree, and applicability of data security and
            privacy regulations.

        Short of rulemaking, this rulemaking-like approach offers the most
    clarity, comprehensibility, and predictability for both FTC enforcement
    staff and industry actors.
    B. What the Commission Said in 2012 about Modifying the Guides
        There is an obvious tension between conducting thorough empirical
    assessments to inform updating Commission guidance and how often that
    guidance can be updated: the more regular the update, the more
    difficult it will be to for the Commission to maintain methodological
    rigor in justifying that update. The 2012 Statement of Basis and
    Purpose noted requests that the Commission review and update the Guides
    every two or three years, but concluded:

            Given the comprehensive scope of the review process, the
            Commission cannot commit to conducting a full-scale review of
            the Guides more frequently than every ten years. The
            Commission, however, need not wait ten years to review
            particular sections of the Guides if it has reason to believe
            changes are appropriate. For example, the Commission can
            accelerate the scheduled review to address significant changes
            in the marketplace, such as a substantial change in consumer
            perception or emerging environmental claims. When that happens,
            interested parties may contact the Commission or file petitions
            to modify the Guides pursuant to the Commission's general
            procedures.\137\
    ---------------------------------------------------------------------------
        \137\ See Statement of Basis and Purpose, at 26-27.

        This strikes a sensible balance. Unfortunately, this is not at all
    how the Commission has handled modification of the 2012 Green Guides.
    Within a year, the FTC would modify the Green guides substantially with
    no such process for empirical substantiation to justify the new change.
    And this year, not five years after the issuance of the Guides, it
    modified the Guides yet again.
    VI. Eroding the Green Guides and their Empirical Approach
        While the Green Guides offer a model for empirically grounded
    consumer protection, the Commission has gradually moved away from that
    approach since issuing its last update to the Green Guides in 2012--
    following an approach that more closely resembles its approach to data
    security and privacy.
    A. Modification of the Green Guides by Policy Statement (2013)
        In 2013, FTC issued an enforcement policy statement clarifying how
    it would apply the Green Guides,\138\ updated just the year after
    taking notice-and-comment, to architectural coatings such as paint. The
    Commission appended this Policy Statement onto its settlement with PPG
    Architectural Finishes, Inc. (``PPG'') and The Sherwin-Williams Company
    (``Sherwin-Williams'') to settle alleged violations of Section 5 for
    marketing paints as being ``Free'' of Volatile Organic Compounds
    (VOCs).\139\ Specifically, the Policy Statement focused on application
    of the 2012 Green Guides' trace-amount test, which provided:
    ---------------------------------------------------------------------------
        \138\ Fed. Trade Comm'n, Enforcement Policy Statement Regarding
    VOC-Free Claims for Architectural Coatings (Mar. 6, 2013), https://
    www.ftc.gov/sites/default/files/documents/cases/2013/03/
    130306ppgpolicystatement.pdf.
        \139\ Press Release, Fed. Trade Comm'n, FTC Approves Final Orders
    Settling Charges Against The Sherwin-Williams Co. and PPG Architectural
    Finishes, Inc.; Issues Enforcement Policy Statement on ``Zero VOC''
    Paint Claims (Mar. 6, 2013), https://www.ftc.gov/news-events/press-
    releases/2013/03/ftc-approves-final-orderssettling-charges-against-
    sherwin.

        Depending on the context, a free-of or does-not-contain claim is
    appropriate even for a product, package, or service that contains or
    uses a trace amount of a substance if: (1) the level of the specified
    substance is no more than that which would be found as an acknowledged
    trace contaminant or background level; (2) the substance's presence
    does not cause material harm that consumers typically associate with
    that substance; and (3) the substance has not been added intentionally
    to the product.\140\
    ---------------------------------------------------------------------------
        \140\ 16 C.F.R. Sec. 260.9(c) (2012).

        The Policy Statement made two clarifications specific to
    ---------------------------------------------------------------------------
    architectural coatings:

            First, the ``material harm'' prong specifically includes harm
            to the environment and human health. This refinement
            acknowledges that consumers find both the environmental and
            health effects of VOCs material in evaluating VOC-free claims
            for architectural coatings.

            Second, the orders define ``trace level'' as the background
            level of VOCs in the ambient air, as opposed to the level at
            which the VOCs in the paint would be considered ``an
            acknowledged trace contaminant.'' The harm consumers associate
            with VOCs in coatings is caused by emissions following
            application. Thus measuring the impact on background levels of
            VOCs in the ambient air aligns with consumer expectations about
            VOC-free claims for coatings.\141\
    ---------------------------------------------------------------------------
        \141\ Fed. Trade Comm'n, Enforcement Policy Statement Regarding
    VOC-Free Claims for Architectural Coatings, at 2, https://www.ftc.gov/
    sites/default/files/documents/public_statements/voc-free-claims-
    architectural-coatings/130306ppgpolicystatement.pdf.

        In both respects, the Policy Statement amended the Green Guides--
    while purporting merely to mirror the Guides. Most notably, the Guides
    had always been grounded in claims about environmental harms. For
    example, the Statement of Basis and Purpose for the 2012 Update had
    ---------------------------------------------------------------------------
    said:

            In this context [the ``free of'' section of the Guides''], the
            Commission reminds marketers that although the Guides provide
            information on making truthful environmental claims, marketers
            should be cognizant that consumers may seek out free-of claims
            for non-environmental reasons. For example, as multiple
            commenters stated, chemically sensitive consumers may be
            particularly likely to seek out products with free-of claims,
            and risk the most grievous injury from deceptive claims.\142\
    ---------------------------------------------------------------------------
        \142\ See Statement of Basis and Purpose, at 138 n. 469.

        But now the FTC's enforcement framework would, for the first time,
    focus on ``human health'' as well. In principle, this is perfectly
    appropriate: after all, ``Unjustified consumer injury is the primary
    focus of the FTC Act,'' as the Unfairness Policy Statement reminds
    us.\143\ But note that the Commission was not bringing an unfairness
    claim--which would have required satisfying the cost-benefit analysis
    of Section 5(n). Instead, the Commission was bringing a pure deception
    claim, as with any Green Guides claim. But unlike deception cases
    brought under the Green Guides, the Commission provided none of the
    kind of empirical evidence about how consumers understood green
    marketing claims that had informed the Green Guides. The Commission did
    not seek public comment on this proposed enforcement policy statement,
    nor did it supply any such evidence of its own.
    ---------------------------------------------------------------------------
        \143\ 1980 Unfairness Policy Statement.
    ---------------------------------------------------------------------------
        In short, the 2013 Policy Statement represented not merely a de
    facto amendment of the Green Guides, undermining the precedential value
    of the Guides and of all other FTC guidance documents, but a break with
    the empirical approach by which the FTC had developed the Guides since
    1992. This alone should call into question the FTC's willingness, in
    recent years, to ground consumer protection work in empirical analysis.
    But worse was yet to come.
    B. Modification of the Green Guides by Re-Opening Consent Decree (2017)
        This July, Ohlhausen, now Acting Chairwoman, effectively proposed
    amending the FTC's Green Guides--first issued in 1992 and updated in
    1996, 1998 and 2012--via proposed consent orders issued to four paint
    companies accused of deceptively promoting emission-free or zero
    volatile organic compounds in violation of Section 5 of the FTC
    Act.\144\ In the corresponding press release, the Commission said it
    plans to ``propose harmonizing changes to two earlier consent orders
    issued in the similar PPG Architectural Finishes, Inc. (Docket No. C-
    4385) and the Sherwin Williams Company (Docket No. C-4386) matters,''
    and plans to ``issue orders to show cause why those matters should not
    be modified pursuant to Section 3.72(b) of the Commission Rules of
    Practice, 16 C.F.R. 3.72(b),'' if the consent orders are
    finalized.\145\
    ---------------------------------------------------------------------------
        \144\ Press Release, Fed. Trade Comm'n, Paint Companies Settle FTC
    Charges That They Misled Consumers; Claimed Products Are Emission- and
    VOC-free and Safe for Babies and other Sensitive Populations, (July 11,
    2017), available at https://www.ftc.gov/news-events/press
    -releases/2017/07/paint-companies-settle-ftc-charges-they-misled-
    consumers-claimed.
        \145\ Id. at  13.
    ---------------------------------------------------------------------------
        This repeated, and compounded, the two sins committed by the FTC in
    2013: (1) undermining the value of Commission guidance (here, both the
    2012 Guides and the 2013 Enforcement Policy Statement) by reminding all
    affected parties that guidance provided one day can be changed or
    revoked the next and (2) failing to provide empirical substantiation
    for its new approach. To these sins, the Commission added two more: (3)
    revoking guidance that had been treated as authoritative, and relied
    upon, by regulated parties for the previous four years through a
    consent decree and (4) re-opening the two consent decrees to which the
    2013 Enforcement policy was attached to ``harmonize'' them with the
    FTC's new approach. Revoking guidance treated as authoritative raises
    fundamental constitutional concerns about ``fair notice.'' Re-opening
    consent decrees raises even more serious concerns about the FTC's
    process.
        These concerns are reflected in recently proposed FTC settlements.
    In the 2013 PPG and Sherwin-Williams consent orders, the Commission
    specified the scope of its jurisdiction in Article II of the orders,
    stating:

            IT IS FURTHER ORDERED that respondent, directly or through any
            corporation, subsidiary, division, trade name, or other device,
            in connection with the manufacturing, labeling, advertising,
            promotion, offering for sale, sale, or distribution of any
            covered product in or affecting commerce, shall not make any
            representation, in any manner, expressly or by implication,
            regarding:

            A. The VOC level of such product; or

            B. Any other environmental benefit or attribute of such
            product,

            unless the representation is true, not misleading, and, at the
            time it is made, respondent possesses and relies upon competent
            and reliable scientific evidence that substantiates the
            representation.\146\
    ---------------------------------------------------------------------------
        \146\ Fed. Trade Comm'n, In the Matter of PPG Architectural
    Finishes, Inc., Agreement Containing Consent Order (Oct. 25, 2012), at
    4, https://www.ftc.gov/sites/default/files/documents/cases/2012/10/
    121025ppgagree.pdf; see also Fed. Trade Comm'n, In the Matter of
    Sherwin-Williams Company, Agreement Containing Consent Order (Oct. 25,
    2012), at 4, https://www.ftc.gov/sites/default/files/documents/cases/
    2012/10/121025sherwinwilliamsagree.pdf.

        In the same orders, the Commission defined ``trace'' levels of VOCs
    ---------------------------------------------------------------------------
    as including a ``human health'' component, stating:

            7. ``Trace'' level of VOCs shall mean:

            A. VOCs have not been intentionally added to the product;

            B. The presence of VOCs at that level does not cause material
            harm that consumers typically associate with VOCs, including
            but not limited to, harm to the environment or human health;
            and

            C. The presence of VOCs at that level does not result in
            concentrations higher than would be found at background levels
            in the ambient air.\147\
    ---------------------------------------------------------------------------
        \147\ Id. at 3.

        of language that specified health as a VOC-related hazard created
    no immediate substantive changes, it laid the groundwork for a
    broadening of what constitutes a legitimate claim under the definition
    of VOC. Specifically, this would mean that the FTC would only have to
    take one additional step to claim a VOC-related violation if a company
    did not meet some broad, amorphous standard of ``human health''
    conceived by the FTC. In fact, the 2017 Benjamin & Moore Co., Inc., ICP
    Construction Inc., YOLO Colorhouse LLC, and Imperial Paints, LLC
    consent orders took this additional step in an updated Article II,
    ---------------------------------------------------------------------------
    stating:

            IT IS FURTHER ORDERED that Respondent . . . must not make any
            representation, expressly or by implication . . . regarding:

            A. The emission of the covered product;

            B. The VOC level of the covered product;

            C. The odor of the covered product;

            D. Any other health benefit or attribute of, or risk associated
            with exposure to, the covered product, including those related
            to VOC, emission, or chemical composition; or

            E. Any other environmental benefit or attribute of the covered
            product, including those related to VOC, emission, or chemical
            composition, unless the representation is non-misleading,
            including that, at the time such representation is made,
            Respondent possesses and relies upon competent and reliable
            scientific evidence that is sufficient in quality and quantity
            based on standards generally accepted in the relevant
            scientific fields, when considered in light of the entire body
            of relevant and reliable scientific evidence, to substantiate
            that the representation is true.

        Given the nature and type of these products, it is possible that
    health-related hazards should have been included in these particular
    consent orders. This would imply that it is the specific context of
    these cases that serves as a justification for the inclusion of the
    health-related language. However, the harmonization of these new orders
    with the 2013 PPG and Sherwin-Williams orders would create new, broader
    obligations on those two companies. More generally, this would imply
    that the basis of the FTC's authority emanates not from the context in
    which the claim is brought, but instead from the very nature of VOCs,
    i.e., as newly-deemed health hazards.
        As a general principle, this means that, under its deception
    authority, the FTC could create ex post facto justifications for
    expanding its enforcement powers arbitrarily and with no forward
    guidance. For example, although the voluminous 2012 Green Guides
    Statement of Basis and Purpose made no mention of health risks,\148\
    the Commission found a way to add it on to previous consent agreements
    in a unilateral, non-deliberative way. This places industry actors at
    the mercy of the FTC, which can alter previous consent orders based on
    present or future interpretations of ``deception.''
    ---------------------------------------------------------------------------
        \148\ See generally Statement of Basis and Purpose.
    ---------------------------------------------------------------------------
    C. Remember Concerns over Revocation of the Disgorgement Policy?
        It is ironic that it should be this particular FTC that would
    modify a Policy Statement, which was treated as authoritative by
    regulated parties for four years and which was itself a surreptitious
    modification of a Guide issued through public notice and comment (and
    resulting in a 314-page Statement of Basis and Purpose), through such
    summary means--given that Acting Chairman Ohlhausen had previously
    urged greater deliberation and public input in withdrawing a policy
    statement.
        In July 2012, the FTC summarily revoked its 2003 Policy Statement
    on Monetary Equitable Remedies in Competition Cases (commonly called
    the ``Disgorgement Policy Statement'') \149\ on a 2-1 vote.\150\
    Commissioner Ohlhausen, the sole Republican on the Commission at the
    time, objected: ``we are moving from clear guidance on disgorgement to
    virtually no guidance on this important policy issue.'' \151\ She also
    objected to the cursory, non-deliberative nature of the underlying
    process:
    ---------------------------------------------------------------------------
        \149\ Fed. Trade Comm'n, Policy Statement on Monetary Equitable
    Remedies in Competition Cases, 68 Fed. Reg. 45,820 (Aug. 4, 2003).
        \150\ Press Release, Fed. Trade Comm'n, FTC Issues Policy Statement
    on Use of Monetary Remedies in Competition Cases (July 31, 2003),
    available at http://www.ftc.gov/opa/2003/07/disgorgement.shtm.
        \151\ See Statement of Commissioner Maureen K. Ohlhausen Dissenting
    from the Commission's Decision to Withdraw its Policy Statement on
    Monetary Equitable Remedies in Competition Cases, at 2 (July 31, 2012),
    https://www.ftc.gov/public-statements/2012/07/statement-commissioner-
    maureen-k-ohlhausen-dissenting-commissions-decision.

            I am troubled by the seeming lack of deliberation that has
            accompanied the withdrawal of the Policy Statement. Notably,
            the Commission sought public comment on a draft of the Policy
            Statement before it was adopted. That public comment process
            was not pursued in connection with the withdrawal of the
            statement. I believe there should have been more internal
            deliberation and likely public input before the Commission
            withdrew a policy statement that appears to have served this
            agency well over the past nine years.\152\
    ---------------------------------------------------------------------------
        \152\ Id. at 2.

        What then-Commissioner Ohlhausen said then about revocation of a
    policy statement remains true now about substantial modification of a
    policy statement (which is effectively a partial withdrawal of previous
    guidance): both internal debate and public input are essential. Burying
    the request for public comment in a press release about new settlements
    hardly counts as an adequate basis for reconsidering the 2013 Policy
    Statement--let alone modifying the 2012 Green Guides.
    D. What Re-Opening FTC Settlements Could Mean for Tech Companies
        The Commission could have, at any time over the last twenty years,
    undertaken the kind of empirical analysis that led to the Green Guides,
    and published guidance about interpretation of Section 5, but never did
    so. Instead, the Commission issued only a series of reports making
    broad, general recommendations. In fact, in one of the only two data
    security cases not to end in a consent decree, a Federal district judge
    blasted the FTC's decision not provide any data security standards:

        No wonder you can't get this resolved, because if [a 20-year
    consent order is] the opening salvo, even I would be outraged, or at
    least I wouldn't be very receptive to it if that's the opening bid. . .
    . You have been completely unreasonable about this. And even today you
    are not willing to accept any responsibility. . . . I think that you
    will admit that there are no security standards from the FTC. You kind
    of take them as they come and decide whether somebody's practices were
    or were not within what's permissible from your eyes. . . . [H]ow does
    any company in the United States operate when. . .[it] says, well, tell
    me exactly what we are supposed to do, and you say, well, all we can
    say is you are not supposed to do what you did. . . . [Y]ou ought to
    give them some guidance as to what you do and do not expect, what is or
    is not required. You are a regulatory agency. I suspect you can do
    that.\153\
    ---------------------------------------------------------------------------
        \153\ Transcript of Proceedings at 91, 94-95, LabMD, Inc. v. Fed.
    Trade Comm'n, No. 1:14-CV-810-WSD, 2014 WL 1908716 (N.D. Ga. May 7,
    2014)) (emphasis added).
    ---------------------------------------------------------------------------
        In recent years, the Commission has proudly trumpeted its ``common
    law of consent decrees'' as providing guidance to regulated
    entities.\154\ Now, everyone must understand that those consent decrees
    may be modified at any time, particularly those consent decrees that
    are ordered by the Commission (as opposed to a Federal court). As the
    Supreme Court made clear, ``[t]he Commission has statutory power to
    reopen and modify its orders at all times.'' \155\ In order to reopen
    and modify an order, the Commission faces an incredibly low bar, having
    to merely show that it has ``reasonable grounds to believe that public
    interest at the present time would be served by reopening.'' \156\
    Meanwhile, the FTC's consent decrees often stipulate that the defendant
    ``waives . . . all rights to seek judicial review or otherwise
    challenge or contest the validity of the order entered pursuant to this
    agreement.'' \157\
    ---------------------------------------------------------------------------
        \154\ Julie Brill, Comm'r, Fed. Trade Comm'n, ``Privacy, Consumer
    Protection, and Competition,'' Address at the 12th Annual Loyola
    Antitrust Colloquium (Apr. 27, 2012), http://www.ftc.gov/sites/default/
    files/documents/public_statements/privacy-consumer-protection-and-
    competition/120427loyolasymposium.pdf (stating the FTC consent decrees
    have ``created a `common law of consent decrees,' producing a set of
    data protection rules for businesses to follow'').
        \155\ Atl. Ref. Co. v. F.T.C., 381 U.S. 357, 377 (1965).
        \156\ Elmo Co. v. F.T.C., 389 F.2d 550, 552 (D.C. Cir. 1967), cert.
    denied, 392 U.S. 905 (1968).
        \157\ See, e.g., Agreement Containing Consent Order at 3(C), In re
    Oracle, No. 132 3115 (F.T.C. Dec. 21, 2015), https://www.ftc.gov/
    system/files/documents/cases/151221oracleorder.pdf.
    ---------------------------------------------------------------------------
        But in cases where the FTC needs a court to issue a consent decree
    (e.g., to obtain an injunction or restitution), if the FTC wishes to
    modify the decree, it must at least meet the requirements imposed by
    Federal Rule of Civil Procedure 60:\158\ the FTC must meet a heightened
    pleading standard through a showing of, for example, ``fraud,''
    ``mistake,'' or ``newly discovered evidence'' necessitating such a
    modification.\159\ Furthermore, the FTC does not have the freedom to
    modify court ordered consent decrees ``at any time,'' as with
    settlements, but must file a motion ``within a reasonable time''--the
    same standard that applies to all litigants in Federal court.\160\
    ---------------------------------------------------------------------------
        \158\ Fed. R. Civ. P. 60 (stating that ``the court may relieve a
    party or its legal representative from a final judgment, order, or
    proceeding'' for certain reasons, including ``mistake,'' ``newly
    discovered evidence,'' ``fraud,'' and ``any other reason that justifies
    relief.'').
        \159\ Fed. R. Civ. P. 60(b).
        \160\ Fed. R. Civ. P. 60(c).
    ---------------------------------------------------------------------------
        Why should there be such radically different standards? It is true
    that violating court-ordered consent decrees can result in criminal
    liability penalties, while violating Commission-ordered consent decrees
    means only civil penalties--but those penalties may be significant. For
    example, in 2015, the FTC imposed a $100 million fine against Lifelock
    for violating a 2010 consent decree by failing to provide
    ``reasonable'' data security \161\--over eight times the amount of the
    company's 2010 settlement and two thirds of the company's entire
    revenue that quarter ($156.2 million).\162\ In general, arbitrarily-
    imposed, post-hoc civil liability carries the risk of causing
    significant economic loss, reputational harm, and even business
    closure. For example, the Commission could re-open all its past data
    security and privacy cases to modify the meaning of the term ``covered
    information.'' To the extent that companies are found to be in non-
    compliance with the new standard, they would be liable for prosecution
    to the full extent of the FTC's powers. Besides compromising the
    ability of existing industry actors to comply, invest, and grow, this
    would have the effect of deterring new actors from entering a data-
    based industry for fear of uncertainty and retroactive prosecution.
    ---------------------------------------------------------------------------
        \161\ Fed. Trade Comm'n, LifeLock to Pay $100 Million to Consumers
    to Settle FTC Charges it Violated 2010 Order (Dec. 17, 2015), available
    at https://www.ftc.gov/news-events/press-releases/2015/12/lifelock-pay-
    100-million-consumers-settle-ftc-charges-it-violated.
        \162\ LifeLock, Inc., LifeLock Announces 2015 Fourth Quarter
    Results (Feb. 10, 2016), available at https://www.lifelock.com/pr/2016/
    02/10/lifelock-announces-2015-fourth-quarter-results-2/
    ---------------------------------------------------------------------------
        Congress should reassess the standard by which the FTC may reopen
    and modify its own orders. In doing so, it should begin with the
    question articulated long ago by the Supreme Court: ``whether any thing
    has happened that will justify . . . changing a decree.'' \163\ In
    answering this question, the Court made clear that ``[n]othing less
    than a clear showing of grievous wrong evoked by new and unforeseen
    conditions should lead us to change what was decreed . . . with the
    consent of all concerned.'' \164\ The reason for the Court's hesitation
    to modify consent decrees should be obvious: despite retaining the
    force of a court order, consent decrees are, at their core, stipulated
    terms mutually agreed to by the parties to the litigation, similar to
    traditional settlements of civil litigation. Thus, by choosing to
    settle and enter into consent decrees, ``[t]he parties waive their
    right to litigate the issues involved in the case and thus save
    themselves the time, expense, and inevitable risk of litigation.''
    \165\
    ---------------------------------------------------------------------------
        \163\ United States v. Swift & Co., 286 U.S. 106, 119 (1932).
        \164\ Id.
        \165\ Local No. 93, Int'l Asso. of Firefighters, etc. v. Cleveland,
    478 U.S. 501, 522 (1986) (quoting United States v. Armour & Co., 402
    U.S. 673, 681-682 (1971)).
    ---------------------------------------------------------------------------
        In Federal court, Rule 60 forces parties to show that circumstances
    have indeed changed enough to justify modification of a court order.
    However, having to only show that it believes the ``public interest''
    would be served, the FTC essentially is not required to make any
    showing of necessity that would counterbalance the value of preserving
    the terms of the settlement. Given the enormous weight the FTC itself
    has placed upon its ``common law of consent decrees,'' as a substitute
    both for judicial decisions and clearer guidance from the agency,
    Congress should find it alarming that the FTC is now undermining the
    value of that pseudo-common law.
        Ultimately, allowing the FTC to modify such agreements without
    showing any real cause not only negates the value of such agreements to
    each company (in efficiently resolving the enforcement action and
    allowing the company to move on), but more systemically and perhaps
    more importantly, it diminishes the public's trust in the government to
    be true to its word. Procedure matters. When agencies fail to utilize
    fair procedures in developing laws, the public's faith in both the laws
    and underlying institutions is diminished. This, in turn, undermines
    their effectiveness and further erodes the public's trust in the legal
    institutions upon which our democracy rests.\166\ Thus, even in
    instances where the policy behind the rule may be sound, a failure by
    the implementing agency to follow basic due process will undermine the
    public's faith and deprive businesses of the certainty they need to
    thrive.\167\
    ---------------------------------------------------------------------------
        \166\ See, e.g, Pew Research Center, Beyond Distrust: How Americans
    View Their Government (2015) (``Only 19 percent of Americans today say
    they can trust the government in Washington to do what is right ``just
    about always'' (3 percent) or ``most of the time'' (16 percent).'').
        \167\ See, e.g., Nat'l Petroleum Refiners Ass'n v. F.T.C., 482 F.2d
    672, 675-76 (D.C. Cir. 1973), cert. denied, 415 U.S. 951 (1974)
    (recognizing that ``courts have stressed the advantages of efficiency
    and expedition which inhere in reliance on rulemaking instead of
    adjudication alone,'' including in providing businesses with greater
    certainty as to what business practices are not permissible).
    ---------------------------------------------------------------------------
    VII. Better Empirical Research & Investigations
        Why doesn't the FTC do more empirical research--the kind that went
    into the Green Guides? What should the process around, and following,
    its forthcoming workshop on ``informational injuries'' look like?
    A. What the FTC Does Now
        Since 2013, the FTC has published each January an annual report
    titled the ``Privacy & Data Security Update.'' \168\ The 2016 Report
    \169\ boasts the FTC's ``unparalleled experience in consumer privacy
    enforcement'' \170\ and the wide spectrum of offline, online, and
    mobile privacy practices that the Commission has addressed with
    enforcement actions:
    ---------------------------------------------------------------------------
        \168\ FED. TRADE COMM'N, PRIVACY AND DATA SECURITY UPDATE: 2013
    (June 2012), available at https://www.ftc.gov/policy/reports/policy-
    reports/commission-and-staff-reports?title
    =data+security&items_per_page=20.
        \169\ Fed. Trade Comm'n, Privacy and Data Security Update: 2016
    (Jan 2017), available at https://www.ftc.gov/reports/privacy-data-
    security-update-2016.
        \170\ Id. at 2.

            [The FTC] has brought enforcement actions against well-known
            companies, such as Google, Facebook, Twitter, and Microsoft, as
            well as lesser-known companies. The FTC's consumer privacy
            enforcement orders do not just protect American consumers;
            rather, they protect consumers worldwide from unfair or
            deceptive practices by businesses within the FTC's
            jurisdiction.\171\
    ---------------------------------------------------------------------------
        \171\ Id.

        Given the far-reaching scope of the FTC's jurisdiction on Section 5
    enforcement and the wide range of companies that have settled
    ``informational injury'' cases, one might expect the these annual
    ``Updates'' to do more than merely summarize the previous year's
    activities, and instead provide empirical research into the privacy and
    data threats facing consumers. By failing to do so, the Commission not
    only leaves businesses in the dark as to what constitutes
    ``reasonable'' practices in the Government's eyes, but fails to inform
    them of the best practices available to ensure that Americans' data and
    privacy is adequately protected.
        For example, if the Commission is to proudly report that consumer
    protection was achieved from settling charges with a mobile ad network
    on the grounds that ``[the company] deceived consumers by falsely
    leading them to believe they could reduce the extent to which the
    company tracked them online and on their mobile phones,'' \172\ that
    Commission's work should not have ended there as a single bullet-point
    of the Commission's many highlights. As an enforcement agency with vast
    interpretive powers on deceptive practices, and an investigative body
    with considerable analytical resources, the Commission has a further
    duty to clearly explain the empirical rationale that substantiates the
    settlement: Just how do consumers understand privacy in the use of
    advertising cookies? How might companies use Do Not Track signals,
    given those consumer expectations, to provide an effective opt-out
    mechanism? How should the standard differ based on the sizes of
    companies and the services they provide? What ``informational
    injuries'' occur when consumers unknowingly receiving tailored
    advertisements through the use of unique device identifiers? It is one
    thing to say that the Commission should not have to answer all these
    questions in its pleadings, or even in order to prevail in a deception
    case. It is quite another to say that the Commission should not be
    expected to perform any research even after the fact, especially on
    matters that recur across a larger arc of enforcement actions.
    ---------------------------------------------------------------------------
        \172\ Id.
    ---------------------------------------------------------------------------
        Unforeseen vulnerabilities are the inevitable side-effect of rapid
    technological advancements; in the area of data privacy and security,
    new consumer risks will arise continually, raising questions that
    should merit careful quantitative and qualitative analyses. However, in
    its ``Privacy & Data Security Update,'' the FTC essentially asserts an
    answer without ``showing its work.''
        This is in stark comparison to the FTC's approach on the Green
    Guides, where ``the Commission sought comment on a number of general
    issues, including the continuing need for, and economic impact of, the
    Guides, as well as the Guides' effect on environmental claims'':\173\
    ---------------------------------------------------------------------------
        \173\ Statement of Basis and Purpose, at 8.

            [B]ecause the Guides are based on consumer understanding of
            environmental claims, consumer perception research provides the
            best evidence upon which to formulate guidance. The Commission
            therefore conducted its own study in July and August of 2009.
            The study presented 3,777 participants with questions
            calculated to determine how they understood certain
            environmental claims. The first portion of the study examined
            general environmental benefit claims (``green'' and ``eco-
            friendly''), as well as ``sustainable,'' ``made with renewable
            materials,'' ``made with renewable energy,'' and ``made with
            recycled materials'' claims. To examine whether consumers'
            understanding of these claims differed depending on the product
            being advertised, the study tested the claims as they appeared
            on three different products: wrapping paper, a laundry basket,
            and kitchen flooring. The second portion of the study tested
            carbon offset and carbon neutral claims.\174\
    ---------------------------------------------------------------------------
        \174\ Id. at 9-10.

        Here is an excellent example of the FTC's use of consumer
    perception data to study the effect of environmental labels, with
    variables on consumer behavioral segments and changes on perception
    over time, to substantiate deception claims. Even with the empirical
    research grounded in a large sample size, the Commission continued to
    reanalyze ``claims appearing in marketing on a case-by-case basis
    because [the Commission] lacked information about how consumers
    interpret these claims.'' \175\ The ``Green Guides: Statement of Basis
    and Purpose'' \176\ is a 314 page document that comprehensively reviews
    the Commission's economic and consumer perception studies and weighs
    different empirical methodologies on the appropriate model of risk
    assessment. It meaningfully fleshes out the Green Guides' core guidance
    on the ``(1) general principles that apply to all environmental
    marketing claims; (2) how consumers are likely to interpret particular
    claims and how marketers can substantiate these claims; and (3) how
    marketers can qualify their claims to avoid deceiving consumers,'' with
    self-awareness of the economic impact of regulations and a robust
    metric on consumer expectations to materialize the Commission's
    enforcement policies.
    ---------------------------------------------------------------------------
        \175\ See Statement of Basis and Purpose, at 27.
        \176\ See generally Statement of Basis and Purpose.
    ---------------------------------------------------------------------------
        It is deeply troubling that this level of thoroughness evades the
    Commission's privacy enforcement, where the toolbox of economics
    remains unopened in managing the information flows of commercial data
    in boundless technology sectors pervading everyday life. The FTC's
    history of consent decrees provides nothing more than anecdotal
    evidence that some guiding principle is present, within the vague
    conceptual frameworks of ``privacy by design,'' ``data minimization'',
    or ``notice and choice.'' \177\ Data privacy and security regulations
    do not exist in a silo, abstracted and harbored from real-life economic
    consequences for the consumers, firms, and stakeholders--whose
    interests intersect at the axis of the costs and benefits of
    implementing privacy systems, the need for working data in nascent
    industries, and the market's right to make informed decisions. Consumer
    protection through privacy regulation is undoubtedly a matter of
    economic significance parallel to antitrust policies or the label
    marketing in the Green Guides. Personally identifiable information
    (``PII'') is a valuable corporate asset like any other,\178\ with
    competitive market forces affecting how it is processed, shared, and
    retained. Modern consumers are cognizant of the tradeoffs they make at
    the convenience of integrated technology services, and the downstream
    uses of their data. Accordingly, not every technical deviation from a
    company's privacy policy is an affront to consumer welfare that causes
    ``unavoidable harms not outweighed by the benefits to consumers or
    competition.'' \179\ The FTC has too long failed to articulate the
    privacy risks it intends to rectify, nor to quantify the ``material''
    consumer harm through behavioral economics or any empirical metric
    substantiated beyond its usual ipso facto assertion of deception.
    ---------------------------------------------------------------------------
        \177\ See generally 2012 Privacy Report.
        \178\ Clearwater Compliance LLC, The Clearwater Definition of an
    Information Asset, https://clearwatercompliance.com/wp-content/uploads/
    2015/11/Clearwater-Definition-of-Information-Assets-with-Exam-
    ples_V8.pdf.
        \179\ 12 U.S.C. Sec. 5331(c)(1).
    ---------------------------------------------------------------------------
    B. The Paperwork Reduction Act
        A noteworthy legislation that defined the FTC's administrative
    authority after Congress imposed additional safeguards upon the FTC's
    Magnuson-Moss rulemaking powers in 1980 is the Paperwork Reduction Act
    of 1980 (``PRA'').\180\ These two 1980 enactments must be understood
    together as embodying Carter-era attempts to reduce the burdens of
    government. Specifically, Congress intended the PRA to serve as an
    administrative check on the Federal agency's information collection
    policy, with the goal of reducing paperwork burdens for individuals,
    businesses, and nonprofits by requiring the FTC to seek clearance from
    the Office of Management and Budget (``OMB'') on compulsory process
    orders surveying ten or more members of the public.
    ---------------------------------------------------------------------------
        \180\ Paperwork Reduction Act of 1980, Pub. L. No. 96-511, 94 Stat.
    2812 (codified as amended at 44 U.S.C. Sec. Sec. 3501-3520 (2012)).
    ---------------------------------------------------------------------------
        The ``collection of information'' that falls under the constraints
    of the PRA is defined as:

            the obtaining, causing to be obtained, soliciting, or requiring
            the disclosure to third parties or the public, of facts or
            opinions by or for an agency, regardless of form or format,
            calling for either--answers to identical questions posed to, or
            identical reporting or recordkeeping requirements imposed on,
            ten or more persons, other than agencies, instrumentalities, or
            employees of the United States.\181\
    ---------------------------------------------------------------------------
        \181\ 44 U.S.C. Sec. 3502(3).

        Some have claimed that the PRA has hampered the FTC's ability to
    collect data from companies and thus to perform better analysis of
    industry practices, informational injuries, and the like. The FTC's
    power to gather information without ``a specific law enforcement
    purpose'' derives from Section 6(b) of the FTC Act, which the FTC has
    ---------------------------------------------------------------------------
    summarized in relevant part as follows:

            Section 6(b) empowers the Commission to require the filing of
            ``annual or special reports or answers in writing to specific
            questions'' for the purpose of obtaining information about
            ``the organization, business, conduct, practices, management,
            and relation to other corporations, partnerships, and
            individuals'' of the entities to whom the inquiry is addressed.
            \182\
    ---------------------------------------------------------------------------
        \182\ Fed. Trade Comm'n, A Brief Overview of the Federal Trade
    Commission's Investigative and Law Enforcement Authority (July 2008),
    available at https://www.ftc.gov/about-ftc/what-we-do/enforcement-
    authority.

        Such reports would certainly be helpful for providing better
    substantiated guidance regarding data privacy and security practices.
    It is worth carefully considering what the PRA requires and how it
    might affect the FTC's collection of data. There is indeed some
    circumstantial evidence to suggest that the FTC may be structuring its
    6(b) inquiries to avoid the PRA, by limiting the number of firms from
    which the FTC requests data to fewer than ten \183\--the threshold for
    triggering the PRA's requirements.
    ---------------------------------------------------------------------------
        \183\ See e.g., FTC To Study Credit Card Industry Data Security
    Auditing Commission Issues Orders to Nine Companies That Conduct
    Payment Card Industry Screening (March 2016) https://www.ftc.gov/news-
    events/press-releases/2016/03/ftc-study-credit-card-industry-data-
    security-auditing; FTC To Study Mobile Device Industry's Security
    Update Practices (May 2016) https://www.ftc.gov/news-events/press-
    releases/2016/05/ftc-study-mobile-device-industrys-security-update-
    practices.
    ---------------------------------------------------------------------------
        A case study on the FTC's survey of Patent Assertion Entities
    (``PAEs'') \184\ illustrates two potential ways the PRA might affect
    the FTC's collection of empirical data and thus the quality of its
    analysis and guidance in data security and privacy cases. First, by its
    own terms, the PRA applies even to voluntary data-collection of the
    sort that could allow the FTC compile ``line of business'' studies that
    consider wider practices beyond a single case:
    ---------------------------------------------------------------------------
        \184\ Layne-Farrar, Anne, What Can the FTC's Sec. 6(B) PAE Study
    Teach Us? A Practical Review of the Study's Methodology (March 1,
    2016). Available at SSRN: https://ssrn.com/abstract
    =2722057. or http://dx.doi.org/10.2139/ssrn.2722057.

            [T]he obtaining, causing to be obtained, soliciting, or
            requiring the disclosure to an agency, third parties or the
            public of information by or for an agency . . . whether such
            collection of information is mandatory, voluntary, or required
            to obtain or retain a benefit.\185\
    ---------------------------------------------------------------------------
        \185\ 5 C.F.R. Sec. 1320.3(c).

        The burden-minimization goal of the PRA is evaluated by the OMB
    based on broad, unpredictable criteria, such as whether the ``the
    proposed collection of information is necessary for the proper
    performance of the functions of the agency, including whether the
    information will have practical utility.'' \186\ The PRA has been
    enforced by the OMB with tunnel vision on reducing the burden of
    paperwork and compliance, measured quite simply on the metric of man
    hours spent processing the paperwork.\187\ However, the more important
    question lies on balancing the potential burden of information
    collection with the value of added research and empirical data on FTC
    policymaking. The balance was correctly struck on the Green Guides,
    where the PRA analysis was satisfied upon a consideration of the
    benefits of consumer surveys which outweighed the minimal burdens to
    the respondents:
    ---------------------------------------------------------------------------
        \186\ United States Office of Personnel Management, Paperwork
    Reduction Act (PRA) Guide Version 2.0 (April 2011), available at
    https://www.opm.gov/about-us/open-government/digital-government-
    strategy/fitara/paperwork-reduction-act-guide.pdf.
        \187\ Id. See also Sam Batkins, Evaluating the Paperwork Reduction
    Act: Are Burdens Being Reduced? AAF, https://
    www.americanactionforum.org/testimony/evaluating-paperwork-reduction-
    act-burdens-reduced/.

            Overall burden for the pretest and questionnaire would thus be
            2,511 hours. The cost per respondent should be negligible.
            Participation is voluntary and will not require start-up,
            capital, or labor expenditures by respondents.\188\
    ---------------------------------------------------------------------------
        \188\ Fed. Trade Comm'n, Agency Information Collection Activities;
    Submission for OMB Review; Comment Request (May 2009), Federal
    Register/VOL. 74, NO. 90, available at https://www.ftc.gov/sites/
    default/files/documents/federal_register_notices/green-marketing-
    consumer-perception-study-agency-information-collection-activities-
    submission-omb/090512greenmarket
    ing.pdf.

        Moreover, the FTC integrated various suggestions on the study
    methodology and data collection methods submitted in a public comment
    by the General Electric Company (``GE''), to ensure that the Commission
    surveyed ``a proper universe of consumers'' upon which to ``obtain
    accurate projections of national sentiment.'' \189\
    ---------------------------------------------------------------------------
        \189\ Id at 22398.

            With respect to GE's concern about identifying the ``proper
            universe of consumers,'' FTC staff has included in the
            questionnaire a brief section of questions that address
            participants' level of interest in environmental issues. For
            example, one question asks: ``In the past six months, have you
            chosen to purchase one product rather than another because the
            product is better for the environment?'' Through analyses of
            answers to such questions, staff can compare the study
            responses of participants who have a high degree of interest in
            environmental issues and who take these issues into account
            when making purchasing decisions with responses of participants
    ---------------------------------------------------------------------------
            who are not as concerned with environmental issues.

            GE also asserts that the FTC should ensure a ``proper sample
            size.'' The FTC staff determined the sample size of 3,700
            consumers based on several considerations, including the funds
            available for the study, the cost of different sample size
            configurations, the number of environmental claims to be
            examined, and a power analysis. In this study, 150 participants
            will see each of the various environmental marketing claims to
            be compared. Staff believes that this will be adequate to allow
            comparisons across treatment cells.\190\
    ---------------------------------------------------------------------------
        \190\ Id.

        By contrast, the FTC study on PAEs, which also received PRA
    clearance, compiled ``nonpublic data on licensing agreements, patent
    acquisition practices, and related costs and revenues'' \191\ to
    illuminate how PAEs operate in patent enforcement activity outside the
    confines of litigation records. But even when the OMB cleared the PAE
    study, the FTC chose a limited sample size of ``25 PAEs, 9 wireless
    chipset manufacturers that hold patents, and 6 non-practicing wireless
    chipset patent holders.'' \192\ This restrictive sample size
    significantly limited the applicability of the Commission's
    conclusions. More broadly, it suggests a shift towards a general
    reluctance to design and implement systemic research even when the
    required administrative blessing is obtained under the PRA.
    ---------------------------------------------------------------------------
        \191\ See What Can the FTC's Sec. 6(B) PAE Study Teach Us? A
    Practical Review of the Study's Methodology (March 1, 2016);
    ``Supporting Statement for a Paperwork Reduction Act: Part B''
    available at http://www.reginfo.gov/public/do/
    DownloadDocument?objectID=47563401.
        \192\ Id.
    ---------------------------------------------------------------------------
        The PRA Guide of 2011 outlines information collection policies and
    procedures, albeit with only a superficial explanation of statistical
    methodologies, and zero mention of survey design and quantitative
    research methods.\193\ It is a cause for concern that the OMB's task of
    cutting down on the amount of paperwork is framed so parochially, for
    the short term goal of reducing participation hours, without perhaps
    considering cases where the quality and usability of the research
    itself depends on obtaining a larger sample. The mandate to limit the
    sample size of survey respondents ironically defeats the ``practical
    utility'' of the research, which is one of the main cornerstones of the
    PRA.
    ---------------------------------------------------------------------------
        \193\ See generally Paperwork Reduction Act (PRA) Guide Version
    2.0.
    ---------------------------------------------------------------------------
        On the other hand, the PRA does not apply to all voluntary
    collection--only when the FTC sends ``identical'' questions to ten or
    more companies (whether their answer is voluntary or compulsory). The
    PRA would not apply to the FTC requesting public comment, such as it
    has done through the Green Guides process. This point is critical:
    while targeting specific companies with the same questions might well
    prove useful in informing the FTC's understanding of informational
    injuries, the FTC's failure to collect more such data thus far, to
    analyze it, and to publish it in useful guidance can in no way be
    blamed on the requirements of the PRA. Nor can it excuse the FTC staff
    for relying on an expert witness in the LabMD case whose
    recommendations about ``reasonable'' data security referred exclusively
    to the practices of Fortune 500 companies, without referencing any
    small businesses comparable in size and technical sophistication to
    LabMD.\194\
    ---------------------------------------------------------------------------
        \194\ Gus Hurwitz, The FTC's Data Security Error: Treating Small
    Businesses Like the Fortune 1000 (Feb. 20, 2017), available at https://
    www.forbes.com/sites/washingtonbytes/2017/02/20/the-ftcs-data-security-
    error-treating-small-businesses-like-the-fortune-1000/#58d2b735a825.
    ---------------------------------------------------------------------------
        Indeed, the PRA Guide exempts from the definition of
    ``information,'' and thus eliminates the need for clearance on, the
    collection of ``facts or opinions submitted in response to general
    solicitations of comments from the general public'' \195\ and
    ``examinations designed to test the aptitude, abilities, or knowledge
    of the person tested for a collection.'' \196\ The PRA poses no
    impediment to the FTC taking a proactive approach on conducting
    empirical research on data privacy by calling for consumer survey
    participants, holding public workshops, or from analyzing public data
    such as companies' privacy policies as a means to test privacy risk
    perception and consumer expectations. The Green Guides illustrate just
    how much data collection the FTC can do to substantiate its
    policymaking with empirical and economic research, based on real
    consumer studies.
    ---------------------------------------------------------------------------
        \195\ United States Office of Personnel Management, Paperwork
    Reduction Act (PRA), Version 2.0, OPM at 6 (April 2011), available at
    https://www.opm.gov/about-us/open-government/digital-government-
    strategy/fitara/paperwork-reduction-act-guide.pdf.
        \196\ Id.
    ---------------------------------------------------------------------------
    VIII. Pleading, Settlement and Merits Standards under Section 5
        In general, the FTC Act currently sets a very low bar for bringing
    complaints: ``reason to believe that [a violation may have occurred]''
    and that ``it shall appear to the Commission that [an enforcement
    action] would be to the interest of the public.'' \197\ In practice,
    this has be-come the standard for settlements, since the Act does not
    provide such a standard, and the FTC commonly issues both together.
    This raises three questions:
    ---------------------------------------------------------------------------
        \197\ 15 U.S.C. 45(b).

    ---------------------------------------------------------------------------
      1.  What should the standard be for issuing complaints?

      2.  Closely related, what should the standard be for courts weighing
            a defendant's motions to dismiss?

      3.  What should the standard be for settling cases?

        Raising all three bars would do much to improve the quality of the
    agency's ``common law'' in several respects:

      1.  It would provide greater rigor for FTC staff throughout the
            course of the investigation;

      2.  Companies would be less likely to settle, and more likely to
            litigate, if they had a better chance of prevailing at the
            motion to dismiss stage; and

      3.  Complaints that settle before trial (after the FTC has survived a
            motion to dismiss) would, or complaints that the FTC has
            withdrawn (after the FTC has lost a motion to dismiss) would
            provide more guidance standing on their own as the final,
            principle record of each case.

        We take the questions raised above in reverse order, beginning with
    the standard by which a court will assess a motion to dismiss and
    concluding with the standard by which Commissioners will decide whether
    to issue a complaint (and thus, in nearly every case, also a
    settlement):
    A. Pleading & Complaint Standards
        Fortunately, the courts are already moving towards requiring the
    FTC to do a better job of writing its pleadings (complaints) or face
    dismissal of its complaints--at least with respect to deception.
    Congress should take note of the current case law on this issue and
    consider codifying a heightened pleading requirement for any use of
    Section 5.
        Heightened pleading standards can be fatal to normal plaintiffs,
    who need to survive a motion to dismiss in order to obtain the
    discovery they need to actually prevail on the merits. But the FTC has
    uniquely broad investigative powers. It is difficult to see why they
    would ever need court-ordered discovery--in other words, why would it
    be a problem for the Commission to have to do more to ground their
    complaints in the requirements of Section 5, as made clear in the FTC's
    Deception and Unfairness policy statements, and Section 5(n). Today,
    the FTC wants the best of both worlds: vast pre-trial discovery power
    and the low bar for pleadings claimed by normal plaintiffs who lack
    that power.
        At a minimum, the FTC should be required to plead its Section 5
    claims with specificity. Ide-ally, this standard would closely mirror a
    ``preponderance of the evidence,'' as explained in the attached white
    paper.\198\
    ---------------------------------------------------------------------------
        \198\ See White Paper, supra note 51, at 18-21 (unfairness) and 28
    (deception).
    ---------------------------------------------------------------------------
    1. Deception Cases
        TechFreedom has long argued that the FTC's deception complaints
    should have to satisfy the heightened pleading standards of Fed. R.
    Civ. Pro. 9(b).\199\ Under that rule, ``[i]n alleging fraud or mistake,
    a party must state with particularity the circumstances constituting
    fraud or mistake.'' \200\ In other words, such claims must be
    accompanied by the ``who, what, when, where, and how'' of the conduct
    charged.\201\ Rule 9(b) gives defendants ``notice of the claims against
    them, provide[ ] an increased measure of protection for their
    reputations, and reduce[ ] the number of frivolous suits brought solely
    to extract settlements.'' \202\
    ---------------------------------------------------------------------------
        \199\ See Brief of Amicus Curiae TechFreedom, International Center
    for Law and Economics, & Consumer Protection Scholars in Support of
    Defendants, FTC. v. Wyndham Worldwide Corp., 10 F. Supp. 3d 602 (D.N.J.
    2014) (No. 13-1887), 2013 WL 3739729, available at https://goo.gl/
    JGUE9e.
        \200\ Fed. R. Civ. P. 9(b).
        \201\ Vess v. Ciba-Geigy Corp., USA, 317 F.3d 1097, 1106 (9th Cir.
    2003).
        \202\ In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410,
    1418 (3d Cir. 1997).
    ---------------------------------------------------------------------------
        Several district courts have concluded that 9(b) applies to FTC
    deception allegations.\203\ Most recently, the Northern District of
    California dismissed two of the FTC's five deception counts in its data
    security complaint against D-Link\204\ for failure to satisfy the
    heightened pleading standard of Rule 9(b).\205\ The district court
    noted that the Ninth Circuit has yet to address the question, but
    nonetheless found controlling the appeals court's decision holding that
    California's Unfair Competition Law--the state's ``Baby FTC Act,''
    which, ``like Section 5 outlaws deceptive practices without requiring
    fraud as an essential element''--is subject to Rule 9(b).\206\
    ---------------------------------------------------------------------------
        \203\ See, e.g., FTC v. Lights of Am., Inc., 760 F. Supp. 2d 848
    (C.D. Cal. 2010); FTC v. Ivy Capital, Inc., 2011 WL 2118626 (D. Nev.
    May 25, 2011); FTC v. ELH Consulting, LLC, No. CV 12-02246-PHX-FJM,
    2013 WL 4759267, at *1 (D. Ariz. Sept. 4, 2013) (same); see also FTC v.
    Swish Marketing, No. C-09-03814-RS, 2010 WL 653486, at *2-4 (N.D. Cal.
    Feb. 22, 2010) (finding ``a real prospect'' that Rule 9(b) applies but
    not deciding the issue).
        \204\ See Complaint for Permanent Injunction and Other Equitable
    Relief, Fed. Trade Comm'n v. D-Link Sys., Inc., No. 3:17-CV-00039-JD,
    2017 (N.D. Cal. Sept. 19, 2017), https://www.ftc.gov/system/files/
    documents/cases/d-link_complaint_for_permanent_injunction_and_
    other_equitable_relief_unredacted_version_seal_lifted_-_3-20-17.pdf.
        \205\ See Order Re Motion to Dismiss, Fed. Trade Comm'n v. D-Link
    Sys., No. 3:17-CV-00039-JD, 2017 (N.D. Cal. Sept. 19, 2017), at 2-3,
    https://consumermediallc.files.wordpress.com/2017/09/
    dlinkdismissal.pdf.
        \206\ Id. at 2-3 (discussing Vess v. Ciba-Geigy Corp. USA, 317 F.3d
    1097, 1103-04 (9th Cir. 2003)).
    ---------------------------------------------------------------------------
        The D-Link court's analysis of each of the FTC's five deception
    counts illustrates that, while a heightened pleading standard would
    require more work from Commission staff to establish their cases, this
    burden would be relatively small and would in no way hamstring the
    Commission from bringing legitimate cases. The court upheld the
    principal deception count (Count II: ``that DLS has misrepresented the
    data security and protections its devices provide'') and two others,
    dismissing only two peripheral claims. If anything, merely applying
    Section 9(b) to the Commission's complaints would likely not be enough,
    on its own, to provide adequate discipline to the Commission's use of
    its investigation and enforcement powers--but it would certainly be a
    start.
        The district court's discussion of Count II illustrates what
    specificity in pleading deception claims would look like. The FTC's
    allegations identified ``specific statements DLS made at specific times
    between December 2013 and September 2015,'' and that the allegations
    ``also specify why the statements are deceptive.'' \207\ The court goes
    on to say that ``Count II identifies the time period during which DLS
    made the statements and provides specific reasons why the statements
    were false--for example, that the routers and IP cameras could be
    hacked through hard-coded user credentials or command injection
    flaws,'' and that ``this is all Rule 9(b) demands.'' \208\
    ---------------------------------------------------------------------------
        \207\ Id. at 4.
        \208\ Id. at 4-5.
    ---------------------------------------------------------------------------
    2. Unfairness Cases
        The D-Link court noted that ``[w]hether the FTC must also plead its
    unfairness claim under Rule 9(b) is more debatable,'' finding ``little
    flavor of fraud in the[  ] elements [of unfairness under Section
    5(n)].'' But, the court continued:

            the FTC has expressly stated that the unfairness claim against
            DLS is not tied to an alleged misrepresentation. See Section
            III, below. At the same time, however, the FTC has said that
            for all of its claims ``the core facts overlap, absolutely,''
            and there is no doubt that the overall theme of the complaint
            is that DLS misled consumers about the data security its
            products provide. The FTC also acknowledges that DLS's
            misrepresentations are relevant to the unfairness claim because
            consumers could not have reasonably avoided injury in light of
            them.

            Consequently, there is a distinct possibility that Rule 9(b)
            might apply to the unfairness claim. But the question presently
            is not ripe for resolution. As discussed below, the unfairness
            claim is dismissed under Rule 8. Whether it will need to
            satisfy Rule 9(b) will depend on how the unfairness claim is
            stated, if the FTC chooses to amend.\209\
    ---------------------------------------------------------------------------
        \209\ Fed. Trade Comm'n v. D-Link Sys., at *2 (N.D. Cal. Sept. 19,
    2017).

        Whatever the courts actually conclude about the applicability of
    Rule 9(b) to unfairness claims, we see no reason why the Commission
    should not be subject to the same heightened pleading requirements
    under unfairness.
    B. Preponderance of the Evidence Standard
        Applying Section 9(b) to all Section 5 pleadings would help
    greatly. But the more fundamental problem in unfairness cases is the
    low bar set by Section 5(b) for bringing a complaint--and the lack of
    any standard for settling it. We believe the answer is to require the
    Commission staff to demonstrate that it would prevail by a
    preponderance of the evidence. It may, at first, seem strange to apply
    this standard--the general standard for resolving civil litigation--at
    the early stages of litigation, but it must be remembered that this is
    not normal litigation. As noted above, the FTC has unique pre-trial
    discovery powers, and so is very likely to have accumulated all the
    evidence it will need at trial before the complaint is ever issued.
    Second, in nearly every ``informational injury'' case, the Commission's
    decision over whether to issue a complaint is the final decision over
    the case--because the cause will simply settle at that point. Congress
    should consider applying this standard either to the issuance of
    unfairness complaints, or to the issuance of settlements. If the
    standard is applied only to the issuance of settlements, Congress
    should consider some other heightened standard for bringing unfairness
    complaints, above that required by Section 9(b). In any event, the
    purpose of any standard imposed at this stage would not be to change
    how litigation would work--which would still be resolved under separate
    standards for motions to dismiss, motions for summary judgment and
    final resolution of litigation on the merits--but rather to spur
    Commissioners to demand more analytical work of the staff. Some such
    change is likely the only way to create sustainable analytical
    discipline inside the Commission.
    IX. Conclusion
        There is little reason to expect that the FTC will not continue to
    more and more closely resemble the Federal Technology Commission with
    each passing year: the Commission will continue to grapple with new
    issues. This is just as Congress intended. But if the agency is to be
    trusted with such broad power, Congress should expect--and indeed take
    steps to ensure--that the FTC does more to justify how it wields that
    power. As Sens. Barry Goldwater (R-AZ) & Harrison Schmitt (D-AZ) said
    in 1980:

            Considering that rules of the Commission may apply to any act
            or practice ``affecting commerce'', and that the only statutory
            restraint is that it be unfair, the apparent power of the
            Commission with respect to commercial law is virtually as broad
            as the Congress itself. In fact, the Federal Trade Commission
            may be the second most powerful legislature in the country. . .
            . All 50 State legislatures and State Supreme Courts can agree
            that a particular act is fair and lawful, but the five-man
            appointed FTC can overrule them all. The Congress has little
            control over the far-flung activities of this agency short of
            passing entirely new legislation.\210\
    ---------------------------------------------------------------------------
        \210\ S. Rep. No. 96-184, at 18 (1980), available at http://
    digitalcollections.library.cmu.edu/aw-web/
    awarchive?type=file&item=417102.

        This testimony, and the attached documents, lay out some of the
    ideas that Congress should consider in assessing how to reform the
    FTC's processes and standards. But these questions are sufficiently
    complex, and have been simmering for long enough, that the Committee
    would benefit from finding ways to maximize the input of outside
    experts.
        One model for that would be the House Energy & Commerce Committee's
    ongoing #CommActUpdate effort.\211\ The Committee has issued six white
    papers, each time taking public comment and refining its proposals.
    Given the complex interrelationships among the pieces of FTC reform,
    this would be a more constructive approach than having a flurry of
    separate bills, as Energy & Commerce did with FTC reform.
    ---------------------------------------------------------------------------
        \211\ The Energy and Commerce Committee, #COMMSUPDATE (last visited
    Sept. 25, 11:00 AM), https://energycommerce.house.gov/commactupdate/.
    ---------------------------------------------------------------------------
        The Committee could also consider establishing a blue-ribbon
    Commission modeled on the Antitrust Modernization Commission--as
    TechFreedom and the International Center for Law & Economics proposed
    in 2014:

            A Privacy Law Modernization Commission could do what Commerce
            on its own cannot, and what the FTC could probably do but has
            refused to do: carefully study where new legislation is needed
            and how best to write it. It can also do what no Executive or
            independent agency can: establish a consensus among a diverse
            array of experts that can be presented to Congress as, not
            merely yet another in a series of failed proposals, but one
            that has a unique degree of analytical rigor behind it and
            bipartisan endorsement. If any significant reform is ever going
            to be enacted by Congress, it is most likely to come as the
            result of such a commission's recommendations.\212\
    ---------------------------------------------------------------------------
        \212\ Comments of TechFreedom & International Center for Law and
    Economics, In the Matter of Big Data and Consumer Privacy in the
    Internet Economy, Docket No. 140514424-4424-01, at 4 (Aug. 5, 2014),
    available at http://www.laweconcenter.org/images/articles/tf-icle_ntia
    _big_data_comments.pdf
    ---------------------------------------------------------------------------
        We stand ready to assist the Committee in whatever approach it
    takes.

        Senator Moran. Mr. Szoka, thank you very much. Let me begin
    with a question about privacy and data security.
        The FTC is one of several agencies that play a role in
    addressing privacy and data security practices. Would you
    describe to me what the authorities of the FTC are in this
    arena? And should the Congress take any steps to increase or
    decrease that authority and its relationship with other
    agencies related to the topic of data security and breach? I'm
    happy to have anyone respond.
        Ms. Rich.
        Ms. Rich. I was there most recently. So the FTC has----
        Senator Moran. That means, you, Mr. Szoka, must come last.
        [Laughter.]
        Ms. Rich. The FTC has played the leading role in privacy
    and data security for quite a few years. It's what I started
    working on in the late 1990s, and that was mid to late 1990s,
    the FTC has been the lead agency. That said, there are others--
    and the FTC has several laws it uses. It uses the FTC Act,
    Unfair and Deceptive Practices, and then it has a few sectoral
    laws that bear on this, the Gramm-Leach-Bliley Act, the Fair
    Credit Reporting Act. There are gaps in those, and the FTC
    sometimes is frustrated and can't address privacy and data
    security because the practices don't happen to fall within
    those sectoral laws.
        The FCC and the CFPB have both played some role in privacy
    and data security because they are active in consumer
    protection, but it really has not been nearly as substantial,
    and the agencies coordinate closely when anything like that
    arises, and they are all subject to MOUs that they follow. And,
    of course, the Department of Justice investigates the hackers,
    and so--and perhaps U.S. Attorneys Offices may--individual U.S.
    Attorneys Offices may do that. And, again, the FTC is in close
    contact when that occurs and coordinates very closely.
        Senator Moran. Ms. Rich, you say there are gaps. Does some
    other agency then fill in, or the gaps are unintended and need
    legislative attention?
        Ms. Rich. The gaps need legislative attention. They aren't
    filled in by anybody else. If the data security isn't covered
    by the FTC Act, which covers unfair and deceptive practice
    across most of the marketplace, others can't fill that in. For
    example, there is a huge gap in that the FTC lacks jurisdiction
    over common carriers, entirely over common carrier activity.
    And the FCC's jurisdiction over common carrier activity does
    not cover everything that carriers do, so there are gaps there.
    And there are many other gaps that I can assist the Committee
    in if you need it.
        Senator Moran. Should Congress--I know, Ms. Parnes, you
    have comments, and I welcome them--should the Congress then
    repeal or modify the common carrier exclusion?
        Ms. Rich. The Consumers Union would very much support the
    repeal of the common carrier exemption, which really hampers
    the FTC's ability to fully protect consumers in that area, and
    we also support enactment of a comprehensive data security law
    that would apply across the marketplace, it wouldn't just be
    data breach, it would apply to common carriers, it should apply
    to nonprofits, and it should also have strong civil penalty
    authority, which the FTC, for the most part, lacks right now.
        Senator Moran. Others? Ms. Parnes?
        Ms. Parnes. Thank you. Thank you, Mr. Chairman. So I think
    that one of the things that I would like to add is that it is
    true that the Commission enforces a number of sectoral laws and
    that Section 5 of the FTC Act is incredibly broad and does give
    the Commission the authority to reach virtually all other
    sectors of the economy, and, as Jessica notes, other than
    common carriers, which is a very, very big gap.
        I think that the Commission has for many years supported
    repeal of that exemption, and it is a recommendation that's
    included in the task force report as well. I think it would go
    a long way toward addressing potential inconsistencies in
    enforcement, which is also a very big problem when you're
    looking at kind of a level playing field.
        Senator Moran. Thank you. Anyone else?
        [No response.]
        Senator Moran. I'll turn then to Senator Blumenthal.
        Senator Blumenthal. Thanks, Mr. Chairman.
        I have just received, as a matter of fact, while the
    Chairman was asking his questions, a response to a letter that
    I wrote to Equifax asking a number of detailed questions
    regarding the data breach. And the response from Paul Zurawski,
    Senior Vice President of External Affairs, which I will ask be
    made a part of the record----
        Senator Moran. Without objection.
        [The information referred to follows:]

                                                        Equifax
                                        Atlanta, GA, September 25, 2017

    Hon. Richard Blumenthal,
    United States Senate,
    Washington, DC.

    Dear Senator Blumenthal:

        I am in receipt of your letter to Mr. Smith dated September 11,
    2017 in regard to Equifax's announcement of a cyber security incident.
    Thank you for your letter and please let me respond on behalf of
    Equifax.
        We deeply regret this incident and apologize to every affected
    consumer. Protecting the security of information in our possession is a
    responsibility we take very seriously, and we are committed to making
    this right. We are all working diligently to support consumers and make
    the necessary changes to minimize the risk that something like this
    happens again.
        With respect to our Congressional leaders, we are working
    cooperatively with a number of Congressional committees. We will
    continue these efforts in the coming weeks as we respond to questions
    and requests regarding the security incident and as we prepare for the
    upcoming Congressional hearings.
        Thank you again for your letter and for sharing your questions and
    concerns.
                Sincerely,
                                                 Paul Zurawski,
                               Senior Vice President, External Affairs.

        Senator Blumenthal.--essentially says they're not going to
    respond to my questions. They're, quote, ``working diligently
    to support consumers and make the necessary changes to minimize
    the risk that something like this happens again. We are working
    cooperatively with a number of congressional committees. We
    will continue these efforts in coming weeks as we respond to
    questions and requests,'' et cetera, et cetera.
        So essentially they're saying they'll respond to
    committees. I would respectfully suggest that our Committee, I
    know that you don't have jurisdiction or authority to make this
    decision, but I hope that this Committee will have a hearing
    and that we will have those officials of Equifax come before us
    to be where you are sitting to answer these questions. And I'm
    disappointed that they haven't provided responses to my
    questions.
        And I gather, Ms. Rich, that you agree that Section 5 is
    insufficient right now to protect privacy and ensure data
    security and that Congress ought to act to fill the gaps.
        Ms. Rich. Absolutely. Section 5 may cover the breach that
    occurred, but then there are no penalties or proper deterrents
    under Section 5. It would just be an order after the fact, as
    we've noted.
        The Fair Credit Reporting Act, which could govern this
    breach, has penalties, but it's by no means certain that this
    breach may fall within the Fair Credit Reporting Act. So the
    FTC has to do this careful analysis and balancing act to see
    whether one of these laws would apply when there seems to be
    enormous agreement across Congress and elsewhere that data
    security is a value every company should follow.
        Senator Blumenthal. Well, as about 143 million Americans
    are struggling and scrambling and deeply worrying about
    identify theft and criminality against them, I hope to fill
    that gap with legislation, I'm going to be introducing it this
    week, that would ensure that the FTC can investigate any data
    breach and exercise oversight and deter these kinds of breaches
    through negligent or careless practices by imposing strong and
    stringent penalties. I'll be introducing that legislation this
    week, and I hope that it will have bipartisan support.
        Is there anyone here who feels that such legislation should
    not be adopted?
        Yes, sir, Mr. Szoka.
        Mr. Szoka. Well, I would note, first of all, that if we
    want to make consumers whole, penalties don't do that;
    restitution is what does that. And the FTC has broad powers
    today to obtain restitution. That's the conversation that Lydia
    was just alluding to.
        Senator Blumenthal. Well, restitution is fine, and I agree
    that restitution should be made to anybody who is harmed, but
    restitution is usually inadequate, and, most importantly, it
    does not deter because it is insufficient to send that message
    that they need to do better. That's why we have penalties. And
    I think Equifax, you know, potentially could be criminally
    liable here. Criminal liability offers no restitution, it never
    does, but it sends a message and it deters that kind of
    misconduct in the future.
        Mr. Szoka. So, Senator, I agree that there should be a
    remedy here, and I would just note again that losing 30 percent
    of your market capitalization is a far larger penalty than the
    government is ever going to be able to impose against a company
    like that.
        So we should just note that there are many forces at work
    here. As you know, criminal law also plays a role. My concern
    in general with giving the FTC broad civil penalty authority
    for first-time violations boils down to this: The FTC deals
    with a wide range of conduct, and in many cases involving
    technology, it's not inherently nefarious conduct; we're not
    talking nefariously intended actors here. And then the problem
    is if you bring down the potential of civil liability on all of
    those parties, you----
        Senator Blumenthal. I just want to make the point to you,
    first of all, market value goes and it comes. It's not a finite
    penalty. But, second, maybe more important, market value
    decreases are a penalty not for the management that violated
    consumer trust, it falls on the shareholders. Now, you can
    argue that penalties do the same, but if those penalties can be
    assessed against individual managers, even if they're only
    civil penalties, they would send a strong message.
        Mr. Szoka. Well, I would be even more concerned--I mean, it
    sounds great in theory to start talking about applying civil
    penalties against individuals, but if you apply that across the
    wide range of American businesses in a question of--now, we're
    not talking about someone intentionally defrauding a customer,
    we're talking about whether they've struck the right balance on
    how much data security they provide. That's a gray question. It
    may be in a particular case, it might be that a company really
    has had very lax data security, and they should be punished.
    But when you start talking about a general civil penalty
    authority, especially applied against individuals, it's
    actually very easy to see the sort of effect that could have,
    especially on small businesses and startups in the tech space.
        Senator Blumenthal. I'm going to yield because a number of
    my colleagues are waiting to ask questions, but perhaps we'll
    have a second round. And I appreciate your comments.
        Senator Moran. I just would inform the Committee that the
    full Committee is contemplating hearings mid-October on the
    topic that we're discussing and what Senator Blumenthal was
    suggesting.
        The Senator from Oklahoma, Senator Inhofe.

                     STATEMENT OF HON. JIM INHOFE,
                       U.S. SENATOR FROM OKLAHOMA

        Senator Inhofe. Thank you, Mr. Chairman. I was not here
    during the opening statements of Mr. MacLeod and Ms. Parnes, so
    I'll direct my questions--if you've already answered them, I
    want to hear it again.
        So, Ms. Parnes, the Acting Director, Maureen Ohlhausen I
    guess it is, has prioritized connecting enforcement actions
    directly to concrete consumer injury. That's a novel idea. In
    your testimony, you note that the FTC has sought significant
    civil penalties, even when violations are unintentional and
    injury to the consumers is minimal or non-existing. In fact, it
    seems that the FTC sometimes seeks some action without regard
    to the underlying facts in litigation.
        Do you believe that the consumer protection would be better
    served if the FTC aligned the penalties directly with the
    misconduct or harm? And I know your answer would be yes there.
    But then how do you do it?
        Ms. Parnes. So I do agree with that, Senator. I think the
    FTC has the ability to obtain monetary relief in a number of
    situations; one is civil penalties. And the FTC Act very
    specifically says that a penalty needs to be related to injury,
    the degree of culpability, and the nature of the violation. But
    the Commission also has the authority to obtain equitable
    relief when it files actions in Federal court or settles with
    companies, and those settlements are entered into by a court.
    So in that context, the Commission can obtain restitution or
    can disgorge ill-gotten gains.
        And so when the Report talks about monetary relief, it
    really is talking about all three prongs: civil penalties,
    disgorgement, restitution. And there's concern that the
    Commission has been seeking money generally and not tying it
    very specifically to the legal authority to obtain that
    monetary judgment and not really focusing on the extent of
    injury and the culpability of the defendants.
        We're not suggesting--the Report doesn't suggest that money
    relief should be higher, that it should be lower, just that it
    should be considered within a more rigorous analytical
    framework.
        Senator Inhofe. Yes. You're saying, though, that it doesn't
    really require a change in the existing law or----
        Ms. Parnes. I don't think in this----
        Senator Inhofe. Because it sounds to me like there's a
    change in the philosophy of those who are serving or in the
    case of the Obama administration, who had more tendencies
    toward more that type of regulation, that the language there
    that set this up is broad enough that it can be interpreted by
    the members. But my question would be, to preclude this from
    happening again, wouldn't it better--isn't there something that
    can be done legislatively that would be imperative? You might
    give some thought to that, and for the record, since my time
    will expire if I keep talking.
        Mr. MacLeod, the enforcement actions by the FTC make
    headlines, but when the FTC is empowered with all of its other
    tools, the tools at their disposal, to achieve its mission of
    preventing unfair competition in commerce, some of those tools
    include policy advocacy, business and consumer education,
    guiding research efforts, and convening experts to think
    through difficult issues.
        Now, would the increased use of these tools in lieu of
    enforcement action to help protect consumers and ensure that
    small businesses and entrepreneurs are empowered to work with
    the FTC?
        Mr. MacLeod. Senator, I think the answer to that question
    is an emphatic yes. The----
        Senator Inhofe. Are a lot of these not used, a lot of these
    tools that are out there?
        Mr. MacLeod. They are not used as often as I think they
    could be and should be. The Commission over the years has been
    a very powerful force for advising and spreading knowledge
    about the benefits of sensible law enforcement and about the
    cost of law enforcement gone awry. And one of the important
    things the Commission has been able to accomplish over the
    years has been to achieve a consensus among policymakers, law
    enforcers, enforcement agencies, as to an appropriate consumer-
    friendly approach to consumer protection. This is an economic
    issue, it's a legal issue, and it's something which I think the
    Commission could do in much more vigorous fashion than it has
    recently.
        Senator Inhofe. Yes, I think so, too. And, well, my time is
    expired, but I'll have a question for the record on privacy
    that I'll submit at the appropriate time.
        Senator Moran. Thank you, Senator.
        The Senator from West Virginia.

                STATEMENT OF HON. SHELLEY MOORE CAPITO,
                    U.S. SENATOR FROM WEST VIRGINIA

        Senator Capito. Thank you. Thank you, Mr. Chairman.
        And thank you all for your opening remarks and for being
    with us here today.
        I'm going to go back to the Equifax situation, realizing
    that almost half of my entire State of West Virginia was
    impacted by that. And then there has been a recent story about
    the SEC having a data breach. And I know this question has been
    asked sort of around, but I'm going to ask it again.
        Ms. Parnes, with your experience at the FTC, you know,
    prevention is where we want to go. And also investigation of
    these data breaches. What other recommendations would you have
    to try to avoid these kinds of situations?
        Ms. Parnes. It's a tough question. And I actually think
    that one thing that the Commission has started doing is to
    provide much more guidance to industry. They've begun to do
    this. I think it's a really important effort. I think companies
    need to understand what types of security measures are
    critical. But, you know, the truth is that no company wants to
    kind of throw its consumer data out into the public.
        Senator Capito. Right.
        Ms. Parnes. I mean, my sense is that companies that are
    subject to these major data breaches, they are attempting to
    keep data safe, and it is a big, big challenge. Frankly, my
    sense is that issuing additional rules about what companies
    should do or should not do would not really solve this problem.
        There are industry standards that are set. There are NIST
    standards and there are ISO standards that companies follow in
    terms of setting up their comprehensive data security programs,
    and those procedures, they're process-based, and they change on
    a regular basis. And it would be impossible, I think, to set a
    regulation that says this is what is the right data security.
    Five years ago, maybe we thought that complex passwords were
    good data security. Maybe 2 years ago, what we considered was
    two-factor authentication.
        Senator Capito. Right.
        Ms. Parnes. You know, maybe in a couple of years we'll be
    using facial recognition or some kind of biometrics to identify
    people. A rule would freeze the security measures in place.
        Senator Capito. Right. So the technology needs to go----
        Ms. Parnes. Absolutely.
        Senator Capito.--and innovation. I'll get back to you in
    just a minute because I have one other question I wanted to ask
    Mr. MacLeod.
        I don't even know if this is a proper question for this
    hearing, but because you mentioned advertising, it made me
    think about this. We all get these phone calls into our phones
    from these numbers that look like they're your next-door
    neighbor, you know, it says it's from Charleston, West
    Virginia, where I live, and if you make the mistake of picking
    it up, it's a voice trying to sell me relief on my student
    loan. Well, I don't know if you can tell by looking at me, but
    I haven't had a student loan for many, many years.
        So my question is, does the regulatory framework to try to
    control those kinds of things come from the FTC? The FCC? CFPB?
    And if it's all of the above, what kind of regulatory
    coordination are we seeing here? Because you can see a scenario
    where, ``Well, it's not really my bailiwick, it's more
    theirs.''
        Do you see this as a conflict? And how do we get around
    those kinds of things?
        Mr. MacLeod. This I don't see as a conflict, this I see as
    a major challenge that law enforcement has faced for as long as
    I have observed it. And it's a little bit like bank robberies
    and car thefts, we are always going to see these things. The
    Federal Trade Commission has done some very valuable work and
    has brought some very big cases against robocallers and other
    fraudsters using the telephone----
        Senator Capito. Right.
        Mr. MacLeod.but there has also been some pretty impressive
    law enforcement coming out of the Department of Justice and
    local criminal authorities. These folks should go to jail. The
    Federal Trade Commission can't do that, but some of this is
    just outright fraud that is no different from robbing a bank
    except it's taking it from consumers.
        Senator Capito. To this Committee's credit, we have looked
    at this issue of phantom calls or where they're using phantom
    numbers, I can't remember the exact title of it, but we have
    tried to look into that to try to cut that off as an avenue for
    fraudulent marketing and I would say misuse of privacy, too, if
    you're getting into somebody's cell phone to get that.
        Ms. Rich. I----
        Senator Capito. Yes, Ms.----
        Ms. Rich. Robocalls and unwanted telemarketing calls are an
    area where the FTC and the FCC have worked really closely
    together. And, in fact, my organization has been somewhat
    critical of the current FCC. But one thing that the FCC is
    doing is more to allow the phone companies to block these types
    of calls, and they've got a bunch of rulemaking underway to
    push forward in that area, and we're very supportive of that.
    And this is an area where the two agencies have worked very
    harmoniously together to push on different angles.
        Senator Capito. Thank you.
        Thank you, Mr. Chairman.
        Senator Moran. Senator Young.

                     STATEMENT OF HON. TODD YOUNG,
                       U.S. SENATOR FROM INDIANA

        Senator Young. Thank you, Mr. Chairman. Thanks so much for
    holding this timely hearing on the FTC reform proposals
    intended to improve innovation and consumer protection.
        The FTC is important to the safety of all American lives,
    especially Hoosiers, when it comes to keeping data secure and
    safe. And we have recently, of course, been reminded of the
    extraordinary risk of personal information being compromised by
    the massive data breach at Equifax.
        In my home state, that breach affected 3.8 million
    Hoosiers. Now, that sounds like a big number, and that's
    because it is. That breach has compromised the personal
    information of nearly 60 percent of the people I represent.
        What's unique about this breach is the nature of the
    information that Equifax and all credit reporting agencies have
    on the American people and the fact that most Hoosiers have
    absolutely no idea what they have. It's a case of 143 million
    Americans, many unknowingly, having their sensitive personal
    information maintained by a credit reporting company
    compromised to an unprecedented level.
        Now, given the nature of the breach, the criminals who
    stole this information could easily apply for fraudulent loans
    and open bank accounts and credit cards and engage in other
    nefarious activities. Not only that, but with just part of the
    information stolen, scam artists are now armed with new
    information to more credibly target senior citizens and other
    vulnerable people, which, frankly, is all of us today, in our
    communities. Part of the problem is that the FTC has failed to
    provide clear guidance on data security to American businesses.
    Their approach is to receive a feedback loop from the courts--
    inadequate to signal to the business community what they must
    do to keep Hoosier information safe.
        But it's not all the FTC's fault. Congress itself has
    fallen short in providing a bipartisan solution to this
    problem. And so I'm calling, Mr. Chairman, on this Committee to
    hold a hearing on the Equifax data breach, and I have a sense
    that that's going to be forthcoming fairly soon. You may have
    already discussed that----
        Senator Moran. We expect the full Committee to have a
    hearing on this topic mid-October.
        Senator Young. That's really encouraging, so thank you.
        Mr. Szoka, you mentioned in your testimony you'd like to
    see the FTC implement process reforms that make certain
    consumers' data and privacy are afforded the greatest
    protection possible. Candidly, Hoosiers I spoke with after the
    Equifax data breach don't feel like that's the case right now,
    understandably.
        You also referenced the FTC's very different approach to
    the Green Guides and how this might be a better model when
    approaching data and privacy.
        What steps can the FTC take today to begin addressing this
    issue in a tangible way? And how can the Green Guides provide a
    better model for addressing these issues?
        Mr. Szoka. Well, thank you. Thank you for asking, Senator.
    The conversation about agency process reform is often framed as
    a conversation about whether an agency should do more or less.
    I just want to disabuse everyone of that notion. I actually
    think that process reform is important precisely because it
    would encourage the agency not just to be more active, but to
    do a better job of explaining what good data security looks
    like.
        So the reason that I think it's important that we get some
    litigation here and that we undertake process reforms to make
    sure that happens is that the courts will actually force the
    agency to do a better job of explaining itself. So that is one
    track. And the goal is clear guidance to companies so they know
    what they need to do to provide good data security.
        What we're talking about here is negligence. So some
    companies are, of course, negligent, just as people across the
    economy are. We need clear guidance to them to encourage them
    not to do that. And I think we start there before even getting
    to the conversation about penalties.
        And then, Senator, I think you're asking the right
    question. What is notable here to me is that the FTC has been
    dealing with data security now for 15, 16, 17 years, depending
    on how you count, and it has never done what it has done in the
    context of the Green Guides.
        The Green Guides represented, to my mind, the best, most
    rigorous, most thoughtful attempt by the agency to study a new
    area of, in that case, it was how companies were making claims
    about the environmental benefits of their products, whether
    they were recyclable and so on, and to gather data and study,
    what do consumers understand? What do they expect? And what
    should companies do? Right? If the FTC were to have done that
    16 years ago, I think we'd be in a very different place today.
    I think companies would have much clearer guidance and the data
    security would be better.
        It's not too late for them to start. And that's what
    Commissioner Ohlhausen's workshop offers now.
        Senator Young. Are there additional statutory authorities,
    say, the FTC would need to ensure that these sort of breaches
    don't occur in the first place, to your mind?
        Mr. Szoka. Well, they don't need any changes at all to do
    something like the Green Guides, I want to make that very
    clear. So there are two separate conversations here: one is
    what Congress should do, and the other is what the agency
    itself should do with the tools it has today. But, yes, I think
    there are some statutory changes.
        I do agree that there is a problem surrounding the common
    carrier exception. I think the Committee needs to study that,
    and I've explained that in my testimony. There are a range of
    options. Ending the exception altogether is one end of the
    spectrum of options. At the other end, we absolutely need to
    make sure that the Commission is at least able to go after the
    data security and privacy practices of companies that provide
    both a common carrier service and a non-common carrier service.
    That non-common carrier service, like broadband is about to
    become again, needs to be within the FTC's jurisdiction. So I
    would certainly support that kind of change.
        Senator Young. Ms. Rich, I see I'm over time here, so----
        Ms. Rich. I just want to make one point, which is there is
    extensive guidance on data security that has been created over
    the years, and somebody here could probably pull it up on their
    phone and see all the guidance that the FTC has put out on data
    security. So I just wanted to correct that one point.
        Mr. Szoka. If I may just quote briefly from the Third
    Circuit's decision in Wyndham in 2015. ``At oral argument, we
    asked how private parties in 2008 would have known to consult
    the guidance that the Commission had issued or its consent
    decrees. The FTC's only answer was, `If you're a careful
    general counsel, you do pay attention to what the FTC is doing
    and you do look at these things.' We also asked whether the FTC
    has informed the public that it needs to look at complaints and
    consent decrees, and the Commission could offer no examples.''
        I mean, if the Commission is pointing to its settlements,
    it's putting out guidance, that is not the same thing as the
    Green Guides, which, for example, involve 314 pages in the last
    update where the Commission explained why it was recommending
    certain things, and went into detail. That would be quality
    guidance that would encourage the high level of data security
    that Americans should enjoy.
        Senator Young. Thank you all.
        Senator Moran. Senator Hassan.

                   STATEMENT OF HON. MAGGIE HASSAN,
                    U.S. SENATOR FROM NEW HAMPSHIRE

        Senator Hassan. Thank you, Chairman Moran and Ranking
    Member Blumenthal.
        And thank you all to the witnesses for being here today.
        Ms. Rich, you state in your testimony that some of the
    recommendations from the American Bar Association's report--and
    this is a quote ``would limit the FTC's effectiveness in
    protecting consumers.'' Could you explain for the Committee
    which of the ABA's recommendations would do so and how?
        Ms. Rich. I'll mention two. The ABA report suggests that
    both administrative and Federal court orders should be as short
    as 5 years. The longer orders are very important for
    deterrence, especially where many of the orders actually have
    no money. So the discussion today about how the money is
    disproportionate to the injury just bear no relation to what
    really happens, which is often the FTC can't get money back to
    consumers.
        So most cases address fraud or straightforward deception
    warranting long orders to make sure they don't do it again. The
    FTC has been able to cite instances where companies violated
    their order after 15 years, at least 10 instances of that. And
    it's just very important for deterrence. So that's one.
        The second is the argument that we've heard that monetary
    relief is too high. As I mentioned, most of the time, it's
    really too low. Consumers don't get their money back. The
    company has already spent the money. They claim inability to
    pay. It's very frustrating bringing a case and not being able
    to return money to consumers.
        If it's not a hardcore fraud case, but if a company
    deceived consumers, it's fine to say, ``Well, it wasn't
    intentional,'' but who should have that money? Should it be the
    company that deceived the consumers, or should consumers get
    their money back? The FTC should give the money back to
    consumers who were deceived. And far from there being no
    systematic way to calculate the money, there are rules
    governing how you calculate civil penalties. If consumers lost
    money, and the FTC is returning it, they calculate how much
    money consumers lost, and try to get that back to consumers. So
    those are the two issues.
        Senator Hassan. Thank you. I want to go back to the issue
    of overlapping or sometimes siloed jurisdictions. Earlier this
    year, Congress utilized an arcane tool known as the
    Congressional Review Act to undo critical privacy protections
    for consumers by the Federal Communications Commission.
        The FCC and the FTC play complementary roles in protecting
    consumer privacy. The FCC protects consumers when they use
    their broadband connection. The FTC protects consumers using
    websites and social media and so on. People in my home State of
    New Hampshire and most Americans I talk to really don't want
    their private and personal data used or sold without their
    consent just to line the pockets of Internet service providers.
        So, Ms. Rich, how important is it that the Federal Trade
    Commission work with the Federal Communications Commission to
    protect consumers' privacy in our data-driven society? And how
    can these agencies collaborate to protect consumers from bad
    actors?
        Ms. Rich. It was very unfortunate that the broadband
    privacy rule was rolled back. That was a very important rule to
    protect consumers in an area where the ISPs have extraordinary
    access to consumer information. Many consumers do not have
    choice in who their ISP is. And consumers really do care about
    this issue, as we saw after the rule was rolled back.
        The FTC and the FCC have long worked together in a
    complementary way. They have different authority. For example,
    the FTC can get redress. The FCC gets penalties. They have
    different jurisdiction over different entities, as you note. So
    they've done joint work on cramming, on robocalls, on privacy,
    and that's been very important. Unfortunately, right now, with
    the rollback of the privacy rule, consumers have very weak
    protections over their ISP privacy, and right now, because of
    the Federal order and various other things, the FTC completely
    lacks jurisdiction over carriers at all.
        So consumers are the losers. Consumers have virtually no
    protections in this vital telecom space for their data. And
    it's something that needs to be repaired by repealing the
    common carrier exemption.
        Senator Hassan. Thank you very much.
        And thank you, Mr. Chairman.
        Senator Moran. Thank you, Senator.
        Senator Klobuchar.

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

        Senator Klobuchar. Thank you very much, Ms. Rich--this
    hearing.
        And thank you to the Chairman and Ranking Member.
        This hearing is focused on the FTC's consumer protection
    mission, and I am the Ranking Member on the Antitrust
    Subcommittee in Judiciary. And I appreciate Consumer Union's
    work in this area. Particularly, you've been supportive of the
    paper delay bill that I have with Senator Grassley to stop the
    practice of pharmaceuticals paying off generics to keep their
    products off the market, which means no competition for
    consumers, costing the CBO score $2.9 billion to the government
    in 10 years.
        And I also appreciate the statement and letter from the
    Consumers Union on my two recent antitrust bills that I
    introduced. And Senator Blumenthal was helpful with that.
        Ms. Rich, can you explain why strengthening merger
    enforcement is important to Consumers Union?
        Ms. Rich. Yes. And thank you for your leadership. We were
    delighted to see that you were moving forward on these
    important issues.
        So antitrust enforcement is extremely important for the
    free market to work, giving consumer choices, keeping prices
    down. There is a growing concern among many that the market is
    too concentrated right now. That harms consumers, it harms
    businesses, it harms small businesses, startups, suppliers,
    workers, and the overall economy.
        We, at Consumers Union, have expressed concern that
    enforcers have too high a burden to show that mergers will
    cause immediate harm, while disregarding the kind of cumulative
    harm that mergers and the trend toward bigger is causing. So we
    do think it's a very important issue. It's time to look closely
    at this area. And we thank you for your leadership on it.
        Senator Klobuchar. OK. Senator Hassan asked you a bit about
    the FTC and the FCC and the issue of data, and I think we know
    how hard these cases can be and how complex they are. And I
    always believe that our government, if we want to even the
    playing field against fraudsters, have to have as much
    sophistication in the law and the tools that we use as the
    people that are committing the crimes. So does the FTC have the
    resource it needs, resources that it needs, to adequately
    protect consumers?
        Ms. Rich. It has a lot of expertise in that it has its own
    tech shop. It has a chief privacy and technology officer. And
    it has been bringing these cases in the data security area,
    which has been the subject of discussion for a long time, and
    it has been bringing fraud and deception cases.
        But there are some areas--and the ABA agreed with some of
    this--where the FTC really needs stronger tools. It needs
    jurisdiction over common carriers very badly right now for
    consumers' benefit. I think consumers deserve general data
    security legislation, which we've all been talking about with
    tough penalties to plug the holes, and, frankly, privacy
    legislation, which is for maybe another hearing, and stronger
    rulemaking authority. It's very important that when laws are
    passed, it gets ABA rulemaking and not something more difficult
    or something that doesn't allow the FTC to change a rule with
    time to make sure it keeps pace. It needs stronger remedies for
    consumers, including strong penalties in many instances. And
    more resources. I'm done.
        [Laughter.]
        Senator Klobuchar. No, very good. Thank you.
        Mr. MacLeod, changing the subject a little bit here. On
    July 17th, the FTC announced reforms to its civil investigation
    demands process to add more clarity, streamlining it. While
    CIDs are an important part of the investigative process if not
    tailored appropriately, which I think is why you did this, they
    did this, they can create unnecessary burdens that can be
    especially difficult for small businesses. What effect will
    these reforms have on how businesses comply with civil
    investigative demands?
        Mr. MacLeod. We are very encouraged at this announcement
    that came from the FTC. This included some of the
    recommendations that we had in our report. So we are looking
    forward very much to see how these announcements will play out
    in the orders.
        It is hard to exaggerate the effect of a broad CID on a
    company. It can take months. It can divert the top leadership.
    And if it is not reasonably necessary to get the Commission the
    evidence that it needs, then it ought to be diverted.
        Another point that we recommended that has not yet been
    addressed by the Commission, but which is, we think, very
    important, is that it is very difficult for a company to
    contest the scope of a CID because when one moves to petition
    or quash a CID, that's when an otherwise non-public
    investigation becomes public. You may never have violated the
    law, but all of a sudden you are litigating in public over a
    Commission investigative demand, and that is a very difficult
    thing for a company to do.
        Mr. Szoka. Senator, if I could just note, LabMD, the small
    cancer testing lab that has been in litigation with the FTC,
    they started to go out of business the day they decided to
    fight back against the CID because it was that public
    revelation that caused them to lose the insurance that made
    their business possible.
        So the stakes here really are very high. When I talk about
    the reputational consequences, you know, we could talk about
    maybe Equifax could survive losing 30 percent of its market
    cap, but a small business, you know, once that fight goes
    public or once even a small corporation has to notify its
    shareholders that they're now subject to investigation, it's
    over.
        So we need to keep in mind that we can give--keep the FTC
    with those broad powers, but if the FTC is able to use those
    powers to coerce settlement, that's what changes this from a
    true common law process into what we have today.
        Senator Klobuchar. Thanks. I have questions that I'll ask
    on the record about the senior fraud bill I have with Senator
    Collins. Maybe I'll give them to all of you so I can be fair
    and equal and everything else.
        So thank you very much, everyone.
        Senator Moran. Senator Markey.

                   STATEMENT OF HON. EDWARD MARKEY,
                    U.S. SENATOR FROM MASSACHUSETTS

        Senator Markey. Thank you, Mr. Chairman, very much.
        The arguments that we are hearing today to limit, limit,
    the Federal Trade Commission's authority are yet another reason
    why the Federal Communications Commission must stop its harmful
    proposal to rescind net neutrality protections. If the Federal
    Communications Commission reclassifies broadband as an
    information service, the Federal Trade Commission would regain
    jurisdiction over broadband and net neutrality.
        So here is the broadband giant's industry formula: Give the
    Federal Trade Commission authority over broadband, and then gut
    the Federal Trade Commission's authority to protect competition
    and innovation. That's their ideal scenario. You can put that
    on a 3-by-5 card as a business plan for the broadband giants.
        Now, the big broadband industry and their allies say the
    Federal Trade Commission provides a light-touch regulatory
    framework. So what do they mean when they say a ``light
    touch''? Well, what they mean is hands off, hands off the
    broadband companies' ability to choose the online winners and
    losers because they know the Federal Trade Commission currently
    does not have the authority to establish net neutrality
    protections.
        The Federal Trade Commission only enforces policies
    companies create for themselves, and brings enforcement action
    if, and only if, a company violates those policies. But if a
    broadband giant has a policy that says you have no net
    neutrality protections, well, there's nothing to enforce
    because it's not unfair and deceptive to say you have no
    protections, you're on your own.
        So the Federal Trade Commission is then left with no
    ability to be able to protect people from having their rights,
    as consumers, being compromised. And if that's not a sufficient
    guarantee for the broadband giants, Congress is now considering
    proposals to actually undermine the Federal Trade Commission's
    limited enforcement authority.
        So, Ms. Rich, shouldn't the Federal Communications
    Commission really protect the free and open Internet? Isn't
    that where the jurisdiction should be, given the limited
    ability, which the Federal Trade Commission has legally?
        Ms. Rich. Absolutely. In this case, I would note that the
    carriers, or particularly AT&T, have simultaneously been
    arguing that the FTC should have jurisdiction over this issue,
    but fighting the FTC in court, which is what led to the FTC
    losing jurisdiction over carriers. So I do think it's just a
    matter of not having net neutrality addressed at all.
        This is an area where it makes sense to have clear rules of
    the road across the entire industry. The rule, the net
    neutrality rule, put out was very clear. There are gaps,
    serious gaps, in what the FTC can do on net neutrality, so
    absolutely.
        Senator Markey. OK. So let me ask you this, Ms. Rich. OK.
    So can the Federal Trade Commission, like the Federal
    Communications Commission, through affirmative rulemaking
    authority, ensure that broadband providers do not block,
    prioritize, or slow down online contact? Can the Federal Trade
    Commission do that?
        Ms. Rich. The FTC does not have general rulemaking
    authority to do that.
        Senator Markey. It has no ability. So on privacy, can the
    Federal Trade Commission, like the Federal Communications
    Commission, through affirmative rulemaking authority, require
    the broadband giants to receive user consent before selling
    browsing history?
        Ms. Rich. The same answer, no.
        Senator Markey. No, they don't have that authority. So
    let's then move over to--because so far the Republicans have
    brought out a repeal of the FCC rule to protect privacy of
    Americans that broadband companies had to provide them, they've
    already repealed that. Now we move on to this next front, and
    crocodile tears being shed about Equifax, ``Oh, how can this
    happen in America?'' You know, one of my staffers right behind
    me was just telling me that his information was compromised on
    Equifax, which might be the reason I'm asking this next
    question.
        [Laughter.]
        Senator Markey. Earlier this month, Equifax was subject to
    a cyber attack that compromised the personally identifiable
    information of 143 million consumers. This massive data breach
    has exemplified the total lack of consumer recourse when their
    sensitive information, names, Social Security Numbers,
    birthdates, addresses, is stolen.
        Ms. Rich, should data brokers be required to develop
    comprehensive privacy and data security programs, and to
    provide reasonable notice to end the case of breachers?
        Ms. Rich. As a general matter, absolutely, yes.
        Senator Markey. OK. And that's why I have introduced with
    Senator Blumenthal the Data Broker Accountability and
    Transparency Act, to give consumers meaningful control over
    their sensitive information. So instead of debating whether to
    take authority away from the Federal Trade Commission, we
    should instead be discussing how we will give more authority to
    the Federal Trade Commission to better protect consumers in our
    increasingly digital world where people's most sensitive
    information is bought and sold on the black market.
        We're having the wrong conversation in this room. The
    public is wild that 143 million people's, you know, credit can
    be compromised, and rather than saying, ``We're going to come
    in here and ensure that the rules and regulations are in place,
    that it never happens again,'' instead, you know, we are just
    pretending that we don't have the ability to be able to respond
    to that. And it's just a part of a pattern that we saw with the
    repeal of the Federal Communications Commission's authority to
    protect the privacy of broadband consumers. So all that
    information just becomes a product to be sold by the broadband
    companies for their own profit. It's just plain wrong and I
    think it's fundamentally un-American. It's just plain and
    simple wrong that people can't have protections of their most
    private, sensitive information.
        Thank you, Mr. Chairman.
        Senator Moran. Thank you, Senator.
        Senator Cortez Masto.

               STATEMENT OF HON. CATHERINE CORTEZ MASTO,
                        U.S. SENATOR FROM NEVADA

        Senator Cortez Masto. Thank you, Mr. Chair, and Ranking
    Member Blumenthal.
        So I appreciate this conversation because I served as the
    Attorney General for Nevada for 8 years, and one of my best
    partners was the FTC. And I don't support some of the
    recommendations that were made, and I want to talk about that.
        And maybe, Mr. MacLeod, if you could enlighten me because
    you started with one of the cases that you actually defended,
    and it was a pesticide company. And the reason why I'm curious,
    because I know, I know, as the State of Nevada, we are involved
    in some actions against pesticide companies because they
    misused or mislabeled their pesticides, which could cause
    serious illness to humans and be toxic to wildlife.
        And the reason why we have consent decrees, the reason why
    we enter into these agreements, is to change that conduct, to
    protect the consumer forever, not for 10 years, not for 20
    years, it's forever. You want to change that conduct, you want
    to make sure they're not going to engage it in the future for
    monetary gain.
        And so I'm curious your thoughts on that. Are you looking
    at--are you saying that that long-term oversight and that
    change of conduct is burdensome to these companies or--if you
    don't mind giving me your thoughts.
        Mr. MacLeod. The FTC orders typically go well beyond
    telling a company not to violate the law. They impose numerous
    affirmative requirements that over time can end up having very
    little relevance to the world in which a company is operating.
        The point that we made in our report, which I think is very
    important to emphasize, is that we are not suggesting that
    every order be a limited order. There are some con artists out
    there who could well deserve what they sometimes get from the
    FTC, and that's a lifetime ban from participating in an
    industry.
        On the other hand, when there are orders that require a
    company--Toys ``R'' Us is a perfect example of a company that
    petitioned the FTC, probably spent tens of thousands of
    dollars, 16 years after it had entered an order, to try to get
    relief from some of the fencing-in provisions that just
    restricted Toys ``R'' Us and made it a less effective
    competitor to Amazon, to Target, and to some of the other
    retailers. And the FTC ultimately said, Yes, we see no reason
    for all these extra provisions in the order anymore. Our point
    is that 16 years after an order has been entered, you probably
    don't need to require a company to petition the FTC or petition
    a court to be treated like everybody else in its industry.
        Senator Cortez Masto. Thank you.
        Ms. Rich, do you have any comments to that?
        Ms. Rich. One important issue is that some of these
    affirmative requirements in the order that Bill is talking
    about expire well before 20 years; they are 5 years, they are
    much shorter. So the rest of the order is largely, in many of
    these cases, an obey-the-law order. And I don't know the
    particulars of the cases that Bill is mentioning. I assume they
    were Bill's clients. So you know, you have a particular
    perspective, but I would love to hear the perspective of those
    that brought the action against the companies.
        Senator Cortez Masto. And I appreciate that because as I
    read through the report, knowing from my perspective, as
    somebody from the attorney general's office for 8 years that
    was focused on consumer protection and worked closely with the
    FTC, there is give-and-take. I know I was in meetings with the
    corporations before the consent decrees were entered into.
        The last thing we wanted to do was bring litigation, so we
    were trying to change the conduct to address any monetary
    component, to hold them accountable, and deter their conduct in
    the future, but they were in the meetings with us. We were in
    roundtables talking about how we address this. And then when we
    entered into an agreement, it was brought before a judge. And
    if anybody disagreed with it, then the judge would help us make
    that determination.
        So it's not like there isn't negotiation, it's not like
    there isn't some give-and-take at the end of the day. So to say
    that we should be eroding the FTC's enforcement and tools to
    the benefit of corporations that somehow they are not in the
    room at the beginning when we're talking about this, I don't
    understand.
        Now, with that said, I also get--sometimes you're on the
    other side of a negotiation with somebody from the FTC, a
    staffer, who may not be reasonable or who may not be willing to
    sit and talk with you, and I think those are times where then
    you're going to reach above their heads or try to figure out
    how you address that. I get that. I get that. And I've seen
    that happen in government, but at the same time, that doesn't
    mean we erode the tools for law enforcement to do the jobs that
    they need.
        So, Ms. Parnes, and then, Ms. Rich, please, I'd love to
    hear from you.
        Ms. Parnes. Thank you, Senator. Just, you know, kind of
    some context on this. I mentioned that I was at the FTC for 27
    years, and in the mid nineties, I was the Deputy Director of
    the Bureau of Consumer Protection, and at that time,
    administrative orders, like Federal court orders, were
    perpetual in nature, and we all thought that's the way they
    should be. You know, this is how it's always been, and this is
    how it always should be.
        And a new Chairman came in, Robert Pitofsky, and he said,
    you know, ``I think we should revisit this, I think perpetual
    administrative orders need to be reevaluated.'' And there was
    that reevaluation. And ultimately the Commission decided to
    limit the administrative orders to 20 years with a lot of, you
    know, kind of bells and whistles around if a company violates
    the order during that timeframe.
        I think the point is that in 1995, when this happened, a
    20-year order, it was a significant change, but it seemed as if
    it gave companies the opportunity to kind of get it right. And
    then if there was going to be movement at the company, if there
    were changes in the way the business was operating, just life
    didn't move as quickly back in the mid nineties. And our sense
    is that because things move so much more quickly now, that it
    makes--certainly makes sense to re-evaluate the length of these
    orders and to consider a shorter order, and we did put a
    shorter timeframe in our recommendations.
        I don't think that anybody who was involved in drafting
    this report looks at this as in some way trying to weaken the
    Commission or its use of its enforcement authority.
        Senator Cortez Masto. Thank you. And I know my time is up,
    but I'd like to hear from Ms. Rich if that's--with the
    Chairman's indulgence.
        Ms. Rich. I just want to bring the focus back on consumers
    because there has been a lot of talk on the burdens on
    businesses, but keep in mind that in the vast majority of
    orders here, we're talking about situations where consumers
    were either ripped off or harmed in other serious ways, and
    these orders are designed to return money to consumers and make
    sure these companies don't do it again.
        In addition, the processes at the FTC are fairly extensive
    in terms of how many bites of the apple you get to appeal
    through the chain and make your arguments to different people.
    And so that's an opportunity that people don't have at all
    Federal agencies, and companies really do make use of that to
    try to change what they may disagree with the staff. And there
    also is an opportunity for order modification over time.
        Senator Cortez Masto. Thank you. I appreciate the comments.
    Thank you very much for the conversation today.
        Senator Moran. We're about to conclude our hearing. Let me
    turn to Senator Blumenthal and see if he has any closing
    comments.
        Senator Blumenthal. I appreciate all of your testimony here
    today, and I look forward to hearing your comments on the
    legislation that we're going to propose. I think all of you, I
    hope all of you, would agree that restitution is often
    appropriate even where there is no precise or provable harm to
    consumers as when a Social Security Number is stolen, it's out
    there, its value depends on its security and its
    confidentiality. And so Equifax, in my view, should be held
    accountable and made liable for the loss of privacy as to those
    Social Security Numbers, even for consumers who may not be able
    to prove a precise loss due to identity theft. I hope you would
    all agree.
        Thank you. That concludes my questioning.
        Senator Moran. Thank you, Senator Blumenthal.
        I had hoped to ask some questions at least about mergers,
    but I'll submit it for the record. Let me take just a moment to
    tell you I was significantly impressed by the quality of the
    panel. Thank you all very much for testifying. You're all very
    articulate, very intelligent, and seemingly have experiences
    that are of great value to us as we figure out the right public
    policy related to the FTC.
        With that, the hearing record will remain open for two
    weeks. During this time, Senators are asked to submit any
    questions for the record. Upon receipt, we'd ask the witnesses
    to respond as quickly as possible. With that, this concludes
    our hearing. And I again thank the witnesses. We are adjourned.
        [Whereupon, at 4:02 p.m., the hearing was adjourned.]

                                A P P E N D I X

         The FTC and Privacy Regulation: The Missing Role of Economics

                George Mason University Law and Economics Center
         Briefing on Nomi, Spokeo, and Privacy Harms--November 12, 2015

                          Joshua D. Wright*
    ---------------------------------------------------------------------------

        \*\ Professor, George Mason University School of Law and Director,
    Global Antitrust Institute. I thank James Cooper and Beth Delaney for
    comments and Khouryanna DiPrima for research assistance.
    ---------------------------------------------------------------------------
    Introduction
        Good morning, I am pleased to be here today for the Law and
    Economics Center's Briefing on Nomi, Spokeo, and Privacy Harms. I want
    to thank the Law and Economics Center for the invitation to speak with
    you today, and especially my colleague James Cooper. I'm very excited
    about his work here at the Law and Economics Center on privacy and
    economics. And it is nice to finally be able to give a speech where I
    do not have to begin with a disclaimer about how the things I am about
    to say are not the views of the Commissioner or any of its
    Commissioners.
        Privacy is an ever-evolving and remarkably important regulatory
    landscape and it has been, unfortunately in my view, even more
    remarkably resistant to the influence of economics. As an antitrust
    economist, law professor, and practitioner, I see close parallels
    between privacy regulation and competition law and policy. The problem
    is that the closest parallels are to antitrust in the 1960s--before the
    influence of economics had made that body of law coherent as a consumer
    welfare prescription. That resistance to economics is harming
    consumers. We can do better. The FTC has the tools to do better right
    now.
        I'm going to focus my remarks on how the FTC can and should
    integrate economics in assessing privacy regulation. I will also focus
    more specifically upon the FTC's settlement with Nomi. In particular,
    as I argued in my dissent in that case why a consumer-welfare focused
    and economic approach to privacy regulation requires that promises in
    privacy policies be proven rather than presumed material to consumers.
    Presuming materiality when actual evidence of consumer behavior
    suggests otherwise is even more misguided.
    Economic Analysis of Privacy At The FTC
        A primary goal of my tenure at the FTC was to encourage a deeper
    integration of economics and cost-benefit analysis into the consumer
    protection framework at the Commission. The hesitancy to fully
    incorporate economic tools into consumer protection analysis is
    discouraging, but not completely surprising given the Commission's
    portfolio of consumer protection work. It is important to understand
    where the reluctance and resistance comes from in order to know how to
    fix it.
        The issue is not whether economics will influence privacy
    regulation, but when. So let me start with what is intended to be a
    provocative proposition: economic analysis of privacy will exert a
    significant influence on the development of law and regulation in this
    area within this decade. In the 1960s and 70s, antitrust lawyers and
    agencies too were reluctant to allow economic analysis to seep into
    their body of law. But as was the case with antitrust, it will simply
    be impossible for privacy--which is inherently economic regulation--to
    remain impervious to the insights from economics, such as how firms
    compete with respect to privacy protections, the effect of privacy
    rgulation on consumer welfare and competition, and consumer preferences
    for privacy.
        So let's begin with why the FTC has rejected an economic view of
    privacy thus far. The vast majority of work that the Bureau of Consumer
    Protection performs simply does not require significant economic
    analysis. In most consumer protection cases, the business practices at
    issue create substantial risk of consumer harm but little or nothing in
    the way of consumer benefits. A team of Ph.D. economists, or even one,
    is usually unnecessary in a simple fraud case. The FTC's consumer
    protection arm has ``grown up'' around its deception authority. The
    consumer protection enforcement culture at the FTC remains at its core
    one that contemplates its role as smiting out business practices that
    always harm consumers. That approach is substantively correct,
    intellectually coherent, and efficient when applied to business conduct
    like fraud that always harms consumers.
        Applying economic theory in the consumer protection realm at all is
    a fairly recent development. Only in 1980, when the Commission adopted
    the Policy Statement on Unfairness, did it begin considering the
    benefits of various business practices on consumers. Under this revised
    standard, and as subsequently codified by Congress in 1994 in Section
    5(n) of the FTC Act, the agency may pursue enforcement action on the
    basis of ``unfairness,'' in cases where an act or practice ``causes or
    is likely to cause substantial injury to consumers which is not
    reasonably avoidable by consumers themselves and not outweighed by
    countervailing benefits to consumers or competition.'' In reformulating
    its unfairness standard, the Commission recognized that in utilizing
    its authority to deem an act or practice as ``unfair'' it must
    undertake a much more rigorous analysis than is necessary when it uses
    its deception authority. However, even deception authority is not
    immune to the need for analysis. It too has a proxy for analysis of
    whether an unavoidable injury occurred--the ``materiality'' requirement
    codified in the Commission's 1983 Policy Statement on Deception, which
    I will discuss in a moment.
        There are technological and economic forces that point toward an
    inevitable conflict between the old, fraud-based consumer protection
    culture at the FTC and the realities of the digital economy. For
    example, as we become fully immersed in the digital age, and as the
    Commission considers policy issues relating to topics such as the
    ``Internet of Things,'' this conflict becomes apparent. On one hand,
    there are innumerable gains to consumers from new and enhanced products
    and services resulting from the Internet of Things, all of which depend
    critically upon the free flow and exchange of data. While on the other
    hand, there are privacy and data security concerns that may arise
    because of that free flow and exchange of data.
        An economic approach to privacy regulation is guided by the
    tradeoff between the consumer welfare benefits of these new and
    enhanced products and services against the potential harm to consumers,
    both of which arise from the same free flow and exchange of data.
    Unfortunately, government regulators have instead been slow, and at
    times outright reluctant, to embrace the flow of data. What I saw
    during my time at the FTC is what appears to be a generalized
    apprehension about the collection and use of data--whether or not the
    data is actually personally identifiable or sensitive--along with a
    corresponding, and arguably crippling, fear about the possible misuse
    of such data.
        This generalized fear of data takes many forms. And it has many
    costs. Any sensible approach to regulating the collection and use of
    data will take into account the risk of abuses that will harm
    consumers. But those risks must be weighed with as much precision as
    possible, as is the case with potential consumer benefits, in order to
    guide sensible policy for data collection and use. The appropriate
    calibration, of course, turns on our best estimates of how policy
    changes will actually impact consumers on the margin, not whether we
    can identify plausible yet speculative narratives about how particular
    business practices might result in consumer harm.
        The failure to engage in a thorough and appropriate cost-benefit
    analysis that incorporates recent economic insights can lead to serious
    policy errors. And, unfortunately, the failure has maintained all too
    common in the FTC's consumer protection work involving the digital
    economy generally, and privacy regulation specifically. If the benefits
    of these welfare-enhancing business practices are not weighed correctly
    against the harms they present to consumers, we run the risk of
    squelching innovation and depriving consumers of these benefits. There
    is still serious resistance to adequately accounting for the full
    economic costs and benefits of various business decisions and
    practices.
        The tendency appears to be to discount benefits, as is the case in
    the Internet of Things Report. As I noted in my dissent, the Report
    only ``pay[s] lip service to the obvious fact that the various best
    practices and proposals . . . might have both costs and benefits,'' and
    places far too much emphasis on speculative and anecdotal risks without
    adequately assessing whether the benefits of these new technologies
    outweigh the concerns. Indeed, the Report seems to go out of its way to
    avoid discussing key components of how the Internet of Things is
    already improving society--for example, not adequately considering how
    consumer-facing Internet of Things devices fuel the development of
    smart cities, smart grids, and other socially beneficially
    technologies.
        Other times, the Commission simply asserts that consumer benefits
    do not exist, as the Commission chose to do in justifying its
    settlement with Apple. In Apple, the Commission found unlawful Apple's
    decision to allow the entry of a password upon a first transaction to
    trigger a 15-minute window during which users could make additional
    purchases without reentering the password. The Commission's clear
    disregard for rigorous cost-benefit analysis in Apple is also apparent
    in various recent Workshop Reports produced by the FTC--for example,
    the Data Broker Report or the Internet of Things Report--that
    disseminate best practices and legislative recommendations without
    conducting such an analysis. In other contexts, the FTC relies upon
    slogans like ``data minimization'' and ``security by design'' to guide
    policy decisions--but those slogans and catchphrases simply don't bear
    any meaningful analytical content and their pursuit at any cost will
    simply mean higher prices and less useful products for consumers.
        This is simply not good enough; there is too much at stake for
    consumers as the Digital Revolution begins to transform their homes,
    vehicles, and other aspects of daily life, not to mention the potential
    for addressing societal problems on a broader scale. What is needed to
    guide consumer-welfare enhancing privacy regulation is an economic and
    evidence-based approach sensitive to key tradeoffs between the value to
    consumers and society of the free flow and exchange of data and the
    creation of new products and services on the one hand, against the
    value lost by consumers from any associated reduction in privacy.
        I've been fairly critical of the FTC to this point. But it is
    important to note that I do not view the problem with privacy
    regulation at the FTC to be a lack of talent or leadership. The FTC has
    a collection of highly talented consumer protection lawyers and the
    best collection of economists in any government agency. The issue is
    that the FTC is at a crossroads when it comes to consumer protection in
    the digital economy generally. An ever-increasing proportion of the
    business practices the FTC is asked to engage with on a daily basis are
    no longer the types of practice that can simply be dismissed as fraud
    and enforced without the fear that aggressive enforcement might chill
    virtuous competition.
        While the FTC must always remain vigilant in identifying and
    prosecuting fraud, it is critical that it develop a sensible and more
    nuanced approach to business practices that might produce benefits for
    consumers. When it comes to privacy regulation, the fraud-based culture
    of the FTC's consumer protection mission cannot be robotically and
    mechanically employed where that framework no longer makes sense.
    Adapting the culture within any institution to recognize these changes
    and develop the human capital and skills to deal with them is always a
    tricky problem; and perhaps at its trickiest when that institution is a
    government agency. It will be no surprise that an economist who was
    formerly an intern within the Bureau of Economics believes that the key
    to changing the culture within the agency is to empower the economists.
    And I will close with a few suggestions along those lines.
        But for now, I'd like to turn to Nomi, which is an important case
    with significant implications for privacy regulation, but is also in my
    view a misguided attempt to retrofit the fraud-based FTC consumer
    protection culture to an area of privacy regulation that requires
    economic analysis.
    FTC v. Nomi Technologies
        Nomi was a startup company that provided analytics services to
    retailers based upon data collected from mobile device tracking
    technology to brick-and-mortar retailers through its ``Listen''
    service. Nomi uses sensors placed in its clients' retail locations or
    its clients' existing WiFi access points to detect the media access
    control (MAC) address broadcast by a consumer's mobile device when it
    searches for WiFi networks. Nomi passed MAC addresses through a
    cryptographic hash function before collection and created a persistent
    unique identifier for the mobile device. Nomi did not ``unhash'' this
    identifier to retrieve the MAC addresses and Nomi did not store the MAC
    addresses of the mobile devices.
        The FTC's case against Nomi rested on a single line within its
    privacy policy that stated ``Nomi pledges to . . . Always allow
    consumers to opt out of Nomi's service on its website as well as at any
    retailer using Nomi's technology.'' Nomi did allow consumers to opt out
    of its service on the website, but the FTC argued that because some
    retailers did not have the ability to allow consumers to opt-out of
    tracking within the store, this statement was deceptive.
        Importantly, yet completely ignored by the FTC majority, Nomi did
    not track individual consumers--instead, Nomi's technology recorded
    whether individuals are unique or repeat visitors, but it did not
    identify them. The information collected was used only to provide
    analytics to Nomi's clients. The data provided by Nomi's Listen service
    can generated potentially valuable insights that allowed retailers to
    measure how different retail promotions, product offerings, displays,
    and services impact consumers. In short, these insights help retailers
    optimize consumers' shopping experiences, inform staffing coverage for
    their stores, and improve store layouts, all without knowing the
    identity of those visiting the store.
        Let's talk about the law. Section 5(b) of the FTC Act requires us,
    before issuing any complaint, to establish ``reason to believe that [a
    violation has occurred]'' and that an enforcement action would ``be to
    the interest of the public.'' In my dissent, I argued that the
    Commission did not meet the relatively low ``reason to believe'' bar
    because its complaint did not meet the basic requirements of the
    Commission's 1983 Deception Policy Statement. This failure has
    significant economic consequences because it runs the risk of deterring
    industry participants from adopting business practices that benefit
    consumers.
        The fundamental failure of the Commission's complaint is that the
    evidence simply does not support the allegation that Nomi's
    representation about an opportunity to opt out of the Listen service at
    the retail level--in light of the immediate and easily accessible opt
    out available on the webpage itself--was material to consumers. This
    failure alone is fatal. A representation simply cannot be deceptive
    under the long-standing FTC Policy Statement on Deception in the
    absence of materiality.
        The Policy Statement on Deception makes this requirement clear,
    observing that the ``basic question is whether the act or practice is
    likely to affect the consumer's conduct or decision with regard to a
    product or service.'' It is important to understand the economic
    function of the materiality requirement. Once again, the FTC's own
    Policy Statement on Deception does our work for us when it describes
    materiality as an evidentiary proxy for consumer injury: ``[i]njury
    exists if consumers would have chosen differently but for the
    deception. If different choices are likely, the claim is material, and
    injury is likely as well.''
        Now why would the FTC choose to enforce only those
    misrepresentations that are material--that is, misrepresentations that
    cause consumers to make choices that reduce their welfare? The answer
    is that this essential link between materiality and consumer injury
    ensures the Commission's deception authority is employed to deter only
    conduct that is likely to harm consumers and does not chill business
    practices that makes consumers better off. This link also unifies the
    Commission's two foundational consumer protection authorities--
    deception and unfairness--by tethering them to consumer injury.
        Historically, the FTC has applied its deception authority in the
    context of advertising. In the advertising setting, the Commission
    enjoys a legal presumption of materiality. The underlying logic of that
    presumption is that advertising communications reflect the judgment and
    investment of the advertiser that the communication will indeed affect
    consumer behavior. But that logic simply doesn't fit in the context of
    privacy policies. Unlike advertising, privacy policies are not designed
    by marketers to influence consumer behavior, rather they are often
    drafted by attorneys and included on websites to comply with state laws
    or industry self-regulatory regimes. The logic of the materiality
    presumption built for advertising simply does not fit when evaluating
    representations in privacy policies.
        The practical reality is that, while privacy policies do serve
    valuable functions, most consumers do not read privacy polices and when
    they do, they do not understand them. Researchers have shown that it is
    virtually impossible for consumers to read and understand all the
    privacy policies typically encountered, given the time commitment
    required. It is not surprising that according to a recent Pew Research
    Center survey, half of Americans believe that when a company posts a
    private policy, it ensures that the company keeps confidential all the
    information it collects on users. The point is not that privacy
    policies should be presumed immaterial; it is that privacy policies are
    so fundamentally different than mass advertising communications from a
    consumer perspective that it makes sense for the Commission to bear the
    burden of proof of demonstrating materiality.
        Nomi illustrates why the materiality requirement is so important.
    The FTC Act does not legally obligate Nomi to produce a privacy policy
    or to publish one at all. It did. And the FTC's case against Nomi
    rested on a single line within its privacy policy that stated ``Nomi
    pledges to . . . Always allow consumers to opt out of Nomi's service on
    its website as well as at any retailer using Nomi's technology.'' The
    FTC argued that because some retailers did not have the ability to
    allow consumers to opt-out of tracking within the store, this statement
    was deceptive. However, Nomi did provide consumers the ability to opt-
    out of being tracked through it's website. The fundamental failure of
    the Commission's complaint is that the evidence simply does not support
    the allegation that Nomi's representation about an opportunity to opt
    out of the Listen service at the retail level--in light of the
    immediate and easily accessible opt out available on the webpage
    itself--was material to consumers. In other words, the Commission did
    not show any evidence, empirical or otherwise, the consumers would not
    ``have chosen differently'' but-for the allegedly deceptive
    representation.
        In fact, the evidence strongly implies that specific representation
    was not material and therefore not deceptive. Nomi's ``tracking'' of
    users was widely publicized in a story that appeared on the front page
    of The New York Times, a publication with a daily reach of nearly 1.9
    million readers. Most likely due to this publicity, Nomi's opt-out rate
    (3.8 percent) was significantly higher than the opt-out rate for other
    online activities. This high rate, relative to website visitors, likely
    reflects the ease of a mechanism that was immediately and quickly
    available to consumers at the time they may have been reading the
    privacy policy. This behavior indicates that consumers that were
    interested in opting out of the tracking service took their first
    opportunity to do so. To presume the materiality of a representation in
    a privacy policy concerning the availability of an additional and more
    onerous in-store opt-out mechanism requires one to accept the
    proposition that the privacy-sensitive consumer would be more likely to
    bypass the easier and immediate route (the online opt out) in favor of
    waiting until she had the opportunity to opt out in a physical
    location.
        Untethered from the materiality requirement, the FTC's consumer
    protection efforts in privacy regulation are no longer about consumer
    harm--or promoting consumer welfare--they are about micromanaging
    privacy policies and placing broad sectors of the digital economy under
    the thumb of a single agency. And in Nomi in particular, the approach
    is about micromanaging privacy policies for firms that do not need to
    have one in the first place. Firms in Nomi's position or those reading
    the complaint and consent carefully have an increased incentive to take
    down voluntary privacy policies or not generate one. This will leave
    consumers and privacy watchdogs with even less information than they
    are already receiving about website activity--exacerbating the very
    problem the FTC was attempting to solve. This unintended consequence is
    one that is easily foreseeable; and one that is obvious to most
    economists. But the Commission's analysis simply ignores these
    tradeoffs.
        By enforcing the FTC Act against trivial misstatements in privacy
    policies that nobody reads, the Commission has been able to put an
    increasingly large number of firms in the digital economy under 20-year
    orders. Putting businesses under order for 20 years, including
    intrusive monitoring and reporting requirements, seems especially
    questionable in the digital economy in which a firm's half-life is
    closer to two years than 10. What's more, the FTC can obtain
    substantial monetary penalties for violations of orders and certain
    statutes--Spokeo will pay $800,000 for violations of the Federal Credit
    Reporting Act.
        Not only does this approach threaten to chill innovation in the
    digital economy, they will deter firms from engaging in voluntary
    practices that promote consumer choice and transparency--the very
    principles that lie at the heart of the Commission's consumer
    protection mission. If the benefits of these welfare-enhancing business
    practices are not weighed correctly against the harms they present to
    consumers, we run the risk of squelching innovation and depriving
    consumers of these benefits. Indeed, innovation in new privacy-
    enhancing tools and technologies might be at risk--if a company might
    face legal action for incorrectly yet harmlessly describe an opt-out
    feature they did not need to provide in the first place, then why
    bother? So long as economic analysis is a marginal player in privacy
    regulation at the FTC, this unfortunate equilibrium will remain.
        Let me conclude with a few remarks on how to set the FTC on a
    course toward embracing the intersection of economics and privacy
    rather than resisting it.
    Recommendations
    Recommendation #1: The Bureau of Economics must serve the Commission,
            not the Bureau of Consumer Protection, when those two conflict.
        This is quite simple but bears repeating. The question of how to
    best organize economists within regulatory agencies is one that has
    attracted a significant amount of attention from legal scholars,
    economists, practicing lawyers, and regulators. One possible conception
    of the relationship between the Bureau of Consumer Protection and the
    Bureau of Economics is that the latter should be a litigation and
    research support team for the former. And to be sure, the economists
    within the agency have an important function in conducting economic
    analyses to facilitate investigations and enforcement. But sometimes
    the objectives of the FTC and the Bureau of Consumer Protection should
    be in conflict from an economic perspective. Sometimes, from an
    economic perspective, the direction the FTC is going in terms of
    consumer protection enforcement does not make economic sense.
        When such a conflict exists, it is important that the institutional
    design structure of the agency makes room for the economists--indeed,
    encourages the economists--to have a voice in terms of policy and case
    selection. A structure that subordinates economists to lawyers runs the
    risk of not only encouraging economically misguided privacy policy, but
    also a reduction in alternative information flow to the Commissioners,
    poorer staff skill retention, and inefficient use of economists with
    specialized skills or knowledge.
        BE must not become a mere input supplier to the Bureau of Consumer
    Protection. While the economists--like the smaller group within any
    bureaucracy--must pick their battles wisely and economize on their own
    scarce reputational capital within the agency, the Commission as a
    whole must recognize that the optimal level of economist and lawyer
    conflict over the direction of privacy regulation is not zero.
    Recommendation #2: The FTC Should Be an Intellectual Leader in the
            Movement to Create Economically Coherent Privacy Regulation
        The FTC is at its best when it combines its unique combination of
    institutional features. Perhaps the most unique is that the FTC's
    statutory mandate includes a research and reporting function that
    distinguishes it from many agencies. The Commission has a long and
    well-regarded history of conducting its own research and using its
    authority to produce public reports that examine novel, emerging or
    otherwise important issues. Privacy should be no exception. The case
    for strengthening the incentives within the agency for FTC economists
    to produce their own research, and to be active and engaged scholars in
    the field of privacy economics, is quite clear. But I do want to be
    elaborate a bit about what we mean when discussing the type of report
    that the FTC should be producing.
        The Commission will often seek information using its Section 6(b)
    authority to compel private parties to submit information for review.
    Commission staff reports often are the result of extensive research,
    rigorous investigation into certain industry sectors, practices or
    products, and economic analysis. Reports taking advantage of the
    Commission's unique ability to collect and analyze data and to conduct
    economic analyses to form the basis of its recommendations predictably
    have had significant impact on public policy debates.
        Reports that do not meet that standard of research and analytical
    rigor should not make legislative recommendations at minimum and,
    frankly, ought not be published at all in many cases. The track record
    of rigorous reports and research show that the issue here is not
    capability but discretion. The FTC Bureau of Economics has housed some
    of the most influential consumer protection economists in history and
    can claim many of the most influential papers as its own. Reports that
    do not meet this standard detract from the agency's limited
    reputational capital and its ability to perform its missions.
        The FTC has the legal authority, the human capital, and the
    economic talent to be a leader in the economic approach to privacy. It
    should do so. An obvious candidate is to set forth a comprehensive and
    rigorous research agenda for understanding the economics of privacy
    policies.
    Recommendation #3: The FTC Should Require the Bureau of Economics to
            Make Public Its Views in All Consents
        I continue to believe that the FTC should consider interpreting or
    amending FTC Rule of Practice 2.34 to mandate that BE publish, in
    matters involving consent decrees, and as part of the already required
    ``explanation of the provisions of the order and the relief to be
    obtained, ``a separate explanation of the economic analysis of the
    Commission's action. This is especially important in the area of
    privacy regulation where most of the Commission's work takes place in
    consents.
        The public-facing documents associated with this rule are critical
    for communicating the role that economic analysis plays in Commission
    decision-making in cases. In many cases, public facing document
    surrounding consents in privacy cases either do not describe well or at
    all the economic analysis conducted by staff or upon which BE
    recommended the consent. In cases where there is no economic analysis
    to explain, the Commission should make the information public as well.
        The additional explanation I have in mind would be a BE document,
    not requiring approval of the Commission. Aside from a high-level and
    general description of the economic analyses relied upon in
    recommending or rejecting the proposed consent order, the BE
    explanation could also provide the more general economic rationale for
    its recommendation. Requiring BE to make public its economic rationale
    for supporting or rejecting a consent decree voted out by the
    Commission could offer a number of benefits at little cost. First, it
    would offer BE an avenue to communicate its findings to the public.
    Second, it reinforces the independent nature of the recommendation that
    BE offers. Third, it breaks the agency monolopy the FTC consumer
    protection lawyers currently enjoy in terms of framing a particular
    matter to the public. The internal leverage BE gains by the ability to
    publish such a document may increase conflict between bureaus on the
    margin in close cases, but it will also provide BE a greater role in
    the consent process and a mechanism to discipline privacy consents that
    are not supported by sound economics.
        Thank you very much for your time today. I am happy to take any
    questions that you have for me.
                                     ______

             Dissenting Statement of Commissioner Joshua D. Wright
                          In the Matter of Apple, Inc.
                              FTC File No. 1123108
                                January 15, 2014
        Today, through the issuance of an administrative complaint, the
    Commission alleges that Apple, Inc. (``Apple'') has engaged in ``unfair
    acts or practices'' by billing parents and other iTunes account holders
    for the activities of children who were engaging with software
    applications (``apps'') likely to be used by children that had been
    downloaded onto Apple mobile devices.\1\ In particular, the Commission
    takes issue with a product feature of Apple's platform that opens a
    fifteen-minute period
    ---------------------------------------------------------------------------
        \1\ Complaint, Apple, Inc., FTC File No. 1123108, at para. 28-30
    (Jan. 15, 2014) [hereinafter Apple Complaint].
    ---------------------------------------------------------------------------
        during which a user does not need to re-enter a billing password
    after completing a first transaction with the password.\2\ Because
    Apple does not expressly inform account holders that the entry of a
    password upon the first transaction triggers the fifteen-minute window
    during which users can make additional purchases without once again
    entering the password, the Commission has charged that Apple bills
    parents and other iTunes account holders for the activities of children
    without obtaining express informed consent.\3\
    ---------------------------------------------------------------------------
        \2\ As indicated in the complaint, initially the fifteen-minute
    window was triggered when an app was downloaded. Id. at para. 16. Apple
    changed the interface in March 2011 and subsequently the fifteen-minute
    window was triggered upon the first in-app purchase. Id. at para. 17.
    See also infra note 13.
        \3\ Apple Complaint, supra note 1, at para. 4, 20, 28.
    ---------------------------------------------------------------------------
        Today's action has been characterized as nothing more than a
    reaffirmance of the concept that ``companies may not charge consumers
    for purchases that are unauthorized.'' \4\ I respectfully disagree.
    This is a case involving a miniscule percentage of consumers--the
    parents of children who made purchases ostensibly without their
    authorization or knowledge. There is no disagreement that the
    overwhelming majority of consumers use the very same mechanism to make
    purchases and that those charges are properly authorized. The injury in
    this case is limited to an extremely small--and arguably, diminishing--
    subset of consumers. The Commission, under the rubric of ``unfair acts
    and practices,'' substitutes its own judgment for a private firm's
    decisions
    ---------------------------------------------------------------------------
        \4\ Statement of Chairwoman Ramirez and Commissioner Brill at 1.
    ---------------------------------------------------------------------------
        as to how to design its product to satisfy as many users as
    possible, and requires a company to revamp an otherwise indisputably
    legitimate business practice. Given the apparent benefits to some
    consumers and to competition from Apple's allegedly unfair practices, I
    believe the Commission should have conducted a much more robust
    analysis to determine whether the injury to this small group of
    consumers justifies the finding of unfairness and the imposition of a
    remedy.
        Section 5 of the FTC Act prohibits, in part, ``unfair . . . acts or
    practices in or affecting commerce.'' \5\ As set forth in Section 5(n),
    in order for an act or practice to be deemed unfair, it must ``cause[ ]
    or [be] likely to cause substantial injury to consumers which is not
    reasonably avoidable by consumers themselves and not outweighed by
    countervailing benefits to consumers or competition.'' \6\
    ---------------------------------------------------------------------------
        \5\ 15 U.S.C. Sec. 45(a).
        \6\ 15 U.S.C. Sec. 45(n).
    ---------------------------------------------------------------------------
        The test the Commission uses to evaluate whether an unfair act or
    practice is unfair used to be different. Previously the Commission
    considered: whether the practice injured consumers; whether it violated
    established public policy; and whether it was unethical or
    unscrupulous.\7\ Only after an aggressive enforcement initiative that
    culminated in a temporary rulemaking suspension and Congressional
    threats of stripping the Commission of its unfairness authority
    altogether, was the current iteration of the unfairness test
    reached.\8\ Importantly, this articulation, as set forth in the FTC
    Policy Statement on Unfairness (``Unfairness Statement''), not only
    requires that the alleged injury be substantial, it also includes the
    critical requirements that such injury ``must not be outweighed by any
    countervailing benefits to consumers or competition that the practice
    produces'' and ``it must be an injury that consumers themselves could
    not reasonably have avoided.'' \9\
    ---------------------------------------------------------------------------
        \7\ FTC Policy Statement on Unfairness, appended to Int'l Harvester
    Co., 104 F.T.C. 949, 1070 (1984), available at http://www.ftc.gov/ftc-
    policy-statement-on-unfairness [hereinafter Unfairness Statement].
        \8\ ABA Section of Antitrust Law, Consumer Protection Law
    Developments, 57-59 (2009); J. Howard Beales, III, Director, Bureau of
    Consumer Protection, Fed. Trade Comm'n, The FTC's Use of Unfairness
    Authority: Its Rise, Fall, and Resurrection at 9 (May 2003), available
    at http://www.ftc.gov/public-statements/2003/05/ftcs-use-unfairness-
    authority-its-rise-fall-and-resurrection [hereinafter Beales'
    Unfairness Speech].
        \9\ Unfairness Statement, supra note 7, at 1073.
    ---------------------------------------------------------------------------
        As set forth in more detail below, I do not believe the Commission
    has met its burden to satisfy all three requirements in the unfairness
    analysis. In particular, although Apple's allegedly unfair act or
    practice has harmed some consumers, I do not believe the Commission has
    demonstrated the injury is substantial. More importantly, any injury to
    consumers flowing from Apple's choice of disclosure and billing
    practices is outweighed considerably by the benefits to competition and
    to consumers that flow from the same practice. Accordingly, I
    respectfully dissent from the issuance of this administrative complaint
    and consent order.
    Introduction
        This case requires the Commission to analyze consumer injury under
    the unfairness theory in a novel context: an allegation of a failure to
    disclose a product feature to consumers that results in some injury to
    one group of consumers but that generates benefits for another group.
        The circumstances surrounding Apple's decision to forgo disclosing
    during the transaction the fifteen-minute window to its users--and
    according to the Commission's complaint, thereby failing to obtain
    express informed consent--are distinguishable
        from any other prior Commission case alleging unfairness. The
    economic consequences of the allegedly unfair act or practice in this
    case--a product design decision that benefits some consumers and harms
    others--also differ significantly from those in the Commission's
    previous unfairness cases.
        The Commission commonly brings unfairness cases alleging failure to
    obtain express informed consent. These cases invariably involve conduct
    where the defendant has intentionally obscured the fact that consumers
    would be billed. Many of these cases involve unauthorized billing or
    cramming--the outright fraudulent use of payment information.\10\ Other
    cases involve conduct just shy of complete fraud--the consumer may have
    agreed to one transaction but the defendant charges the consumer for
    additional, improperly disclosed items.\11\ Under this scenario, the
    allegedly unfair act or practice injures consumers and does not provide
    economic value to consumers or competition. In such cases, the
    requirement to provide adequate disclosure itself does not cause
    significant harmful effects and can be satisfied at low cost.
    ---------------------------------------------------------------------------
        \10\ See, e.g., Complaint at 6, FTC v. Jesta Digital, LLC, Civ. No.
    1:13-cv-01272 (D.D.C. Aug. 20, 2013) (alleging that ``Jesta charged
    consumers who did not click on the subscribe button and charged
    consumers for products they did not order.''); Complaint, FTC v. Wise
    Media, LLC, Civ. No. 1:13-CV-1234 (N.D. Ga. Apr. 16, 2013) (alleging
    that defendants charge consumers for purported services without
    consumers ever knowingly signing up for such services).
        \11\ Complaint at 15-16, FTC v. JAB Ventures, LLC, Civ No. CV08-
    04648 (RZx) (C.D. Cal. July 8, 2008) (alleging unauthorized billing
    when defendants charged consumers who had cancelled their enrollment or
    who had not been adequately informed about negative option features);
    FTC v. Crescent Publ'g Group, Inc., 129 F. Supp. 2d 311 (S.D.N.Y. 2001)
    (pornography website failing to disclose the point at which a ``free
    tour'' ended and a monthly membership would begin).
    ---------------------------------------------------------------------------
        However, the particular facts of this case differ in several
    respects from the above scenario. First, there is no evidence Apple
    intended to harm consumers by not disclosing the fifteen-minute
    window.\12\ For example, when Apple began receiving complaints about
    children making unauthorized in-app purchases on their parents' iTunes
    accounts, the company took steps to address the problem.\13\ In
    addition, Apple has an established relationship with its customers and
    its business model depends upon customer satisfaction and repeat
    business.
    ---------------------------------------------------------------------------
        \12\ By distinguishing the facts of this case from other unfairness
    cases brought by the Commission alleging the failure to obtain express
    informed consent, I do not imply that intent is a required element of
    the analysis. However, I think drawing the distinction informs the
    discussion. Furthermore, I am unaware that the Commission has ever
    exercised its unfairness authority where it has alleged only that the
    defendant inadvertently charged consumers.
        \13\ See Chris Foresman, Apple facing class-action lawsuit over
    kids' in-app purchases, arstechnica, Apr. 15, 2011, http://
    arstechnica.com/apple/2011/04/apple-facing-class-action-lawsuit-over-
    kids-in-app-purchases/ (``After entering a password to purchase an app
    from the App Store, the password now has to be reentered in order to
    make any initial in-app purchases.'').
    ---------------------------------------------------------------------------
        Second, rather than an unscrupulous or questionable practice, the
    nature of Apple's disclosures on its platform is an important attribute
    of Apple's platform that affects the demand for and consumer benefits
    derived from Apple devices and services. Disclosures made on the screen
    while consumers interact with mobile devices are a fundamental part of
    the user experience for products like mobile computing devices. It is
    well known that Apple invests considerable resources in its product
    design and functionality.\14\ In streamlining disclosures on its
    platform and in its choice to integrate the fifteen-minute window into
    Apple users' experience on the platform, Apple has apparently
    determined that most consumers do not want to experience excessive
    disclosures or to be inconvenienced by having to enter their passwords
    every time they make a purchase.
    ---------------------------------------------------------------------------
        \14\ Nigel Hollis, The Secret to Apple's Marketing Genius (Hint:
    It's Not Marketing), The Atlantic, July 11, 2011, http://
    www.theatlantic.com/business/archive/2011/07/the-secret-to-apples-
    marketing-genius-hint-its-not-marketing/241724/ (in discussing Apple's
    functionality, ``[u]sing an Apple product feels so natural, so
    intuitive, so transparent, that sometimes, even people paid to know
    what makes products great completely miss the cause of their addiction
    to Apple products. It's the natural, intuitive transparency of the
    technology. The superlative product experience comes from an unusual
    combination of human and technical understanding, and it creates the
    foundation of all the other positive aspects of the brand.''); Peter
    Eckert, Dollars And Sense: The Business Case For Investing In UI
    Design, Fast Company, Mar. 15, 2012, http://www.fastcodesign.com/
    1669283/dollars-and-sense-the-business-case-for-investing-in-ui-design
    (``As we have seen with Apple's success, creating products that offer
    as much simplicity as functionality drives market share and premium
    pricing.''). See also Neil Hughes, Apple's research & development costs
    ballooned 32 percent in 2013 to $4.5B, Apple Insider, Oct. 30, 2013,
    http://appleinsider.com/articles/13/10/30/apples-research-development-
    costs-ballooned-32-in-2013-to-45b; Cliff Kuang, The Six Pillars of
    Steve Jobs' Design Philosophy, Fast Company, Nov. 7, 2011, http://
    www.fastcodesign.com/1665375/the-6-pillars-of-steve-jobss-design-
    philosophy.
    ---------------------------------------------------------------------------
        The Commission has long recognized that in utilizing its authority
    to deem an act or practice as ``unfair'' it must undertake a much more
    rigorous analysis than is necessary under a deception theory.\15\ As a
    former Bureau Director has noted, ``the primary difference between
    full-blown unfairness analysis and deception analysis is that deception
    does not ask about offsetting benefits. Instead, it presumes that false
    or misleading statements either have no benefits, or that the injury
    they cause consumers can be avoided by the company at very low cost.''
    \16\ It is also well established that one of the primary benefits of
    performing a cost-benefit analysis is to ensure that government action
    does more good than harm.\17\ The discussion below explains why I
    believe the Commission's action today fails to satisfy the elements of
    the unfairness framework and thereby conclude that placing Apple under
    a twenty-year order in a marketplace in which consumer preferences and
    technology are rapidly changing is very likely to do more harm to
    consumers than it is to protect them.
    ---------------------------------------------------------------------------
        \15\ Int'l Harvester Co., 104 F.T.C. 949, 1070 (1984); Beales'
    Unfairness Speech, supra note 8, Sec. III.
        \16\ Beales' Unfairness Speech, supra note 8, Sec. III.
        \17\ Int'l Harvester, 104 F.T.C. at 1070.
    ---------------------------------------------------------------------------
    I. The Evidence Does Not Support a Finding of Substantial Injury as
            Required by the Unfairness Analysis
        Apple's choice to include the fifteen-minute window in its platform
    design, and its decision on how to disclose this window, resulted in
    harm to a small fraction of consumers. Any consumer harm is limited to
    parents who incurred in-app charges that would have been avoided had
    Apple instead designed its platform to provide specific disclosures
    about the fifteen-minute window for apps with in-app purchasing
    capability that are likely to be used by children. That harm to some
    consumers results from a design choice for a platform used by millions
    of users with disparate preferences is not surprising. The failure to
    provide perfect information to consumers will always result in ``some''
    injury to consumers. The relevant inquiry is whether the injury to the
    subset of consumers is ``substantial'' as contemplated by the
    Commission's unfairness analysis.
        Consumer injury may be established by demonstrating the allegedly
    unfair act or practice causes ``a very severe harm to a small number''
    \18\ of people or ``a small harm to a large number of people.'' \19\
    While it is possible to demonstrate substantial injury occurred as a
    result of an act or practice causing a small harm to a large number of
    consumers, substantiality is analyzed relative to the magnitude of any
    offsetting benefits.\20\ This is particularly critical when the
    allegedly unfair practice is not a fraudulent activity such as
    unauthorized billing or cramming, where there are no offsetting
    benefits.
    ---------------------------------------------------------------------------
        \18\ Int'l Harvester, 104 F.T.C. at 1064.
        \19\ Unfairness Statement, supra note 7, at n.12.
        \20\ Beales' Unfairness Speech, supra note 8, Sec. III (``relative
    to the benefits, the injury may still be substantial'' and ``[t]o
    qualify as substantial, an injury must be real, and it must be large
    compared to any offsetting benefits.'').
    ---------------------------------------------------------------------------
        By reasonable measures of the potential harms and benefits
    available to the Commission, the injury is relatively small and not
    necessarily substantial in this case. The complaint alleges Apple has
    received ``at least tens of thousands of complaints related to
    unauthorized in-app charges by children'' \21\ while playing games
    acquired on Apple's platform, which supports all music, books, and
    applications purchased for use with Apple mobile devices (e.g., iPhone,
    iPad, iPod, hereinafter ``iDevices''). Although ``tens of thousands''
    sounds like a large number, the unfairness inquiry requires this number
    be evaluated in an appropriate context. Apple announced its 50
    billionth app download in May 2013.\22\ Even 200,000 complaints in 50
    billion downloads would represent only four complaints in a million,
    which is quite a small fraction.
    ---------------------------------------------------------------------------
        \21\ Apple Complaint, supra note 1, at para. 24.
        \22\ Press Release, Apple, Inc., Apple's App Store Marks Historic
    50 Billionth Download (May 16, 2013), available at http://
    www.apple.com/pr/library/2013/05/16Apples-App-Store-Marks-Historic-50-
    Billionth-Download.html.
    ---------------------------------------------------------------------------
        In addition, the complaint presents a few examples in which
    children made unauthorized in-app purchases that were relatively large,
    some greater than $500, and one bill as high as $2,600.\23\ There is
    undoubtedly consumer harm in these instances, assuming the purchases
    are correctly attributed to the alleged failure to disclose, but again,
    in order to qualify as substantial, the harm ``must be large compared
    to any offsetting benefits.'' \24\
    ---------------------------------------------------------------------------
        \23\ Apple Complaint, supra note 1, at para. 25-26.
        \24\ Beales' Unfairness Speech, supra note 8, Sec. III.
    ---------------------------------------------------------------------------
        The relevant economic context required to understand substantiality
    of injury in this case includes the proportions of populations
    potentially harmed and benefitted by the failure to disclose product
    features in this case. A measure of harm that gives weight to both the
    number of consumers harmed and the size of the individual harms is the
    ratio of the value of unauthorized purchases to the total sales
    affected by the practice. We can construct such a measure as follows.
    The $32.5 million in consumer refunds required by the consent decree
    presumably relates in some way to the harm arising from Apple's
    disclosure practices. Recognizing that monetary amounts emerging from
    consent decrees are a product of compromise and an assessment of
    litigation risk, suppose that the value of unauthorized purchases is
    ten times higher than the negotiated settlement amount. This assumption
    gives a conservatively high estimate of $325 million in unauthorized
    purchases since the inception of the App Store.
        The total sales affected by Apple's disclosure practices likely
    include not only the sale of apps and in-app purchases, but also the
    sale of iDevices. This is likely because the benefits from using apps
    and making in-app purchases are components of the stream of benefits
    generated by iDevices, and a customer's decision to purchase an iDevice
    will depend upon the stream of benefits derived from the device.
    Indeed, the degree of integration across all components of Apple's
    platform is remarkably high, suggesting that Apple's disclosure
    practices may affect all Apple's sales. For completeness, Charts 1 and
    2 below measure the estimated harm as a fraction of all three variants
    of Apple's sales--App Store sales, iDevice sales, and total sales.
    These data are available from Apple's Annual Reports and press
    releases.
        Chart 1 shows that the estimated value of the harm is a miniscule
    fraction of both Apple total sales (about six one-hundredths of one
    percent) and iDevice sales (about eight one-hundredths of one percent)
    over the five-year period from the inception of the App Store to
    September 2013. This measure of harm, a conservatively high estimate,
    is also a relatively small fraction of App Store sales (about 4.6
    percent).

        Sources: Apple, Inc., Annual Reports for 2009-2013 (Form 10-K);
    Marin Perez, Apple App Store A $1.2 Billion Business In 2009,
    InformationWeek, June 11, 2008, available at http://
    www.informationweek.com/mobile/mobile-devices/apple-app-store-a-$12-
    billion-business-in-2009/d/d-id/1068794; Apple Complaint, supra note 1
    (for the $32.5 million settlement amount).

        Chart 2 illustrates the same relationship with respect to Apple
    sales growth over the last 13 years.

        Sources: Same as Chart 1, plus Apple, Inc., Annual Reports for
    2002-2008 (Form 10-K). Calculations assume the App Store sales and
    estimated unauthorized purchases grew at a constant percentage growth
    rate from 2009 through 2013.

        Taking into account the full economic context of Apple's choice of
    disclosures relating to the fifteen-minute window undermines the
    conclusion that any consumer injury is substantial.
    II. At Least Some of the Injury Could Be Reasonably Avoided by
            Consumers
        The Unfairness Statement provides that the ``injury must be one
    which consumers could not reasonably have avoided.'' \25\ In explaining
    that requirement the Commission noted, ``[i]n some senses any injury
    can be avoided--for example, by hiring independent experts to test all
    products in advance, or by private legal actions for damages--but these
    courses may be too expensive to be practicable for individual consumers
    to pursue.'' \26\ The complaint does not allege that the undisclosed
    fifteen-minute window is an unfair practice as to any consumer other
    than parents of children playing games likely to be played by children
    that have in-app purchasing capability.\27\ In the instant case, it is
    very likely that most parents were able to reasonably avoid the
    potential for injury, and this avoidance required nothing as drastic as
    hiring an independent expert, but rather common sense and a modicum of
    diligence.
    ---------------------------------------------------------------------------
        \25\ Unfairness Statement, supra note 7, at 1074.
        \26\ Unfairness Statement, supra note 7, at n.19.
        \27\ Indeed, there are many financial, banking, and retail apps and
    websites that allow consumers to conduct a series of transactions after
    entering a password only once. These services usually only require re-
    entry of a password after a certain amount of time has elapsed, or the
    session expires because of inactivity on the user's part. It is
    doubtful that the Commission would bring an unfairness case because
    these services do not disclose this window.
    ---------------------------------------------------------------------------
        The harm to consumers contemplated in the complaint involves app
    functionality that changed over time. In the earliest timeframe, the
    harm occurred when a parent typed in their Apple password to download
    an app with in-app purchase capability, handed the Apple device to
    their child, and then unbeknownst to the parent, the child was able to
    make in-app purchases by pressing the ``buy'' button during the
    fifteen-minute window in which the password was cached. This was
    apparently an oversight on Apple's part. When it came to the company's
    attention, Apple implemented a password prompt for the first in-app
    purchase after download.\28\
    ---------------------------------------------------------------------------
        \28\ See Foresman, supra note 13.
    ---------------------------------------------------------------------------
        During the later timeframe, after being handed the Apple device, a
    child again would press the ``buy'' button to make an in-app purchase.
    At this point, the child would have needed to turn the device back over
    to the parent for entry of the password. Alternatively, some children
    may have known their parent's password and entered it themselves. In
    either case, the fifteen-minute window was opened and additional in-app
    purchases could be made without further password prompts.
        Under the first scenario, account holders received no password
    prompt for the first in-app purchase and thus the injury experienced by
    some consumers arguably may not have been reasonably avoidable. Because
    the opening of the fifteen-minute window in this context does not
    appear to be a product design feature, but rather an unintended
    oversight, I will focus my attention upon the harm experienced by
    consumers in the latter scenario and discuss their ability to
    reasonably avoid it.
        Irrespective of the existence of the fifteen-minute window, a user
    can only make an in-app purchase by pressing a ``buy'' button while
    engaging with the app. In other words, the user must decide to make an
    in-app purchase. To execute the first in-app purchase, the user must
    enter a password. The fifteen-minute window eliminates the second step
    of verification--entering a password--only after the user has made the
    first in-app purchase by clicking the ``buy'' button and entering the
    password.
        By entering their password into the Apple device--an action that is
    performed in response to a request for permission--parents were
    effectively put on notice that they were authorizing a transaction.\29\
    Although the complaint alleges that the fifteen-minute window was not
    expressly disclosed to parents, regular users of Apple's platform
    become familiar with the opportunity to make purchases without entering
    a password every time.\30\ Even if some parents were not familiar with
    the fifteen-minute window, the requirement to re-enter their password
    to authorize a transaction arguably triggered some obligation for them
    to investigate further, rather than just to hand the device back to the
    child without further inquiry.\31\
    ---------------------------------------------------------------------------
        \29\ Furthermore, Apple sends an e-mail receipt to the iTunes
    account holder after a purchase has been made in the either the iTunes
    or App Store. See e.g., http://www.apple.com/privacy/.
        \30\ To the extent that users read the Apple Terms and Conditions
    when they opened their iTunes accounts, consumer injury would also have
    been avoided. The Terms and Conditions explain the fifteen-minute
    window and other aspects of how Apple's platform works, including the
    App Store. It appears that Apple has included these explanations since
    at least June 2011. See http://www.apple.com/legal/internet-services/
    itunes/us/terms.html#SALE (Apple's current Terms and Conditions) and
    http://www.proandcontracts.com/wp-content/uploads/2011/06/2011.06.09-
    iTunes-Terms-and-Conditions-June-2011-Update-with-Highlighting.pdf
    (cached copy of what appears to be its Terms and Conditions as of June
    2011).
        \31\ The Terms and Conditions also explain how to use the parental
    control settings to control how the App Store works. See http://
    support.apple.com/kb/HT1904 and http://support
    .apple.com/kb/HT4213. These parental control settings allow users to
    disable in-app purchasing capability as well as establish settings that
    require a password each time a purchase is made, thereby eliminating
    the fifteen-minute window.
    ---------------------------------------------------------------------------
    III. Any Consumer Injury Caused by Apple's Platform is Outweighed by
            Countervailing Benefits to Consumers and Competition
        Assuming for the moment there is at least some harm that consumers
    cannot reasonably avoid, the question turns to whether the harms are
    substantial relative to any benefits to competition or consumers
    attributable to the conduct. In performing this balancing, the
    Commission must also take ``account of the various costs that a remedy
    would entail. These include not only the costs to the parties directly
    before the agency, but also the burdens on society in general in the
    form of increased paperwork, increased regulatory burdens on the flow
    of information, reduced incentives to innovation and capital formation,
    and similar matters.'' \32\ I now turn to that question.
    ---------------------------------------------------------------------------
        \32\ Unfairness Statement, supra note 7, at 1073-74.
    ---------------------------------------------------------------------------
    A. Apple's Platform as a Benefit to Consumers and Competition
        Unfairness analysis requires an evaluation and comparison of the
    benefits and costs of Apple's decision not to increase or enhance its
    disclosure of how Apple's platform works, including the fifteen-minute
    window. The fifteen-minute window is a feature of Apple's platform that
    applies to purchases of songs, books, apps, and in-app purchases. This
    feature has long been a part of the iTunes Store for downloading music,
    and regular users of iTunes apparently value it. In the context here,
    disclosure is perhaps better thought of as a product attribute--
    guidance--that Apple provides to the customer through on-screen and
    other explanations of how to use Apple's platform.\33\
    ---------------------------------------------------------------------------
        \33\ Compare the disclosure contemplated here with disclosure in
    the mortgage context, for example. Here, the disclosure itself--or the
    guidance offered while the user is interacting with the product--is an
    intrinsic part of the product's value. Indeed, Apple's business model
    is built on offering an integrated platform with a clean design that
    customers find intuitive and easy to use. The way the platform is
    presented, including disclosures or guidance offered during use, is a
    critically important component of value. In the mortgage context, the
    disclosures signed at closing are not a significant component of the
    value of the mortgage.
    ---------------------------------------------------------------------------
        In deciding what guidance to provide and how to provide it, firms
    face two important issues. First, since it is generally not possible to
    customize guidance for every individual customer, the optimal guidance
    inevitably balances the needs of different customers. In drawing this
    balance, the potential for harm from misinterpretation is likely
    important in deciding which customer on the sophistication spectrum
    might represent the least common denominator for directing the
    guidance. For any given degree of guidance, some customers will get it
    immediately, while others will have to work harder. If the potential
    for harm is very large, e.g., harm from a drug overdose, then both the
    firm and consumers want obvious, strong disclosures about dosage, and
    perhaps other steps like childproof caps. If the potential for harm is
    small, then strong guidance (or caps that are hard to open in the drug
    context) may make it more costly for consumers to use the product.
    Platform designers clearly face such tradeoffs in their decision-making
    regarding guidance and disclosures. Apple clearly faces the same
    tradeoff with respect to its decisions concerning the fifteen-minute
    window. This tradeoff is relevant for evaluating the benefit-cost test
    at the core of unfairness analysis.
        Second, because it is difficult to anticipate the full set of
    issues that might benefit from guidance of various types, the firm must
    decide how much time to spend researching, discovering, and potentially
    fixing possible issues ex ante versus finding and fixing issues as they
    arise. With complex technology products such as computing platforms,
    firms generally find and address numerous problems as experience is
    gained with the product. Virtually all software evolves this way, for
    example. This tradeoff--between time spent perfecting a platform up
    front versus solving problems as they arise--is also relevant for
    evaluating unfairness.
        Apple presumably weighs the costs and benefits to Apple of
    different ways to provide guidance. In doing so, Apple must consider:
    (i) the benefit to Apple of greater sales of mobile devices, music,
    books, apps, and in-app components to customers who benefit from the
    additional guidance and make more purchases; (ii) the cost to Apple of
    fewer sales of mobile devices, music, books, apps, and in-app
    components by customers who find that more real-time guidance hampers
    their experience; and (iii) the cost to Apple of developing and
    implementing more guidance. In weighing (i) and (ii), Apple is
    particularly concerned about the effects on the sales of mobile devices
    that use Apple's platform, as they constitute the bulk of Apple's
    business, as indicated in Charts 1 and 2.\34\
    ---------------------------------------------------------------------------
        \34\ In 2012, sales of the iPhone, iPad, and iPod accounted for
    over 76 percent of Apple's $157 billion in sales. See Apple, Inc.,
    Annual Report (Form 10-K), at 73 (Oct. 31, 2012), available at http://
    files.shareholder.com/downloads/AAPL/2661211346x0xS1193125-12-444068/
    320193/filing.pdf.
    ---------------------------------------------------------------------------
        The relevant universe for assessing unfairness of Apple's guidance
    provision, including disclosures relating to the fifteen-minute window,
    is the set of users to whom the guidance is directed. This includes all
    users of Apple's platform who might make online purchases through the
    platform.
        The ratio of estimated unauthorized purchases in this case to all
    purchases made by users of Apple's platform is miniscule, as Charts 1
    and 2 illustrate. This fact, by itself, does not establish that the
    benefits of Apple's decision to forgo additional guidance of the type
    required by the consent order outweigh its costs. However, the
    remarkably low ratio does provide perspective on the following
    question: How much would the average non-cancelling customer need to be
    harmed by a requirement of additional guidance in order to outweigh the
    benefit of preventing harm to other consumers? Suppose the fraction of
    customers that would benefit from additional guidance is approximated
    by the ratio of estimated unauthorized purchases to total sales of
    iDevices. The analysis in Charts 1 and 2 indicates that estimated
    unauthorized purchases have been about 0.08 percent of iDevice-related
    sales since the App Store was launched. Suppose that customers that
    make unauthorized purchases cancel them and seek a refund. Suppose also
    that the time cost involved in seeking a refund return is $11.95.\35\
    Then, if the average harm to non-cancelling customers from additional
    guidance sufficient to prevent cancellations is more than about a penny
    per transaction, the additional guidance will be counter-
    productive.\36\
    ---------------------------------------------------------------------------
        \35\ The $11.95 figure represents the seasonally adjust average
    earnings per half hour across all employees on private nonfarm
    payrolls, as reported by the Bureau of Labor and Statistics in May
    2013. See http://www.bls.gov/news.release/empsit.t19.htm for the most
    recent report. The assumption is that customers asked for returns were
    reimbursed for the charges as Apple attests, and that obtaining a
    reimbursement takes half an hour.
        \36\ Let Y be the harm to non-cancelling customers from additional
    guidance sufficient to prevent cancellations. This harm will just equal
    the benefit of avoiding cancellations if (% Cancelling) x (Refund Time
    Cost)--(% Not Cancelling) x Y = 0. Assuming (% Cancelling) is .0008,
    (Refund Time Cost) is $11.95, and (% Not Cancelling) is .9992, solving
    for Y gives Y = $.009. In other words, if the harm to non-cancelling
    customers from additional guidance is more than roughly one cent for
    each transaction, then then the costs of the additional guidance will
    outweigh the benefits.
    ---------------------------------------------------------------------------
        To be clear, the sales of iDevices are not an estimate of consumer
    benefits but rather they approximate the total universe of economic
    activity implicated by the Commission's consent order. Similarly,
    estimated unauthorized purchases merely approximate the total universe
    of consumers potentially harmed by Apple's practices. The harm from
    Apple's disclosure policy is limited to users that actually make
    unauthorized purchases. However, the potential benefits from Apple's
    disclosure choices are available to the entire set of iDevice users
    because these are the consumers capable of purchasing apps and making
    in-app purchases. The disparity in the relative magnitudes of these
    universes of potential harms and benefits suggests, at a minimum, that
    further analysis is required before the Commission can conclude that it
    has satisfied its burden of demonstrating that any consumer injury
    arising from Apple's allegedly unfair acts or practices exceeds the
    countervailing benefits to consumers and competition.\37\
    ---------------------------------------------------------------------------
        \37\ Commissioner Ohlhausen suggests that our unfairness analysis
    compares inappropriately the injury caused by Apple's lack of clear
    disclosure with the benefits of Apple's disclosure policy to the entire
    ecosystem. She argues that this approach ``skew[s] the balancing test
    for unfairness and improperly compare[s] injury `oranges' from an
    individual practice with overall `Apple' ecosystem benefits.''
    Statement of Commissioner Ohlhausen at 3. For the reasons discussed,
    this analysis misses the point.
    ---------------------------------------------------------------------------
        Nonetheless, the Commission effectively rejects an analysis of
    tradeoffs between the benefits of additional guidance and potential
    harm to some consumers or to competition from mandating guidance by
    assuming that ``the burden, if any, to users who have never had
    unauthorized charges for in-app purchases, or to Apple, from the
    provision of this additional information is de minimis'' and that any
    mandated disclosure would not ``detract in any material way from a
    streamlined and seamless user experience.'' I respectfully disagree.
    These assumptions adopt too cramped a view of consumer benefits under
    the Unfairness Statement and, without more rigorous analysis to justify
    their application, are insufficient to establish the Commission's
    burden.
    B. The Costs and Benefits to Consumers and Competition of Apple's
            Product Design and Disclosure Choices
        To justify a finding of unfairness, the Commission must demonstrate
    the allegedly unlawful conduct results in net consumer injury. This
    requirement, in turn, logically implies the Commission must demonstrate
    Apple's chosen levels of guidance are less than optimal because
    consumers would benefit from additional disclosure. There is a
    considerable economic literature on this subject that sheds light upon
    the conditions under which one might reasonably expect private
    disclosure levels to result in net consumer harm.\38\
    ---------------------------------------------------------------------------
        \38\ Disclosure in this context is analogous to a quality decision
    that may affect different customers differently. A. Michael Spence,
    Monopoly, Quality and Regulation, 6 Bell J. of Econ. 417-29 (1975);
    Eytan Sheshinski, Price, Quality and Quantity Regulation in Monopoly
    Situations, 43 Economica 127-37 (1976). The analysis of this issue is
    also explained in Jean Tirole, The Theory of Industrial Organization
    Sec. 2.2.1 (MIT Press 1988).
    ---------------------------------------------------------------------------
        To support the complaint and consent order the Commission issues
    today requires evidence sufficient to support a reason to believe that
    Apple will undersupply guidance about its platform relative to the
    socially optimal level. Economic theory teaches that such a showing
    would require evidence that ``marginal'' customers--the marginal
    consumer is the customer that is just indifferent between making the
    purchase or not at the current price--would benefit less from the
    consent order than the ``inframarginal'' customers who are willing to
    pay significantly more for the product than the current price and
    therefore would purchase the product irrespective of a small adjustment
    in an attribute. Nobel Laureate Michael Spence points out in his
    seminal work on the subject that this analysis generally requires
    information on the valuations of inframarginal consumers.\39\ Here,
    marginal consumers are those who would not have made in-app purchases
    if Apple would have disclosed the fifteen-minute window. Inframarginal
    consumers are those Apple customers who would not change their
    purchasing behavior in response to a change in Apple's disclosures.
    ---------------------------------------------------------------------------
        \39\ Spence, supra note 38.
    ---------------------------------------------------------------------------
        Staff has not conducted a survey or any other analysis that might
    ascertain the effects of the consent order upon consumers. The
    Commission should not support a case that alleges that Apple has
    underprovided disclosure without establishing this through rigorous
    analysis demonstrating--whether qualitatively or quantitatively--that
    the costs to consumers from Apple's disclosure decisions have
    outweighed benefits to consumers and the competitive process. The
    absence of this sort of rigorous analysis is made more troublesome in
    the context of a platform with countless product attributes and where
    significant consumer benefits are intuitively obvious and borne out by
    data available to the Commission. We cannot say with certainty whether
    the average consumer would benefit more or less than the marginal
    consumer from additional disclosure without empirical evidence. This
    evidence might come from a study of how customers react to different
    disclosures. However, given the likelihood that the average benefit of
    more disclosure to unaffected customers is less than the benefit to
    affected customers who are likely to be customers closer to the margin,
    I am inclined to believe that Apple has more than enough incentive to
    disclose.\40\
    ---------------------------------------------------------------------------
        \40\ This argument does not, as Chairwoman Ramirez and Commissioner
    Brill suggest, ``presuppose that a sufficient number of Apple customers
    will respond to the lack of adequate information by leaving Apple for
    other companies.'' Statement of Chairwoman Ramirez and Commissioner
    Brill at 5-6. Nor does the economic logic require any belief about the
    magnitude of switching costs. Rather, the analysis relies only upon the
    standard economic assumption that Apple chooses disclosure to maximize
    shareholder value, weighing how customers react to different disclosure
    policies. If Apple behaves this way, the average benefit of more
    disclosure to unaffected customers is less than the benefit to affected
    customers, and affected customers are more likely to be on the margin
    than unaffected customers, then economic theory implies that Apple is
    likely to have more than enough incentive to disclose.
    ---------------------------------------------------------------------------
    C. Other Considerations When Examining the Costs and Benefits of
            Platforms and other Multi-Attribute Products
        Unfairness analysis also requires the Commission to consider the
    impact of contemplated remedies or changes in the incentives to
    innovate new product features upon consumers and competition.\41\ I
    close by discussing some additional dimensions of an economic analysis
    of the costs and benefits of product disclosures in the context of
    complicated products and platforms with many attributes, like Apple's
    platform, where such disclosures are a critical component of the user
    experience and have considerable impact upon the value consumers derive
    from the product.
    ---------------------------------------------------------------------------
        \41\ Unfairness Statement, supra note 7, at 1073-74.
    ---------------------------------------------------------------------------
        For complicated products--for example, a web-based platform for
    purchasing and interacting with potentially millions of items using a
    mobile device--there are many things that can negatively impact user
    experience. The number of potential issues for products that involve
    hardware, software, and a human interface is large. This is the nature
    of technology. When designing a complex product, it is prohibitively
    costly to try to anticipate all the things that might go wrong. Indeed,
    it is very likely impossible. Even when potential problems are found,
    it is sometimes hard to come up with solutions that that one can be
    confident will fix the problem. Sometimes proposed solutions make it
    worse. In deciding how to allocate its scarce resources, the creator of
    a complex product weighs the tradeoffs between (i) researching and
    testing to identify and determine whether to fix potential problems in
    advance, versus (ii) waiting to see what problems arise after the
    product hits the marketplace and issuing desirable fixes on an ongoing
    basis. We observe the latter strategy in action for virtually all
    software.
        The relevant analysis of benefits and costs for allegedly unfair
    omissions requires weighing of the benefits and costs of discovering
    and fixing the issue that arose in advance versus the benefits and
    costs of finding the problem and fixing it ex post. These
    considerations fit comfortably within the unfairness framework laid out
    by the Commission.\42\ The Commission also takes account of the various
    costs that a remedy would entail. These include not only the costs to
    the parties directly before the agency, but also the burdens on society
    in general in the form of increased regulatory burdens on the flow of
    information, reduced incentives to innovate and invest capital, and
    other social costs.\43\
    ---------------------------------------------------------------------------
        \42\ The Commission must take ``account of the various costs that a
    remedy would entail'' including ``reduced incentives to innovation and
    capital formation, and similar matters.'' Unfairness Statement, supra
    note 7, at 1073-74.
        \43\Unfairness Statement, supra note 7, at 1073-74.
    ---------------------------------------------------------------------------
        Here, Apple did not anticipate the problems customers would have
    with children making in-app purchases that parents did not expect. When
    the problem arose in late 2010, press reports indicate that Apple
    developed a strategy for addressing the problem in a way that it
    believed made sense, and it also refunded customers that reported
    unintended purchases.\44\ This is precisely the efficient strategy
    described above when complex products like Apple's platform develop
    problems that are difficult to anticipate and fix in advance.
    Establishing that it is ``unfair'' unless a firm anticipates and fixes
    such problems in advance--precisely what the Commission's complaint and
    consent order establishes today--is likely to impose significant costs
    in the context of complicated products with countless product
    attributes. These costs will be passed on to consumers and threaten
    consumer harm that is likely to dwarf the magnitude of consumer injury
    contemplated by the complaint.
    ---------------------------------------------------------------------------
        \44\ See Foresman, supra note 13.
    ---------------------------------------------------------------------------
        This investigation began largely because of complaints that arose
    when in-app purchases were first introduced into the marketplace and
    Apple had not had enough experience with the platform to recognize how
    parents and children would use the App Store. In late 2010, complaints
    began to emerge. In March 2011, Apple first altered its platform to
    address complaints about unauthorized in-app purchases. It is not
    unreasonable to surmise that as Apple has modified its policies based
    on experience, and customers have learned more about how to use the
    platform, unauthorized in-app purchases by children have most likely
    steadily declined.
        The Commission has no foundation upon which to base a reasonable
    belief that consumers would be made better off if Apple modified its
    disclosures to confirm to the parameters of the consent order. Given
    the absence of such evidence, enforcement action here is neither
    warranted nor in consumers' best interest.
                                     ______

                 Prepared Statement of Scott Smith, President,
                  Precious Metals Association of North America
        Chairman Moran and Members of the Subcommittee,

        My name is Scott Smith and I am the CEO of Pyromet, which is a
    privately owned precious metals manufacturer and refiner of silver,
    gold, and platinum group metals. Since 1969, Pyromet is a reputable
    name in precious metals and precious metals management. I also serve as
    President of the of the Precious Metals Association of North America
    (PMANA) and am submitting this written testimony on behalf of our
    members. Our association's members are made up of refiners,
    manufacturers, traders, and distributors of products that are
    essentially comprised of precious metals such as gold, silver,
    platinum, and palladium. All of our members have a vested interest in
    the great work being done at the Federal Trade Commission, but we
    believe steps can be taken to improving fairness and innovation, all
    the while continuing to protect consumer welfare.
        For most products, unless they are automobiles or items made from
    textile or wool, there is no law requiring manufacturers and marketers
    to make a ``Made in USA'' claim. But if a business chooses to make the
    claim, the FTC's ``Made in USA'' standard applies. ``Made in USA''
    means that ``all or virtually all'' the product has been made in
    America. That is, all significant parts, processing, and labor that go
    into the product must be of U.S. origin. Products should not contain
    any--or should contain only negligible--foreign content.
        Manufacturers of products made with recycled materials can't claim
    products were ``Made in USA'' unless they can show that the materials
    originated domestically, according to the Federal Trade Commission.
    This makes ``Made in USA'' claims tricky for recycled materials. Gold
    that is used to make jewelry is likely to have been recycled many
    times, which makes it impossible to determine the location from which
    it was originally mined. As much as 90 percent of gold jewelry contains
    recycled material, and some of it may have been mined centuries ago.
    This is due to the fact that gold can be recycled indefinitely without
    degrading the quality, and the metal's high intrinsic value means
    little if it is not eventually recycled. Given the long and complex
    history of this gold, the FTC's requirement to substantiate that
    material was originally mined in the U.S. is not possible for most of
    the gold jewelry that is crafted here by American hands.
        The innovative process of recycling scrap precious metals--
    particularly gold--begins with the collection of used jewelry, coins,
    electronic and industrial components, investment bars and manufacturing
    by-products. Most recycled gold originates from pre-owned jewelry, with
    smaller amounts deriving from other sources. The material is melted,
    then undergoes the same chemical refining process as would newly mined
    gold to produce a bar that is at least 99.5 percent gold for use by
    jewelry manufacturers.
        Since 1997 when the ``all or virtually all'' standard was adopted,
    globalization and innovation has increased the accessibility and use of
    precious metal scrap. Thus, precious metal scrap is constantly recycled
    and the minerals extracted for production purposes. As precious metal
    scrap continues to be recycled and refined for use by American workers,
    it becomes increasingly difficult to determine the location from which
    the raw materials were mined.
        In addition to the ``all or virtually all'' standard being
    outdated, it appears to conflict with current policies and practices
    used by other agencies regarding scrap, particularly those followed by
    the Commerce department and the United States Trade Representative as
    defined by U.S. Customs in 19 C.F.R. Section 102.1. Additionally, the
    U.S. Customs standard, otherwise known as ``substantial
    transformation,'' takes into consideration the value of American labor
    in recycling, refining, and preparing precious metal scrap for future
    uses.
        The value of American labor--especially in a globalized economy--is
    crucial for promoting our products both domestically and worldwide.
    According to an industry survey approved by the FTC, 62 percent of
    consumers said it didn't matter if some of the materials originated
    elsewhere for something to be labeled ``Made in USA,'' as long as the
    product was created by U.S. labor in the United States. Clearly,
    consumers are aware of the benefits of trade--including the recovery of
    valuable materials by U.S. labor for domestic manufacturing.
        Also, when it comes to trade, it is important to maintain
    consistency policies. It is important to note that the FTC is the only
    government agency to use the ``all or virtually all'' standard to
    determine origination. That being said, the same FTC-approved consumer
    survey found that 92 percent of Americans agreed that only one standard
    for ``Made in USA'' should be applied to all government agencies. This
    is an indication that American consumers very well understand the
    importance of government efficiency in a globalized economy.
    Policy Proposal
        Moving forward, as the United States enters into and renegotiates
    trade agreements, we believe that the FTC should reexamine its ``Made
    in USA'' standard and its effect on industries that take in, recycle,
    and refine valuable materials to be used in production by U.S. labor.
    When considering valuable materials whose unknown origins date back
    centuries ago, the ``Made in USA'' standard should give deference to
    U.S. labor and the significant contributions such labor has made to the
    U.S. economy as a result of skilled American craftsmanship.
        Thank you and I look forward to working with the subcommittee and
    the FTC to ensure a ``Made in USA'' standard that improves fairness
    among industries, considers the innovative processes utilized by
    American industries to prepare recycled materials for use by U.S.
    labor, and upholding the highest common-sense standards for protecting
    consumer welfare. If you have any questions, I am happy to meet with
    you and/or your staff to discuss this issue in greater detail. Thank
    you for the time and I hope the subcommittee will look closely at this
    issue and the impacts it has on U.S. labor and the economy.
                                     ______

                         The Federal Trade Commission:
      Restoring Congressional Oversight of the Second National Legislature
    An Analysis of Proposed Legislation

       Berin Szokai & Geoffrey A. Manneii--May 2016
    ---------------------------------------------------------------------------

        \i\ Berin Szoka is President of TechFreedom (techfreedom.org), a
    non-profit, tax-exempt think tank based in Washington D.C. He can be
    reached at bszoka@techfreedom.org or @BerinSzoka.
        \ii\ Geoffrey Manne is Executive Director of the International
    Center for Law & Economics (laweconcenter.org), a non-profit think tank
    based in Portland, Oregon. He can be reached at
    gmanne@laweconcenter.org or @GeoffManne.
    ---------------------------------------------------------------------------
               Report 2.0 of the FTC: Technology & Reform Project
        The ``FTC: Technology & Reform Project'' was convened by the
    International Center for Law & Economics and TechFreedom in 2013. It is
    not affiliated in any way with the FTC.
    Executive Summary
        Congressional reauthorization of the FTC is long overdue. It has
    been twenty-two years since Congress last gave the FTC a significant
    course-correction and even that one, codifying the heart of the FTC's
    1980 Unfairness Policy Statement, has not had the effect Congress
    expected. Indeed, neither that policy statement nor the 1983 Deception
    Policy Statement, nor the 2015 Unfair Methods of Competition
    Enforcement Policy Statement, will, on their own, ensure that the FTC
    strikes the right balance between over- and under-enforcement of its
    uniquely broad mandate under Section 5 of the FTC Act.
        These statements are not without value, and we support codifying
    the other key provisions of the Unfairness Policy Statement that were
    not codified in 1980, as well as codifying the Deception Policy
    Statement. In particular, we urge Congress or the FTC to clarify the
    meaning of ``materiality,'' the key element of Deception, which the
    Commission has effectively nullified.
        But a shoring up of substantive standards does not address the core
    problem: ultimately, that the FTC's processes have enabled it to
    operate with essentially unbounded discretion in developing the
    doctrine by which its three high level standards are applied in real-
    world cases.
        Chiefly, the FTC has been able to circumvent judicial review
    through what it calls its ``common law of consent decrees,'' and to
    effectively circumvent the rulemaking safeguards imposed by Congress in
    1980 through a variety of forms of ``soft law'': guidance and
    recommendations that have, if indirectly and through amorphous forms of
    pressure, essentially regulatory effect.
        At the same time, and contributing to the problem, the FTC has made
    insufficient use of its Bureau of Economics, which ought to be the
    agency's crown jewel: a dedicated, internal think tank of talented
    economists who can help steer the FTC's enforcement and policymaking
    functions. While BE has been well integrated into the Commission's
    antitrust decisionmaking, it has long resisted applying the lessons of
    law and economics to its consumer protection work.
        The FTC is, in short, in need of a recalibration. In this paper we
    evaluate nine of the seventeen FTC reform bills proposed by members of
    the Commerce, Manufacturing and Trade Subcommittee, and suggest a
    number of our own, additional reforms for the agency.
        Many of what we see as the most needed reforms go to the lack of
    economic analysis. Thus we offer detailed suggestions for how to
    operationalize a greater commitment to economic rigor in the agency's
    decision-making at all stages. Specifically, we propose expanding the
    proposed requirement for economic analysis of recommendations for
    ``legislation or regulatory action'' to include best practices (such as
    the FTC commonly recommends in reports), complaints and consent
    decrees. We also propose (and support bills proposing) other mechanisms
    aimed at injecting more rigor into the Commission's decisionmaking,
    particularly by limiting its use of various sources of informal or
    overly discretionary sources of authority.
        The most underappreciated aspect of the FTC's processes is
    investigation, for it is here that the FTC wields incredible power to
    coerce companies into settling lawsuits rather than litigating them.
    Requiring that the staff satisfy a ``preponderance of the evidence''
    standard for issuing consumer protection complaints would help, on the
    margin, to embolden some defendants not to settle. Other proposed
    limits on the aggressive use of remedies and on the allowable scope of
    the Commission's consent orders would help to accomplish the same
    thing. Changing this dynamic even slightly could produce a significant
    shift in the agency's model, by injecting more judicial review into the
    FTC's evolution of its doctrine.
        Commissioners themselves could play a greater role in constraining
    the FTC's discretion, as well, keeping the FTC focused on advancing
    consumer welfare in everything it does. Together with the Bureau of
    Economics, these two internal sources of constraint could partly
    substitute for the relative lack of external constraint from the
    courts.
        We are not wholly critical of the FTC. Indeed, we are broadly
    supportive of its mission. And we support several measures to expand
    the FTC's jurisdiction to cover telecom common carriers and to make it
    easier for the FTC to prosecute non-profits that engage in for-profit
    activities. We enthusiastically support expansion of the FTC's Bureau
    of Economics. And we recommend expansion of the Commission's
    competition advocacy work into a full-fledged Bureau, so that the
    Commission can advocate at all levels of government--federal, state and
    local--on behalf of consumers and against legislation and regulations
    that would hamper the innovation and experimentation that fuel our
    rapidly evolving economy.
        But most of all, Congress should not take the FTC's current
    processes for granted. Ultimately, the FTC reports to Congress and it
    is Congress's responsibility to regularly and carefully scrutinize how
    the agency operates. The agency's vague standards, sweeping
    jurisdiction, and its demonstrated ability to circumvent both judicial
    review and statutory safeguards on policy making make regular
    reassessment of the Commission through biennial reauthorization crucial
    to its ability to serve the consumers it is tasked with protecting.
                                     ______

                               Table of Contents
    Executive Summary
    Introduction
        The FTC's History: Past is Prologue
        The Inevitable Tendency Towards the Discretionary Model
        The Doctrinal Pyramid
        Our Proposed Reforms
    FTC Act Statutory Standards
        Unfairness
                    The Statement on Unfairness Reinforcement & Emphasis
                    (SURE) Act
        Deception & Materiality
                    No Bill Proposed
        Unfair Methods of Competition
                    No Bill Proposed
    Enforcement & Guidance
        Investigations and Reporting on Investigations
                    The Clarifying Legality & Enforcement Action Reasoning
                    (CLEAR) Act
        Economic Analysis of Investigations, Complaints, and Consent
    Decrees
                    No Bill Proposed
        Economic Analysis in Reports & ``Recommendations''
                    The Revealing Economic Conclusions for Suggestions
                    (RECS) Act
        Other Sources of Enforcement Authority (Guidelines, etc.)
                    The Solidifying Habitual & Institutional Explanations
                    of Liability & Defenses (SHIELD) Act
    Remedies
        Appropriate Tailoring of Remedies
                    No Bill Proposed
        Consent Decree Duration & Scope
                    The Technological Innovation through Modernizing
                    Enforcement (TIME) Act
    Other Process Issues
        Open Investigations
                    The Start Taking Action on Lingering Liabilities
                    (STALL) Act
        Commissioner Meetings
                    The Freeing Responsible & Effective Exchanges (FREE)
                    Act
        Part III Litigation
        Standard for Settling Cases
                    No Bill Proposed
    Competition Advocacy
    Expanding FTC Jurisdiction
        FTC Jurisdiction over Common Carriers
                    The Protecting Consumers in Commerce Act of 2016
        FTC Jurisdiction over Tax-Exempt Organizations & Nonprofits
                    The Tax Exempt Organizations Act
    Rulemaking
        Economic Analysis in All FTC Rulemakings
                    No Bill Proposed
        Issue-Specific Rulemakings
                    Several Bills Proposed
    Conclusion

            Considering that rules of the Commission may apply to any act
            or practice ``affecting commerce'', and that the only statutory
            restraint is that it be unfair, the apparent power of the
            Commission with respect to commercial law is virtually as broad
            as the Congress itself. In fact, the Federal Trade Commission
            may be the second most powerful legislature in the country.. .
            . All 50 State legislatures and State Supreme Courts can agree
            that a particular act is fair and lawful, but the five-man
            appointed FTC can overrule them all. The Congress has little
            control over the far-flung activities of this agency short of
            passing entirely new legislation.\1\--Sens. Barry Goldwater &
            Harrison Schmitt, 1980
    ---------------------------------------------------------------------------
        \1\ S. Rep. No. 96-184, at 18 (1980), available at http://
    digitalcollections.library.cmu.edu/awweb/
    awarchive?type=file&item=417102.

            Within very broad limits, the agency determines what shall be
            legal. Indeed, the agency has been ``lawless'' in the sense
            that it has traditionally been be-yond judicial control.\2\--
            Former FTC Chairman Tim Muris, 1981
    ---------------------------------------------------------------------------
        \2\ Timothy J. Muris, Judicial Constraints, in The Federal Trade
    Commission Since 1970: Economic Regulation and Bureaucratic Behavior,
    35, 49 (Kenneth W. Clarkson & Timothy J. Muris, eds., 1981).

            The FTC's investigatory power is very broad and is akin to an
            inquisitorial body. On its own initiative, it can investigate a
            broad range of businesses without any indication of a predicate
            offense having occurred.\3\--Prof. Chris Hoofnagle, 2016
    ---------------------------------------------------------------------------
        \3\ Chris Jay Hoofnagle, Federal Trade Commission Privacy Law &
    Policy 102 (2016).
    ---------------------------------------------------------------------------
    Introduction
        Only by the skin of its teeth did the Federal Trade Commission
    survive its cataclysmic confrontation with Congress in 1980. Today, the
    Federal Trade Commission remains the closest thing to a second national
    legislature in America. Its jurisdiction covers nearly every company in
    America. It powers over unfair and deceptive acts and practices (UDAP)
    and unfair methods of competition (UMC) remain so inherently vague that
    the Commission retains unparalleled discretion to make policy decisions
    that are essentially legislative. The Commission increasingly wields
    these powers over high tech issues affecting not just the high tech
    sector, but, increasingly, every company in America. It has become the
    de facto Federal Technology Commission--a moniker we coined,\4\ but
    which Chairwoman Edith Ramirez has embraced.\5\
    ---------------------------------------------------------------------------
        \4\ Berin Szoka & Geoffrey Manne, The Second Century of the Federal
    Trade Commission, Techdirt (Sept. 26, 2013), available at https://
    www.techdirt.com/blog/innovation/articles/20130926/16542624670/second-
    century-federal-trade-commission.shtml; see also Consumer Protection &
    Competition Regulation in a High-Tech World: Discussing the Future of
    the Federal Trade Commission, Report 1.0 of the FTC: Technology &
    Reform Project, 3 (Dec. 2013), available at http://
    docs.techfreedom.org/FTC_Tech_Reform_Report.pdf.
        \5\ Kai Ryssdal, The FTC is Dealing with More High Tech Issues,
    Marketplace (Mar. 7, 2016), available at http://www.marketplace.org/
    2016/03/07/tech/ftc-dealing-more-high-tech-issues.
    ---------------------------------------------------------------------------
        For all this power, either by design or by neglect, the FTC is also
    ``a largely unconstrained agency.'' \6\ ``Although appearing effective,
    most means of controlling Commission actions are virtually useless,
    owing to lack of political support and information, lack of interest on
    the part of those ostensibly monitoring the FTC, or FTC maneuvering.''
    \7\ At the same time, ``[t]he courts place almost no restraint upon
    what commercial practices the FTC can proscribe.. . .'' \8\
    ---------------------------------------------------------------------------
        \6\ Part I: The Institutional Setting, in The Federal Trade
    Commission Since 1970, supra note 2 at 11.
        \7\ Id. at 11-12.
        \8\ Timothy J. Muris, Judicial Constraints, in id. 35, 43.
    ---------------------------------------------------------------------------
        The vast majority of what the FTC does is uncontroversial--routine
    antitrust, fraud and advertising cases. Yet, as the FTC has dealt with
    cutting-edge legal issues, like privacy, data security and product
    design, it has raised deep concerns not merely about the specific cases
    brought by the FTC, but also that the agency is drifting away from the
    careful balance it struck in its 1980 Unfairness Policy Statement (UPS)
    \9\ and its 1983 Deception Policy Statement (DPS).\10\
    ---------------------------------------------------------------------------
        \9\ Letter from the FTC to the House Consumer Subcommittee,
    appended to In re Int'l Harvester Co., 104 F.T.C. 949, 1073 (1984)
    [``Unfairness Policy Statement'' or ``UPS''], available at http://
    www.ftc.gov/ftc-policy-statement-on-unfairness.
        \10\ Letter from the FTC to the Committee on Energy & Commerce,
    appended to Cliffdale Assocs., Inc., 103 F.T.C. 110, 174 (1984)
    [``Deception Policy Statement'' or ``DPS''], available at http://
    www.ftc.gov/ftc-policy-statement-on-deception.
    ---------------------------------------------------------------------------
        We applaud the Commerce, Manufacturing & Trade Subcommittee for
    taking up the issue of FTC reform, and for the seventeen bills
    submitted by members of both parties. Even if no legislation passes
    this Congress, active engagement by Congress in the operation of the
    Commission was crucial in the past to ensuring that the FTC does not
    stray from its mission of serving consumers. But active congressional
    oversight has been wanting for far too long.
        Not since 1996 has Congress reauthorized the FTC,\11\ and not since
    1994 has Congress actually substantially modified the FTC's standards
    or processes.\12\
    ---------------------------------------------------------------------------
        \11\ Federal Trade Commission Reauthorization Act of 1996, Pub. L.
    104-216, 110 Stat. 3019 (Oct. 1, 1996), available at http://
    uscode.house.gov/statutes/pl/104/216.pdf.
        \12\ Federal Trade Commission Act Amendments of 1994, Pub. L. 103-
    312, 108 Stat. 1691 (Aug. 26, 1994) available at http://
    uscode.house.gov/statutes/pl/103/312.pdf.
    ---------------------------------------------------------------------------
        The most significant thing Congress has done regarding the FTC
    since 1980 was the 1994 codification of the Unfairness Policy
    Statement's three-part balancing test in Section 5(n). But even that
    has proven relatively ineffective: The Commission pays lip service to
    this test, but there has been essentially none of analytical
    development promised by the Commission in the 1980 UPS:

            The present understanding of the unfairness standard is the
            result of an evolutionary process. The statute was deliberately
            framed in general terms since Congress recognized the
            impossibility of drafting a complete list of unfair trade
            practices that would not quickly become outdated or leave
            loopholes for easy evasion. The task of identifying unfair
            trade practices was therefore assigned to the Commission,
            subject to judicial review, in the expectation that the
            underlying criteria would evolve and develop over time.

        The Commission no doubt believes that it has carefully weighed (1)
    substantial consumer injury with (2) countervailing benefit to
    consumers or to competition, and carefully assessed whether (3)
    consumers could ``reasonably have avoided'' the injury, as Congress
    required by enacting Section 5(n). But whatever weighing the Commission
    has done in its internal decision-making is far from apparent from the
    outside, and it has not been done by the courts in any meaningful
    way.\13\ As former Chairman Tim Muris notes, ``the Commission's
    authority remains extremely broad.'' \14\
    ---------------------------------------------------------------------------
        \13\ See infra at 39.
        \14\ Statement of Timothy J. Muris, Hearing on Financial Services
    and Products: The Role of the Fed. Trade Commission in Protecting
    Customers, before the Subcomm. on Consumer Protection, Product Safety,
    and Insurance of the S. Comm. on Commerce, Science, and Transportation,
    111th Cong. 2 (2010), 28, available at http://
    lawprofessors.typepad.com/files/muris_senate_
    testimony_ftc_role_protecting_consumers_3-17-101.pdf.
    ---------------------------------------------------------------------------
        The situation is little on better on Deception--at least, on the
    cutting edge of Deception cases, involving privacy policies, online
    help pages, and enforcement of other promises that differ fundamentally
    from traditional marketing claims. Just as the Commission has rendered
    the three-part Unfairness test essentially meaningless, it has
    essentially nullified the ``materiality'' requirement that it
    volunteered in the 1983 Deception Policy Statement. The Statement began
    by presuming, reasonably, that express marketing claims are always
    material, but the Commission has extended that presumption (and other
    narrow presumptions of materiality in the DPS) to cover essentially all
    deception cases.\15\
    ---------------------------------------------------------------------------
        \15\ See infra at 21.
    ---------------------------------------------------------------------------
        Congress cannot fix these problems simply by telling the FTC to
    dust off its two bedrock policy statements and take them more seriously
    (as it essentially did in 1994 regarding Unfairness). Instead, Congress
    must fundamentally reassess the process that has allowed the FTC to
    avoid judicial scrutiny of how it wields its discretion.
        The last time Congress significantly reassessed the FTC's processes
    was in May 1980, when it created procedural safeguards and evidentiary
    requirements for FTC rulemaking. These reforms were much needed, and
    remain fundamentally necessary (although we do, below, encourage the
    FTC to attempt a Section 5 rulemaking for the first time in decades in
    order to provide a real-world experience of how such rulemakings work
    and whether Congress might make changes at the margins to facilitate
    reliance on that tool).\16\
    ---------------------------------------------------------------------------
        \16\ See infra at 99.
    ---------------------------------------------------------------------------
        But these 1980 reforms failed to envision that the Commission
    would, eventually, find ways of exercising the vast discretion inherent
    in Unfairness and Deception through what it now proudly calls its
    ``common law of consent decrees'' \17\--company-specific, but cookie-
    cutter consent decrees that have little to do with the facts of each
    case (and always run for twenty years). These consent decrees are
    bolstered by the regular issuance of recommended best practices in
    reports and guides that function as quasi-regulations, imposed on
    entire industries not by rulemaking but by the administrative
    equivalent of a leering glare. Together, these new tactics have allowed
    the FTC to effectively circumvent not only the process reforms of May
    1980 but also the substantive constraints volunteered by the FTC later
    that year in the Unfairness Policy Statement and, three years later, in
    the Deception Policy Statement.
    ---------------------------------------------------------------------------
        \17\ ``Together, these enforcement efforts have established what
    some scholars call `the common law of privacy' in the United States.''
    Julie Brill, Commissioner, Fed. Trade Comm'n, Remarks to the Mentor
    Group Forum for EU-US Legal-Economic Affairs Brussels, April 16, 2013,
    3 (Apr. 16, 2013), available at https://www.ftc.gov/sites/default/
    files/documents/public_statements/remarks-mentor-group-forum-eu-us-
    legal-economic-affairs-brussels-belgium/130416mentorgroup
    .pdf (citing Christopher Wolf, Targeted Enforcement and Shared
    Lawmaking Authority As Catalysts for Data Protection in the United
    States (2010), available at http://www.justice.gov.il/NR/
    rdonlyres/8D438C53-82C8-4F25-99F8-E3039D40E4E4/26451/Consumer_WOLF
    DataProtectionandPrivacyCommissioners.pdf (FTC consent decrees have
    ``created a `common law of consent decrees,' producing a set of data
    protection rules for businesses to follow.'')). FTC Chairman Edith
    Ramirez said roughly the same thing in a 2014 speech:
        I have expressed concern about recent proposals to formulate
    guidance to try to codify our unfair methods principles for the first
    time in the Commission's 100 year history. While I don't object to
    guidance in theory, I am less interested in prescribing our future
    enforcement actions than in describing our broad enforcement principles
    revealed in our recent precedent.
        Quoted in Geoffrey Manne, FTC Commissioner Joshua Wright gets his
    competition enforcement guidelines, Truth On The Market (Aug. 13,
    2015), available at https://truthon
    themarket.com/2015/08/13/ftc-commissioner-joshua-wright-gets-his-
    competiton-enforcement-guidelines/ (speech video available at http://
    masonlec.org/media-center/299).
    ---------------------------------------------------------------------------
        Such process reforms are the focus of this paper. The seventeen
    bills currently before the Subcommittee would begin to address these
    problems--but only begin. In this paper we evaluate nine of the
    proposed bills in turn, offer specific recommendations, and also offer
    a slate of our own additional suggestions for reform.
        Our most important point, though, is not any one of our proposed
    reforms, but this: The default assumption should not be that the FTC
    continues operating indefinitely without course corrections from
    Congress.
        Justice Scalia put this point best in his 2014 decision, striking
    down the EPA's attempt to ``rewrite clear statutory terms to suit its
    own sense of how the statute should operate,'' when he said: ``We are
    not willing to stand on the dock and wave goodbye as EPA embarks on
    this multiyear voyage of discovery.'' \18\ The point is more, not less,
    important when a statute like Section 5 has been ``deliberately framed
    in general terms since Congress recognized the impossibility of
    drafting a complete list of unfair trade practices that would not
    quickly become outdated or leave loopholes for easy evasion'': trusting
    the FTC to follow an ``evolutionary process'' requires regular,
    searching reassessments by Congress. This need is especially acute
    given that the ``underlying criteria'' have not ``evolve[d] and
    develop[ed] over time'' through the ``judicial review'' expected by
    both Congress and the FTC in 1980--at least, not in any analytically
    meaningful way.
    ---------------------------------------------------------------------------
        \18\ Util. Air Regulatory Grp. v. EPA, 134 S. Ct. 2427, 2446
    (2014).
    ---------------------------------------------------------------------------
        Reauthorization should happen at regular two-year intervals and it
    should never be a pro forma rubber-stamping of the FTC's processes.
    Each reauthorization should begin from the assumption that the FTC is a
    uniquely important and valuable agency--one that can do enormous good
    for consumers, but also one whose uniquely broad scope and broad
    discretion require constant supervision and regular course corrections.
    Regular tweaks to the FTC's processes should be expected and welcomed,
    not resisted.
        The worst thing defenders of the FTC could do would be allowing the
    FTC to drift along towards the kind of confrontation with Congress that
    nearly destroyed the FTC in 1980.
    The FTC's History: Past is Prologue
        It is no exaggeration to say that the 1980 compromise over
    unfairness saved the FTC from going the way of the Civil Aeronautics
    Board, which Congress began phasing out in 1978 under the leadership of
    Alfred Kahn, President Carter's deregulator-in-chief. President Carter
    signed the 1980 FTC Improvements Act even though he objected to some of
    its provisions because, as he noted, ``the very existence of this
    agency is at stake.'' \19\ Those reforms to the FTC's rulemaking
    process, enacted in May 1980, were only part of what saved the FTC from
    oblivion.
    ---------------------------------------------------------------------------
        \19\ Jimmy Carter, Federal Trade Commission Improvements Act of
    1980 Statement on Signing H.R. 2313 into Law (May 28, 1980), available
    at http://www.presidency.ucsb.edu/ws/?pid=
    44790.
    ---------------------------------------------------------------------------
        Driven largely by outrage over the FTC's attempt to regulate
    children's advertising, Congress had allowed the FTC's funding to
    lapse, briefly shuttering the FTC. As Howard Beales, then (in 2004)
    director of the FTC's Bureau of Consumer Protection, noted, ``shutting
    down a single agency because of disputes over policy decisions is
    almost unprecedented.'' \20\ In the mid-to-late 1970s, the FTC had
    interpreted ``unfairness'' expansively in an attempt to regulate
    everything from funeral home practices to labor practices and
    pollution. Beales and former FTC Chairman, Tim Muris, summarize the
    problem thusly:
    ---------------------------------------------------------------------------
        \20\ J. Howard Beales III, Advertising to Kids and the FTC: A
    Regulatory Retrospective that Advises the Present, 8 n.32 (2004),
    available at https://www.ftc.gov/sites/default/files/documents/
    public_statements/advertising-kids-and-ftc-regulatory-retrospective-
    advises-present/040802adsto
    kids.pdf.
    ---------------------------------------------------------------------------
        Using its unfairness authority under Section 5, but unbounded by
    meaningful standards, in the 1970s the Commission embarked on a vast
    enterprise to transform entire industries. Over a 15-month period, the
    Commission issued a rule a month, usually without a clear theory of why
    there was a law violation, with only a tenuous connection between the
    perceived problem and the recommended remedy, and with, at best, a
    shaky empirical foundation.\21\
    ---------------------------------------------------------------------------
        \21\ J. Howard Beales III & Timothy J. Muris, Striking the Proper
    Balance: Redress Under Section 13(B) of the FTC Act, 79 Antitrust L. J.
    1, 1 (2013), available at http://papers.ssrn.com/sol3/
    papers.cfm?abstract_id=2764456.
    ---------------------------------------------------------------------------
        When the FTC attempted to ban the advertising of sugared cereals to
    children, the Washington Post dubbed the FTC the ``National Nanny.''
    \22\ This led directly to the 1980 FTC Improvements Act--the one Sens.
    Goldwater and Schmitt endorsed in the quotation that opens this paper.
    ---------------------------------------------------------------------------
        \22\ Editorial, Wash. Post (Mar. 1, 1978), reprinted in Michael
    Pertschuk, Revolt Against Regulation, 69-70 (1982); see also Beales,
    supra note 20, at 8 n.37 (``Former FTC Chairman Pertschuk characterizes
    the Post editorial as a turning point in the Federal Trade Commission's
    fortunes.'').
    ---------------------------------------------------------------------------
        In early 1980, by a vote of 272-127, Congress curtailed the FTC's
    Section 5 rulemaking powers under the 1975 Magnuson-Moss Act, imposing
    additional evidentiary and procedural safeguards.\23\ But the FTC
    refused to narrow its doctrinal interpretation of unfairness until
    Congress briefly shuttered the FTC in the first modern government
    shutdown. In December, 1980, the FTC issued its Unfairness Policy
    Statement, promising to weigh (a) substantial injury against (b)
    countervailing benefit and (c) to focus only on practices consumers
    could not reasonably avoid. Last year, the FTC finally adopted a Policy
    Statement on Unfair Methods of Competition that parallels the two UDAP
    statements.\24\
    ---------------------------------------------------------------------------
        \23\ Federal Trade Commission Act Improvements Act of 1980, Pub. L.
    96-252, 94 Stat. 374 (May 28, 1980), available at http://
    uscode.house.gov/statutes/pl/96/252.pdf.
        \24\ Fed. Trade Comm'n, Statement of Enforcement Principles
    Regarding ``Unfair Methods of Competition'' Under Section 5 of the FTC
    Act (Aug. 13, 2015) [``UMC Policy Statement''], available at https://
    www.ftc.gov/system/files/documents/public_statements/735201/
    150813section
    5enforcement.pdf.
    ---------------------------------------------------------------------------
        In 1994, in Section 5(n), Congress codified the core requirements
    of the UPS, and further narrowed the FTC's ability to rely on its
    assertions of what constituted public policy. This was the last time
    Congress substantially modified the FTC Act--meaning that the
    Commission has operated since then without course-correction from
    Congress.\25\ This is itself troubling, given that independent agencies
    are supposed to operate as creatures of Congress, not regulatory
    knights errant. But it is even more problematic given the extent of the
    FTC's renewed efforts to escape the bounds of even its minimal
    discretionary constraints.
    ---------------------------------------------------------------------------
        \25\ The 1996 FTC reauthorization was purely pro forma.
    ---------------------------------------------------------------------------
    The Inevitable Tendency Towards the Discretionary Model
        To paraphrase Winston Churchill on democracy, the FTC offers the
    ``worst form of consumer protection and competition regulation--except
    for all the others.'' Democracy, without constant vigilance and reform,
    will inevitably morph into the unaccountable exercise of power--what
    the Founders meant by the word ``corruption'' (literally, ``decayed'').
    When Benjamin Franklin was asked, upon exiting the Constitutional
    Convention of 1787, ``Well, Doctor, what have we got--a Republic or a
    Monarchy?,'' he famously remarked ``A Republic, if you can keep it.''
    \26\
    ---------------------------------------------------------------------------
        \26\ Benjamin Franklin, quoted in Respectfully Quoted: A Dictionary
    of Quotations, Bartleby.Com (last visited May 22, 2016), http://
    www.bartleby.com/73/1593.html
    ---------------------------------------------------------------------------
        The same can be said for the FTC: an ``evolutionary process . . .
    subject to judicial review,'' \27\ if we can keep it. Any agency given
    so broad a charge as to prohibit ``unfair methods of competition . . .
    and unfair or deceptive acts or practices . . .'' will inevitably tend
    towards the exercise of maximum discretion.
    ---------------------------------------------------------------------------
        \27\ UPS, supra note 9.
    ---------------------------------------------------------------------------
        This critique is of a dynamic inherent in the FTC itself, not of
    particular Chairmen, Commissioners, Bureau Directors or other staffers.
    The players change regularly, each leaving their mark on the agency,
    but the agency has institutional tendencies of its own, inherent in the
    nature of the agency.
        The Commission itself most clearly identified the core of the FTC's
    institutional nature in the Unfairness Policy Statement, in a passage
    so critical it bears quoting in full:

            The present understanding of the unfairness standard is the
            result of an evolutionary process. The statute was deliberately
            framed in general terms since Congress recognized the
            impossibility of drafting a complete list of unfair trade
            practices that would not quickly become outdated or leave
            loopholes for easy evasion. The task of identifying unfair
            trade practices was therefore assigned to the Commission,
            subject to judicial review, in the expectation that the
            underlying criteria would evolve and develop over time. As the
            Supreme Court observed as early as 1931, the ban on unfairness
            ``belongs to that class of phrases which do not admit of
            precise definition, but the meaning and application of which
            must be arrived at by what this court elsewhere has called `the
            gradual process of judicial inclusion and exclusion.' '' \28\
    ---------------------------------------------------------------------------
        \28\ UPS, supra note 9.

        In other words, Congress delegated vast discretion to the
    Commission from the very start because of the difficulties inherent in
    prescriptive regulation of competition and consumer protection. The
    Commission generally exercised that discretion primarily through case-
    by-case adjudication, but began issuing rules on its own authority in
    1964,\29\ setting it on the road that culminated in the cataclysm of
    1980.
    ---------------------------------------------------------------------------
        \29\ Statement of Basis and Purpose, Unfair or Deceptive
    Advertising and Labeling of Cigarettes in Relation to the Health
    Hazards of Smoking, 29 Fed. Reg. 8324, 8355 (1964).
    ---------------------------------------------------------------------------
        Indeed, given the essential nature of bureaucracies, it was
    probably only a matter of time before the FTC reached this point. It is
    no accident that it took just three years from 1975, when Congress
    affirmed the FTC's claims to ``organic'' rulemaking power (implicit in
    Section 5), until the FTC was being ridiculed as the ``National
    Nanny.'' In short, the 1975 Magnuson-Moss Act created a monster,
    magnifying the effects of the FTC's inherent Section 5 discretion with
    the ability to conduct statutorily sanctioned rulemakings. If it had
    not been then-Chairman Michael Pertschuk who pushed the FTC too far, it
    probably would have, eventually, been some other chairman. The power
    was simply too great for any government agency to resist using without
    some feedback mechanism in the system telling it to stop.
        In that sense, we believe the rise of the Internet played a role
    analogous to the 1975 Mag-nuson-Moss Act, spurring the FTC to greater
    activity where it had previously been more restrained.\30\
    ---------------------------------------------------------------------------
        \30\ Of course, we also recognize that other societal forces were
    at work, such as the Naderite consumer protection movement of the
    1970s, and the growing privacy protection movement of the 1990s and
    2000s. But the analogy still offers some value.
    ---------------------------------------------------------------------------
        After 1980, the FTC ceased conducting new Section 5 rulemakings.
    Between 1980 and 2000, the FTC brought just sixteen unfairness cases,
    all of which fell into narrow categories of clearly ``bad'' conduct:
    ``(1) theft and the facilitation thereof (clearly the leading
    category); (2) breaking or causing the breaking of other laws; (3)
    using insufficient care; (4) interfering with the exercise of consumer
    rights; and (5) advertising that promotes unsafe practices.'' \31\ Just
    how easy these cases were conveys in turn just how cautious the
    Commission was in using its unfairness powers--not only because it was
    chastened by the experience of 1980 but also because of Congress's
    reaffirmation of the limits on unfairness in its 1994 codification of
    Section 5(n). In a 2000 speech, Commissioner Leary summarized the
    Commission's restrained, ``gap-filling'' approach to unfairness
    enforcement over the preceding two decades:
    ---------------------------------------------------------------------------
        \31\ Stephen Calkins, FTC Unfairness: An Essay, 46 Wayne L. Rev.
    1935, 1962 (2000).

            The overall impression left by this body of law is hardly that
            policy has been created from whole cloth. Rather, the
            Commission has sought through its unfairness authority to
            challenge commercial conduct that under any definition would be
            considered wrong but which escaped or evaded prosecution by
            other means.\32\
    ---------------------------------------------------------------------------
        \32\ Thomas B. Leary, Former Commissioner of the Fed. Trade Comm'n,
    Unfairness and the Internet, II (Apr. 13, 2000), available at http://
    www.ftc.gov/public-statements/2000/04/unfairness-and-internet.

        Yet even then Commissioner Leary noted his concerns about the
    burgeoning unfairness enforcement innovation in two of the Commission's
    then-recent cases: Touch Tone (1999)\33\ and ReverseAuction (2000).
    Tellingly, his concern was over the Commission's failure to properly
    assess the substantiality of the amorphous privacy injuries alleged in
    those cases. Still, he concluded on a note of optimism:
    ---------------------------------------------------------------------------
        \33\ Id. at II-C (``The unfairness count in Touch Tone also raised
    interesting questions about whether an invasion of privacy by itself
    meets the statutory requirement that unfairness cause ``substantial
    injury.'' Unlike most unfairness prosecutions, there was no concrete
    monetary harm or obvious and immediate safety or health risks. The
    defendants' revenue came, not from defrauding consumers, but from the
    purchasers of the information who received exactly what they had
    requested.'').

            The extent of the disagreement should not be exaggerated,
            however. The majority [in Reverse Auction] did not suggest that
            all privacy infractions are sufficiently serious to be unfair
            and the minority did not suggest that none of them are. The
            boundaries of unfairness, as applied to Internet privacy
    ---------------------------------------------------------------------------
            violations, remain an open question.

            The Commission has so far used its unfairness authority in
            relatively few cases that involve the Internet. These cases,
            however, suggest that future application of unfairness will be
            entirely consistent with recent history. Internet technology is
            new, but we have addressed new technology before. I believe
            that the Commission will do what it can to prevent the Internet
            from becoming a lawless frontier, but it will also continue to
            avoid excesses of paternalism.

            The lessons of the past continue to be relevant because the
            basic patterns of dishonest behavior continue to be the same.
            Human beings evolve much more slowly than their artifacts.\34\
    ---------------------------------------------------------------------------
        \34\ Id., at III-IV.

        The Commission began bringing cases in 2000 alleging that companies
    employed unreasonable data security practices. While these early cases
    alleged that the practices were ``unfair and deceptive,'' they were, in
    fact, pure deception cases.\35\ In 2005, the FTC filed its first pure
    unfairness data security action, against BJ's Warehouse. Unlike past
    defendants, BJ's had, apparently, made no promise regarding data
    security upon which the FTC could have hung a deception action.\36\
    Since 2009, we believe the Commission has become considerably more
    aggressive in its prosecution of unfairness cases, not just about data
    security, but about privacy and other high tech issues like product
    design.
    ---------------------------------------------------------------------------
        \35\ See, e.g., FTC v. Rennert, Complaint, FTC File No. 992 3245,
    http://www.ftc.gov/os/2000/07/iogcomp.htm (2000); In re Eli Lilly,
    Complaint, File No. 012 3214, http://www.ftc.gov/os/2002/05/
    elilillycmp.htm (2002).
        \36\ Complaint, In the Matter of BJ's Wholesale Club, Inc., a
    corporation, Fed. Trade Comm'n Docket No. C-4148, available at http://
    www.ftc.gov/enforcement/cases-proceedings/042-3160/bjs-wholesale-club-
    inc-matter.
    ---------------------------------------------------------------------------
        Yet it would be hard to pinpoint a single moment when the FTC's
    approach changed, or to draw a clear line between Republican data
    security cases and Democratic ones. And this is precisely a function of
    the first of the two crucial attributes of the modern FTC with which we
    are concerned: Legal doctrine continues to evolve even in the absence
    of judicial decisions, its evolution just becomes less transparent and
    more amorphous. As Commissioner Leary remarked in a footnote that now
    seems prescient:

            Because this case was settled, I cannot be sure that the other
            Commissioners agreed with this rationale.\37\
    ---------------------------------------------------------------------------
        \37\ Leary, Unfairness and the Internet, supra note 32, n.50.

        Indeed, this is the crucial difference between the FTC's pseudo
    common law and real common law. There is an observable directedness to
    the evolution of the real common law, which rests on a sort of ongoing
    conversation among the courts and the economic actors that appear
    before them. The FTC's ersatz common law, however, has little of this
    directedness or openness, and the conversations that do occur are more
    like whispered tete-a-tetes in the corner that someone else
    occasionally overhears.
        But the second point is actually the more important, although the
    two are related: In this institutional structure, how often individual
    Commissioners dissent and how much rigor they demand matters far, far
    less than the structure of the agency itself. There is only so much an
    individual can do to divert the path of an already-steaming ship.
        This leads back to the point made above: that we should expect
    regulatory agencies, over time, to expand their discretion as much as
    the constraints upon the agency allow. In this, regulatory agencies
    resemble gases, which, when unconstrained, do not occupy a fixed volume
    (defined by a clear statutory scheme, as in the Rulemaking Model) but
    rather expand to fill whatever space they occupy. What ultimately
    determines the size, volume and shape of a gas is its container. So,
    too, with regulatory agencies: what ultimately determines an agency's
    scale, scope, and agenda are the external constraints that operate upon
    it.
        The FTC has evolved the way it has because, most fundamentally,
    Section 5 offers little in the way of prescriptive, statutory
    constraints, and because the FTC's processes have enabled it to operate
    case-by-case with relatively little meaningful, ongoing oversight from
    the courts.
        We distinguish this from two other models of regulation: (1) the
    Rulemaking Model, in which the agency's discretion is constrained
    chiefly by the language of its organic statute, procedural rulemaking
    requirements and the courts; and (2) the Evolutionary Model, in which
    the agency applies a vague standard case by case, but is constrained in
    doing so by its ongoing interaction with the courts.\38\ By contrast,
    we call the FTC's current approach the Discretionary Model, in which
    the agency also applies a vague standard case-by-case, but in which it
    operates without meaningful judicial oversight, such that doctrine
    evolves at the Commission's discretion and with little of the
    transparency provided by published judicial opinions. (Dialogue between
    majority and minority Commissioners seldom approaches the analysis of
    judicial opinions.)
    ---------------------------------------------------------------------------
        \38\ We derive the term ``evolutionary'' from the Unfairness Policy
    Statement itself, supra note 9:

        The present understanding of the unfairness standard is the result
    of an evolutionary process. The statute was deliberately framed in
    general terms since Congress recognized the impossibility of drafting a
    complete list of unfair trade practices that would not quickly become
    outdated or leave loopholes for easy evasion. The task of identifying
    unfair trade practices was therefore assigned to the Commission,
    subject to judicial review, in the expectation that the underlying
    criteria would evolve and develop over time.
    ---------------------------------------------------------------------------
        We believe there is an inherent tendency of agencies that begin
    with an Evolutionary Model--which is very much the design of the FTC--
    to slide towards the Discretionary Model, simply because all agencies
    tend to maximize their own discretion, and because the freedom afforded
    by the lack of statutory constraints on substance or the agency's case-
    by-case process enable these agencies to further evade judicial
    constraints. The only way to check this process, without, of course,
    simply circumscribing its discretion by substantive statute (i.e.,
    amending section 5(a)(2)), is regular assessment and course-correction
    by Congress--not with the aim of its own micromanagement of the agency,
    but rather with the aim of invigorating the ability of the courts to
    exert their essential role in steering doctrine.
        This is not to be taken as an admission of defeat or a condemnation
    of the Commission. There is no reason to think that the FTC was in
    every way ideally constituted from the start (or in 1980 or in 1994),
    that its model could perform exactly as intended and perfectly in the
    public interest no matter what changed around it. Rather, limited,
    thoughtful oversight by Congress is simply in the nature of the beast.
    As Justice Holmes said (of the importance of free speech):

            That, at any rate, is the theory of our Constitution. It is an
            experiment, as all life is an experiment. Every year, if not
            every day, we have to wager our salvation upon some prophecy
            based upon imperfect knowledge.\39\
    ---------------------------------------------------------------------------
        \39\ Abrams v. United States, 250 U.S. 616, 630 (1919) (Holmes, J.
    dissenting).

        That, in a nutshell, is why regular reauthorization is critical for
    agencies like the FTC. As President Carter said, ``[w]e need vigorous
    congressional oversight of regulatory agencies.'' This is more true for
    the FTC--with its vast discretion, immense investigative power, and
    all-encompassing scope--than any other agency. As we wrote in the
    ---------------------------------------------------------------------------
    precursor to this report:

            Thus, while the Congress of 1914 intended to create an agency
            better suited than itself to establish a flexible but
            predictable and consistent body of law governing commercial
            conduct, the modern trend of administrative law has relaxed the
            requirement that an agency's output be predictable or
            consistent.

            The FTC has embraced this flexibility as few other agencies
            have. Particularly in its efforts to keep pace with changing
            technology, the FTC has embraced its role as an administrative
            agency, and frequently sought to untether itself from ordinary
            principles of jurisprudence (let alone judicial review).\40\
    ---------------------------------------------------------------------------
        \40\ Consumer Protection & Competition Regulation in a High-Tech
    World, supra, note 4.
    ---------------------------------------------------------------------------
    The Doctrinal Pyramid
        One of the chief reasons the FTC has come to operate the way it
    does is that the vocabulary around its operations is deeply confused,
    particularly around the word ``guidance'' and the term ``common law.''
    In an (admittedly first-cut) effort to introduce some concreteness, we
    view the various levels of ``guidance'' as steps in a Doctrinal Pyramid
    that looks something like the following, from highest to lowest degrees
    of authority:

       1.  The Statute: Section 5 (and other, issue-specific statutes)

       2.  Litigated Cases: Only these are technically binding on courts,
            thus they rank near the top of the pyramid, even though they
            are synthesized in, or cited by, the guidance summarized below.
            There are precious few of these on Unfairness or the key
            emerging issues of Deception

       3.  Litigated Preliminary Injunctions: Less meaningful than full
            adjudications of Section 5, these are, unfortunately, largely
            the only judicial opinions on Section 5.

       4.  High-Level Policy Statements: Unfairness, Deception, Unfair
            Methods of Competition

       5.  Lower-Level Policy Statements: The now-rescinded Disgorgement
            Policy Statement, the (not-yet existent) Materiality Statement
            we propose, etc.

       6.  Guidelines: Akin to the several DOJ/FTC Antitrust Guidelines,
            synthesizing past approaches to enforcement into discernible
            principles to guide future en-forcement and compliance

       7.  Consent Decrees: Not binding upon the Commission and hinging
            (indirectly) upon the very low bar of whether the Commission
            has ``reason to believe'' a violation occurred, these provide
            little guidance as to how the FTC really understands Section 5

       8.  Closing Letters: Issued by the staff, these letters at times
            provide some limited guidance as to what the staff believe is
            not illegal

       9.  Reports & Recommendations: In their current form, the FTC's
            reports do little more than offer the majority's views of what
            companies should do to comply with Section 5, but carefully
            avoid any real legal analysis

      10.  Industry Guides: Issue-specific discussions issued by staff
            (e.g., photo copier data security)

      11.  Public Pronouncements: Blog posts, press releases, congressional
            testimony, FAQs, etc.

        In essence, under today's Discretionary Model, the FTC puts great
    weight on the base of the pyramid, while doing little to develop the
    top. Under the Evolutionary Model, the full Commission would develop
    doctrine primarily through litigation, and do everything it possibly
    could to provide guidance at higher levels of the pyramid, such as by
    debating, refining and voting upon new Policy Statements on each of the
    component elements of Unfairness and Deception and Guidelines akin to
    the Horizontal Merger Guidelines. Instead, the FTC staff issues Guides
    and other forms of casual guidance. Yet not all ``guidance'' is of
    equal value. Indeed, much of the ``guidance'' issued by the FTC serves
    not to constrain its discretion, but rather to expand it by increasing
    the agency's ability to coerce private parties into settlements--which
    begins the cycle anew.
    Our Proposed Reforms
        Seventeen bills have been introduced in the House Energy & Commerce
    Committee's Subcommittee on Commerce, Manufacturing and Trade aimed at
    reforming the agency for the modern, technological age and improving
    FTC process and subject-matter scope in order to better protect
    consumers. Most of these will, we hope, be consolidated into a single
    FTC Reauthorization Act of 2016, passed in both chambers, and signed by
    the President.
        With the hope of aiding this process, we describe and assess nine
    of these proposed bills, focusing in particular on whether and how well
    each proposal addresses the fundamental issues that define the problems
    of today's FTC. In broad strokes, the proposed bills address the
    following areas:

       Substantive standards

       Enforcement and guidance

       Remedies

       Other process issues

       Jurisdictional issues

       Other issues

        Our analysis addresses the bills within the context of these broad
    categories, and adds our own suggestions (and one additional category:
    Competition Advocacy) for both minor amendments and additional
    legislation in each category.
        Despite our concerns, we remain broadly supportive of the FTC's
    mission and we generally support expanding the agency's jurisdiction,
    to the extent that doing so effectively addresses substantial,
    identifiable consumer harms or reduces the scope of authority for
    sector-specific agencies. Although the process reforms proposed in
    these bills are, we believe, relatively minor, targeted adjustments,
    taken together they would do much to make the FTC more effective in its
    core mission of maximizing consumer welfare. But these proposed reforms
    are only a beginning.
        Even if all of these reforms were enacted immediately, they would
    not fundamentally, or even substantially, change the core functioning
    of the FTC--and the core problem at the FTC today: its largely
    unconstrained discretion.
        The FTC loudly proclaims the advantages of its ex post approach of
    relying on case-by-case enforcement of UDAP and UMC standards rather
    than rigid ex ante rulemaking, especially over cutting-edge issues of
    consumer protection. And there is much to commend this sort of approach
    relative to the prescriptive regulatory paradigm that characterizes
    many other agencies--again, the Evolutionary Model. But under the FTC's
    Discretionary Model, the Commission uses its ``common law of consent
    decrees'' (more than a hundred high-tech cases settled without
    adjudication, and with essentially zero litigated cases to guide these
    settlements) and a mix of other forms of soft law (increasingly
    prescriptive reports based on workshops tailored to produce
    predetermined outcomes, and various other public pronouncements), to
    ``regulate''--or, more accurately, to try to steer--the evolution of
    technology.
        The required balancing of tradeoffs inherent in unfairness and
    deception have little meaning if the courts do not review, follow or
    enforce them; if the Bureau of Economics has little role in the
    evaluation of these inherently economic considerations embodied in the
    enforcement decision-making of the Bureau of Consumer Protection or in
    its workshops; and if other Commissioners are able only to quibble on
    the margins about the decisions made by the FTC Chairman. Simply
    codifying these standards, as Congress codified the heart of the
    Unfairness Policy Statement in Section 45(n) back in 1994, and as the
    proposed CLEAR Act would finish doing, will not solve the problem: The
    FTC has routinely circumvented the rigorous analysis demanded by these
    standards, and the same processes would enable it to continue doing so.
        To address these concerns, we also propose here a number of further
    process reforms that we believe would begin to correct these problems
    and ensure that the Commission's process really does serve the
    consumers the agency was tasked with protecting.
        Our aim is not to hamstring the Commission, but to ensure that it
    wields its mighty powers with greater analytical rigor--something that
    should inure significantly to the benefit of consumers. Ideally, the
    impetus for such rigor would be provided by the courts, through careful
    weighing of the FTC's implementation of substantive standards in at
    least a small-but-significant percentage of cases. Those decisions
    would, in turn, shape the FTC's exercise of its discretion in the vast
    majority of cases that will--and should, in such an environment--
    inevitably settle out of court. The Bureau of Economics and the other
    Commissioners would also have far larger roles in ensuring that the FTC
    takes its standards seriously. But reaching these outcomes requires
    adjustment to the Commission's processes, not merely further
    codification of the standards the agency already purports to follow.
        We believe that our reforms should attract wide bipartisan support,
    if properly understood, and that they would put the FTC on sound
    footing for its second century--one that will increasingly see the FTC
    assert itself as the Federal Technology Commission.
    FTC Act Statutory Standards
    Unfairness
        The Statement on Unfairness Reinforcement & Emphasis (SURE) Act
        Rep. Markwayne Mullin's (R-OK) bill (H.R. 5115) \41\ further
    codifies promises the FTC made in its 1980 Unfairness Policy
    Statement--thus picking up where Congress left off in 1994, the last
    time Congress reauthorized the FTC in Section 5(n):
    ---------------------------------------------------------------------------
        \41\ The Statement on Unfairness Reinforcement and Emphasis Act,
    H.R. 5115,114th Cong. (2016) [hereinafter SURE Act] available at
    https://www.congress.gov/bill/114th-congress/house-bill/5115/text.

            The Commission shall have no authority . . . to declare
            unlawful an act or practice on the grounds that such act or
            practice is unfair unless the act or practice [i] causes or is
            likely to cause substantial injury to consumers [ii] which is
            not reasonably avoidable by consumers themselves and [iii] not
            outweighed by countervailing benefits to consumers or to
            competition. In determining whether an act or practice is
            unfair, the Commission may consider established public policies
            as evidence to be considered with all other evidence. Such
            public policy considerations may not serve as a primary basis
            for such determination.\42\
    ---------------------------------------------------------------------------
        \42\ 15 U.S.C. Sec. 45(n).

        This effectively codified the core of the Unfairness Policy
    Statement, while barring the FTC from relying on public policy
    determinations alone.\43\ The bill would add several additional clauses
    to Section 5(n), drawn from the Unfairness Policy Statement. Most
    importantly:
    ---------------------------------------------------------------------------
        \43\ The Unfairness Policy Statement had said:

        Sometimes public policy will independently support a Commission
    action. This occurs when the policy is so clear that it will entirely
    determine the question of consumer injury, so there is little need for
    separate analysis by the Commission. . . .

        To the extent that the Commission relies heavily on public policy
    to support a finding of unfairness, the policy should be clear and
    well-established. In other words, the policy should be declared or
    embodied in formal sources such as statutes, judicial decisions, or the
    Constitution as interpreted by the courts, rather than being
    ascertained from the general sense of the national values. The policy
    should likewise be one that is widely shared, and not the isolated
    decision of a single state or a single court. If these two tests are
    not met the policy cannot be considered as an ``established'' public
    policy for purposes of the S&H criterion. The Commission would then act
    only on the basis of convincing independent evidence that the practice
    was distorting the operation of the market and thereby causing
    unjustified consumer injury.

        UPS, supra note 9.

      1.  It would exclude ``trivial or merely speculative'' harm from the
            definition of ``substantial'' injury.\44\
    ---------------------------------------------------------------------------
        \44\ SURE Act, supra note 41.

      2.  It would enhance the Act's ``countervailing benefits'' language
            to require consideration of the ``net effects'' of conduct,
            including dynamic, indirect consequences (like effects on
            innovation).\45\
    ---------------------------------------------------------------------------
        \45\ Id.

      3.  It would prohibit the Commission from ``second-guess[ing] the
            wisdom of particular consumer decisions,'' and encourage it to
            ensure ``the free exercise of consumer decisionmaking.'' \46\
    ---------------------------------------------------------------------------
        \46\ Id.

        These provisions in particular (along with the others included in
    the bill, to be sure) would codify core aspects of the economic trade-
    off embodied in the UPS. They would enhance the Commission's
    administrative efficiency and direct its resources where consumers are
    most benefited. They would ensure that the FTC's weighing of costs and
    benefits is as comprehensive as possible, avoiding the systematic focus
    on concrete, short-term costs to the exclusion of larger, longer-term
    benefits. And they would help to preserve the inherent benefits of
    consumer choice, and avoid the intrinsic costs of agency paternalism.
        Codification of these provisions would benefit consumers. And
    because H.R. 5115's language hews almost verbatim to the Unfairness
    Policy Statement, it should be uncontroversial. Effectively, it simply
    makes binding those parts of the UPS that Congress did not codify back
    in 1994.
    Value of the Bill: Codifying the Unfairness Policy Statement Would
            Reaffirm its Value, Encouraging Dissents and Litigation
        Codifying a policy statement, even if verbatim and only in part,
    does essentially four things:

      1.  Legally, it makes the policy binding upon the Commission, since
            Policy Statements, technically, are not. On the margin this
            should deter the FTC from bringing more-tenuous cases that may
            not benefit consumers but that it might otherwise have brought.

      2.  Practically, it confers greater weight on the codified text in
            the Commission's deliberations, empowering dissenting
            Commissioners to point to the fact that Congress has chosen to
            codify certain language and requiring the majority to respond.

      3.  Legally, it somewhat reduces the deference the courts will give
            the FTC when it applies the statute (under Chevron) relative to
            the stronger deference given to agencies applying their own
            policy statements (under Auer).\47\
    ---------------------------------------------------------------------------
        \47\ Note that not everyone agrees that Chevron deference is weaker
    than Auer deference. See Sasha Volokh, Auer and Chevron, The Volokh
    Conspiracy (Mar. 22, 2013), available at http://volokh.com/2013/03/22/
    auer-and-chevron/.

      4.  Perhaps most importantly, it gives defendants a stronger leg to
            stand on in court, thus increasing, on the margin, the number
            that will actually litigate rather than settle. That, in turn,
            benefits everyone by increasing the stock of judicial analysis
    ---------------------------------------------------------------------------
            of doctrine.

        In all four respects, the FTC would greatly benefit from the H.R.
    5115's further codification of the Unfairness Policy Statement. As a
    string of dissenting statements by former Commissioner Wright make lays
    bare, the FTC is not consistently taking the Unfairness Policy
    Statement seriously.\48\ At most, it pays lip service even to the three
    core elements of unfairness set forth in Section 5(n)--and even less
    regard to those aspects of the UPS not codified in Section 5(n).\49\
    ---------------------------------------------------------------------------
        \48\ See, e.g., Dissenting Statement of Commissioner Joshua D.
    Wright, In the Matter of Apple, Inc., FTC File No. 1123108 (Jan. 15,
    2014), available at https://www.ftc.gov/sites/default/files/documents/
    cases/140115applestatementwright_0.pdf. See also Berin Szoka, Josh
    Wright's Unfinished Legacy: Reforming FTC Consumer Protection
    Enforcement, Truth on the Market (Aug. 26, 2015), https://
    truthonthemarket.com/2015/08/26/josh-wrights-unfinished-legacy/.
        \49\ UPS, supra note 9.
    ---------------------------------------------------------------------------
        Indeed, it is difficult to imagine any principled objection to
    codifying a document that the FTC already claims to observe carefully.
    And if the agency plans to bring unfairness cases that are not covered
    by the four corners of the Unfairness Policy Statement (yet somehow
    within Section 5(n)), that should be a matter of grave concern to
    Congress.
    Recommendation: Require a Preponderance of the Evidence Standard for
            Unfairness Complaints
        As valuable as codification of the substantive standards of the
    Unfairness Policy Statement would be, mere codification, or even
    tweaking, is unlikely to change much about the FTC's apparent evasion
    of its obligation to adhere to those standards. Rather, unless the
    process of enforcement by which the FTC has evaded the limits of the
    Statement is adjusted, the Commission will remain free to avoid the
    rigor it contemplates.
        Indeed, it is far from clear that even the 1994 codification of the
    heart the Unfairness Policy Statement has been effective in actually
    changing the FTC's approach to enforcement. It is certainly possible
    that, but for Section 5(n), the Commission would have taken an even
    more aggressive approach to unfairness, and done even less to analyze
    its component elements in enforcement actions.
        The process reforms we propose below are intended either (a) to
    increase the likelihood that the FTC will actually litigate unfairness
    cases, thus gaining judicial development of the doctrine, (b) that the
    Commissioners themselves will better develop doctrine through debate,
    or (c) that FTC staff, particularly through the involvement of the
    Bureau of Economics, will do so. Some combination of these (and,
    doubtless, other) reforms is essential to giving effect to Section 5(n)
    in its current form, to say nothing of expanding 5(n).
        But the reform that would make the biggest difference within 5(n)
    itself would be to amend the existing Section 5(n) as follows:

            The Commission may not issue a complaint under this section
            unless the Commission demonstrates by a preponderance of
            objective evidence that an act or practice causes or is likely
            to cause substantial injury to consumers which is not
            reasonably avoidable by consumers themselves and not outweighed
            by countervailing benefits to consumers or to competition.

        The preponderance of the evidence standard is certainly a higher
    standard than the FTC currently faces for bringing complaints, but only
    because that standard is so absurdly low under Section 5(b): ``reason
    to believe that [a violation may have occurred]'' and that ``it shall
    appear to the Commission that [an enforcement action] would be to the
    interest of the public.'' \50\ The ``preponderance of the evidence''
    standard is the same standard used in civil cases, simply requiring
    that civil plaintiffs provide evidence that that their argument is
    ``more likely than not'' to get judgement against defendants. This
    standard is substantially less stringent than the ``beyond a reasonable
    doubt'' standard used in criminal cases, or the ``clear and
    convincing'' standard used in habeas petitions, so it should be
    suitable for the FTC's unfairness work.
    ---------------------------------------------------------------------------
        \50\ 15 U.S.C. Sec. 45(b).
    ---------------------------------------------------------------------------
        Why should the FTC have a higher burden (than it does today) at
    this intermediate stage in its enforcement process, when it brings a
    complaint? The FTC has significant pre-complaint powers of
    investigation at its disposal; it will have had considerable
    opportunity to perform discovery before bringing its complaint. Unlike
    private plaintiffs, who must first survive a Twombly/Iqbal motion to
    dismiss before they can compel discovery, typically at their own
    expense, the FTC can do so (through its civil investigative demand
    power)--and impose all of its costs on potential defendants--before
    ever alleging wrongdoing.
        As we discuss in more detail below,\51\ in order to justify the
    massive expense of this pre-complaint discovery process, it is not
    enough that it enables the Commission to engage in fishing expeditions
    to ``uncover'' possible violations of the law. Rather, if it is to be
    justified, and if its use by the Commission is to be kept consistent
    with its consumer-welfare mission, it must tend to lead to enforcement
    only when complaints can be justified by the weight of the evidence
    uncovered. A heightened burden is more likely to ensure this fealty to
    the consumer interest and to reduce the inefficient imposition of
    discovery costs on the wrong enforcement targets.
    ---------------------------------------------------------------------------
        \51\ See infra at 31.
    ---------------------------------------------------------------------------
        It is also important to note that, although we disagree strongly
    with their claims,\52\ several FTC Commissioners and commentators have
    asserted that the set of consent orders entered into by the Commission
    with various enforcement targets constitute a de facto common law:
    ``Technically, consent orders legally function as contracts rather than
    as binding precedent. Yet, in practice, the orders function much more
    broadly. . . .'' \53\ In making these claims, proponents, including the
    Commission's current Chairwoman,\54\ assert that ``the trajectory and
    development [of FTC enforcement] has followed a predictable set of
    patterns . . . [that amount to] the functional equivalent of common
    law.'' \55\
    ---------------------------------------------------------------------------
        \52\ See, e.g., Berin Szoka, Indictments Do Not a Common Law Make:
    A Critical Look at the FTC's Consumer Protection ``Case Law,'' (2014
    TPRC Conference Paper, Jul. 15, 2014), available at http://
    papers.ssrn.com/sol3/papers.cfm?abstract_id=2418572; Geoffrey A. Manne
    & Ben Sperry, FTC Process and the Misguided Notion of an FTC ``Common
    Law'' of Data Security, available at http://masonlec.org/site/
    rte_uploads/files/manne%20%26%20sperry%20-%20ftc%
    20common%20law%20conference%20paper.pdf.
        \53\ Daniel J. Solove & Woodrow Hartzog, The FTC and the New Common
    Law of Privacy, 114 Colum. L. Rev. 583, 607 (2014).
        \54\ Address by FTC Chairwoman Edith Ramirez, at 6, at the
    Competition Law Center at George Washington University School of Law
    (Aug. 13, 2015), available at https://www.ftc.gov/system/files/
    documents/public_statements/735411/150813section5speech.pdf (``As I
    have emphasized, I favor a common law approach to the development of
    Section 5 doctrine.''). The previous chairwoman held the same view. See
    Commissioner Julie Brill, Privacy, Consumer Protection, and
    Competition, speech given at 12th Annual Loyola Antitrust Colloquium
    (Apr. 27, 2012), available at http://www.ftc.gov/sites/default/files/
    documents/public_statements/privacy-consumer-protection-andcompetition/
    120427loyolasymposium.pdf (``Yet our privacy cases are also more
    generally informative about data collection and use practices that are
    acceptable, and those that cross the line, under Section 5 of the
    Federal Trade Commission Act creating what some have referred to as a
    common law of privacy in this country.'').
        \55\ Solove & Hartzog, supra note 53, at 608.
    ---------------------------------------------------------------------------
        For these claims to be true or worthy, it would seem necessary, at
    a minimum, that the Commission's consumer protection complaints, which
    are virtually always coupled with consent orders upon their release
    (because there is no statutory standard for settling FTC enforcement
    actions), be tied to substantive standards that go beyond the mere
    exercise of three commissioners' discretion. And yet the FTC and the
    courts have consistently argued that the FTC Act's ``reason to
    believe'' standard for issuance of complaints requires nothing more
    than this minimal exercise of discretion. As former Commissioner Tom
    Rosch put it,

            [t]he ``reason to believe'' standard, however, is not a summary
            judgment standard: it is a standard that simply asks whether
            there is a reason to believe that litigation may lead to a
            finding of liability. That is a low threshold. . . . [T]he
            ``reason to believe'' standard is amorphous and can have an ``I
            know it when I see it'' feel.'' \56\
    ---------------------------------------------------------------------------
        \56\ J. Thomas Rosch, Commissioner, Fed. Trade Comm'n, Remarks at
    the American Bar Association Annual Meeting, 3-4 (Aug. 5, 2010),
    available at https://www.ftc.gov/sites/default/files/documents/
    public_statements/so-i-serve-both-prosecutor-and-judge-whats-big-deal/
    100805abaspeech.pdf.

        This creates a real problem for the claims that the Commission's
    ---------------------------------------------------------------------------
    consent orders have any kind of precedential power:

            In theory, the questions of whether to bring an enforcement
            action and whether a violation occurred are distinct; but in
            practice, when enforcement actions end in settlements (and when
            the two are often filed simultaneously), the two questions
            collapse into one. The FTC Act does not impose any additional
            requirement on the FTC to negotiate a settlement. . . . Thus,
            at best, the FTC's decisions are roughly analogous not to court
            decisions on the merits, but to court decisions on motions to
            dismiss. . . . Or, perhaps even more precisely, the FTC's
            decisions are analogous to reviews of warrants in criminal
            cases, as Commissioner Rosch has argued. It would be a strange
            criminal common law, indeed, that confused ultimate standards
            of guilt with the far lower standard of whether the police
            could properly open an investigation, yet this is essentially
            what the FTC's ``common law'' of settlements does.\57\
    ---------------------------------------------------------------------------
        \57\ Berin Szoka, Indictments Do Not a Common Law Make: A Critical
    Look at the FTC's Consumer Protection ``Case Law'' 7-8, available at
    http://masonlec.org/site/rte_uploads/files/
    Szoka%20for%20GMU%20FTC%20Workshop%20%20May%202014.pdf.

        The incentives, discussed in more detail below,\58\ that impel
    nearly every FTC consumer protection enforcement target to settle with
    the agency ensure that the only practical inflection point at which the
    entire enforcement process is subject to any kind of ``review,'' is
    when the Commissioners vote to authorize the issuance of a formal
    complaint and, simultaneously, approve an already-negotiated
    settlement. That such a determination may be based solely on the
    effectively unreviewable \59\ discretion of the Commission that the
    complaint--not the consent order--meets the current, low threshold is
    troubling.
    ---------------------------------------------------------------------------
        \58\ See infra at 31.
        \59\ See FTC v. Standard Oil Co. of Cal., 449 U.S. 232 (1980).
    ---------------------------------------------------------------------------
        As former FTC Chairman Tim Muris observed, ``Within very broad
    limits, the agency determines what shall be legal. Indeed, the agency
    has been `lawless' in the sense that it has traditionally been beyond
    judicial control.'' \60\ If meaningful judicial review is ever to be
    brought to bear on the final agency decisions embodied in consent
    orders, it is crucial that the complaints that give rise to those
    settlements be subject to a more meaningful standard that imposes some
    evidentiary and logical burden on the Commission beyond the mere
    exercise of its discretion. While a preponderance of the evidence
    standard would hardly impose an insurmountable burden on the agency, it
    would at least impose a standard that is more than purely
    discretionary, and thus reviewable by courts and subject to
    recognizable standards upon which such review could proceed. Most
    importantly, enacting such a standard should, on the margin, embolden
    defendants to resist settling cases, thus producing more judicial
    decisions, which could in turn constrain the FTC's discretion.
    ---------------------------------------------------------------------------
        \60\ Muris, supra note 8, at 49.
    ---------------------------------------------------------------------------
        None of our proposed reforms to the FTC's investigation process
    \61\ would in any way undermine the FTC's ability to gather information
    prior to issuing a complaint. The FTC would still be able to contact
    parties and investigate them through its 6(b) powers and use civil
    investigative demands if necessary to compel disclosure. But it is
    necessary to heighten the FTC's standard for finally bringing a
    complaint since it can do significant investigation beforehand. It is
    not unreasonable to think they should have enough evidence to determine
    a violation of the law by a preponderance of the evidence by the point
    of complaint, especially since this is where most enforcement actions
    end in settlement.
    ---------------------------------------------------------------------------
        \61\ See infra at 31.
    ---------------------------------------------------------------------------
    Deception & Materiality
    No Bill Proposed
        The FTC's 1983 Deception Policy Statement forms one of the two
    pillars of its consumer protection work. As with Unfairness, the
    purpose of the Deception power is to protect consumers from injury. But
    unlike Unfairness, Deception does not require the FTC to prove injury.
    Instead, the FTC need prove only materiality--as an evidentiary proxy
    for injury:

            [T]he representation, omission, or practice must be a
            ``material'' one. The basic question is whether the act or
            practice is likely to affect the consumer's conduct or decision
            with regard to a product or service. If so, the practice is
            material, and consumer injury is likely, because consumers are
            likely to have chosen differently but for the deception. In
            many instances, materiality, and hence injury, can be presumed
            from the nature of the practice. In other instances, evidence
            of materiality may be necessary. Thus, the Commission will find
            deception if there is a representation, omission or practice
            that is likely to mislead the consumer acting reasonably in the
            circumstances, to the consumer`s detriment. . . .\62\
    ---------------------------------------------------------------------------
        \62\ DPS supra note 10.

            A finding of materiality is also a finding that injury is
            likely to exist because of the representation, omission, sales
            practice, or marketing technique. Injury to consumers can take
            many forms. Injury exists if consumers would have chosen
            differently but for the deception. If different choices are
            likely, the claim is material, and injury is likely as well.
            Thus, injury and materiality are different names for the same
            concept.\63\
    ---------------------------------------------------------------------------
        \63\ Id. at 6 (emphasis added).

        Materiality is the point of the Deception Policy Statement. It is a
    shortcut by which the FTC can protect consumers from injury (i.e., not
    getting the benefit of the bargain promised them) without having to
    establish injury (that failing to get this benefit actually harms
    them). A finding of materiality allows the FTC to presume injury
    because, in the traditional marketing context, a deceptive claim that
    is ``material'' enough to alter consumer behavior (which is the point
    of marketing, after all) may reasonably be presumed to do so in ways
    that a truthful claim wouldn't (or else why bother making the
    misleading claim?).
        Unfortunately, the FTC has effectively broken the logic of the
    materiality ``shortcut'' by extending a second set of presumptions:
    most notably, that all express statements are material. This
    presumption may make sense in the context of traditional marketing
    claims, but it breaks down with things like privacy policies and other
    non-marketing claims (like online help pages)--situations where
    deceptive statements certainly may alter consumer behavior, but in
    which such an effect can't be presumed (because the company making the
    claim is not doing so in order to convince consumers to purchase the
    product).\64\
    ---------------------------------------------------------------------------
        \64\ Of course, even in the marketing context this presumption is
    one of administrative economy, not descriptive reality. While there is
    surely a correlation between statements intended to change consumer
    behavior and actual changes in consumer behavior, a causal assumption
    is not warranted. See generally Geoffrey A. Manne & E. Marcellus
    Williamson, Hot Docs vs. Cold Economics: The Use and Misuse of Business
    Documents in Antitrust Enforcement and Adjudication, 47 Ariz, L. Rev.
    609 (2005).
    ---------------------------------------------------------------------------
        The FTC has justified this presumption-on-top-of-a-presumption by
    pointing to this passage of the DPS (shown with the critical
    footnotes):

            The Commission considers certain categories of information
            presumptively material.\47\ First, the Commission presumes that
            express claims are material.\48\ As the Supreme Court stated
            recently [in Central Hudson Gas & Electric Co. v. PSC], ``[i]n
            the absence of factors that would distort the decision to
            advertise, we may assume that the willingness of a business to
            promote its products reflects a belief that consumers are
            interested in the advertising.''

            \47\ The Commission will always consider relevant and competent
            evidence offered to rebut presumptions of materiality.

            \48\ Because this presumption is absent for some implied
            claims, the Commission will take special caution to ensure
            materiality exists in such cases.\65\
    ---------------------------------------------------------------------------
        \65\ Id. at 5.

        In effect, the first two sentences have come to swallow the rest of
    the paragraph, including the logic of the Supreme Court's decision in
    Central Hudson, the single most important case of all time regarding
    the regulation of commercial speech.\66\ In particular, the FTC ignores
    the ``absence of factors that would distort the decision to
    advertise.'' \67\
    ---------------------------------------------------------------------------
        \66\ Cent. Hudson Gas & Elec. Corp. v. Pub. Serv. Comm'n of NY, 447
    U.S. 557 (1980).
        \67\ Id. at 567-68.
    ---------------------------------------------------------------------------
        When the Deception Policy Statement talked about ``express
    claims,'' it was obviously contemplating marketing claims, where the
    presumption of materiality makes sense: if a company buys an ad,
    anything it says in the ad is intended to convince the viewer to buy
    the product. The intention to advertise the product is simply the
    flipside of materiality--a way of inferring what reasonable buyers
    would think from what profit-maximizing sellers obviously intended. But
    this logic breaks down once we move beyond advertising claims.
        We have written at length about this problem in the context of the
    FTC's 2015 settlement with Nomi, the maker of a technology that allowed
    stores to track users' movement on their premises, as well as a
    shopper's repeat visits, in order to deliver a better in-store shopping
    experience, placement of products, etc.\68\
    ---------------------------------------------------------------------------
        \68\ See Geoffrey A. Manne, R. Ben Sperry & Berin Szoka, In the
    Matter of Nomi Technologies, Inc.: The Dark Side of the FTC's Latest
    Feel-Good Case (ICLE Antitrust & Consumer Protection Research Program
    White Paper 2015-1), available at http://laweconcenter.org/images/
    articles/icle-nomi_white_paper.pdf.
    ---------------------------------------------------------------------------
        The FTC's complaint focused on a claim made in the privacy policy
    on Nomi's website that consumers could opt out on the website or at
    ``any retailer using Nomi's technology.'' Nomi failed to provide an in-
    store mechanism for allowing consumers to opt out of the tracking
    program, but it did provide one on the website--right where the
    allegedly deceptive claim was made. That Nomi did not, in fact, offer
    an in-store opt-out mechanism in violation of its express promise to do
    so is clear. Whether, taken in context, that failure was material,
    however, is not clear.
        For the FTC majority, even though the website portion of the
    promise was fulfilled, Nomi's failure to comply with the in-store
    portion amounted to an actionable deception. But the majority dodged
    the key question: whether the evidence that Nomi accurately promised a
    website opt-out, and that consumers could (and did) opt-out using the
    website, rebuts the presumption that the inaccurate, in-store opt-out
    portion of the statement was material, and sufficient to render the
    statement as a whole deceptive.
        In other words, the majority assumed that Nomi's express claim, in
    the context of a privacy policy rather than a marketing statement,
    affected consumers' behavior. But given the very different purposes of
    a privacy policy and a marketing statement (and the immediate
    availability of the website opt-out in the very place that the claim
    was made), that presumption seems inappropriate. The majority did not
    discuss the reasonableness of the presumption given the different
    contexts, which should have been the primary issue. Instead it simply
    relied on a literal reading of the DPS, neglecting to consider whether
    its underlying logic merited a different approach.
        The Commission failed to demonstrate that, as a whole, Nomi's
    failure to provide in-store opt out was deceptive, in clear
    contravention of the Deception Policy Statement's requirement that all
    statements be evaluated in context:

            [T]he Commission will evaluate the entire advertisement,
            transaction, or course of dealing in determining how reasonable
            consumers are likely to respond. Thus, in advertising the
            Commission will examine ``the entire mosaic, rather than each
            tile separately.'' \69\
    ---------------------------------------------------------------------------
        \69\ DPS supra note 10, at 4 n.31 (quoting Fed. Trade Comm'n v.
    Sterling Drug, 317 F.2d 669, 674 (2d Cir. 1963)).

        Moreover, despite the promise in the DPS that the Commission would
    ``always consider relevant and competent evidence offered to rebut
    presumptions of materiality,'' the FTC failed to do so in Nomi. As
    ---------------------------------------------------------------------------
    Commissioner Wright noted in his dissent:

            [T]he Commission failed to discharge its commitment to duly
            consider relevant and competent evidence that squarely rebuts
            the presumption that Nomi's failure to implement an additional,
            retail-level opt out was material to consumers. In other words,
            the Commission neglects to take into account evidence
            demonstrating consumers would not ``have chosen differently''
            but for the allegedly deceptive representation.

            Nomi represented that consumers could opt out on its website as
            well as in the store where the Listen service was being
            utilized. Nomi did offer a fully functional and operational
            global opt out from the Listen service on its website. Thus,
            the only remaining potential issue is whether Nomi's failure to
            offer the represented in-store opt out renders the statement in
            its privacy policy deceptive. The evidence strongly implies
            that specific representation was not material and therefore not
            deceptive. Nomi's ``tracking'' of users was widely publicized
            in a story that appeared on the front page of The New York
            Times, a publication with a daily reach of nearly 1.9 million
            readers. Most likely due to this publicity, Nomi's website
            received 3,840 unique visitors during the relevant timeframe
            and received 146 opt outs--an opt-out rate of 3.8 percent of
            site visitors. This opt-out rate is significantly higher than
            the opt-out rate for other online activities. This high rate,
            relative to website visitors, likely reflects the ease of a
            mechanism that was immediately and quickly available to
            consumers at the time they may have been reading the privacy
            policy.

            The Commission's reliance upon a presumption of materiality as
            to the additional representation of the availability of an in-
            store opt out is dubious in light of evidence of the opt-out
            rate for the webpage mechanism. Actual evidence of consumer
            behavior indicates that consumers that were interested in
            opting out of the Listen service took their first opportunity
            to do so. To presume the materiality of a representation in a
            privacy policy concerning the availability of an additional,
            in-store opt-out mechanism requires one to accept the
            proposition that the privacy-sensitive consumer would be more
            likely to bypass the easier and immediate route (the online opt
            out) in favor of waiting until she had the opportunity to opt
            out in a physical location. Here, we can easily dispense with
            shortcut presumptions meant to aid the analysis of consumer
            harm rather than substitute for it. The data allow us to know
            with an acceptable level of precision how many consumers--3.8
            percent of them--reached the privacy policy, read it, and made
            the decision to opt out when presented with that immediate
            choice. The Commission's complaint instead adopts an approach
            that places legal form over substance, is inconsistent with the
            available data, and defies common sense.\70\
    ---------------------------------------------------------------------------
        \70\ Dissenting Statement of Commissioner Joshua D. Wright, In the
    Matter of Nomi Technologies, Inc., at 3-4 (Apr. 23, 2015) (emphasis
    added), available at https://www.ftc.gov/system/files/documents/
    public_statements/638371/150423nomiwrightstatement.pdf.

        The First Circuit's recent opinion in Fanning v. FTC compounds the
    FTC's error. First, it holds (we believe erroneously) that the DPS's
    ---------------------------------------------------------------------------
    presumptions aren't limited to the marketing milieu:

            There is no requirement that a misrepresentation be contained
            in an advertisement. The FTC Act prohibits `deceptive acts or
            practices,' and we have upheld the Commission when it imposed
            liability based on misstatements not contained in
            advertisements.\71\
    ---------------------------------------------------------------------------
        \71\ Fanning v. Fed. Trade Comm'n, No. 15-1520, slip op. at 13 (May
    9, 2016), available at https://www.ftc.gov/system/files/documents/
    cases/051816jerkopinion.pdf (citing Sunshine Art Studios, Inc. v. FTC,
    481 F.2d 1171, 1173-74 (1st Cir. 1973) (finding FTC Act violation based
    on company's practice of sending customers excess merchandise and using
    ``a fictitious collection agency to coerce payment'')).

        In addition, the Fanning decision would allow the FTC to go even a
    step further. Citing the language from the Deception Policy Statement
    that ``claims pertaining to a central characteristic of the product
    about `which reasonable consumers would be concerned,' '' are material,
    the First Circuit shifted the burden of proof to Fanning to prove that
    its promises were not material.
        Of course, the DPS strongly suggests that this ``central
    characteristic'' language is also applicable only in the marketing
    context--in the context, that is, of claims made about a product's
    ``central characteristics'' in the service of selling that product--and
    that it is fact-dependent:

            Depending on the facts, information pertaining to the central
            characteristics of the product or service will be presumed
            material. Information has been found material where it concerns
            the purpose, safety, efficacy, or cost, of the product or
            service. Information is also likely to be material if it
            concerns durability, performance, warranties or quality.\72\
    ---------------------------------------------------------------------------
        \72\ DPS supra note 10, at 5.

        Much like Nomi, the effect of the First Circuit's decision could be
    far-reaching. If the FTC may simply assert that claims relate to the
    central characteristic of a product, receive a presumption of
    materiality on that basis, and then shift the burden the defendant to
    adduce evidence to the contrary, it may never need to offer any
    evidence of its own on materiality. Combined this with the reluctance
    of the FTC to actually consider evidence rebutting the presumption (as
    illustrated in Nomi), we could see cases where the FTC presumes
    materiality on the basis of mere allegation and ignores all evidence to
    the contrary offered in rebuttal, despite its promise to ``always
    consider relevant and competent evidence offered to rebut presumptions
    of materiality.\73\ This would lead to an outcome that the drafters of
    the Deception Policy Statement plainly did not intend: that effectively
    every erroneous or inaccurate word ever publicly disseminated by
    companies may be presumed to injure consumers and constitute an
    actionable violation of Section 5.
    ---------------------------------------------------------------------------
        \73\ Id. at n.47.
    ---------------------------------------------------------------------------
        In short, if the courts will defer to the FTC even as it reads the
    materiality requirement out of the Deception Policy Statement, this is
    not a vindication of the FTC's reading; it is merely a reminder of the
    vastness of the deference paid to agencies in interpreting ambiguous
    statutes. And it should be a reminder to Congress that only through
    legislation can Congress ultimately reassert itself--if only to keep
    the FTC on the path the agency itself laid out decades ago.
    Recommendation: Codify the 1983 Deception Policy Statement
        Congress should codify the Deception Policy Statement in a new
    Section 5(o), just as it codified the core part of the Unfairness
    Policy Statement in 1994, and just as the SURE Act would codify the
    rest of the UPS today. Fully codifying both statements (all three
    statements, including the UMC Enforcement Policy Statement) is a good
    idea if only because the FTC is somewhat more likely to take them
    seriously if they are statutory mandates. But, as we have emphasized,
    codification alone will not do much to change the institutional
    structures and processes that are at the heart of the statements'
    relative ineffectiveness in guiding the FTC's discretion.
        In codifying the DPS, Congress should be mindful of the problems we
    discuss above. It should also modify the DPS' operative language to
    mitigate the interpretative problems arising from its inevitable
    ambiguity. Without specifying precise language here, a few guidelines
    for drafting such language come readily to mind:

      1.  Defer to the DPS drafters: they could never have meant for the
            exceptions (presumptions) to subsume the rule (the materiality
            requirement), and the codified language should endeavor to
            reflect this.

      2.  Acknowledge that there are differences between marketing language
            and language used in other contexts, including, importantly,
            today's ubiquitous privacy policies and website terms of use--
            settings that weren't contemplated by the DPS drafters.

      3.  Clarify what evidentiary burden is required to demonstrate
            materiality in contexts where it shouldn't simply be inferred,
            and, after Fanning, clarify whether, and when, the burden
            should shift from the FTC to defendants.
    Recommendation: Clarify that Legally Required Statements Cannot Be
            Presumptively Material
        Particularly given the increasing importance of privacy policies in
    the FTC's deception enforcement practice, it is also important to
    clarify whether legally mandated language should be presumed material.
    We believe that the DPS' exception for ``factors that would distort the
    decision to advertise'' includes a legal mandate to say something,
    which unequivocally ``distorts'' the decision to proffer such language.
    Thus, in most cases, privacy policies--required by California law
    \74\--ought not be treated as presumptively material. This would not
    preclude the FTC from proving that they are material, of course. It
    would simply require the Commission to establish their materiality in
    each particular case--which, again, was the point of the Deception
    Policy Statement in the first place.
    ---------------------------------------------------------------------------
        \74\ See Cal. Bus. & Prof. Sec. 22575, available at http://
    www.leginfo.ca.gov/cgi-bin/displaycode
    ?section=bpc&group=22001-23000&file=22575-22579.
    ---------------------------------------------------------------------------
    Recommendation: Delegate Reconsideration of Other Materiality
            Presumptions
        Unfortunately, it will be difficult for Congress to address the
    other aspects of the FTC's interpretation of materiality by statute,
    because each is highly fact-specific. But, ultimately, ensuring that
    the FTC's implementation of the Deception Policy Statement's
    requirement of a rigorous assessment of trade-offs doesn't require
    specification of outcomes; it requires some institutional rejiggering
    ensure that the Bureau of Consumer Protection is motivated to do so by
    some combination of the courts, the commissioners, and the Bureau of
    Economics.
        Instead of trying to address these issues directly, Congress could,
    for example, direct the FTC to produce a Policy Statement on
    Materiality in which the Commission attempts to clarify these issues on
    its own. Thus, for example, the Commission could describe factors for
    determining whether and when an online help center should be considered
    a form of marketing that merits the presumption. Or, as we have
    previously proposed, Congress could delegate this and other key
    doctrinal questions to a Modernization Commission focused on high-tech
    consumer protection issues like privacy and data security, parallel to
    the Antitrust Modernization Commission.\75\
    ---------------------------------------------------------------------------
        \75\ Comments of TechFreedom & International Center for Law and
    Economics, In the Matter of Big Data and Consumer Privacy in the
    Internet Economy, Docket No. 140514424-4424-01, at 4 (Aug. 5, 2014),
    available at http://www.laweconcenter.org/images/articles/tf-icle_ntia
    _big_data_comments.pdf (``A Privacy Law Modernization Commission could
    do what Commerce on its own cannot, and what the FTC could probably do
    but has refused to do: carefully study where new legislation is needed
    and how best to write it. It can also do what no Executive or
    independent agency can: establish a consensus among a diverse array of
    experts that can be presented to Congress as, not merely yet another in
    a series of failed proposals, but one that has a unique degree of
    analytical rigor behind it and bipartisan endorsement. If any
    significant reform is ever going to be enacted by Congress, it is most
    likely to come as the result of such a commission's
    recommendations.'').
    ---------------------------------------------------------------------------
    Recommendation: Require Preponderance of the Evidence in Deception
            Cases
        Above, we explain that among our top three priorities for
    additional reforms--indeed, for reforms overall--is adding a
    ``preponderance of the evidence'' standard for unfairness cases by
    expanding upon Section 5(n).\76\ We urge Congress to include the same
    standard in a new Section 5(o) for non-fraud deception cases. Again,
    this standard should be easy for the FTC to satisfy.
    ---------------------------------------------------------------------------
        \76\ See supra note 18.
    ---------------------------------------------------------------------------
    Unfair Methods of Competition
    No Bill Proposed
        The Commission's unanimous adoption last year of a ``Statement of
    Enforcement Principles Regarding `Unfair Methods of Competition' '' was
    a watershed moment for the agency.\77\ The adoption of the Statement
    marked the first time in the Commission's 100-year history that the FTC
    issued enforcement guidelines for cases brought under the Unfair
    Methods of Competition (``UMC'') provisions of Section 5 of the FTC
    Act.\78\
    ---------------------------------------------------------------------------
        \77\ Fed. Trade Comm'n, Statement of Enforcement Principles
    Regarding ``Unfair Methods of Competition'' Under Section 5 of the FTC
    Act (Aug. 13, 2015), available at https://www.ftc.gov/system/files/
    documents/public_statements/735201/150813section5enforcement.pdf.
        \78\ It should be noted that the Statement represents a landmark
    victory for Commissioner Joshua Wright, who has been a tireless
    advocate for defining the scope of the Commission's UMC authority since
    before his appointment to the FTC in 2013. See, e.g., Joshua D. Wright,
    Abandoning Antitrust's Chicago Obsession: The Case for Evidence-Based
    Antitrust, 78 Antitrust L. J. 241 (2012).
    ---------------------------------------------------------------------------
        Enforcement principles for UMC actions were in desperate need of
    clarification at the time of the Statement's adoption. Without any UMC
    standards, the FTC had been essentially completely free to leverage its
    costly adjudication process into settlements (or short-term victories),
    and to leave businesses in the dark as to what sorts of conduct might
    trigger enforcement. Through a series of unadjudicated settlements, UMC
    unfairness doctrine (such as it is) has remained largely within the
    province of FTC discretion and without judicial oversight. As a result,
    and either by design or by accident, UMC never developed a body of law
    encompassing well-defined goals or principles like antitrust's
    consumer-welfare standard. Several important cases had seemingly sought
    to take advantage of the absence of meaningful judicial constraints on
    UMC enforcement actions to bring standard antitrust cases under the
    provision.\79\ And more than one recent Commissioner had explicitly
    extolled the virtue of the unfettered (and unprincipled) enforcement of
    antitrust cases the provision afforded the agency.\80\ The new
    Statement makes it official FTC policy to reject this harmful dynamic.
    ---------------------------------------------------------------------------
        \79\ For a succinct evaluation of these cases (including, e.g.,
    Intel and N-Data), see Geoffrey A. Manne & Berin Szoka, Section 5 of
    the FTC Act and monopolization cases: A brief primer, Truth on the
    Market (Nov. 26, 2012), https://truthonthemarket.com/2012/11/26/
    section-5-of-the-ftc-act-and-monopolization-cases-a-brief-primer/.
        \80\ See, e.g., Statement of Chairman Leibowitz and Commissioner
    Rosch, In the Matter of Intel Corp., Docket No. 9341, 1, available at
    https://www.ftc.gov/system/files/documents/public_statements/568601/
    091216intelchairstatement.pdf (``[I]t is more important than ever that
    the Commission actively consider whether it may be appropriate to
    exercise its full Congressional authority under Section 5.'').
    ---------------------------------------------------------------------------
        The UMC Statement is deceptively simple in its framing:

            In deciding whether to challenge an act or practice as an
            unfair method of competition in violation of Section 5 on a
            standalone basis, the Commission adheres to the following
            principles:

       the Commission will be guided by the public policy
            underlying the antitrust laws, namely, the promotion of
            consumer welfare;

       the act or practice will be evaluated under a framework
            similar to the rule of reason, that is, an act or practice
            challenged by the Commission must cause, or be likely to cause,
            harm to competition or the competitive process, taking into
            account any associated cognizable efficiencies and business
            justifications; and

       the Commission is less likely to challenge an act or
            practice as an unfair method of competition on a standalone
            basis if enforcement of the Sherman or Clayton Act is
            sufficient to address the competitive harm arising from the act
            or practice.\81\
    ---------------------------------------------------------------------------
        \81\ Statement of UMC Enforcement Principles, supra note 77.

        Most importantly, the Statement espouses a preference for
    enforcement under the antitrust laws over UMC when both might apply,
    and brings the weight of consumer-welfare-oriented antitrust law and
    economics to bear on such cases.
    Recommendation: Codify the Statement of Enforcement Principles
            Regarding ``Unfair Methods of Competition'' Under a New Section
            5(p) of the FTC Act
        As beneficial as the Statement is, it necessarily reflects
    compromise. In particular, the third prong is expressed merely as a
    preference for antitrust enforcement rather than an obligation. And, of
    course, such statements are not binding on the Commission, no matter
    how strongly worded they may be, and no matter how much ``soft law''
    may be brought to bear on the Commissioners charged with following it.
        For these reasons, Congress should codify the most important
    aspects of the Statement--much as it did with the Unfairness Policy
    Statement's consumer-injury unfairness test--by adding the following
    language in a new Section 5(p):

            The Commission shall not challenge an act or practice as an
            unfair method of competition on a standalone basis if the
            alleged competitive harm arising from the act or practice is
            subject to enforcement under the Sherman or Clayton Act.

            An act or practice challenged by the Commission as an unfair
            method of competition must cause, or be likely to cause, harm
            to competition or the competitive process, taking into account
            any associated cognizable efficiencies and business
            justifications.

        This language is taken directly from the UMC Statement, with the
    small tweak highlighted above requiring application of the antitrust
    laws instead of UMC in appropriate cases, rather than merely expressing
    a preference for doing so.
        Such language would harmonize enforcement of all anticompetitive
    practices under the antitrust laws' consumer-welfare standard, while
    still permitting the few cases not amenable to Sherman or Clayton Act
    jurisdiction (e.g., invitations to collude) to be brought by the
    Commission. Importantly, language such as this, which would make
    enforcement under the antitrust laws obligatory where both UMC and
    antitrust could apply, would transform the Statement's expression of
    agency preference into an enforceable statutory requirement.
    Enforcement & Guidance
        The FTC is commonly labeled a ``law enforcement agency,'' but in
    reality it is an administrative agency that regulates primarily through
    enforcement rather than rulemaking:

            As an administrative agency, the FTC's primary form of
            regulation involves administrative application of a set of
            general principles--a ``law enforcement'' style function that,
            practically speaking, operates as administrative regulation.. .
            .\82\
    ---------------------------------------------------------------------------
        \82\ Consumer Protection & Competition Regulation in a High-Tech
    World: Discussing the Future of the Federal Trade Commission, supra
    note 4, at 12.

        This administrative enforcement model puts significant emphasis on
    the agency's investigative power, and it is the investigatory aspect of
    its enforcement process that has become the agency's most powerful--and
    least overseen--tool. As one commentator notes, ``[t]he FTC possesses
    what are probably the broadest investigatory powers of any Federal
    regulatory agency.'' \83\
    ---------------------------------------------------------------------------
        \83\ Stephanie W. Kanwit, 1 Federal Trade Commission Sec. 13:1 at
    13-1 (West 2003).
    ---------------------------------------------------------------------------
        The Commission's investigatory process is also the heart of the
    mechanism by which the agency largely bypasses judicial oversight:

            [Not even] the courts have . . . been a significant factor in
            deterring FTC investigation. Indeed, the bulk of court cases
            appear to affirm the agency's authority to obtain information
            pursuant to the Federal Trade Commission Act. Thus, any
            constraints placed upon the FTC's ability to obtain information
            must lie elsewhere.\84\
    ---------------------------------------------------------------------------
        \84\ Darren Bush, The Incentive and Ability of the Federal Trade
    Commission to Investigate Real Estate Markets: An Exercise in Political
    Economy, 20-21, available at http://www.anti
    trustinstitute.org/files/517c.pdf.

        By overly compelling companies to settle enforcement actions when
    they are little more than investigations, the investigative process
    inevitably leads, on the margin, to less-well-targeted investigations,
    increased discovery burdens on (even blameless) potential defendants,
    inefficiently large compliance expenditures throughout the economy,
    under-experimentation and innovation by firms, doctrinally questionable
    consent orders, and a relative scarcity of judicial review of
    Commission enforcement decisions.
        More than any other aspect of the FTC Act or the FTC's operations,
    it is here that reinvigorated congressional oversight is needed. Even
    Chris Hoofnagle, who has long advocated that the FTC be far more
    aggressive on privacy and data security, warns, in his new treatise on
    privacy regulation at the agency, that

            the FTC's investigatory power is very broad and is akin to an
            inquisitorial body. On its own initiative, it can investigate a
            broad range of businesses without any indication of a predicate
            offense having occurred.\85\
    ---------------------------------------------------------------------------
        \85\ Hoofnagle, Federal Trade Commission Privacy Law & Policy,
    supra note 3, at 102.

        In competition cases, the entire Commission must vote to authorize
    CIDs in each matter and also vote to close investigations once
    compulsory process is issued. But in the consumer protection context,
    the Commission issues standing orders--``omnibus resolutions'' (ORs)--
    authorizing extremely broad, industry-wide investigations that
    authorize the subsequent issuance of CIDs with the consent of only a
    single Commissioner. For instance, there is a standing Commission order
    authorizing staff to investigate telemarketing fraud cases.\86\ Thus,
    if staff wants to issue a CID to investigate a specific telemarketer or
    any of a wide range of companies that may be supporting telemarketers,
    it need seek approval for the CID from only a single Commissioner.
    These requests are frequent (to the best of our knowledge amounting to
    many dozens per week), and routinely granted.
    ---------------------------------------------------------------------------
        \86\ Resolution No. 0123145, ``Resolution Directing the Use of
    Compulsory Process in a Nonpublic Investigation of Telemarketers,
    Sellers, Suppliers, and Others'' Technically the Telemarketing
    Resolution expired in April 2016. But it authorizes continuing
    investigation subject to already-issued CIDs as long as necessary.
    Although no further CIDs will be issued, the investigation continues.
    ---------------------------------------------------------------------------
        The staff's ability to rely upon Omnibus Resolutions in this manner
    bypasses an important aspect of how the FTC's enforcement approach is
    structured on paper. The FTC Operating Manual draws a clear line
    between initial phase investigations (initiated and run by the staff at
    their own discretion for up to 100 hours in consumer protection cases)
    and full investigations. The decision to upgrade an investigation can
    be made by the Bureau Director on delegated authority, but at least
    this creates some potential for involvement of other Commissioners. It
    also requires written analysis by the staff \87\--something other
    Commissioners could ask to see. But most relevant to the immediate
    discussion is the Commission's policy that
    ---------------------------------------------------------------------------
        \87\ Federal Trade Commission, Operating Manual, 3.5.1.2
    [hereinafter Operating Manual].

            Compulsory procedures are not ordinarily utilized in the
            initial phase of investigations; therefore, facts and data
            which cannot be obtained from existing sources must be
            developed through the use of voluntary procedures.\88\
    ---------------------------------------------------------------------------
        \88\ Id. at 3.2.3.2.

        Relying on ORs, however, the staff may make use of compulsory
    process even when it would not otherwise be appropriate to do so.
        At the same time, the Commission may (if it so chooses) bring its
    Section 5 cases (those relatively few that don't settle) in its own
    administrative tribunal, whose decisions are appealed to the Commission
    itself. Only after the Commission's review (or denial of review) may a
    party bring its case before an Article III court. Needless to say, this
    adds an extremely costly layer of administrative process to
    enforcement, as former Commissioner Wright explains:

            [T]he key to understanding the threat of Section 5 is the
            interaction between its lack of boundaries and the FTC's
            administrative process advantages. . . . Consider the following
            empirical observation that demonstrates at the very least that
            the institutional framework that has evolved around the
            application of Section 5 cases in administrative adjudication
            is quite different than that faced by Article III judges in
            Federal court in the United States. The FTC has voted out a
            number of complaints in administrative adjudication that have
            been tried by administrative law judges (``ALJs'') in the past
            nearly twenty years. In each of those cases, after the
            administrative decision was appealed to the Commission, the
            Commission ruled in favor of FTC staff. In other words, in 100
            percent of cases where the ALJ ruled in favor of the FTC, the
            Commission affirmed; and in 100 percent of the cases in which
            the ALJ ruled against the FTC, the Commission reversed. By way
            of contrast, when the antitrust decisions of Federal district
            court judges are appealed to the Federal courts of appeal,
            plaintiffs do not come anywhere close to a 100 percent success
            rate. Indeed, the win rate is much closer to 50 percent.\89\
    ---------------------------------------------------------------------------
        \89\ Joshua Wright, Recalibrating Section 5: A Response to the CPI
    Symposium, CPI Antitrust Chronicle (Nov. 2013 (2)), at 4 (emphasis
    added), available at https://www.ftc.gov/sites/default/files/documents/
    public_statements/recalibrating-section-5-response-cpi-symposium/1311
    section5.pdf.

        The net effect of these procedural circumstances is stark. Wright
    ---------------------------------------------------------------------------
    continues:

            The combination of institutional and procedural advantages with
            the vague nature of the Commission's Section 5 authority gives
            the agency the ability, in some cases, to elicit a settlement
            even though the conduct in question very likely may not
            [violate any law or regulation]. This is because firms
            typically prefer to settle a Section 5 claim rather than going
            through lengthy and costly administrative litigation in which
            they are both shooting at a moving target and have the chips
            stacked against them. Significantly, such settlements also
            perpetuate the uncertainty that exists as a result of the
            ambiguity associated with the Commission's [Section 5]
            authority by encouraging a process by which the contours of
            Section 5 are drawn without any meaningful adversarial
            proceeding or substantive analysis of the Commission's
            authority.\90\
    ---------------------------------------------------------------------------
        \90\ Id. at 5 (emphasis added).

        Further, the Commission currently enjoys a nearly insurmountable
    presumption that its omnibus resolutions are proper--a fact that places
    subjects of investigations at a severe disadvantage when trying to
    challenge the Commission's often intrusive investigative process.
        Whether issued under an Omnibus Resolution or otherwise, the
    Commission's CIDs allow the agency to impose enormous costs on
    potential defendants before even a single Commissioner--let alone the
    entire Commission or a court of law--determines that there is even a
    ``reason to believe'' that the party being investigated has violated
    any law.
        The direct costs of compliance with these extremely broad CIDs can
    be enormous. Unlike discovery requests in private litigation,
    reimbursement of costs associated with CID compliance is not available,
    even if a defendant prevails. Among other things, CID recipients will
    be required to incur the expense of performing electronic and offline
    searches for copious amounts of information (which may require the
    hiring of outside vendors), interviewing employees, the business costs
    of lost employee and management time, and attorneys' fees. Moreover,
    there may be several CIDs issued to a single company. And, sometimes of
    greatest importance, in many cases publicly traded companies will be
    required to disclose receipt of a CID in its SEC filings. This can have
    significant immediate effects on a company's share price and do lasting
    damage to its reputation among consumers.
        The experience of Wyndham Hotels is illustrative. The company
    became the first to challenge an FTC data security enforcement action
    following more than twelve years of FTC data security settlements. Even
    before it finally had recourse to an Article III court, Wyndham had
    already incurred enormous costs, as we noted in our amicus brief in
    support of Wyndham's 2013 motion to dismiss:

            Burdensome as settlements can be, not settling can be even
            costlier. Wyndham, for example, has already received 47
            document requests in this case and spent $5 million responding
            to these requests. The FTC's compulsory investigative discovery
            process and administrative litigation both consume the most
            valuable resource of any firm: the time and attention of
            management and key personnel.\91\
    ---------------------------------------------------------------------------
        \91\ Amici Curiae Brief Of TechFreedom, International Center for
    Law and Economics & Consumer Protection Scholars, Fed. Trade Comm'n v.
    Wyndham Worldwide Corp., No. 2:13-cv-01887 (3d Cir. 2013) at 13.

        And it is difficult for CID recipients to challenge a CID on the
    basis of cost. As the Commission notes in a ruling denying one such
    ---------------------------------------------------------------------------
    request:

            WAM [West Asset Management] has not satisfied its burden of
            demonstrating compliance with the CID would be unduly
            burdensome. . . . WAM has not cited, and the Commission is
            unaware of, any cases to support WAM`s minimize-disruption
            standard. ``Thus courts have refused to modify investigative
            subpoenas unless compliance threatens to unduly disrupt or
            seriously hinder normal operations of a business.'' As in
            Texaco the breadth of the CID is a reflection of the
            comprehensiveness of the inquiry being undertaken and the
            magnitude of WAM`s business operations.\92\
    ---------------------------------------------------------------------------
        \92\ Request for Review of Denial of Petition to Limit Civil
    Investigative Demand, File No. 0723006 (Jul. 2, 2008), available at
    https://www.ftc.gov/sites/default/files/documents/petitions-quash/west-
    asset-management-inc./080702westasset.pdf (citing Fed. Trade Comm'n v.
    Texaco, Inc., 555 F.2d 862, 882 (D.C. Cir. 1977)).

        High costs, as long as they don't threaten a company's viability,
    will be insufficient to quash or even minimize the scope of a CID. But
    even expenses that don't threaten viability can be extremely large and
    extremely burdensome. And, of course, broader costs (e.g., on stock
    price and market reputation) are extremely difficult to measure and
    unaccounted for in the FTC's assessment of a CID's burden.
        It should be noted that, unlike complaints (before adjudication)
    and consent orders, CIDs are directly reviewed by courts at times. For
    better or worse, however, courts are prone to give the Commission an
    extreme degree of deference when reviewing CIDs. ``The standard for
    judging relevancy in an investigatory proceeding is more relaxed than
    in an adjudicatory one . . . The requested material, therefore, need
    only be relevant to the investigation--the boundary of which may be
    defined quite generally.'' \93\ Thus, the Commission has `` `extreme
    breadth' in conducting . . . investigations.'' \94\
    ---------------------------------------------------------------------------
        \93\ Invention Submission, 965 F.2d at 1090 (emphasis in original,
    internal citations omitted) (citing Fed. Trade Comm'n v. Carter, 636
    F.2d 781, 787-88 (D.C. Cir. 1980), and Texaco, 555 F.2d at 874 & n.26).
        \94\ Re: LabMD, Inc.'s Petition to Limit or Quash the Civil
    Investigative Demand; and Michael J. Daugherty's Petition to Limit or
    Quash the Civil Investigative Demand (Apr. 20, 2012), 5, available at
    https://www.ftc.gov/sites/default/files/documents/petitions-quash/
    labmd-inc./102
    -3099-lab-md-letter-ruling-04202012.pdf.
    ---------------------------------------------------------------------------
        But high direct costs aren't even the most troubling part. The
    indirect, societal cost of overly broad CIDs is the increased
    propensity of companies to settle to avoid them. For reasons we also
    discuss elsewhere, an excessive tendency toward settlements imposes
    costs throughout the economy. Among other things:

       It reduces the salutary influence of judicial review of
            agency enforcement actions;

       It reduces the stock of judicial decisions from which
            companies, courts and the FTC would otherwise receive essential
            guidance regarding appropriate enforcement theories and the
            propriety of ambiguous conduct;

       It induces companies that haven't violated the statute to be
            saddled with remedies nonetheless, and thereby induces other,
            similarly-situated companies to incur inefficient costs to
            avoid the same fate;

       It incentivizes the FTC to impose remedies via consent order
            that a court might not sustain; and

       It may induce companies that would be found by a court not
            to have violated the statute to admit liability.

        These largely hidden, underappreciated effects are, collectively,
    enormously distorting. And they feedback into the process, reinforcing
    the institutional dynamics that lead to such outcomes in the first
    place. In short, the FTC's discovery process greatly magnifies its
    already vast discretion to make substantive decisions about the
    evolution of Section 5 doctrine (or quasi-doctrine).
        At the same time, there is reason to believe that the rate of CID
    issuance, and the scope of CIDs issued, are (far) greater than optimal.
        In order to issue a CID pursuant to an OR, staff need not present
    the authorizing Commissioner with a theory of the case or anything
    approaching ``probable cause'' for the CID; rather, the OR effectively
    takes care of that (although without anything like the specificity
    required of, say, a subpoena), and staff need only assert that the CID
    is in furtherance of an OR. The other Commissioners do not have an
    opportunity to vote on the issuance of the CID and would not likely
    even know about the investigation. Even if dissenting staff members
    attempt to notify Commissioners,\95\ it may be difficult, at this early
    stage, for Commissioners to recognize the doctrinal or practical
    significance of the cases the staff is attempting to bring, and thus to
    provide any meaningful check upon the discretion of the staff to use
    the discovery process to coerce settlements.
    ---------------------------------------------------------------------------
        \95\ Operating Manual Sec. 3.5.1.1 (``Dissenting staff
    recommendations regarding compulsory process, compliance, consent
    agreements, proposed trade regulation rules or proposed industrywide
    investigations should be submitted to the Commission by the originating
    offices, upon the request of the staff member.'').
    ---------------------------------------------------------------------------
        Thus, because of omnibus resolutions, a great number of
    investigations--encompassing a great number of costly CIDs--are not
    presented to the other Commissioners to determine whether the
    investigation is an appropriate use of the agency's resources or
    whether the legal basis for the case is sound. In many cases, the other
    Commissioners may not even see the case until a settlement has been
    negotiated as a fait accompli.
        The bar for issuing CIDs pursuant to an omnibus resolution is
    extremely low. Nominally the CID request must fall within the agency's
    authority and be relevant to the investigation that authorizes it. But
    the FTC has enormous discretion in determining whether a specific
    compulsory demand is relevant to an investigation, and it need not have
    ``a justifiable belief that wrongdoing has actually occurred.'' \96\
    ---------------------------------------------------------------------------
        \96\ United States v. Morton Salt Co., 338 U.S. 632, 642 (1950).
    ---------------------------------------------------------------------------
        For example, the Commission's telemarketing resolution authorized
    compulsory process

            [t]o determine whether unnamed telemarketers, sellers, or
            others assisting them have engaged in or are engaging in: (1)
            unfair or deceptive acts or practices in or affecting commerce
            in violation of Section 5 of the Federal Trade Commission Act;
            and/or (2) deceptive or abusive telemarketing acts or practices
            in violation of the Commission's Telemarketing Sales Rule,
            including but not limited to the provision of substantial
            assistance or support--such as mailing lists, scripts, merchant
            accounts, and other information, products, or services--to
            telemarketers engaged in unlawful practices. The investigation
            is also to determine whether Commission action to obtain
            redress for injury to consumers or others would be in the
            public interest.\97\
    ---------------------------------------------------------------------------
        \97\ Resolution Directing Use of Compulsory Process in a Nonpublic
    Investigation of Telemarketers, Sellers, Suppliers, or Others, File No.
    0123145 (Apr. 11, 2011), quoted in In the Matter of December 12, 2012
    Civil Investigative Demand Issue to the Western Union Company, File No.
    012 3145 (Mar. 4, 2013), available at https://www.ftc.gov/sites/
    default/files/documents/petitions-quash/unnamed-telemarketers-others/
    130404westernunionpetition.pdf (Citations omitted).

        Pursuant to this OR, the Commission issued a CID to Western Union.
    Western Union challenged the CID on the grounds that it was unrelated
    to the OR (among other things). The FTC, in denying the motion to
    quash, claimed that ``[t]he resolution . . . includes investigations of
    telemarketers or sellers as well as entities such as Western Union who
    may be providing substantial assistance or support to telemarketers or
    sellers.'' While the OR does mention ``assistance or support,'' it
    doesn't specify any companies by name and doesn't specify that payment
    processors provide the sort of support it contemplates. In fact, it is
    fairly clear from even the impressively broad characterization of these
    in the OR--``mailing lists, scripts, merchant accounts, and other
    information, products, or services''--that the ancillary processing of
    payment transactions by legitimate companies was not really
    contemplated.
        Nevertheless, the standard of review for the relevance of CIDs--in
    the rare instance that they are challenged at all--is extremely
    generous to the agency. As the Commission notes in its Western Union
    decision:

            In the context of an administrative CID, ``relevance'' is
            defined broadly and with deference to an administrative
            agency's determination. An administrative agency is to be
            accorded ``extreme breadth'' in conducting an investigation. As
            the D.C. Circuit has stated, the standard for judging relevance
            in an administrative investigation is ``more relaxed'' than in
            an adjudicatory proceeding. As a result, the agency is entitled
            to the documents unless the CID recipient can show that the
            agency's determination is ``obviously wrong'' or the documents
            are ``plainly irrelevant'' to the investigation's purpose. We
            find that Western Union has not met this burden.\98\
    ---------------------------------------------------------------------------
        \98\ In the Matter of December 12, 2012 Civil Investigative Demand
    Issue to the Western Union Company at 8. (Citing cases).

        Finally, administrative challenges to CIDs are public proceedings,
    which itself presents a substantial bar to their review. Companies
    subject to investigations by the FTC are, not surprisingly, reluctant
    to reveal the existence of such an investigation publicly. While the
    immense breadth and vagueness of the ORs authorizing compulsory process
    in an investigation, the ease with which CIDs are issued, and the lack
    of a ``belief of wrongdoing'' requirement certainly mean that no
    wrongdoing should be inferred from the existence of an investigation or
    a CID, unfortunately public perception may not track these nuances. In
    the case of some publicly traded companies, the mere issuance of a CID
    may require disclosure.\99\ But for other publicly traded companies and
    for all private companies such disclosure is not required. This means
    that, for these companies, there is an added deterrent to challenging a
    CID because doing so will cause it to be disclosed publicly when it
    otherwise would not be.
    ---------------------------------------------------------------------------
        \99\ See, e.g., Deborah S. Birnbach, Do You Have to Disclose a
    Government Investigation?, Harvard Law School Forum on Corporate
    Governance and Financial Regulation (May 21, 2016), https://
    corpgov.law.harvard.edu/2016/04/09/do-you-have-to-disclose-a-
    government-investigation/.
    ---------------------------------------------------------------------------
        The combination of an exceedingly deferential standard of review,
    the need to exhaust administrative process before the very agency that
    issued the OR and CID before gaining access to an independent Article
    III tribunal, the risk of reputational harms, and the massive
    compliance costs combine to ensure that very few CIDs are ever
    challenged. This only reinforces FTC staff's incentives to issue CIDs,
    and to do so with an increasingly tenuous relationship to the
    Commission-approved resolution authorizing them.
        The absence of effective oversight on this process creates a
    further problem. FTC staff have the power to issue Voluntary Access
    Letters requesting the same documents as a CID without any Commissioner
    involvement--or even (at least on paper) the possibility that a
    dissenting staff member can notify a Commissioner of her
    objections.\100\ While these requests are nominally voluntary, the
    omnipresent threat of compelled discovery means that recipients
    virtually always comply with these requests, although they do often
    initiate a discussion between staff and recipients that may result in a
    narrowing of the requests' scope. Voluntary Access Letters are subject
    to even less scrutiny than CIDs, and there is virtually no way for any
    of the FTC's oversight bodies (Congress, the courts, the public, the
    executive branch, etc.) to monitor their use.
    ---------------------------------------------------------------------------
        \100\ Again, Operating Manual Section 3.3.5.1.1 requires that
    ``[d]issenting staff recommendations . . . be submitted to the
    Commission by the originating offices, upon the request of the staff
    member,'' but does not include voluntary assistance letters in the list
    of covered subjects, only ``compulsory process.''
    ---------------------------------------------------------------------------
    Investigations and Reporting on Investigations
    The Clarifying Legality & Enforcement Action Reasoning (CLEAR) Act
        While identifying the problems with the Commission's investigation
    and CID process is fairly straightforward, identifying solutions is not
    so straightforward. A critical first step, however, would be imposing
    greater transparency requirements on the Commission's investigation
    practices.
        Rep. Brett Guthrie's (R-KY) proposed CLEAR Act (H.R. 5109) \101\
    would require the FTC to report annually to Congress on the status of
    its investigations, including the legal analysis supporting the FTC's
    decision to close some investigations without action. This requirement
    would not require the Commission to identify its targets, thus
    preserving the anonymity of the firms in question.
    ---------------------------------------------------------------------------
        \101\ The Clarifying Legality and Enforcement Action Reasoning Act,
    H.R. 5109, 114th Cong. (2016) [hereinafter CLEAR Act] available at
    https://www.congress.gov/bill/114th-congress/house-bill/5109/text.
    ---------------------------------------------------------------------------
    Value of the Bill: Better Reporting of FTC Enforcement Trends
        The FTC used to provide somewhat clearer data on the number of
    enforcement actions it took every year, classifying each by product and
    ``type of matter.'' \102\ The FTC's recent ``Annual Highlights''
    reports do not include even this level of data on its enforcement
    actions.\103\ But neither includes the basic data required by the CLEAR
    Act on the number of investigations commenced, closed, settled or
    litigated. Without hard data on this, it is difficult to assess how the
    FTC's enforcement approach works, the relationship between the agency's
    investigations and enforcement actions, and how these has changed over
    time. While the bill does not specifically mention consent decrees
    among the items that must be reported to Congress, it does require that
    the report include ``the disposition of such investigations, if such
    investigations have concluded and resulted in official agency action,''
    which would include consent decrees.
    ---------------------------------------------------------------------------
        \102\ See. e.g., 1995 Annual Report at 49, https://www.ftc.gov/
    sites/default/files/documents/reports_annual/annual-report-1995/
    ar1995_0.pdf.
        \103\ Fed. Trade Comm'n, FTC Annual Reports, https://www.ftc.gov/
    policy/reports/policy-reports/ftc-annual-reports.
    ---------------------------------------------------------------------------
    Recommendation: Add Discovery Tools to the Required Reporting
        The bill omits, however, one of the most important aspects of the
    FTC's operations, which is very easily quantifiable: the FTC's use of
    its various discovery tools. The FTC should, in addition, have to
    produce aggregate statistics on its use of discovery tools, excluding
    the specific identity of the target, but including, for example:

       The source of the investigation (e.g., Omnibus Resolution,
            consumer complaint, etc.);

       The volume of discovery requested;

       The volume of discovery produced;

       The time elapsed between the initiation of the investigation
            and the request(s);

       The time elapsed between the request(s) and production;

       Estimated cost of compliance (as volunteered by the target);

       The specific tool(s) used to authorize the investigation and
            production request(s) (e.g., Omnibus Resolution, CID, Voluntary
            Access Letter, etc.);

       Who approved the investigation and production request(s)
            (e.g., a single Commissioner, the full Commission, the Bureau
            Director, the staff itself, etc.);

       The approximate size (number of employees) and annual
            revenues of the target business (to measure effects on small
            businesses); and

       The general nature of the issue(s) connected to the
            investigation and production request(s).

        This reporting could be largely automated from the FTC database
    used to log investigations, discovery requests and resulting production
    of documents. And, of course, the FTC should have such a flexible and
    usable database if it does not already. Once created, it should be
    relatively easy to make the data public, as it will require little more
    than obscuring the identity of the target, putting the size of the
    company in ranges, and ensuring that the metadata identifying the
    relevant issues is sufficiently high level (e.g., ``data security''
    rather than ``PED skimming'').
    Value of the Bill: What is Not Prohibited Is a Crucial Form of Guidance
        Clarity as to what the law does not prohibit may be a more
    important hallmark of the Evolutionary Model (the true common law),
    than is specificity as to what the law does prohibit.
        The FTC used to issue closing letters regularly but stopped
    providing meaningful guidance at least since the start of this
    Administration. The FTC Operating Manual already requires staff to
    produce a memo justifying closure of any investigation that has gone
    beyond the initial stage, thus requiring the approval of the Bureau
    Directors to expand into a full investigation, that ``summarize[s] the
    results of the investigation, discuss[es] the methodology used in the
    investigation, and explain[s] the rationale for the closing.'' \104\
    ---------------------------------------------------------------------------
        \104\ Operating Manual Sec. 3.2.4.1.1 (consumer protection) &
    Sec. 3.2.4.1.2 (competition)
    ---------------------------------------------------------------------------
        In other words, the staff already, in theory, does the analysis
    that would be required by the bill (at least for cases that merit being
    continued beyond the 100 hours allowed for initial phase consumer
    protection investigations);\105\ they simply do not share it. Thus, at
    most, the bill would require (i) greater rigor in the memoranda that
    staff already writes, (ii) that some version of memoranda be included
    in the annual report, edited to obscure the company's identity, and
    (iii) that some analysis be written for initial phase cases that may be
    closed without any internal memoranda. And this last requirement should
    not be difficult for the staff to satisfy, since cases that did not
    merit full investigations ought to raise simpler legal issues.
    ---------------------------------------------------------------------------
        \105\ Operating Manual Sec. 3.2.2.1.
    ---------------------------------------------------------------------------
        For example, in 2007, the FTC issued a no-action letter closing its
    investigation into Dollar Tree Stores that offers a fair amount of
    background on the issue: ``PED skimming,'' the tampering with of
    payment card PIN entry devices (PEDs) used at checkout that allowed
    hackers to steal customers' card information and thus make fraudulent
    purchases.\106\ The FTC explained its decision to close the Dollar Tree
    Stores investigation at length, listing the factors considered by the
    FTC:
    ---------------------------------------------------------------------------
        \106\ Letter from Joel Winston, Associate Director of Fed. Trade
    Comm'n to Michael E. Burke, Esq., Counsel to Dollar Tree Stores, Inc.
    (June 5, 2001) available at http://www.ftc.gov/sites/default/files/
    documents/closing_letters/dollar-tree-stores-inc./070605doltree.pdf.

            the extent to which the risk at issue was reasonable
            foreseeable at the time of the compromise; the nature and
            magnitude of the risk relative to other risks; the benefits
            relative to the costs of protecting against the risk; Dollar
            Tree's overall data security practices, the duration and scope
            of the compromise; the level of consumer injury; and Dollar
            Tree's prompt response to the incident.\107\
    ---------------------------------------------------------------------------
        \107\ Id. at 2.

    ---------------------------------------------------------------------------
        The letter went on to note:

            We continue to emphasize that data security is an ongoing
            process, and that as risks, technologies, and circumstances
            change over time, companies must adjust their information
            security programs accordingly. The staff notes that, in recent
            months, the risk of PED skimming at retain locations has been
            increasingly identified by security experts and discussed in a
            variety of public and business contexts. We also understand
            that some businesses have now taken steps to improve physical
            security to deter PED skimming, such as locking or otherwise
            securing PERs in checkout lanes; installing security cameras or
            other monitoring devices; performing regular PED inspections to
            detect tampering, theft, or other misuse; and/or replacing
            older PEDs with newer tamper-resistant and tamper-evident
            models. We hope and expect that all businesses using PEDs in
            their stores will consider implementing these and/or other
            reasonable and appropriate safeguards to secure their
            systems.\108\
    ---------------------------------------------------------------------------
        \108\ Id.

        The FTC has issued only one closing letter in standard data
    security cases since its 2007 letter in Dollar Tree Stores--and,
    apparently, about the same issue. In 2011, the FTC issued a letter
    closing its investigation of the Michaels art supply store chain.\109\
    The letter offers essentially no information about the investigation or
    analysis of the issues involved--in marked contrast to the Dollar Tree
    Stores letter. But based on press reports from 2011, the issue appears
    to have been the same as in Dollar Tree Stores: ``crooks [had] tampered
    with PIN pads in the Michaels checkout lanes, allowing them to capture
    customers` debit card and PIN numbers.'' \110\
    ---------------------------------------------------------------------------
        \109\ Letter from Maneesha Mithal, Associate Director of Fed. Trade
    Comm'n to Lisa J. Sotto, Counsel to Michael's Stores, Inc. (June 5,
    2001) available at http://www.ftc.gov/sites/default/files/documents/
    closing_letters/michaels-stores-inc./120706michaelsstorescltr.pdf.
        \110\ Elisabeth Leamy, Debit Card Fraud Investigation Involving
    Michaels Craft Stores PIN Pads Spreads to 20 U.S. States, ABC News (May
    13, 2011) available at http://abcnews.go.com/Business/ConsumerNews/
    debit-card-fraud-michaels-crafts-customers-info-captured/story?id=135
    93607.
    ---------------------------------------------------------------------------
        Once again, the FTC has become increasingly unwilling to constrain
    its own discretion, even in the issuance of closing letters that do not
    bar the FTC from taking future enforcement actions. This underscores
    not only the value of the CLEAR Act, but also of the challenge in
    getting the FTC to take seriously the bill's requirement that annual
    reports include, ``for each such investigation that was closed with no
    official agency action, a description sufficient to indicate the legal
    analysis supporting the Commission's decision not to continue such
    investigation, and the industry sectors of the entities subject to each
    such investiga-tion.'' \111\
    ---------------------------------------------------------------------------
        \111\ CLEAR Act, supra note 101.
    ---------------------------------------------------------------------------
    Recommendation: Require the Bureau of Economics to Be Involved
        Wherever possible, Congress should specify that the Bureau of
    Economics be involved in the making of important decisions, and in the
    production of important guidance materials. Absent that instruction,
    the FTC, especially the Bureau of Consumer Protection, will likely
    resist fully involving the Bureau of Economics in its processes. The
    simplest way to make this change is as follows:

            For each such investigation that was closed with no official
            agency action, a description sufficient to indicate the legal
            and economic analysis supporting the Commission's decision not
            to continue such investigation, and the industry sectors of the
            entities subject to each such investigation.

        Of course, there will be many cases where the economists have
    essentially nothing to say. The point is not that each case merits
    detailed economic analysis. Rather, the recommendation is intended to
    ensure that, at the very least, the opportunity to produce and
    disseminate a basic economic analysis by the BE is built into the
    enforcement process.
        Moreover, if an economic analysis is deemed appropriate, the
    determination of what constitutes an appropriate level of analysis
    should be made by the Bureau of Economics alone. For example, in the
    Dollar Tree Stores letter quoted above, it would have been helpful if
    the letter had provided some quantitative analysis as to the factors
    mentioned in the letter. To illustrate this point, one might ask the
    following questions about the factors identified in Dollar Tree Stores:

       ``the extent to which the risk at issue was reasonably
            foreseeable at the time of the compromise'' and ``the nature
            and magnitude of the risk relative to other risks''--How widely
            known was the vulnerability generally at that time? How fast
            was awareness spreading among similarly situated companies? How
            likely was the vulnerability to occur?

       ``the benefits relative to the costs of protecting against
            the risk''--Given the impossibility of completely eradicating
            risk, how much ex ante ``protection'' would have been
            sufficient? Given the ex ante uncertainty of any particular
            risk occurring, how much would it have cost to mitigate against
            all such risks, not just the one that actually materialized?

       ``Dollar Tree's overall data security practices''--How much
            did the company spend? How else do its practices compare to its
            peers? How can good data security be quantified?

       ``the duration and scope of the compromise''--How long? How
            many users?

       ``the level of consumer injury''--Can this be quantified
            specifically to this case? Or can injury be extrapolated from
            reliably representative samples of similar injury?

       ``Dollar Tree's prompt response to the incident''--Just how
            prompt was it, in absolute terms? And relative to comparable
            industry practice?

        Given the general scope of the FTC's investigations, it likely
    already collects the kind of data that could allow it to answer some,
    if not all, of these questions (and others as well). It may even have
    performed some of the requisite analysis. Why should the Commission's
    economists not have a seat at the table in writing the closing
    analysis? This could be perhaps the greatest opportunity to begin
    bringing the analytical rigor of law and economics to consumer
    protection.
        Of course, the Commission may be (quite understandably) reluctant
    to include this data in company-specific closing letters--for the same
    reasons that investigations are supposed to remain confidential. But
    therein lies one of the chief virtues of the CLEAR Act: Instead of
    writing company-specific letters, the FTC could aggregate the
    information, obscure the identity of the company at issue in each
    specific case, and thus speak more freely about the details of its
    situation. Although the tension between the goals of providing
    analytical clarity and maintaining confidentiality for the subjects of
    investigation is obvious, it is not an insurmountable conflict, and
    thus no reason not to require more analysis and disclosure, in
    principle.
        Finally, it is worth noting that if BE is to be competent in its
    participation in these investigations and the associated reports, it
    will need a larger staff of economists. Thus, as we discuss below,
    Congress should devote additional resources to the Commission that are
    specifically earmarked for hiring additional BE staff.\112\
    ---------------------------------------------------------------------------
        \112\ See infra note 123.
    ---------------------------------------------------------------------------
    Recommendation: Attempt to Make the FTC Take the Analysis Requirement
            Seriously
        We recommend that Congress emphasize why such reporting is
    important with something like the following language, added either to
    Congressional findings or made clear in the leg-islative history around
    the bill:

       Guidance from the Commission as to what is not illegal may
            be the most important form of guidance the Commission can
            offer; and

       To be truly useful, such guidance should hew closely the
            FTC's applicable Policy Statements.

        We further recommend that Congress carefully scrutinize the FTC's
    annual reports issued under the CLEAR Act in oral discussions at
    hearings and in written questions for the record. Indeed, not doing so
    will indicate to the FTC that Congress is not really serious about
    demanding greater analytical rigor.
    Recommendation: Ensure that the Commission Organizes These Reports in a
            Useful Manner
        The legal analysis section of the bill is markedly different from
    the other three sections. The first two sections require simple counts
    of investigations commenced and closed with no action. The third
    section (``disposition of such investigations, if such investigations
    have concluded and resulted in official agency action'') can be
    satisfied with a brief sentence for each (or less). But the fourth
    section requires long-form analysis, which could run many pages for
    each case.
        At a minimum, the FTC should do more than it does today to make it
    easy to identify which closing letters are relevant. Today, the
    Commission's web interface for closing letters is essentially useless.
    Letters are listed in reverse chronological order with no information
    provided other than the name, title and corporate affiliation of the
    person to whom the letter is addressed. There is no metadata to
    indicate what the letter is about (e.g., privacy, data security,
    advertising, product design) or what doctrinal issues (e.g.,
    unfairness, deception, material omissions, substantiation) the letter
    confronts. Key word searches for, say, ``privacy'' or ``data security''
    produce zero results.
        The CLEAR Act offers Congress a chance to demand better of the
    Commission. Congress should communicate what a useful discussion of
    closing decisions might look like--whether by including specific
    instructions in legislation, by addressing the issue in legislative
    history, or simply (and probably least effectively in the long term) by
    raising the issue regularly with the FTC at hearings. For instance, the
    text in the FTC's reports to Congress could be made publicly available
    in an online database tagged with metadata to make it easier for users
    to search for and find relevant closing letters.
        Ideally, this database would be accessed through the same interface
    envisioned above for transparency into the FTC's discovery process, and
    would include the same metadata and search tools. Thus, a user might be
    able to search for FTC enforcement actions and discovery inquiries
    regarding, say, data security practices in small businesses, in order
    to get a better sense of how the FTC operates in that area.
    Recommendation: Require the FTC to Synthesize Closing Decisions and
            Enforcement Decisions into Doctrinal Guidelines
        When the FTC submitted the Unfairness Policy Statement to Congress,
    it noted, in its cover letter:

            In response to your inquiry we have therefore undertaken a
            review of the decided cases and rules and have synthesized from
            them the most important principles of general applicability.
            Rather than merely reciting the law, we have attempted to
            provide the Committee with a concrete indication of the manner
            in which the Commission has enforced, and will continue to
            enforce, its unfairness mandate. In so doing we intend to
            address the concerns that have been raised about the meaning of
            consumer unfairness, and thereby attempt to provide a greater
            sense of certainty about what the Commission would regard as an
            unfair act or practice under Section 5.\113\
    ---------------------------------------------------------------------------
        \113\ UPS, supra note 9.

        This synthesis is what the FTC needs to do now--and could get close
    to doing, in part, through better organized reporting on its closing
    decisions--only on a more specific level of the component elements of
    each of its Policy Statements. This is essentially what the various
    Antitrust Guidelines issued jointly by the DOJ and the FTC's Bureau of
    Competition do. These are masterpieces of thematic organization.
    Consider, for example, from the 2000 Antitrust Guidelines for
    ---------------------------------------------------------------------------
    Collaborations Among Competitors, this sample of the table of contents:

            3.34 Factors Relevant to the Ability and Incentive of the
            Participants and the Collaboration to Compete

                    3.34(a) Exclusivity

                    3.34(b) Control over Assets

                    3.34(c) Financial Interests in the Collaboration or in
                    Other Participants

                    3.34(d) Control of the Collaboration's Competitively
                    Significant Decision Making

                    3.34(e) Likelihood of Anticompetitive Information
                    Sharing

                    3.34(f) Duration of the Collaboration

            3.35 Entry

            3.36 Identifying Procompetitive Benefits of the Collaboration

                    3.36(a) Cognizable Efficiencies Must Be Verifiable and
                    Potentially Pro-competitive

                    3.36(b) Reasonable Necessity and Less Restrictive
                    Alternatives

            3.37 Overall Competitive Effect \114\
    ---------------------------------------------------------------------------
        \114\ Fed. Trade Comm'n & Dep't of Justice, Antitrust Guidelines
    for Collaborations Among Competitors ii (Apr. 2000), available at
    https://www.ftc.gov/sites/default/files/documents/public_events/joint-
    venture-hearings-antitrust-guidelines-collaboration-among-competitors/
    ftcdojguidelines-2.pdf.

        The guidelines are rich with examples that illustrate the way the
    agencies will apply their doctrine. As noted in the introduction, these
    guidelines are one level down the Doctrinal Pyramid: They explain how
    the kind of concepts articulated at the high conceptual level of, say,
    the FTC's UDAP policy statements, can actually be applied to real world
    circumstances.\115\
    ---------------------------------------------------------------------------
        \115\ See supra note 12.
    ---------------------------------------------------------------------------
        One obvious challenge is that the antitrust guidelines synthesize
    litigated cases, of which the FTC has precious few on UDAP matters.
    This makes it difficult, if not impossible, for the FTC to do precisely
    the same thing on UDAP matters as the antitrust guidelines do. But that
    does not mean the FTC could not benefit from writing ``lessons
    learned'' retrospectives on its past enforcement efforts and closing
    letters.
        Importantly, publication of these guidelines would not actually be
    a constraint upon the FTC's discretion; it would merely require the
    Commission to better explain the rationale for what it has done in the
    past, connecting that arc across time. Like policy statements and
    consent decrees, guidelines are not technically binding upon the
    agency. Yet, in practice, they would steer the Commission in a far more
    rigorous way than its vague ``common law of consent decrees [or of
    congressional testimony or blog posts].'' It would allow the FTC to
    build doctrine in an analytically rigorous way as a second-best
    alternative to judicial decision-making--and, of course, as a
    supplement to judicial decisions, to the extent they happen.
    Recommendation: Ensure that Defendants Can Quash Subpoenas
            Confidentially
        Among the biggest deterrents to litigation today is companies'
    reluctance to make public investigations aimed at them. But a company
    wishing to challenge the FTC's overly broad investigative demands
    effectively must accede to public disclosure because the FTC has the
    discretion to make such fights public.
        Specifically, FTC enforcement rules currently allow parties seeking
    to quash a subpoena to ask for confidential treatment for their motions
    to quash, but the rules also appear to set public disclosure as the
    default:

            (d) Public disclosure. All petitions to limit or quash
            Commission compulsory process and all Commission orders in
            response to those petitions shall become part of the public
            records of the Commission, except for information granted
            confidential treatment under Sec. 4.9(c) of this chapter.\116\
    ---------------------------------------------------------------------------
        \116\ 16 C.F.R. Sec. 2.10(d).

        The referenced general rule on confidentiality gives the FTC's
    ---------------------------------------------------------------------------
    General Counsel broad discretion in matters of confidentiality:

            (c) Confidentiality and in camera material.

            (1) Persons submitting material to the Commission described in
            this section may designate that material or portions of it
            confidential and request that it be withheld from the public
            record. All requests for confidential treatment shall be
            supported by a showing of justification in light of applicable
            statutes, rules, orders of the Commission or its administrative
            law judges, orders of the courts, or other relevant authority.
            The General Counsel or the General Counsel`s designee will act
            upon such request with due regard for legal constraints and the
            public interest.\117\
    ---------------------------------------------------------------------------
        \117\ 16 C.F.R. Sec. 4.9(c)(1).

        Setting the default to public disclosure for such disputes is
    flatly inconsistent with the FTC's general policy of keeping
    ---------------------------------------------------------------------------
    investigations nonpublic:

            While investigations are generally nonpublic, Commission staff
            may disclose the existence of an investigation to potential
            witnesses or other third parties to the extent necessary to
            advance the investigation.\118\
    ---------------------------------------------------------------------------
        \118\ 16 C.F.R. Sec. 2.6; See also Federal Trade Commission,
    Operating Manual, Section 3.3.1 (To promote orderly investigative
    procedures and to protect individuals or business entities under
    investigation from premature adverse publicity, the Commission treats
    the fact that a particular proposed respondent is under investigation
    and the documents and information submitted to or developed by staff in
    connection with the investigation as confidential information that can
    be released only in the manner and to the extent authorized by law and
    by the Commission. In general, even if a proposed respondent in a
    nonpublic investigation makes a public disclosure that an investigation
    is being conducted, Commission personnel may not acknowledge the
    existence of the investigation, or discuss its purpose and scope or the
    nature of the suspected violation.)

        This is the right balance: Commission staff should sometimes be
    able to disclose aspects of an investigation. It should not be able to
    coerce a company into settling, or complying with additional discovery,
    in order to avoid bad press. Even if a company calculates that bad
    press is inevitable, if the FTC seems determined to extract a
    settlement, disclosing the investigation earlier can increase the
    direct expenses and reputational costs incurred by the company by
    stretching out the total length of the fight with the Commission for
    months or years longer.
        We propose that the default be switched, so that motions to quash
    are generally kept under seal except in exceptional circumstances.
    Economic Analysis of Investigations, Complaints, and Consent Decrees
    No Bill Proposed
            The Federal Trade Commission's Bureau of Economics' (BE) role
            as an independent and expert analyst is one of the most
            critical features of the FTC's organizational structure in
            terms of enhancing its performance, expanding its substantive
            capabilities, and increasing the critical reputational capital
            the agency has available to promote its missions.\119\
    ---------------------------------------------------------------------------
        \119\ Statement of Commissioner Joshua D. Wright, On the FTC's
    Bureau of Economics, Independence, and Agency Performance, at 1 (Aug.
    6, 2015), available at https://www.ftc.gov/system/files/documents/
    public_statements/695241/150806bestmtwright.pdf.
    ---------------------------------------------------------------------------
            Former FTC Commissioner Joshua Wright, 2015

        Commissioner Wright wrote as a veteran of both the Bureau of
    Economics and the Bureau of Competition. He was only the fourth
    economist to serve as FTC Commissioner (following Jim Miller, George
    Douglas and Dennis Yao) and the first JD/PhD. His 2015 speech, ``On the
    FTC's Bureau of Economics, Independence, and Agency Performance,''
    marked the beginning of an effort to bolster the role of the Bureau of
    Economics in the FTC's decision-making, especially in consumer
    protection matters. Wright warned, pointedly, that the FTC has ``too
    many lawyers, too few economists,'' calling this ``a potential threat
    to independence and agency performance.'' \120\
    ---------------------------------------------------------------------------
        \120\ Id. at 5.
    ---------------------------------------------------------------------------
        Unfortunately, this was only a beginning: shortly after delivering
    this speech, Wright resigned from the Commission to return to teaching
    law and economics. For now, at least, the task of bolstering economic
    analysis at the Commission falls to Congress.
        The RECS Act's proposal that BE be involved in any recommendation
    for new legislation or regulatory action is an important step towards
    this goal, but it is too narrow.\121\ It does not address the need to
    bolster the FTC's role in the institutional structure of the agency, or
    its role in enforcement decisions. The following chart (from Wright's
    speech) ably captures the first of these problems:
    ---------------------------------------------------------------------------
        \121\ See infra at 54.
    ---------------------------------------------------------------------------
      Number of Attorneys to Economists at the FTC from 2003 to 2013\122\
    ---------------------------------------------------------------------------
        \122\ Statement of Commissioner Joshua D. Wright, On the FTC's
    Bureau of Economics, Independence, and Agency Performance, supra note
    119, at 6.

    Recommendation: Hire More Economists
        Wright recommends:

            Hiring more full-time economists is one obvious fix to the
            ratio problem. There are many benefits to expanding the
            economic capabilities of the agency. Many cases simply cannot
            be adequately staffed with one or two staff economists.
            Doubling the current size of BE would be a good start towards
            aligning the incentives of the Commission and BE staff with
            respect to case recommendations. While too quickly increasing
            the size of BE staff might dilute quality, a gradual increase
            in staffing coupled with a pay increase and a commitment to
            research time should help to keep quality levels at least
            constant.\123\
    ---------------------------------------------------------------------------
        \123\ Statement of Commissioner Joshua D. Wright, On the FTC's
    Bureau of Economics, Independence, and Agency Performance, supra note
    119, at 11.
    ---------------------------------------------------------------------------
        We wholeheartedly endorse former Commissioner Wright's
    recommendation.
    Recommendation: Require BE to Comment Separately on Complaints and
            Consent Orders
        In the case of complaints and consent orders issued by the
    Commission, we recommend that Congress require the Commission to amend
    its Rules of Practice to require that the Bureau of Economics provide a
    separate economic assessment of the complaint or consent order in
    conjunction with each. This proposal is consistent with former
    Commissioner Wright's similar recommendation:

            I suggest the FTC consider interpreting or amending FTC Rule of
            Practice 2.34 to mandate that BE publish, in matters involving
            consent decrees, and as part of the already required
            ``explanation of the provisions of the order and the relief to
            be obtained,'' a separate explanation of the economic analysis
            of the Commission's action. The documents associated with this
            rule are critical for communicating the role that economic
            analysis plays in Commission decision-making in cases. In many
            cases, public facing documents surrounding consents in
            competition cases simply do not describe well or at all the
            economic analysis conducted by staff or upon which BE
            recommended the consent.\124\
    ---------------------------------------------------------------------------
        \124\ Id. at 11-12.

        In order to perform its desired function, this ``separate
    explanation'' would be authored and issued by the Bureau of Economics,
    and not subject to approval by the Commission. The document would
    express BE's independent assessment (approval or rejection) of the
    Commission's proposed complaint or consent order, provide a high-level
    description of the specific economic analyses and evidence relied upon
    in its own recommendation or rejection of the proposed consent order,
    and offer a more general economic rationale for its recommendation.
        Requiring BE to make public its economic rationale for supporting
    or rejecting a complaint or consent decree voted out by the Commission
    would offer a number of benefits. In general, such an analysis would
    both inform the public and demand rigor of the Commission. As former
    Commissioner Wright noted,

            First, it offers BE a public avenue to communicate its findings
            to the public. Second, it reinforces the independent nature of
            the recommendation that BE offers. Third, it breaks the agency
            monopoly the FTC lawyers currently enjoy in terms of framing a
            particular matter to the public. The internal leverage BE gains
            by the ability to publish such a document . . . will also
            provide BE a greater role in the consent process and a
            mechanism to discipline consents that are not supported by
            sound economics . . ., minimizing the ``compromise''
            recommendation that is most problematic in matters involving
            consent decrees.\125\
    ---------------------------------------------------------------------------
        \125\ Id. at 11.

        Wright explains this ``compromise recommendation'' problem in
    ---------------------------------------------------------------------------
    detail that bears extensive quotation and emphasis here:

            Both BC attorneys and BE staff are responsible for producing a
            recommendation memo. The asymmetry is at least partially a
            natural result of the different nature of the work that lawyers
            and economists do. But it is important to note that one
            consequence of this asymmetry, whatever its cause, is that it
            creates the potential to weaken BE's independence. BE maintains
            a high level of integrity and independence over core economic
            tasks--e.g., economic modeling and framing, statistical
            analyses, and assessments of outside economic work--yet when it
            comes to the actual policy recommendation, I think it is fair
            to raise the question whether the Commission always receives
            unfiltered recommendations when BE dissents from the
            recommendation of BC or BCP staff.

            One example of this phenomenon is the so-called ``compromise
            recommendation,'' that is, a BE staff economist might recommend
            the FTC accept a consent decree rather than litigate or
            challenge a proposed merger when the underlying economic
            analysis reveals very little actual economic support for
            liability. In my experience, it is not uncommon for a BE staff
            analysis to convincingly demonstrate that competitive harm is
            possible but unlikely, but for BE staff to rec-ommend against
            litigation on those grounds, but in favor of a consent order.
            The problem with this compromise approach is, of course, that a
            recommendation to enter into a consent order must also require
            economic evidence sufficient to give the Commission reason to
            believe that competitive harm is likely. This type of
            ``compromise'' recommendation in some ways reflects the reality
            of BE staff incentives. Engaging in a prolonged struggle over
            the issue of liability with BC and BC management is exceedingly
            difficult when the economist is simply outmanned. It also ties
            up already scarce BE resources on a matter that the parties are
            apparently ``willing'' to settle.\126\
    ---------------------------------------------------------------------------
        \126\ Id. at 7-8.

        The ability of BC or BCP staff to dilute the analysis of BE
    staffers in a combined compromise recommendation renders moot this
    ---------------------------------------------------------------------------
    provision of the operating manual:

            Dissenting staff recommendations regarding compulsory process,
            compliance, consent agreements, proposed trade regulation rules
            or proposed industrywide investigations should be submitted to
            the Commission by the originating offices, upon the request of
            the staff member.\127\
    ---------------------------------------------------------------------------
        \127\ Operating Manual Sec. 3.3.5.1.1.

        For this provision to have any effect, there must be a separate
    dissenting staff recommendation that can be seen by Commissioners--and,
    ideally, also made public.
    Recommendation: Require BE to Comment on Upgrading Investigations
        Similarly, we recommend enhancing BE's role earlier in the
    investigation process: at the point where the Bureau Director decides
    whether to upgrade an initial (Phase I) investigation to a full
    investigation. This is a critical inflection point in the FTC's
    investigative process for three reasons:

      1.  In principle, the staff is not supposed to negotiate consent
            decrees during the initial investigation phase;

      2.  In principle, the staff is not supposed to use compulsory
            discovery process during the initial investigation phase,
            meaning a target company's cooperation until this point is at
            least theoretically voluntary; and

      3.  Either the decision to open a formal investigation or the
            subsequent issuance of CIDs may trigger a public company's duty
            to disclose the investigation in its quarterly securities
            filings.

        It is also likely the point at which the staff determines (or at
    least begins to seriously consider) whether or not the Commission is
    likely to approve a staff recommendation to issue a complaint against
    any of the specific targets of the investigation.
        For all these reasons, converting an initial investigation to a
    full investigation gives the staff enormous power to coerce a
    settlement. This decision deserves far more rigorous analysis than it
    currently seems to receive.
        When the BC or BCP staff proposes to their Bureau director that an
    initial investigation be expanded into a full investigation, the FTC
    Operating Manual requires a (confidential) memorandum justifying a
    decision, but does not formally require the Bureau of Economics, or
    require that the analysis performed by any FTC staff correspond to two
    of the three requirements of Section 5(n) or the materiality
    requirement of the Deception Policy Statement:

            3.5.1.4 Transmittal Memorandum

            The memorandum requesting approval for full investigation
            should clearly and succinctly explain the need for approval of
            the full investigation, including a discussion of relevant
            factors among the following:

      (1)  A description of the practices and their impact on consumers
            and/or on the marketplace;

      (2)  Marketing area and volume of business of the proposed respondent
            and the overall size of the market;

      (3)  Extent of consumer injury inflicted by the practices to be
            investigated, the benefits to be achieved by the Commission
            action and/or the extent of competitive injury;

      (4)  When applicable, an explanation of how the proposed
            investigation meets objectives and, where adopted, case
            selection criteria or the program to which it has been
            assigned;

      (5)  When applicable, responses to the policy protocol questions (see
            OM Ch. 2);\128\
    ---------------------------------------------------------------------------
        \128\ Operating Manual Sec. 3.3.5.1.4 (emphasis added).

        We recommend modifying this in two ways. First, while approving a
    complaint or a consent decree should absolutely require a separate
    recommendation from the Bureau of Economics, requiring such a
    recommendation merely to convert an initial investigation to a full
    investigation might well pose too great a burden on BE's already over-
    taxed resources. But that is no reason why the FTC rules should not at
    least give BE the opportunity to write a separate memorandum if it so
    desires. Having this written recommendation shared with Commissioners
    would serve as an early warning system, alerting them to potentially
    problematic cases being investigated by BCP or BC staff before the
    staff has extracted a consent decree--something that regularly has
    effectively happened by the time the Commission votes on whether to
    authorize a complaint. Thus, giving BE the opportunity to be involved
    at this early stage may be critical to scrutinizing the FTC's use of
    consent decrees.
        Second, there is no reason that the memorandum prepared by either
    BC or BCP staff should not correspond to the doctrinal requirements of
    the relevant authority. The Operating Manual falls well short of this
    by merely requiring some analysis of the ``[e]xtent of consumer
    injury.'' Why not countervailing benefit and reasonable avoidability,
    too, for Unfairness cases? And materiality in Deception cases? And the
    various other factors subsumed in the consumer welfare standard of the
    rule of reason, for Unfair Methods of Competition Cases?
        That this would be only an initial analysis that will remain
    confidential under the Commission's rules is all the more reason it
    should not be a problem for the Staff to produce.
    Economic Analysis in Reports & ``Recommendations''
    The Revealing Economic Conclusions for Suggestions (RECS) Act
        Rep. Mike Pompeo's (R-KS) bill (H.R. 5136) \129\ would require the
    FTC to include, in ``any recommendations for legislative or regulatory
    action,'' analysis from the Bureau of Economics including:
    ---------------------------------------------------------------------------
        \129\ The Revealing Economic Conclusions for Suggestions Act, H.R.
    5136, 114th Cong. (2016) [hereinafter RECS Act] available at https://
    www.congress.gov/bill/114th-congress/house-bill/5136/text.

            [T]he rationale for the Commission's determination that private
            markets or public institutions could not adequately address the
            issue, and that its recommended legislative or regulatory
            action is based on a reasoned determination that the benefits
    ---------------------------------------------------------------------------
            of the recommended action outweigh its costs.

        Valuable as this is, the bill should be expanded to encompass other
    Commission pronouncements that aren't, strictly, ``recommendations for
    legislative or regulatory action.''
    Value of the Bill: Bringing Rigor to FTC Reports, Testimony, etc.
        The lack of economic analysis in support of ``recommendations for
    legislative or regulatory action'' has grown more acute with time--not
    only in the FTC's reports but also in its testimony to Congress.
        Section 6(b) of the FTC Act gives the Commission the authority ``to
    conduct wide-ranging economic studies that do not have a specific law
    enforcement purpose'' and to require the filing of ``annual or special
    . . . reports or answers in writing to specific questions'' for the
    purpose of obtaining information about ``the organization, business,
    conduct, practices, management, and relation to other corporations,
    partnerships, and individuals'' of any company over which the FTC has
    jurisdiction, except insurance companies. This section is a useful tool
    for better understanding business practices, particularly those
    undergoing rapid technological change. But it is only as valuable as
    the quality of the analyses these 6(b) reports contain. And typically
    they are fairly short on economic analysis, especially concerning
    consumer protection matters.
        The FTC has consistently failed to include any apparent, meaningful
    role for the Bureau of Economics in its consumer protection workshops
    or in the drafting of the subsequent reports. Nor has the FTC explored
    the adequacy of existing legal tools to address concerns raised by its
    reports. For example, the FTC's 2014 workshop, ``Big Data: A Tool for
    Inclusion or Exclusion?,'' included not a single PhD economist or BE
    staffer.\130\ The resulting 2016 report includes essentially just two
    footnotes on economics.\131\ Commissioner Ohlhausen dissented, noting
    that
    ---------------------------------------------------------------------------
        \130\ Fed. Trade Comm'n, Public Workshop: Big Data: A Tool for
    Inclusion or Exclusion? (Sep. 15, 2014), available at https://
    www.ftc.gov/news-events/events-calendar/2014/09/big-data-tool-
    inclusion-or-exclusion.
        \131\ Fed. Trade Comm'n, Big Data: A Tool for Inclusion or
    Exclusion? Understanding the Issues FTC Report (2016), available at
    https://www.ftc.gov/system/files/documents/reports/big-data-tool-
    inclusion-or-exclusion-understanding-issues/160106big-data-rpt.pdf

            Concerns about the effects of inaccurate data are certainly
            legitimate, but policymakers must evaluate such concerns in the
            larger context of the market and economic forces companies
            face. Businesses have strong incentives to seek accurate
            information about consumers, whatever the tool. Indeed,
            businesses use big data specifically to increase accuracy. Our
            competition expertise tells us that if one company draws
            incorrect conclusions and misses opportunities, competitors
    ---------------------------------------------------------------------------
            with better analysis will strive to fill the gap.. . .

            To understand the benefits and risks of tools like big data
            analytics, we must also consider the powerful forces of
            economics and free-market competition. If we give undue
            credence to hypothetical harms, we risk distracting ourselves
            from genuine harms and discouraging the development of the very
            tools that promise new benefits to low income, disadvantaged,
            and vulnerable individuals. Today's report enriches the
            conversation about big data. My hope is that future
            participants in this conversation will test hypothetical harms
            with economic reasoning and empirical evidence.\132\
    ---------------------------------------------------------------------------
        \132\ Id. at A-1 to A-2.

        The Commission's 2016 PrivacyCon conference did include several
    economists on a panel devoted to the ``Economics of Privacy &
    Security.'' \133\ But, as one of the event's discussants, Geoffrey
    Manne, noted:
    ---------------------------------------------------------------------------
        \133\ Fed. Trade Comm'n, Conference: PrivacyCon (Jan. 14, 2016),
    available at https://www.ftc.gov/news-events/events-calendar/2016/01/
    privacycon.

            One of the things I would say is that it's a little bit
            unfortunate we don't have more economists and engineers talking
            to each other. As you might have gathered from the last panel,
            an economist will tell you that merely identifying a problem
            isn't a sufficient basis for regulating to solve it, nor does
            the existence of a possible solution mean that that solution
            should be mandated. And you really need to identify real harms
            rather than just inferring them, as James Cooper pointed out
            earlier. And we need to give some thought to self-help and
            reputation and competition as solutions before we start to
    ---------------------------------------------------------------------------
            intervene. . . .

            So we've talked all day about privacy risks, biases in data,
            bad outcomes, problems, but we haven't talked enough about
            beneficial uses that these things may enable. So deriving
            policy prescriptions from these sort of lopsided discussions is
            really perilous.

            Now, there's an additional problem that we have in this forum
            as well, which is that the FTC has a tendency to find
            justification for enforcement decisions in things that are
            mentioned at workshops just like these. So that makes it doubly
            risky to be talking [  ] about these things without pointing
            out that there are important benefits here, and that the costs
            may not be as dramatic as it seems [just] because we're
            presenting these papers describing them.\134\
    ---------------------------------------------------------------------------
        \134\ Fed. Trade Comm'n, Transcript of the Remarks of Geoffrey A.
    Manne, 19 (Jan. 14, 2016), available at https://www.ftc.gov/system/
    files/documents/videos/privacycon-part-5/ftc_privacy
    con_-_transcript_segment_5.pdf#page=18.

        As Manne notes, as a practical matter, these workshops and reports
    are often used by the Commission either to make legislative
    recommendations or to define FTC enforcement policy by recommending
    industry best practices (which the agency will effectively enforce).
    But, again, because they lack much in the way of economically rigorous
    analysis, these recommendations may not be as well-founded as they may
    be presumed to be.
        In its 2000 Report to Congress, for example, the FTC called for
    comprehensive baseline legislation on privacy and data security.\135\
    Congress has not passed such legislation, but the FTC repeated the
    recommendation in its 2012 Privacy Report.\136\ While that Report
    called for significantly stricter legislation, less tied to consumer
    harm, it did not include any economic analysis by the FTC's Bureau of
    Economics. Indeed, by rejecting the harms-based model of the 2000
    Report,\137\ the 2012 report essentially dismisses the relevance of
    economic analysis, either in the report itself or in case-by-case
    adjudication.
    ---------------------------------------------------------------------------
        \135\ Fed. Trade Comm'n, Privacy Online: Fair Information Practices
    in the Electronic Marketplace (2000), available at https://www.ftc.gov/
    sites/default/files/documents/reports/privacy-online-fair-information-
    practices-electronic-marketplace-federal-trade-commission-report/
    privacy2000text.pdf.
        \136\ Fed. Trade Comm'n, Protecting Consumer Privacy in an Era of
    Rapid Change: Recommendaions for Business And Policymakers (2012),
    available at https://www.ftc.gov/sites/default/files/documents/reports/
    federal-trade-commission-report-protecting-consumer-privacy-era-rapid-
    change-recommendations/120326privacyreport.pdf.
        \137\ Privacy Online: Fair Information Practices in the Electronic
    Marketplace, supra note 135.
    ---------------------------------------------------------------------------
        In his dissent, Commissioner Rosch warned about the Report's
    reliance on unfairness rather than deception, noting that ``
    `Unfairness' is an elastic and elusive concept. What is ``unfair'' is
    in the eye of the beholder. . . .'' \138\ In effect, Rosch, despite his
    long-standing hostility to economic analysis,\139\ was really saying
    that the Commission had failed to justify its analysis of unfairness.
    Rosch objected to the Commission's invocation of unfairness against
    harms that have not been clearly analyzed:
    ---------------------------------------------------------------------------
        \138\ Protecting Consumer Privacy in an Era of Rapid Change, supra
    note 136, at C-3.
        \139\ See e.g., J. Thomas Rosch, Litigating Merger Challenges:
    Lessons Learned (June 2, 2008), available at https://www.ftc.gov/sites/
    default/files/documents/public_statements/litigating-merger-challenges-
    lessons-learned/080602litigatingmerger.pdf (``any kind of economic
    analyses that require the use of mathematical formulae are of little
    persuasive value in the courtroom setting;'' ``when I see an economic
    formula my eyes start to glaze over.''); See generally Joshua Wright,
    Commissioner Rosch v. Economics, Again, Truth on the Market (Oct. 7,
    2008), available at https://truthonthemarket.com/2008/10/07/
    commissioner-rosch-v-economics-again/.

            That is not how the Commission itself has traditionally
            proceeded. To the contrary, the Commission represented in its
            1980, and 1982 [sic], Statements to Congress that, absent
            deception, it will not generally enforce Section 5 against
            alleged intangible harm. In other contexts, the Commission has
            tried, through its advocacy, to convince others that our policy
            judgments are sensible and ought to be adopted.\140\
    ---------------------------------------------------------------------------
        \140\ Protecting Consumer Privacy in an Era of Rapid Change, supra
    note 136, at C-4.

        Rosch contrasted the Report's reliance on unfairness with the
    Commission's Unfair Methods of Competition doctrine, which he called
    ``self-limiting'' because it was tied to analysis of market power.\141\
    Rosch lamented that,
    ---------------------------------------------------------------------------
        \141\ Id. at C-5.

            There does not appear to be any such limiting principle
            applicable to many of the recommendations of the Report. If
            implemented as written, many of the Report's recommendations
            would instead apply to almost all firms and to most information
            collection practices. It would install ``Big Brother'' as the
            watchdog over these practices not only in the online world but
            in the offline world. That is not only paternalistic, but it
            goes well beyond what the Commission said in the early 1980s
            that it would do, and well beyond what Congress has permitted
            the Commission to do under Section 5(n). I would instead stand
            by what we have said and challenge information collection
            practices, including behavioral tracking, only when these
            practices are deceptive, ``unfair'' within the strictures of
            Section 5(n) and our commitments to Congress, or employed by a
            firm with market power and therefore challengeable on a stand-
            alone basis under Section 5's prohibition of unfair methods of
            competition.\142\
    ---------------------------------------------------------------------------
        \142\ Id.

        The proposed bill would help to correct these defects, and to
    ensure that FTC Reports, at least those containing legislative or
    rulemaking recommendations, are based on the rigorous analysis that
    should be expected of an expert investigative agency's policymaking--
    especially one that has arguably the greatest pool of economic talent
    found anywhere in government in America.
    Recommendation: Require Analysis of Recommended Industry Best Practices
        In this regard the proposed bill would be enormously beneficial,
    but it could, and should, do significantly more.
        First and foremost, the term ``recommendations for legislative or
    regulatory action'' would not encompass the most significant FTC
    recommendations: those included in ``industry best practices''
    publications and reports produced by the Commission. These documents
    purport to offer expert suggestions for businesses to follow in order
    to help them to protect consumer welfare and to better comply with the
    relevant laws and regulations. But the FTC increasingly treats these
    recommendations as soft law, not merely helpful guidance, in at least
    two senses:

      1.  The FTC uses these recommendations as the basis for writing its
            20-year consent-decree requirements, including ones unrelated,
            or only loosely related, to the conduct at issue in an
            enforcement action; and

      2.  The FTC uses these recommendations as the substantive basis for
            enforcement actions--for example, by pointing to a company's
            failure to do something the FTC recommended as evidence of the
            unreasonableness of its practices.

        Former Chairman Tim Muris notes this about the ``voluntary''
    guidelines issued by the FTC in 2009 in conjunction with three other
    Federal agencies, comparing them to the FTC's efforts to ban
    advertising to children:

            The FTC has been down this road before. Prodded by consumer
            activists in the late 1970s, the Commission sought to stop
            advertising to children. . .

            One difference between the current proposal and the old
            rulemaking--called Kid Vid--is that this time the agencies are
            suggesting that the standards be adopted ``voluntarily'' by
            industry. Yet can standards suggested by a government claiming
            the power to regulate truly be ``voluntary''? Moreover, at the
            same workshop that the standards were announced, a
            representative of one of the same activist organizations that
            inspired the 1970s efforts speculated that a failure to comply
            with the new proposal would provoke calls for rules or
            legislation.\143\
    ---------------------------------------------------------------------------
        \143\ Statement of Timothy J. Muris, supra note 14, at 11-13.

        Regulation by leering glare is still regulation.
        Informed by the trauma of its near-fatal confrontation with
    Congress at the end of the Carter administration, the FTC was long
    skittish about making recommendations for businesses in its reports,
    beyond high level calls for attention to issues like data security.
    That changed in 2009, however. The FTC has since issued a flurry of
    reports recommending best practices like ``privacy by design'' and
    ``security by design,'' first generally, and then across a variety of
    areas, from Big Data to facial recognition.\144\
    ---------------------------------------------------------------------------
        \144\ Big Data: A Tool for Inclusion or Exclusion, supra note 131;
    Fed Trade Comm'n, Facing Facts: Best Practices for Common Uses of
    Facial Recognition Technologies (2012), available at https://
    www.ftc.gov/sites/default/files/documents/reports/facing-facts-best-
    practices-common-uses-facial-recognition-technologies/
    121022facialtechrpt.pdf.
    ---------------------------------------------------------------------------
        The FTC's recommendations to industry in its 2005 report on file-
    sharing were admirably circumspect:

            Industry should decrease risks to consumers through
            technological innovation and development, industry self-
            regulation (including risk disclosures), and consumer
            education.\145\
    ---------------------------------------------------------------------------
        \145\ Fed. Trade Comm'n, Peer-to-Peer File-Sharing Technology:
    Consumer Protection and Competition Issues (2005), available at https:/
    /www.ftc.gov/sites/default/files/documents/reports/peer-peer-file-
    sharing-technology-consumer-protection-and-competition-issues/
    050623p2prpt.pdf.

        This is not to say that the FTC could not or should not have done
    more to address the very real problem of inadvertent online file-
    sharing. Indeed, one of the authors of this report has lauded the
    (Democratic-led) FTC for bringing its 2011 enforcement action against
    Frostwire\146\ for designing its peer-to-peer file-sharing software in
    a way that deceived users into unwittingly sharing files.\147\ Rather,
    it is simply to say that the FTC, in 2005, understood that a report was
    not a substitute for a rulemaking--i.e., not an appropriate place to
    make ``recommendations'' for the private sector that would have any
    force of law.
    ---------------------------------------------------------------------------
        \146\ Fed. Trade Comm'n v. Frostwire LLC, FTC File No. 112 3041,
    https://www.ftc.gov/enforcement/cases-proceedings/112-3041/frostwire-
    llc-angel-leon (2011).
        \147\ Prepared Statement of Berin Szoka, President of TechFreedom:
    Hearing Before the H. Energy & Commerce Comm. 112th Cong. (2012), 23,
    available at https://techliberation.com/wp-content/uploads/2012/11/
    Testimony_CMT_03.29.12_Szoka.pdf.
    ---------------------------------------------------------------------------
        By 2012 the FTC had lost any such scruples. Its Privacy Report,
    issued that year, is entitled ``Recommendations for Businesses and
    Policymakers.'' The title says it all: The FTC directed its sweeping
    recommendations for ``privacy by design'' to both the companies it
    regulates and the elected representatives the FTC supposedly serves:

            The final privacy framework is intended to articulate best
            practices for companies that collect and use consumer data.
            These best practices can be useful to companies as they develop
            and maintain processes and systems to operationalize privacy
            and data security practices within their businesses. The final
            privacy framework contained in this report is also intended to
            assist Congress as it considers privacy legislation.\148\
    ---------------------------------------------------------------------------
        \148\ Protecting Consumer Privacy in an Era of Rapid Change, supra
    note 136, at iii.

    ---------------------------------------------------------------------------
        Of course, the FTC added:

            To the extent the framework goes beyond existing legal
            requirements, the framework is not intended to serve as a
            template for law enforcement actions or regulations under laws
            currently enforced by the FTC.\149\
    ---------------------------------------------------------------------------
        \149\ Id. at vii.

        Also noteworthy is the contrast between the two reports in their
    ---------------------------------------------------------------------------
    analytical rigor. The file sharing report noted:

            The workshop panelists and public comments did not provide a
            sufficient basis to conclude whether the degree of risk
            associated with P2P file-sharing programs is greater than,
            equal to, or less than the degree of risk when using other
            Internet technologies.\150\
    ---------------------------------------------------------------------------
        \150\ Peer-to-Peer File-Sharing Technology, supra note 145, at 12.

        The 2012 report shows no such modesty, as Commissioner Rosch
    lamented in his dissent (``There does not appear to be any such
    limiting principle applicable to many of the recommendations of the
    Report.'').\151\
    ---------------------------------------------------------------------------
        \151\ Protecting Consumer Privacy in an Era of Rapid Change, supra
    note 136, at C-5.
    ---------------------------------------------------------------------------
        In 2015, Commissioner Wright expressed dismay at this same problem
    in his dissent from the staff report on the Internet of Things
    Workshop:

            I dissent from the Commission's decision to authorize the
            publication of staff's report on its Internet of Things
            workshop (``Workshop Report'') because the Workshop Report
            includes a lengthy discussion of industry best practices and
            recommendations for broad-based privacy legislation without
            analytical support to establish the likelihood that those
            practices and recommendations, if adopted, would improve
            consumer welfare.. . .

            First . . ., merely holding a workshop--without more--should
            rarely be the sole or even the primary basis for setting forth
            specific best practices or legislative recommendations. . . .

            Second, the Commission and our staff must actually engage in a
            rigorous cost-benefit analysis prior to disseminating best
            practices or legislative recommendations, given the real world
            consequences for the consumers we are obligated to protect. . .
            .

            The most significant drawback of the concepts of ``security by
            design'' and other privacy-related catchphrases is that they do
            not appear to contain any meaningful analytical content.. . ..
            An economic and evidence-based approach sensitive to [  ]
            tradeoffs is much more likely to result in consumer-welfare
            enhancing consumer protection regulation. To the extent
            concepts such as security by design or data minimization are
            endorsed at any cost--or without regard to whether the marginal
            cost of a particular decision exceeds its marginal benefits--
            then application of these principles will result in greater
            compliance costs without countervailing benefit. Such costs
            will be passed on to consumers in the form of higher prices or
            less useful products, as well as potentially deter competition
            and innovation among firms participating in the Internet of
            Things.\152\
    ---------------------------------------------------------------------------
        \152\ Dissenting Statement of Commissioner Joshua D. Wright,
    Issuance of The Internet of Things: Privacy and Security in a Connected
    World Staff Report (Jan. 27, 2015) (emphasis added), available at
    https://www.ftc.gov/system/files/documents/public_statements/620701/
    150127iotjdwstmt.pdf.

        The point illustrated by comparing these examples is the difficulty
    inherent in trying to require greater rigor from the FTC in
    recommendations to businesses when those recommendations can be either
    high level and commonsensical (as in 2005) or sweeping and effectively
    regulatory (as in 2012 and 2015). Thus, we recommend the following
    ---------------------------------------------------------------------------
    simple amendment to the proposed bill:

            [The FTC] shall not submit any proposed industry best
            practices, industry guidance or recommendations for legislative
            or regulatory action without [analysis]. . . .

        This wording would not apply to the kind of ``recommendation'' that
    the FTC made occasionally before 2009, as exemplified by the 2005
    report. In any event, the bill's requirement is easily satisfied:
    essentially the FTC need only give the Bureau of Economics a role in
    drafting the report. Because this recommendation would not hamstring
    the FTC's enforcement actions, nor tie the FTC up in court, it should
    not be controversial, even if applied to proposed industry best
    practices and guidance.
        Our proposed amendment would be simpler than attempting to broaden
    the definition of ``regulatory action'' beyond just rulemakings (which
    is how the FTC would likely limit its interpretation of the bill as
    drafted now) to include the kind of ``regulatory action'' that matters
    most: its use of reports to indicate how it will regulate through case
    by case enforcement, i.e., its ``common law of consent decrees.''
    Recommendation: Clarify the Bill's Language to Ensure It Applies to All
            FTC
            Reports
        Another important difference between the 2000 and 2012 privacy
    reports is that the 2000 report is labelled ``A Report to Congress,''
    while the 2012 report is not and, indeed, barely mentions Congress.
    This reflects a little-noticed aspect of the way Section 6(f) is
    currently written, with subsection numbers added for clarity:

            (f) Publication of information; reports

            To [i] make public from time to time such portions of the
            information obtained by it hereunder as are in the public
            interest; and to [ii] make annual and special reports to the
            Congress and to submit therewith recommendations for additional
            legislation; and to [iii] provide for the publication of its
            reports and decisions in such form and manner as may be best
            adapted for public information and use.\153\
    ---------------------------------------------------------------------------
        \153\ 15 U.S.C. Sec. 46(f)

        In other words, the Commission has shifted from relying upon
    6(f)(ii) to 6(f)(i) and (iii). This distinction may seem unimportant,
    but it may cause the bill as drafted to be rendered meaningless,
    because the way it is worded could be read to apply only to 6(f)(ii).
    ---------------------------------------------------------------------------
    The bill would amend the existing proviso in Section 6(f) as follows:

            Provided [t]hat the Commission shall not submit any
            recommendations for legislative or regulatory action without an
            economic analysis by the Bureau of Economics. . .

        The use of the words ``submit'' and ``recommendations'' clearly tie
    this proviso to 6(f)(ii). Thus, the FTC could claim that it need not
    include the analysis required by the bill unless it is specifically
    submitting recommendations to Congress, which it simply does not do
    anymore.
        Instead we propose the following slight tweak to the bill's
    wording, to ensure that it would apply to the entirety of Section 6(f):

            Provided [t]hat the Commission shall not make any
            recommendations for legislative or regulatory action without an
            economic analysis by the Bureau of Economics. . .

        This would require the participation of the Bureau of Economics in
    all FTC reports (that make qualifying recommendations), whatever their
    form. It would also require BE's participation in at least two other
    contexts where such recommendations are likely to be made: (i)
    Congressional testimony and (ii) the competition advocacy filings the
    Commission makes with state and local regulatory and legislative
    bodies, and with other Federal regulatory agencies. This is a feature,
    not a bug: participation by BE is not something to be minimized; it
    should be woven into the fabric of all of the FTC's activities. As we
    have noted previously:

            The most important, most welfare-enhancing reform the FTC could
            undertake is to better incorporate sound economic- and
            evidence-based analysis in both its substantive decisions as
            well as in its process. While the FTC has a strong tradition of
            economics in its antitrust decision-making, its record in using
            economics in other areas is mixed.\154\
    ---------------------------------------------------------------------------
        \154\ Geoffrey A. Manne, Humility, Institutional Constraints and
    Economic Rigor: Limiting the FTC's Discretion, ICLE White Paper 2014-1
    (Feb. 28, 2014) at 4, available at http://docs
    .house.gov/meetings/IF/IF17/20140228/101812/HHRG-113-IF17-Wstate-
    ManneG-20140228-SD002.pdf.

        Because the bill does not in any way create a cause of action
    against the FTC for failing to comply with the requirement, it will not
    hamstring the FTC if the agency fails to take the bill's requirements
    seriously. That, if anything, is a weakness of the bill, but it is
    largely inevitable. It will always be up to the discretion of the
    Commission itself (subject, of course, to congressional oversight) to
    decide how much ``economic analysis'' is ``sufficient'' under the bill.
    Recommendation: Require a Supermajority of Commissioners to Decide What

            Analysis is ``Sufficient''
        As written, the bill might do little more than shame the Chairman
    into involving the Bureau of Economics somewhat more in the writing of
    reports and the workshops that lead to them--if only because the bill
    might embolden a single Commissioner to object to the FTC's lack of
    analysis, as Commissioner Wright objected to the FTC's Internet of
    Things report.\155\ This change in incentives for the Chairman and
    other commissioners, alone, may not significantly improve the
    analytical quality of the FTC's reports, given the hostility of the
    Bureau of Consumer Protection to economic analysis, although having any
    involvement by BE would certainly be an improvement.
    ---------------------------------------------------------------------------
        \155\ See Issuance of The Internet of Things: Privacy and Security
    in a Connected World Staff Report, supra note 152, at 4.
    ---------------------------------------------------------------------------
        Again, the question of ``sufficiency'' is inherently something that
    will be left to the Commission's discretion, but there is no principled
    reason that it has to be resolved through simple majority votes. On the
    other hand, giving a single Commissioner the right to veto an FTC
    ``recommendation'' as lacking a ``sufficient'' analytical basis might
    go too far.
        We recommend striking a balance by requiring a supermajority
    (majority plus one, except in the case of a three-member Commission) of
    Commissioners to approve of the sufficiency of the analysis--
    essentially that this vote be taken, or at least recorded, separately
    from the vote on the issuance of the report itself. (The
    ``sufficiency'' vote would not stop the FTC from issuing a report.) At
    the same time, we recommend that the outcome of the ``sufficiency''
    vote be disclosed on the first page of all reports or other documents
    containing recommendations.
        Such a mechanism would effectively expand the set of options for
    which Commissioners could vote, enabling them to express subtler
    degrees of preference without constraining them, as now, into making
    the binary choice between approving or rejecting a recommendation in
    toto. In other words, while the cost of expressing disapproval today,
    in the form of a dissent from a report, may be too high in some cases
    (especially for Commissioners in the majority party), the cost of
    expressing disapproval for the sufficiency of analysis without vetoing
    an entire report would be much lower. Allowing such a vote, and
    publishing its results, would offer important information to the
    public. It would also increase the leverage of commissioners most
    concerned with ensuring that FTC recommendations are supported by
    sufficient rigor to influence the content and conclusions of FTC
    reports and similar documents.
        In cases where the three-member majority feels the two-member
    minority's objections to analytical rigor are merely a pretense for
    objections to the recommendations themselves, the bill as we envision
    it would do nothing to stop the majority from issuing its
    recommendations anyway, of course; the ``sufficiency'' vote in this
    sense may sometimes be merely an expression of preference. Nonetheless,
    the majority Commissioners would likely be compelled to do more to
    explain why they believe the analysis included in support of a
    recommendation is sufficient, and why the minority is conflating its
    own policy views with the question of analytical sufficiency. These
    would also be valuable additions to the public's understanding of the
    basis for Commission recommendations
        The virtue of our proposed approach is that it would further lower
    the bar for the Commission to do something it ought to do anyway:
    involve the Bureau of Economics in its decision-making.
    Recommendation: Codify Congress's Commitment to Competition Advocacy
        As we propose amending the RECS Act, consistent with the spirit
    with which we believe the bill is intended, BE would also have to be
    involved in any competition advocacy filings made by the FTC. Again, we
    believe this is all for the good. But it might, on the margin,
    discourage the FTC from issuing such filings in the first place--
    something we believe the FTC already does not do enough of. Thus, as
    discussed below, we recommend that Congress do more to encourage
    competition advocacy filings by the FTC.\156\ At minimum, this means
    amending Section 6 to provide specific statutory authority for
    competition advocacy, something the FTC only vaguely divines from the
    Section today. As the text stands today, this authority is far from
    apparent, especially because the current Section 6 makes reference to
    ``recommendations'' only with respect to Congress in what we above
    refer to as Section 6(f)(ii).
    ---------------------------------------------------------------------------
        \156\ See infra note 87.
    ---------------------------------------------------------------------------
    Other Sources of Enforcement Authority (Guidelines, etc.)
    The Solidifying Habitual & Institutional Explanations of Liability &
            Defenses (SHIELD) Act
        Rep. Mike Pompeo's (R-KS) bill (H.R. 5118) \157\ clarifies what is
    already black letter law: agency guidelines do not create any binding
    legal obligations, either upon regulated companies or the FTC. This
    means the FTC can bring enforcement actions outside the bounds of its
    Unfairness and Deception Policy Statements, its Unfair Methods of
    Competition Enforcement Policy Statement, and its regulations
    promulgated under other statutes enforced by the Commission (e.g., the
    ``Safeguards Rule,'' promulgated under the Gramm-Leach-Bliley Act)
    \158\ unless Congress codifies the Statements in the statute. The only
    substantively operative provision of the bill is section (B), which
    provides that:
    ---------------------------------------------------------------------------
        \157\ Solidifying Habitual and Institutional Explanations of
    Liability and Defenses Act, H.R. 5118, 114th Cong. (2016) [hereinafter
    SHIELD Act], available at https://www.con
    gress.gov/bill/114th-congress/house-bill/5118/text.
        \158\ Standards for Safeguarding Customer Information, 16 C.F.R.
    Sec. 314.

            Compliance with any guidelines, general statement of policy, or
            similar guidance issued by the Commission may be used as
            evidence of compliance with the provision of law under which
            the guidelines, general statement of policy, or guidance was
    ---------------------------------------------------------------------------
            issued.

        This does not create a formal safe harbor; it merely allows
    companies targeted by the FTC to cite FTC's past guidance in their
    defense. This should be uncontroversial.
    Value of the Bill: Increasing Legal Certainty and Decreasing the
            Coercive Regulatory Effect of the FTC's Soft Law
        The bill would accomplish two primary goals. First, it would
    formally bar the FTC from doing something it has likely been doing in
    practice for some time: treating its own informal guidance as quasi-
    regulatory. To the extent that the Commission actually does so, it
    would effectively be circumventing the safeguards Congress imposed in
    1980 upon the FTC's Section 5 rulemaking powers by amending the FTC
    Improvement Act of 1975 (commonly called ``Magnuson-Moss'').\159\ But
    of course, for exactly this reason, the Commission would never admit
    that this is what it is doing when its enforcement agenda just happens
    to line up with its previous recommendations.
    ---------------------------------------------------------------------------
        \159\ The term Magnuson-Moss is inapt for two reasons. First, as
    former Chairman Muris explains, ``Although within the Commission these
    procedures are uniformly referred to as `Magnuson Moss,' in fact, the
    procedures are contained within Title II of the Magnuson Moss Warranty-
    Federal Trade Commission Improvement Act of 1975. Only Title I involved
    the Magnuson Moss Warranty Act. . .'' Statement of Timothy J. Muris,
    supra note 14, at 22, n. 44. Second, the safeguards at issue were
    adopted in 1980, not 1975, when ``Mag-Moss'' was passed.
    ---------------------------------------------------------------------------
        More clear and more troubling is that, in the LabMD case, the
    Commission argued that the company, a small cancer testing lab, had
    committed an unfair trade practice sometime between 2006 and 2008 by
    failing to take ``reasonable'' measures to prevent the installation and
    operation of peer-to-peer file-sharing software on its network, which
    made patient billing information accessible to Tiversa, a company with
    specialized tools capable of scouring P2P networks for sensitive
    information. Crucial to the FTC's Complaint was its allegation that:

            Since at least 2005, security professionals and others
            (including the Commission) have warned that P2P applications
            present a risk that users will inadvertently share files on P2P
            networks.\160\
    ---------------------------------------------------------------------------
        \160\ Complaint, In the Matter of LabMD, Inc., Docket No. 9357 at
    4, available at https://www.ftc.gov/sites/default/files/documents/
    cases/2013/08/130829labmdpart3.pdf.

        The Commission was referring, obliquely, to its 2005 report,\161\
    which offered this rather unhelpful suggestion to affected companies:
    ---------------------------------------------------------------------------
        \161\ Peer-to-Peer File-Sharing Technology, supra note 145.

            Industry should decrease risks to consumers through
            technological innovation and development, industry self-
            regulation (including risk disclosures), and consumer
    ---------------------------------------------------------------------------
            education.

        Not until January 2010 did the FTC issue ``Peer-to-Peer File
    Sharing: A Guide for Business'' \162\--about the same time, it appears,
    that the FTC undertook its investigation of LabMD. The SHIELD Act would
    clearly bar the FTC from pointing to its own past guidance as creating
    a legal trigger for liability. The Commission's assessment of
    ``reasonableness'' would have to be proven through other factors;
    indeed, since ``reasonable'' is found nowhere in Section 5 or even in
    the Unfairness Policy Statement, the Commission would have to prove the
    underlying elements of unfairness, without shortcutting this analysis
    by oblique reference to its own past reports.
    ---------------------------------------------------------------------------
        \162\ Fed. Trade, Comm'n, Peer-to-Peer File Sharing: A Guide for
    Business (Jan. 2010), available at https://www.ftc.gov/tips-advice/
    business-center/guidance/peer-peer-file-sharing-guide-business.
    ---------------------------------------------------------------------------
        A related concern is the Commission's application of rules
    promulgated in one context, in which they have binding authority, to
    other contexts in which they do not. The most striking example of this
    practice is the Commission's use of the Safeguards Rule, which
    ``applies to the handling of customer information by all financial
    institutions over which the [FTC] has jurisdiction,'' \163\ to define
    unfair data security practices, and the remedies applied by the FTC in
    consent decrees, outside the financial sector. Although the Safeguards
    Rule has regulatory authority for financial institutions, its authority
    is no different than informal guid-ance (or recommended ``best
    practices'') the Commission offers for everyone else. Nevertheless, the
    Commission has imposed remedies virtually identical to the Safeguards
    Rule in nearly every data security consent order into which it has
    entered.
    ---------------------------------------------------------------------------
        \163\ 16 C.F.R. Sec. 314.1(b).

            [T]he majority of the FTC's [data security] cases, regardless
            of cause of action or facts, impose the same remedy: the set of
            security standards laid out in the FTC's Safeguards Rule. Most
            notably, this is true regardless of whether the respondents
            were financial institutions (to which the Safeguards Rule
            directly applies) or not (to which the Rule has no direct
            application), and regardless of whether the claim is generally
            one of deception or unfairness.\164\
    ---------------------------------------------------------------------------
        \164\ Manne & Sperry, supra note 52, at 20.

        Second, the SHIELD Act would allow companies to raise their
    compliance with FTC guidance as part of their defense. This would, at a
    minimum, help encourage companies to resist settling legally
    questionable or analytically unsupported enforcement actions.
    Recommendation: Clarify that Consent Decrees, Reports, and FTC Best
            Practices are not Binding
        We propose expanding the bill's language slightly to ensure that it
    achieves its intended goal:

            No guidelines, general statements of policy, consent decrees,
            settlements, reports, recommended best practices, or similar
            guidance issued by the Commission shall confer any right.

        As should be clear by now, these other forms of soft law are the
    most important aspects of the FTC's discretionary model, especially
    given the paucity of policy statements (building upon the three major
    ones, such as on materiality, for example) or issue-specific
    ``Guides.''
        Specifically, the Commission regularly applies its recommended best
    practices (grouped under catchphrases like ``privacy by design'' and
    ``security by design'') as mandatory company-specific regulations in
    consent decrees that are themselves applied, in cookie-cutter fashion,
    across enforcement actions brought against companies that differ
    greatly in their circumstances, and regardless of the nature or extent
    of the injury or the specific facts of their case.
        Second, the LabMD case provides at least one clear example wherein
    the FTC has treated its own previous reports, making vague
    recommendations about the need for better industry data security
    practices (regarding peer-to-peer file-sharing), as a critical part of
    the trigger for legal liability.\165\ We suspect this is the tip of the
    iceberg--that the FTC in fact does this kind of thing quite often, but
    usually does not have to admit it, because it is able to settle cases
    without revealing its legal arguments. Only in the LabMD case (one of
    the first (of two) data security cases to be litigated after more than
    a decade of FTC consent decrees in this area) did the Commission have
    to make the connection between its previous ``recommendations'' and its
    application of Section 5. Even here, in its LabMD Complaint, it should
    be noted, the Commission did not specifically cite its 2005 P2P file-
    sharing report, but instead vaguely alluded to it--suggesting that even
    FTC staff were wary of revealing this connection.
    ---------------------------------------------------------------------------
        \165\ See supra note 66 and note 161.
    ---------------------------------------------------------------------------
    Recommendation: Specify When a Defendant May Raise Evidence of Its
            Compliance with FTC Guidance
        The bill does not currently specify when in the enforcement process
    evidence of compliance may be cited. It is important that a defendant
    be able to raise a compliance defense as early as possible. Without
    such an opportunity, the Commission can drag out an investigation that
    should have been terminated early, as when the subject of the
    investigation acted in good faith reliance upon the Commission's own
    statements. Ideally, this would occur during motions to quash CIDs.
        Further, it would help if the FTC amended its rule on such motions,
    16 C.F.R. Sec. 2.10, to specify that this defense could be raised at
    part of a motion to quash. And, as we noted above,\166\ it is critical
    that these challenges be permitted to remain confidential, as many
    companies may choose to avoid the risk the public exposure that comes
    with challenging CIDs.
    ---------------------------------------------------------------------------
        \166\ See supra at 46.
    ---------------------------------------------------------------------------
        At a minimum, the defendant should be able to raise this defense in
    a way that is communicated to Commissioners before the Commission's
    vote on whether to issue a complaint.
    Recommendation: Encourage the FTC to Issue More Policy Statements &
            Guides
        As the proposed SHIELD Act reflects, while there is some risk of
    ossification from over-reliance on ex ante guidelines and policy
    statements, the absence of such guidance documents can leave consumers
    and economic actors with insufficient notice of FTC enforcement
    principles and practices. Absent meaningful constraints on the
    Commission's discretionary authority, the costs of over-enforcement may
    be as great or greater than the costs of over-regulation. For these
    reasons, the bill should require the FTC to issue substantive
    guidelines, allow private parties to petition the FTC to issue
    guidelines, or allow a single Commissioner to force the issue.
        A good place to start would be privacy regulation, where the
    Commission has issued no meaningful guides.\167\ The Commission has
    done better on data security, with guides, for example, on photocopier
    data security (2010),\168\ P2P software (2010),\169\ and mobile app
    security (2013).\170\ But none of these, and even the particularly
    thorough ``Start with Security: A Guide for Business'' (2015),\171\
    does the kind of thing the various antitrust guidelines do: expand upon
    the analytical framework by which the Commission determines how much
    security is enough. This must be grounded in the component elements of
    Section 5, not the Commission's policy agenda or technical expertise.
    ---------------------------------------------------------------------------
        \167\ See, e.g., Fed. Trade Comm'n, Federal Trade Commission
    Enforcement of the U.S.-EU and U.S.-Swiss Safe Harbor Frameworks (Dec.
    2012), available at https://www.ftc.gov/tips-advice/business-center/
    guidance/federal-trade-commission-enforcement-us-eu-us-swiss-safe-
    harbor
        \168\ Fed. Trade Comm'n, Copier Data Security: A Guide for
    Businesses (Nov. 2010), available at https://www.ftc.gov/tips-advice/
    business-center/guidance/copier-data-security-guide-businesses
        \169\ Peer-to-Peer File Sharing: A Guide for Business, supra note
    162.
        \170\ Fed. Trade Comm'n, Mobile App Developers: Start with Security
    (Feb. 2013), available at https://www.ftc.gov/tips-advice/business-
    center/guidance/mobile-app-developers-start-security
        \171\ Fed. Trade Comm'n, Start with Security: A Guide for Business
    (Jun. 2015), available at https://www.ftc.gov/tips-advice/business-
    center/guidance/start-security-guide-business
    ---------------------------------------------------------------------------
        More important than issue-specific guides would be guidance one
    step up the Doctrinal Pyramid, explaining how concepts like
    materiality, weighing injury with benefits, and measuring reasonable
    avoidability will be measured.\172\ Such a document would greatly
    enhance the value of issue-specific guides by allowing regulated
    companies to understand not just what the Commission might demand in
    the future, but the doctrinal legal basis for doing so.
    ---------------------------------------------------------------------------
        \172\ See supra note 12.
    ---------------------------------------------------------------------------
    Remedies
    Appropriate Tailoring of Remedies
    No Bill Proposed
        The FTC has, perhaps predictably, also pushed the envelope with
    regard to the sorts of remedies it seeks against a broader category of
    targets. Initially, the Commission was given authority to pursue
    permanent injunctions under Section 13(b) as part of its ongoing
    mission to curb outright fraud.\173\ Over time, however, the FTC has
    expanded its use of Section 13(b) in order to target companies that
    engage in conduct that implicates issues from substantiation claims to
    product design--all far from fraudulent territory.\174\
    ---------------------------------------------------------------------------
        \173\ See generally Beales & Muris, supra note 21.
        \174\ Id. at 4.
    ---------------------------------------------------------------------------
        For instance, Apple, Google, and Amazon have all been targets of
    the Commission for issues related to the design and function of their
    respective mobile app stores.\175\ Amazon, one of the rare parties to
    proceed to full litigation on a Section 5 unfairness case, recently
    lost a summary judgment motion on a claim that its in-app purchasing
    system permitted children to make in-app purchases without parental
    ``informed consent,'' thus engaging in an ``unfair practice.'' \176\ As
    part of its case the Commission sought a permanent injunction under
    Section 13(b) against Amazon on the basis of the Commission's claim
    that it was ``likely to continue to injure consumers, reap unjust
    enrichment, and harm the public interest.'' \177\
    ---------------------------------------------------------------------------
        \175\ See Geoffrey A. Manne, Federal Intrusion: Too Many Apps for
    That, Wall Str. J. (Sep. 16, 2014), http://www.wsj.com/articles/
    geoffrey-manne-federal-intrusion-too-many-apps-for-that-1410908397.
        \176\ Fed. Trade Comm'n v. Amazon.com, Inc., Case No. C14-1038-JCC,
    slip op. at 10 (W.D. Wash 2016), available at https://www.ftc.gov/
    system/files/documents/cases/160427amazon
    order.pdf.
        \177\ Id. at 10.
    ---------------------------------------------------------------------------
        This practice, called ``fencing-in,'' \178\ may be appropriate for
    the inveterate fraudsters--against whom it is authorized under Section
    19 of the Act:
    ---------------------------------------------------------------------------
        \178\ See, e.g., Federal Trade Commission V. RCA Credit Services,
    LLC, Case No. 8:08-CV-2062-T-27AEP. (M.D. Fla. Jul 21, 2010) at 20
    (``Courts also have discretion to include `fencing-in' provisions that
    extend beyond the specific violations at issue in the case to prevent
    Defendants from engaging in similar deceptive practices in the
    future.'').

            If the Commission satisfies the court that the act or practice
            to which the cease and desist order relates is one which a
            reasonable man would have known under the circumstances was
            dishonest or fraudulent, the court may grant . . . such relief
            as the court finds necessary.\179\
    ---------------------------------------------------------------------------
        \179\ 15 U.S.C. Sec. 57(b)-(a)(2) and -(b).

        The FTC--in the past--indeed viewed Section 13(b) as a tool to
    police clearly fraudulent practices. ``Consistent with the limitations
    in Section 19, the agency used Section 13(b) for a narrow class of
    cases involving fraud, near fraud, or worthless products.'' \180\
    Meanwhile, courts, for their part, ``blessed this limited expansion of
    FTC authority,'' and still see the appropriate scope of Section 13(b)
    as a limited one.
    ---------------------------------------------------------------------------
        \180\ Beales & Muris, supra note 21, at 22.
    ---------------------------------------------------------------------------
        But the argument for extending fencing-in beyond the fraud context
    is extremely weak. Nevertheless, the FTC has more recently, as in the
    Amazon case, sought to use 13(b) against legitimate companies,
    dramatically expanding its scope--and its in terrorem effect.\181\
    ---------------------------------------------------------------------------
        \181\ Id. at 4 (``The FTC now threatens to expand the use of the
    Section 13(b) program beyond fraud cases, suggesting that it may use
    Section 13(b) to seek consumer redress even against legitimate
    companies.'').

            Such broad ``fencing in'' relief (imposition of behavioral
            requirements that are more extensive than required [in order]
            to avoid future violations) goes well beyond prior FTC practice
            and may be aimed at ``encouraging'' other firms in similar
            industries to adopt costly new testing.\182\
    ---------------------------------------------------------------------------
        \182\ Alden Abbott, Time to Reform FTC Advertising Regulation,
    Heritage Foundation Legal Memorandum #140 on Regulation (Oct. 29,
    2014), available at http://www.heritage.org/research/reports/2014/10/
    time-to-reform-ftc-advertising-regulation#_ftnref21.

        Effectively, from the Commission's perspective, Aman--with its app
    store that satisfied the needs of a huge number of consumers--was
    legally equivalent to ``defendants engaged in continuous, fraudulent
    practices [who] were deemed likely to reoffend based on the `systemic
    nature' of their misrepresentations.'' \183\ This could not have been
    what Congress intended.
    ---------------------------------------------------------------------------
        \183\ Amazon case at 11.
    ---------------------------------------------------------------------------
        The courts, when they are presented with the opportunity to review
    this approach (as they sometimes are in Deception cases and as they
    virtually never are in Unfairness cases, given the lack of litigation)
    have been less than receptive. Although Amazon lost its motion for
    summary judgment, it prevailed on the question of whether Section 13(b)
    presented an appropriate remedy for its alleged infractions.

            While permanent injunctions are often awarded in cases where
            liability under the FTC Act is determined, Amazon correctly
            distinguishes those cases from the facts of this case . . .
            [C]ases in which a permanent injunction has been entered
            involved deceptive, ongoing practices.\184\
    ---------------------------------------------------------------------------
        \184\ Amazon case at 11.

        The court properly noted that it was incumbent upon the Commission
    to ``establish, with evidence, a cognizable danger of a recurring
    violation.'' \185\
    ---------------------------------------------------------------------------
        \185\ Id. at 11.
    ---------------------------------------------------------------------------
        Similarly, in FTC v. RCA Credit (a Deception case), the court
    rejected the FTC's use of 13(b)--in that case, accepting the permanent
    injunction but questioning the expansion of its scope:

            The undisputed facts demonstrate that this is a proper case for
            permanent injunctive relief. However, the Court will defer
            ruling on the appropriate scope of an injunction (including
            whether, as the FTC requests, the injunction should include a
            broad fencing-in provision enjoining misrepresentations of
            material fact in connection with the sale of any goods and
            services) until after hearing evidence on the issue.\186\
    ---------------------------------------------------------------------------
        \186\ RCA Credit case at 24.

        The reluctance of some courts to abet the FTC's expansion of its
    use of fencing-in remedies to reach legitimate companies is
    reassuring--and affirms our belief as to what Congress intended in
    Section 13(b). Unfortunately, however, most parties do not proceed to
    ruinously expensive litigation with the Commission, and will accede to
    the demands of a consent order. This creates undue costs of both the
    first order (companies agreeing to remedies that are larger or more
    invasive than what a court would impose) and the second order (the
    systemic cost of companies settling cases they might otherwise
    litigate, all regulated entities losing the benefit of litigation, and
    the FTC having to do less rigorous analysis).
        The FTC's ability to threaten a permanent injunction, or to
    dramatically extend its scope beyond the practices at issue in a case,
    gives parties an inefficiently large incentive to settle in order to
    avoid the risk of the more draconian remedy. But, in doing so, parties
    end up opting in to consent orders that allow the FTC to evade any
    judicially enforced limits on the remedies it imposes, which is what
    the Commission really wants. Whatever the benefits to the agency from
    permanent injunctions, it arguably receives even more benefit from the
    ability to impose more detailed behavioral remedies than a court might
    permit (and to do so in the context of a consent order, the violation
    of which is subject to the lower burden of proving contempt rather than
    an initial violation).
        The Commission's general resistance to constraints upon its
    remedial discretion was aptly illustrated by its abrupt revocation, in
    2012,\187\ of its 2003 Policy Statement On Monetary Equitable Remedies
    in Competition Cases (commonly called the Disgorgement Policy
    Statement).\188\ As Commissioner Ohlhausen noted in her dissent from
    the withdrawal of the policy:
    ---------------------------------------------------------------------------
        \187\ Fed. Trade Comm'n, FTC Withdraws Agency's Policy Statement on
    Monetary Remedies in Competition Cases; Will Rely on Existing Law (Jul.
    31, 2012), available at https://www.ftc.gov/news-events/press-releases/
    2012/07/ftc-withdraws-agencys-policy-statement-monetary-remedies.
        \188\ Fed. Trade Comm'n, Policy Statement On Monetary Equitable
    Remedies--Including in Particular Disgorgement and Restitution, in
    Federal Trade Commission Competition Cases Addressing Violations of the
    FTC Act, The Clayton Act, or the Hart-Scott-Rodino Act (2003),
    available at https://www.ftc.gov/public-statements/2003/07/policy-
    statement-monetary-equitable-remedies-including-particular.

            Rescinding the bipartisan Policy Statement signals that the
            Commission will be seeking disgorgement in circumstances in
            which the three-part test heretofore utilized under the
            Statement is not met, such as where the alleged antitrust
            violation is not clear or where other remedies would be
            sufficient to address the violation.\189\
    ---------------------------------------------------------------------------
        \189\ Dissenting Statement of Commissioner Maureen K. Ohlhausen,
    Commission's Decision to Withdraw its Policy Statement on Monetary
    Equitable Remedies in Competition Cases (Jul. 31, 2012), available at
    https://www.ftc.gov/sites/default/files/documents/public_statements/
    statement-commissioner-maureen-k.ohlhausen/
    120731ohlhausenstatement.pdf.

        Not only does this mean that parties in general are more likely to
    settle, but it also means that parties that are facing novel, untested
    antitrust theories are more likely to settle. This allows the
    Commission to expand its antitrust enforcement authority beyond
    judicially recognized conduct without risk of reversal by the courts.
        Section 13(b) and the Commission's disgorgement powers represent
    tremendous weapons to wield over the heads of investigative targets.
    Their expanding use to impose expansive or draconian remedies in cases
    involving non-fraudulent, legitimate companies and questionable legal
    theories is extremely troubling. Not only is this bad policy, it is
    also inconsistent with the spirit of the FTC Act, which was designed to
    find and punish actively fraudulent conduct, and to deter
    anticompetitive behavior that is not countervailed by pro-consumer
    benefits. But most of all, this gives the FTC greater ability to coerce
    companies that might otherwise litigate into settlements, pushing us
    further away from the Evolutionary Model and towards the Discretionary
    Model.
        To correct these problems, at least two things should be done:
    Recommendation: Limit Injunctions to the ``Proper Cases'' Intended by
            Congress
        First, the Commission's use of Section 13(b) remedies should be
    reevaluated in light of the law's original purpose:

            [O]ne class of cases clearly improper for awarding redress
            under Section 13(b): traditional substantiation cases, which
            typically involve established businesses selling products with
            substantial value beyond the claims at issue and disputes over
            scientific details with well-regarded experts on both sides of
            the issue. In such cases, the defendant would not have known ex
            ante that its conduct was ``dishonest or fraudulent.'' Limiting
            the availability of consumer redress under Section 13(b) to
            cases consistent with the Section 19 standard strikes the
            balance Congress thought necessary and ensures that the FTC's
            actions benefit those that it is their mission to protect: the
            general public.\190\
    ---------------------------------------------------------------------------
        \190\ Beales & Muris, Striking the Proper Balance, supra note 21,
    at 6.
        \190\ 15 U.S.C. Sec. 57(b)-(a)(2) and -(b).
        \190\ Beales & Muris, Striking the Proper Balance, supra note 21,
    at 6-7.

        This same logic applies to a host of other types of cases, as well,
    including the Commission's recent product design cases.\191\ Thus the
    tailoring of the Commission's Section 13(b) powers should not stop
    merely with substantiation cases, but should extend, as a general
    principle, to any party that had not intentionally or recklessly
    engaged in conduct it should have known was dishonest or fraudulent. As
    Josh Wright noted in his dissent in the Apple prod-uct design case:
    ---------------------------------------------------------------------------
        \191\ Fed. Trade Comm'n, FTC Alleges Amazon Unlawfully Billed
    Parents for Millions of Dollars in Children's Unauthorized In-App
    Charges (Jul. 10, 2014), available at https://www.ftc.gov/news-events/
    press-releases/2014/07/ftc-alleges-amazon-unlawfully-billed-parents-
    millions-dollars; In the Matter of Apple Inc., FTC File No 112 3108,
    https://www.ftc.gov/enforcement/cases-proceedings/112-3108/apple-inc
    (2014); Fed. Trade Comm'n, Google to Refund Consumers at Least $19
    Million to Settle FTC Complaint It Unlawfully Billed Parents for
    Children's Unauthorized In-App Charges (Sept. 4, 2014), available at
    https://www.ftc.gov/news-events/press-releases/2014/09/google-refund-
    consumers-least-19-million-settle-ftc-complaint-it.

        The economic consequences of the allegedly unfair act or practice
    in this case--a product design decision that benefits some consumers
    and harms others--also differ significantly from those in the
    ---------------------------------------------------------------------------
    Commission's previous unfairness cases.

            The Commission commonly brings unfairness cases alleging
            failure to obtain express informed consent. These cases
            invariably involve conduct where the defendant has
            intentionally obscured the fact that consumers would be billed.
            Many of these cases involve unauthorized billing or cramming--
            the outright fraudulent use of payment information. Other cases
            involve conduct just shy of complete fraud--the consumer may
            have agreed to one transaction but the defendant charges the
            consumer for additional, improperly disclosed items. Under this
            scenario, the allegedly unfair act or practice injures
            consumers and does not provide economic value to consumers or
            competition. In such cases, the requirement to provide adequate
            disclosure itself does not cause significant harmful effects
            and can be satisfied at low cost.

            However, the particular facts of this case differ in several
            respects from the above scenario.\192\
    ---------------------------------------------------------------------------
        \192\ Dissenting Statement of Commissioner Joshua D. Wright, In the
    Matter of Apple, Inc., FTC File No. 1123108, at 3 (Jan. 15, 2014),
    available at https://goo.gl/0RCC9E.

        The same logic that undergirds former Commissioner Wright's
    objection to the majority's aggressive application of the UPS in Apple
    applies equally to the aggressive 13(b) remedies sought in similar
    cases.
    Recommendation: Narrow Overly Broad ``Fencing-in'' Remedies
        Similarly, the imposition of unreasonable behavioral demands--
    ``fencing-in'' of conduct beyond that at issue in the case--upon
    parties subject to FTC enforcement is problematic.
        For instance, in Fanning v. FTC, the Commission imposed upon
    defendant John Fanning a requirement that the First Circuit
    characterized as ``not reasonably related to [the alleged] violation.''
    \193\ In 2009, Fanning founded jerk.com, a social networking website
    that controversially enabled users to nominate certain persons to be
    ``jerks.'' \194\ In issuing a variety of challenges to jerk.com's
    business practices--including an alleged failure of the site to
    facilitate paid customers' removal of negative information--the
    Commission additionally applied a ``compliance monitoring'' provision
    aimed directly at Fanning.\195\ This provision required that Fanning
    ``notify the Commission of . . . his affiliation with any new business
    or employment,'' and submit information including the new business's
    ``address and telephone number and a description of the nature of the
    business'' for a period of ten years.\196\ Under the Commission's cease
    and desist order, it did not matter whether Fanning engaged in
    reputation work, or started social media sites, or not--the requirement
    applied regardless of what type of work Fanning did and for whom he did
    it.\197\
    ---------------------------------------------------------------------------
        \193\ Fanning v. Fed. Trade Comm'n, FTC File No. 15-1520, slip op.
    at 13 (May 9, 2016), available at https://www.ftc.gov/system/files/
    documents/cases/051816jerkopinion.pdf.
        \194\ Id. at 2-3.
        \195\ Id. at 21-22.
        \196\ Id. at 22.
        \197\ Final Order, Fanning v. Fed. Trade Comm'n, FTC File No. 15-
    1520 (March 13, 2015), available at https://www.ftc.gov/system/files/
    documents/cases/150325jerkorder.pdf
    ---------------------------------------------------------------------------
        The First Circuit rebuked the Commission on this point:

            When asked at oral argument, the Commission conceded that this
            provision would ostensibly require Fanning to report if he was
            a waiter at a restaurant. The only explanation offered by the
            Commission for this breadth is that it has traditionally
            required such reporting.\198\
    ---------------------------------------------------------------------------
        \198\ Id. at 23-24.

        Moreover, the Commission cited a string of district court cases
    upholding similar provisions which the court characterized as ``almost
    entirely bereft of analysis that might explain the rationale for such a
    requirement.'' \199\ While it is encouraging that the First Circuit saw
    fit to rein in the Commission, it is also apparent that the FTC
    frequently receives an extraordinary degree of deference from district
    courts, even when creating punitive provisions that bear little or no
    connection to challenged subject matter.
    ---------------------------------------------------------------------------
        \199\ Id. at 24.
    ---------------------------------------------------------------------------
        In order to deter the Commission from taking advantage of this
    frequent judicial deference by imposing such disconnected ``fencing-
    in'' remedies in non-fraud cases--which, of course, is compounded by
    the fact that most cases are never reviewed by courts at all--Congress
    should consider imposing some sort of minimal requirement that
    provisions in proposed orders and consent decrees be (i) reasonably
    related to challenged behavior, and (ii) no more onerous than necessary
    to correct or prevent the challenged violation.
        This reform is also important to minimizing the daisy-chaining of
    consent decrees discussed in the next Section.\200\ As we note there,
    the ability of the Commission to bring a second enforcement action not
    premised on Section 5, but rather on the terms of a consent decree that
    is vaguely related to the challenged conduct creates several problems.
    The Commission's ability to do this is magnified if the initial consent
    order already contains provisions that reach a broad range of conduct
    or that include a host of difficult conduct remedies that the company
    may even inadvertently violate.
    ---------------------------------------------------------------------------
        \200\ See infra at 76.
    ---------------------------------------------------------------------------
    Recommendation: Revive the 2003 Disgorgement Policy
        Second, Congress should consider requiring the Commission to return
    to its previous disgorgement policy, or to propose targeted amendments
    to it. At a minimum, the Commission should be required to perform some
    process to examine the issue and take public comment on it. As
    Commissioner Ohlhausen noted in her dissent, objecting to the vote to
    rescind the Policy Statement:

            I am troubled by the seeming lack of deliberation that has
            accompanied the withdrawal of the Policy Statement. Notably,
            the Commission sought public comment on a draft of the Policy
            Statement before it was adopted. That public comment process
            was not pursued in connection with the withdrawal of the
            statement. I believe there should have been more internal
            deliberation and likely public input before the Commission
            withdrew a policy statement that appears to have served this
            agency well over the past nine years.\201\
    ---------------------------------------------------------------------------
        \201\ Id. at 2.
    ---------------------------------------------------------------------------
    Consent Decree Duration & Scope
    The Technological Innovation through Modernizing Enforcement (TIME) Act
        Subcommittee Chairman Rep. Michael C. Burgess, M.D.'s (R-TX) bill
    (H.R. 5093) \202\ would, in non-fraud cases, limit FTC consent orders
    to eight years--instead of the 20 years the FTC usually imposes. If the
    term runs five years or more, the FTC must reassess the de-cree after
    five years under the same factors required for setting the length of
    the consent decree from the outset:
    ---------------------------------------------------------------------------
        \202\ The Technological Innovation through Modernizing Enforcement
    Act, H.R. 5118, 114th Cong. (2016) [hereinafter TIME Act], available at
    https://www.congress.gov/bill/114th-congress/house-bill/5093/text.

      1.  The impact of technological progress on the continuing relevance
    ---------------------------------------------------------------------------
            of the consent order.

      2.  Whether there is reason to believe that the entity would engage
            in activities that violate this section without the consent
            order 8 years after the consent order is entered into by the
            Commission.

        Shortening the length of consent decrees will do much to address
    the abuse of consent decrees, but it will not fix the underlying
    problems, as we discuss below.
    Value of the Bill: Reducing the Abuse of Consent Decrees as De Facto
            Regulations
        This reform is critical to reducing the FTC's use of consent
    decrees as effectively regulatory tools. It is entire commonplace for
    the FTC to impose the same twenty-year consent decree term and the same
    conditions (drawn from its quasi-regulatory reports) on every company,
    regardless of the facts of the case, the size of the company etc.
    Limiting the duration of consent decrees would not entirely stop abuse
    of consent decrees as a way to circumvent Section 5 rulemaking
    safeguards (because each consent decree is effectively a mini-
    rulemaking, which implements the FTC's pre-determined policy agenda),
    but it would at least limit the damage, and clear overly broad consent
    decrees more quickly.
        The bill would also make it less likely that the FTC could daisy-
    chain additional enforcement actions--that is, bring a second
    enforcement action not premised on Section 5 (and therefore not even
    paying lip service to its requirements) but on the terms of a consent
    decree that is only vaguely related to the subsequent conduct. Such
    daisy-chaining has allowed enormous leverage in forcing settlements,
    since the FTC Act gives the Commission civil penalty authority only for
    violations of consent decrees (and rules), not Section 5 itself. Thus,
    the FTC gains the sledgehammer of potentially substantial monetary
    fines the second time around. It also allows the FTC to further extend
    the term of the consent decree beyond the initial 20 years--and
    potentially keep a company operating under a consent decree forever.
        This is essentially what the FTC did to Google. First, in 2011, the
    FTC and Google settled charges that Google had committed an unfair
    trade practice in 2010 in by opting Gmail users into certain features
    of its new (and later discontinued) Buzz social network.\203\ A year
    later, the FTC imposed a $22.5 million penalty against Google in
    settling charges that Google had violated the 2011 consent decree by
    misleading consumers by, essentially, failing to update an online help
    page that told users of Apple's Safari browser that they did not need
    to take further action to avoid being tracked, after a technical change
    made by Apple had rendered this statement untrue.\204\ The FTC's Press
    Release boasted ``Privacy Settlement is the Largest FTC Penalty Ever
    for Violation of a Commission Order.'' \205\ The case raised major
    questions about the way the FTC understood its deception
    authority,\206\ none of which were dismissed because (a) Google,
    already being under the FTC's thumb and facing a potentially even-
    larger monetary penalty, was eager to settle the case, and (b) the FTC
    technically did not have to prove the normal elements of deception,
    such as the materiality of a help page seen by a tiny number of users,
    because it was enforcing the consent decree, not Section 5.
    ---------------------------------------------------------------------------
        \203\ Fed. Trade Comm'n, FTC Charges Deceptive Privacy Practices in
    Googles Rollout of Its Buzz Social Network (Mar. 30, 2011), available
    at https://www.ftc.gov/news-events/press-releases/2011/03/ftc-charges-
    deceptive-privacy-practices-googles-rollout-its-buzz.
        \204\ Fed. Trade Comm'n, Google Will Pay $22.5 Million to Settle
    FTC Charges it Misrepresented Privacy Assurances to Users of Apple's
    Safari Internet Browser (Aug. 9, 2012) available at https://
    www.ftc.gov/news-events/press-releases/2012/08/google-will-pay-225-
    million-settle-ftc-charges-it-misrepresented.
        \205\ Id.
        \206\ See, e.g., FTC's Google Settlement a Pyrrhic Victory for
    Privacy and the Rule of Law, International Center for Law & Economics
    (Aug. 9, 2012), available at http://www.lawecon
    center.org/component/content/article/84-ftcs-google-settlement-a-
    pyrrhic-victory-for-privacy-and-the-rule-of-law.html.
    ---------------------------------------------------------------------------
        Perhaps most disconcertingly, the Commission's 2012 action against
    Google had precious little to do with the conduct that gave rise to its
    2011 consent order. To be sure, the 2011 order was written in the
    broadest possible terms, arguably covering nearly every conceivable
    aspect of Google's business. But this just underscores the regulation-
    like nature of the Commission's consent orders, as well as the FTC's
    propensity to treat cases with dissimilar facts and dissimilar
    circumstances essentially the same. While that kind of result might be
    expected of a regulatory regime, it is inconsistent with the idea of
    case-by-case adjudication, which also puts paid to the idea that of a
    ``common law of data security consent decrees'':

            In this sense the FTC's data security settlements aren't an
            evolving common law--they are a static statement of
            ``reasonable'' practices, repeated about 55 times over the
            years and applied to a wide enough array of circumstances that
            it is reasonable to assume that they apply to all
            circumstances. This is consistency. But it isn't the common
            law. The common law requires consistency of application--a
            consistent theory of liability, which, given different
            circumstances, means inconsistent results. Instead, here we
            have consistent results which, given inconsistent facts, means
            [  ] inconsistency of application.\207\
    ---------------------------------------------------------------------------
        \207\ Manne & Sperry, supra note 52, at 13.
    ---------------------------------------------------------------------------
    Recommendation: Allow Petitions for Appeal of Mooted Consent Decrees
        Noticeably not addressed by this bill is the situation in which the
    FTC has found a company in violation of Section 5 for some practice
    (and imposed a consent decree for the violation), then lost in court on
    essentially the same doctrinal point. At a minimum, part of the
    reassessment of any consent decree should include assessing whether
    court decisions have called into question whether the original
    allegation actually violated Section 5. Ideally, the bill should also
    include a procedure by which the company subject to a consent decree
    could petition for review of its consent decree on these grounds.
        Such an amendment should not be controversial, given that the FTC
    so rarely (if ever) litigates its consumer protection cases.
    Other Process Issues
    Open Investigations
    The Start Taking Action on Lingering Liabilities (STALL) Act
        Rep. Susan Brooks' (R-IN) bill (H.R. 5097)\208\ would automatically
    terminate investigations six months after the last communication from
    the FTC. Commission staff can keep an investigation alive either by
    sending a new communication to the target or the Commissioners can vote
    to keep the investigation open (without alerting the target). Current
    FTC rules allow the staff to inform targets that their investigation
    has ended, but does not require them to do so.\209\
    ---------------------------------------------------------------------------
        \208\ Start Taking Action on Lingering Liabilities Act, H.R. 5097,
    114th Cong. (2016) [hereinafter STALL Act], available at https://
    www.congress.gov/bill/114th-congress/house-bill/5097/text.
        \209\ Fed. Trade Comm'n, Operating Manual: Chapter 3:
    Investigations, 46 (last visited May 20, 2016), available at https://
    www.ftc.gov/sites/default/files/attachments/ftc-administrative-staff-
    manuals/ch03investigations_0.pdf (providing, in .3.7.4.5, that ``[i]n
    investigations which have been approved by Bureau Directors, closing
    letters are ordinarily sent to both the applicant and the proposed
    respondent, with copies to their attorneys, if any[,]'' but not
    requiring such letters in any case).
    ---------------------------------------------------------------------------
    Value of the Bill: Good Housekeeping, Reduces In Terrorem Effects of
            Lingering Investigations
        This should be among the least controversial of the pending bills.
    It is simply a good house-keeping measure, ensuring that companies will
    not be left hanging in limbo after initial investigation-related
    communications from the FTC.
        Closing open investigations could have several benefits.
        First, in some circumstances, publicly traded companies may
    conclude that they are required to disclose the FTC's inquiry in their
    SEC filings.\210\ That, in turn, can spark a media frenzy that could be
    as damaging to the company as whatever terms the FTC might impose in a
    consent decree--or at least seem to be less costly to managers who are
    more incentivized to care about the immediate performance of the
    company than the hassle of being subject to an FTC consent decree for
    the next 20 years.\211\ Making such disclosures can be particularly
    problematic if management intends to shop the company around for
    acquisition.
    ---------------------------------------------------------------------------
        \210\ See, e.g., Deborah S. Birnbach, Do You Have to Disclose a
    Government Investigation?, supra note 99.
        \211\ Notably, this also includes the potential for the FTC to
    bring additional enforcement actions premised on violating the terms of
    the consent decree, however attenuated the subsequent enforcement
    action might be, which is even easier than bringing an enforcement
    action premised directly on Section 5 (in that the FTC need not even
    purport to satisfy the requirements of Section 5). See e.g., United
    States v. Google, Inc., Case 5:12-cv-04177-HRL (N.D.Ca. 2012),
    available at https://www.ftc.gov/news-events/press-releases/2012/08/
    google-will-pay-225-million-settle-ftc-charges-it-misrepresented.
    ---------------------------------------------------------------------------
        Presumably, a company that feels compelled to disclose an
    investigation in an SEC filling would, today, eventually feel justified
    in modifying the disclosure to indicate its belief that the
    investigation has concluded, given a long enough period of silence from
    the Commission. But this could take years, during which time the
    ``lingering liability'' could continue to damage the company. The bill
    (if it includes our proposed amendment, below) would give companies a
    clear indication whether or not they can modify their quarterly
    disclosures and inform shareholders and the general public that an
    investigation has concluded.
        Second, giving subject companies repose after six months of silence
    from the FTC would allow management to focus on running their
    businesses. This could be especially critical for small companies.
        Third, giving companies greater certainty in this way would reduce
    the leverage that staff may have to coerce companies into settling
    cases that might otherwise not be brought at all, or that companies
    might litigate. That means, in the first instance, moving closer to the
    optimal number of cases settled and, in the second instance, increasing
    the potential for litigation where it is warranted, which benefits
    everyone by allowing ``the underlying criteria [of Section 5] to evolve
    and develop over time'' through ``judicial review,'' as the Unfairness
    Policy Statement explicitly intends.\212\
    ---------------------------------------------------------------------------
        \212\ UPS, supra note 9.
    ---------------------------------------------------------------------------
        Fourth, holding target companies in terrorem may have other
    indirect costs besides driving companies to settle questionable cases.
    The longer an investigation lingers, or the longer it could linger
    (before the company can safely assume it is over), the more likely the
    company is to treat the FTC's ``recommended'' best practices as
    effectively mandatory, regulatory requirements. This regulation-by-
    terror is impossible to quantify, but it is a very real concern. To the
    extent it happens, it contributes to transforming the FTC's
    ``inquisitorial powers'' into a tool by which the FTC may treat its
    workshops and reports as de facto rulemakings, thus at least partially
    circumventing the Section 5 rulemaking safeguards.
        Finally, the bill makes it harder for FTC staff to circumvent
    Bureau Director oversight--and thus avoid any possibility of alerting
    Commissioners. Current FTC rules allow an Initial Phase Investigation
    to be conducted for up to 100 hours of staff time, after which Staff
    must draft a memo and obtain approval from the Bureau Director to
    continue the investigation.\213\ Today, the staff may be able to
    shoehorn a new investigation into an old investigation for which they
    have already received Director approval, thus avoiding or forestalling
    having to seek new approval from the Bureau Director. One can imagine
    that this would be particularly appealing if the Commission's
    majority--and thus also its Bureau Directors, who are appointed by the
    Chairman--has switched parties. This shoehorning may be very easy to do
    given the breadth of the FTC's investigations: one inquiry about
    questionable data security could very easily morph into another,
    potentially years later. The proposed bill would reduce this
    possibility by reducing the menu of available investigations from which
    staff could pick and choose. In other words, it would help to draw
    lines between old investigations and new ones. While this should not be
    a significant burden for the Staff, it should help to ensure that other
    internal decisionmaking safeguards are respected.
    ---------------------------------------------------------------------------
        \213\ Operating Manual at 9, Sec. 3.2.1.1.
    ---------------------------------------------------------------------------
    Recommendation: Bar Secret Votes as a Means of Evading the Bill
        As drafted, the bill would allow the Commission to take a (non-
    public) vote to keep an investigation alive without the subject
    receiving additional communications. We can think of no reason to
    permit the Commission to hide the existence of a continuing
    investigation from its subject, however. In fact, although doing so
    requires a small price (an affirmative vote of the Commission), the
    price is so small that it is reasonable to expect that the exception
    would subsume the rule, and permit the Commission to evade the overall
    benefits of the proposed bill. Thus, we suggest amending section (2)(B)
    of the proposed bill, which authorizes an investigation to continue if
    ``the Commission votes to extend the covered investigation before the
    expiration of such period,'' \214\ to also require the Commission to
    send a communication to the subject informing it of the vote. This
    would add no appreciable cost to the Commission's ability to extend an
    investigation, but, unlike a non-public vote, it ensures that the
    subject is made aware of the extension.
    ---------------------------------------------------------------------------
        \214\ STALL Act, supra note 208.
    ---------------------------------------------------------------------------
        This amendment would have the benefit of allowing the subject's
    management to take true repose, knowing that an investigation had truly
    ended. Only then, for instance, would many managers feel comfortable
    revising a public securities disclosure about the company's lingering
    potential liability. In short, this would allow companies to clear
    their good names and get on with the business of serving consumers.
    Commissioner Meetings
    The Freeing Responsible & Effective Exchanges (FREE) Act
        Rep. Pete Olson's (R-TX) bill (HR 5116)\215\ would allow a
    bipartisan quorum of FTC Commissioners to meet confidentially under
    certain circumstances: no vote or agency action may be taken, the
    meeting must be FTC staff only, with a lawyer from the Office of
    General Counsel present, and the meeting must be disclosed publicly
    online. This would greatly empower other Commissioners by allowing them
    to meet with each other and with Commission staff--potentially without
    the Chairman, or without the Chairman having organized the meeting.
    ---------------------------------------------------------------------------
        \215\ The Freeing Responsible and Effective Exchanges Act, H.R.
    5116, 114th Cong. (2016) [hereinafter FREE Act], available at https://
    www.congress.gov/bill/114th-congress/house-bill/5116/text.
    ---------------------------------------------------------------------------
        The bill does essentially the same thing as the FCC Process Reform
    Act of 2015 (H.R. 2583), which was so uncontroversial that it passed
    the House on a voice vote in November 2015.\216\ Both bills would, for
    the affected agency, undo an unintended consequence of the Government
    in the Sunshine Act of 1976. That well-intentioned effort to bring
    transparency to agency decision-making in the aftermath of the
    Watergate scandal has the had the perverse result of undermining the
    very purpose of multi-member commissions.
    ---------------------------------------------------------------------------
        \216\ Federal Communications Commission Process Reform Act of 2015,
    H.R. 2583, 114th Cong. (2016), available at https://www.congress.gov/
    bill/114th-congress/house-bill/2583/actions
    ---------------------------------------------------------------------------
    Value of the Bill: Restoring the Collegiality of the FTC
        The Sunshine Act calls multi-member commissions ``collegial
    bod[ies],'' \217\ but the effect of the law has been to greatly
    contribute to the rise of the Imperial Chairmanship, because the law
    not only requires that ``disposing of'' (i.e., voting on) major items
    (e.g., rulemakings or enforcement actions) be conducted in public
    meetings (organized by the Chairman), it also bars Commissioners from
    ``jointly conduct[ing] . . . agency business'' except under the Act's
    tight rules. In effect, this makes it difficult for other Commissioners
    to coordinate without the Chairman.
    ---------------------------------------------------------------------------
        \217\ 5 U.S.C. Sec. 552b(a)(1) & (3).
    ---------------------------------------------------------------------------
        The bill would continue to require that any ``vote or any other
    agency action'' be taken at meetings held under the Sunshine Act. This
    would ensure that the FTC generally continues to operate in full public
    view and according to valid process.
        But the bill would allow Commissioners to meet privately,
    potentially without the Chairman present.
        The benefits of such meetings are self-evident. They would
    encourage collegiality and facilitate bipartisan discussions, leading
    to a more open and inclusive process. They would also provide
    opportunities for minority commissioners to be apprised earlier in the
    process when the Commission is considering various actions, from
    investigations to issuing consent decrees.
        The fact that the Energy & Commerce Committee has already vetted
    these reforms for the FCC, and that the full House has already voted
    for them as part of a larger FCC reform package, should make passage of
    this bill straightforward.
    Recommendation: Ensure that Two of Three Commissioners Can Meet
        As amended by the bill, 15 U.S.C. Sec. 552b(d)(2)(A) would require
    that the group consist of at least three or more Commissioners. This
    would have the perverse result of rendering the bill useless at
    present, when the Commission has only three Commissioners--because all
    three would have to be present for a meeting. We recommend simply
    striking this subsection, so that, on a three-member commission, the
    Democrat and Republican commissioners can meet without the Chairman.
    Part III Litigation
        Numerous commentators have raised serious questions about the FTC's
    use of adjudication under Part III of the FTC's Rules. Commissioner
    Wright put it best in a 2015 speech:

            Perhaps the most obvious evidence of abuse of process is the
            fact that over the past two decades, the Commission has almost
            exclusively ruled in favor of FTC staff. That is, when the ALJ
            agrees with FTC staff in their role as Complaint Counsel, the
            Commission affirms liability essentially without fail; when the
            administrative law judge dares to disagree with FTC staff, the
            Commission almost universally reverses and finds liability.
            Justice Potter Stewart's observation that the only consistency
            in Section 7 of the Clayton Act in the 1960s was that ``the
            Government always wins'' applies with even greater force to
            modern FTC administrative adjudication.

            Occasionally, there are attempts to defend the FTC's perfect
            win rate in administrative adjudication by attributing the
            Commission's superior expertise at choosing winning cases. And
            don't get me wrong--I agree the agency is pretty good at
            picking cases. But a 100 percent win rate is not pretty good;
            Michael Jordan was better than pretty good and made about 83.5
            percent of his free throws during his career, and that was with
            nobody defending him. One hundred percent isn't Michael Jordan
            good; it is Michael Jordan in the cartoon movie ``Space Jam''
            dunking from half-court good. Besides being a facially
            implausible defense--the data also show appeals courts reverse
            Commission decisions at four times the rate of federal district
            court judges in antitrust cases suggests otherwise. This is
            difficult to square with the case-selection theory of the FTC's
            record in administrative adjudication.\218\
    ---------------------------------------------------------------------------
        \218\ Joshua D. Wright, Commissioner, Fed. Trade Comm'n, Remarks at
    the Global Antitrust Institute Invitational Moot Court Competition,16-
    17 (Feb. 21, 2015) (emphasis added), available at https://www.ftc.gov/
    system/files/documents/public_statements/626231/150221judginganti
    trust-1.pdf.

        Former FTC Chairman Terry Calvani provides an apt summary of
    empirical research on the FTC's perfect win rate.\219\ He notes FTC
    practitioner David Balto's study of eighteen years of FTC litigation,
    in which ``the FTC has never found for the respondent and has reversed
    all ALJ decisions finding for the respondent.'' \220\ Balto concluded
    ``there appears to be a lack of impartiality by the Commission that
    really undermines the credibility of the pro-cess, and I think that
    makes it more difficult for the FTC to effectively litigate tough cases
    and get the court of appeals to support [its] decisions going
    forward.'' \221\
    ---------------------------------------------------------------------------
        \219\ Terry Calvani & Angela M. Diveley, The FTC At 100: A Modest
    Proposal for Change, 21 Geo. Mason L. Rev. 1169, 1178-82 (2014).
        \220\ Id. at 1179 (quoting David A. Balto, The FTC at a Crossroads:
    Can It Be Both Prosecutor and Judge?, Legal Backgrounder (Wash. Legal
    Found.) (Apr. 23, 2013), 1).
        \221\ Wash. Lgl Found., FTC's Administrative Litigation Process:
    Should the Commission Be Both Prosecutor and Judge?, Youtube (Mar. 11,
    2014), http://youtu.be/a9zvyDr4a-Y, at 9:24.
    ---------------------------------------------------------------------------
        We recommend that Congress consider one of two structural reforms.
    Recommendation: Separate the FTC's Enforcement & Adjudicatory Functions
        Former Chairman Calvani proposes that

            the FTC be reorganized to separate the prosecutorial and
            adjudicatory functions. The former would be vested in a
            director of enforcement appointed by and serving at the
            pleasure of the president. Commissioners would hear the cases
            brought before the agency. This model is not alien to American
            administrative law and independent agencies. Labor complaints
            are evaluated and issued by National Labor Relations Board
            (``NLRB'') regional directors. Administrative hearings are held
            before ALJs, and appeals from the ALJs are vested in the NLRB.
            Similarly, the Securities and Exchange Commission's (``SEC's'')
            prosecutorial functions are vested in the Division of
            Enforcement while administrative hearings are held before ALJs
            and appeals are vested in the SEC.

            This change in organization would eliminate the existence or
            perception of unfairness associated with the same commissioners
            participating in both the decision to initiate a case and in
            its ultimate resolution. It would also make the decision to
            prosecute more transparent. One person would be responsible for
            the agency's enforcement agenda.\222\
    ---------------------------------------------------------------------------
        \222\ Calvani & Diveley, supra note 219, at 1184.

        Calvani notes that this would not significantly alter the
    responsibility of the powers of Commissioners, since ``the power of a
    commissioner is relatively slight. The only real power of a
    commissioner is a negative one: blocking an enforcement initiative.''
    \223\ But it would ``rather dramatically, [the responsibilities] of the
    chair.'' \224\ In our view, this is a bug, not a feature.
    ---------------------------------------------------------------------------
        \223\ Id. at 1185.
        \224\ Id. at 1184.
    ---------------------------------------------------------------------------
    Recommendation: Abolish or Limit Part III to Settlements
        More fundamentally, Congress should re-examine the continued need
    for Part III as an alternative to litigation in Federal court. There
    are important differences between adjudications that originate in Part
    III proceedings as opposed to those that originate in Article III
    proceedings. Foremost, the selection of venue is an important
    determinant of the FTC's likelihood of success as well as the level of
    deference it will enjoy. Defendants will likewise see major differences
    between litigation in the different fora: from the range of discovery
    options available to the range and sort of materials considered by the
    tribunal (e.g., through amicus briefs). And, perhaps most important,
    the different venues each will create different legal norms and rules
    binding upon parties to future proceedings.
        There is also a question regarding to what extent Part III
    proceedings are more than a mere formality. On the one hand, the FTC's
    Administrative Law Judge takes his job seriously, and has reversed the
    Commission in, most notably, two recent consumer protection
    decisions.\225\ However, on the other hand, the Commission always
    reverses decisions of the ALJ that find against it.\226\ Which leads to
    an important question: if the Commission is simply going to reverse its
    ALJ anyway what is the point of having an ALJ?
    ---------------------------------------------------------------------------
        \225\ In the Matter of LabMD, Inc., FTC File No. 102 3099 (May 16,
    2016), available at https://www.ftc.gov/enforcement/cases-proceedings/
    102-3099/labmd-inc-matter; POM Wonderful LLC v. FTC, 777 F.3d 478 (D.C.
    Cir. 2015).
        \226\ Joshua D. Wright, Recalibrating Section 5: A Response to the
    CPI Symposium, CPI Antitrust Chronicle, 4 (2012).
    ---------------------------------------------------------------------------
        Even the threat of Part III litigation has a significant effect in
    coercing defendants to settle with the FTC during the investigation
    stage--not merely because of the direct financial costs of two
    additional rounds of litigation (first before the ALJ and then before
    the full Commission) prior to facing an independent Article III
    tribunal, but also because the Part III process drags out the other,
    less tangible but potentially far greater costs to the company in
    reputation and lost management attention. The threat of suffering two
    rounds of bad press before going to Federal court (or at least one, if
    the ALJ rules for a defendant but the Commission reverses) may persuade
    some defendants who wouldn't otherwise to settle. Thus, the current
    operation of Part III rarely, if ever, serves to actually advance the
    interests of a fair hearing on disputed issues, and is more a tool to
    coerce settlements.
        Congress could end this dynamic by requiring the FTC to litigate in
    Federal court while potentially still preserving Part III for the
    supervision of the settlement process and discovery. This is not a
    novel idea, nor would it be disruptive to the FTC as the Commission has
    had independent litigating authority since the 1970s.\227\ The Smarter
    Act (H.R. 2745) effectively abolishes Part III with respect to merger
    cases, by requiring the FTC to bring Clayton Act Section 7 cases (for
    preliminary injunctions to stop mergers) in Federal court under the
    same procedures as the Department of Justice.\228\ This bill passed by
    a vote of 230 to 170.\229\
    ---------------------------------------------------------------------------
        \227\ Elliott Karr, Essay: Independent Litigation Authority and
    Calls for the Views of the Solicitor General, 77 Geo. Wash. L. Rev.
    1080, 1090-91 (2009).
        \228\ Standard Merger and Acquisition Reviews Through Equal Rules
    Act of 2015, H.R. 2745, 114th Cong. (2015), available at https://
    www.congress.gov/bill/114th-congress/house-bill/2745 [hereinafter
    SMARTER Act].
        \229\ U.S. House of Rep., Final Vote Results For Roll Call 137
    (Mar. 23, 2016) available at http://clerk.house.gov/evs/2016/
    roll137.xml
    ---------------------------------------------------------------------------
        Finally, those who might object that abolishing Part III would
    hamstring the agency should take comfort in the fact that the FTC uses
    Part III so rarely anyway. Abolishing Part III will not bury the FTC in
    an avalanche of litigation in Federal court. At most it would
    marginally increase the willingness of companies to resist the siren
    song of settlement, thus resulting in slightly more litigation (and
    perhaps also slightly more cases simply abandoned by staff, if they do
    not think they could win). But this is a trivial price to pay in
    comparison with the benefit of getting more judicial review and
    consistent enforcement standards and judicial standards of review. The
    difference between essentially no litigation and some litigation is the
    key difference between the Discretionary and Evolutionary Models.
    Recommendation: Allow Commissioners to Limit the Use Part III
        The least draconian reform would be to empower one or two
    Commissioners to insist that the Commission bring a particular
    complaint in Federal court. This would allow them to steer cases out of
    Part III either because they are doctrinally significant or because the
    Commissioners fear that, unless the case goes to Federal court, the
    defendant will simply settle, thus denying the entire legal system the
    benefits of litigation in building the FTC's doctrines. In particular,
    it would be a way for Commissioners to act on the dissenting
    recommendations of staff, particularly the Bureau of Economics, about
    cases that are problematic from either a legal or policy perspective.
    Standard for Settling Cases
    No Bill Proposed
    Recommendation: Set a Standard for Settling Cases Higher than for
            Bringing
            Complaints
        Currently there is no standard for settling cases. The Commission
    simply applies the ``reason to believe'' standard set forth in Section
    5(b)--and very often combines the vote as to whether to bring the
    complaint with the vote on whether to settle the matter, when the staff
    has already negotiated the settlement during the investigation process
    (because of the enormous leverage it has in this process, as we explain
    above). As Commissioner Wright has noted, ``[w]hile the Act does not
    set forth a separate standard for accepting a consent decree, I believe
    that threshold should be at least as high as for bringing the initial
    complaint.'' \230\ Reform in this area is especially critical if
    Congress chooses not to enact the ``preponderance of the evidence''
    standard for issuing complaints.\231\
    ---------------------------------------------------------------------------
        \230\ Dissenting Statement of Commissioner Joshua D. Wright, In the
    Matter of Nomi Technologies, Inc., FTC. File No. 132 3251 (Sept. 3,
    2015), 2, available at https://www.ftc.gov/system/files/documents/
    public_statements/638371/150423nomiwrightstatement.pdf.
        \231\ See, supra, at 18.
    ---------------------------------------------------------------------------
        While it would certainly be an improvement to adopt even a
    ``preponderance of the evidence'' standard for the approval of consent
    decrees (relative to the status quo), we believe that this should be
    the standard for the approval of complaints, and that approval of
    consent decrees should be even higher (although, as we emphasis above,
    the ``preponderance of the evidence'' is not a particularly high
    standard).\232\ The standard and process required by the Tunney Act for
    antitrust settlements would be a good place to begin. That act requires
    the FTC to file antitrust consent decrees with a Federal court, and
    requires the court make the following determination:
    ---------------------------------------------------------------------------
        \232\ See infra at 18.

            Before entering any consent judgment proposed by the United
            States under this section, the court shall determine that the
            entry of such judgment is in the public interest. For the
    ---------------------------------------------------------------------------
            purpose of such determination, the court shall consider:

            (A) the competitive impact of such judgment, including
            termination of alleged violations, provisions for enforcement
            and modification, duration of relief sought, anticipated
            effects of alternative remedies actually considered, whether
            its terms are ambiguous, and any other competitive
            considerations bearing upon the adequacy of such judgment that
            the court deems necessary to a determination of whether the
            consent judgment is in the public interest; and

            (B) the impact of entry of such judgment upon competition in
            the relevant market or markets, upon the public generally and
            individuals alleging specific injury from the violations set
            forth in the complaint including consideration of the public
            benefit, if any, to be derived from a determination of the
            issues at trial.\233\
    ---------------------------------------------------------------------------
        \233\ 15 U.S.C. Sec. 16(b)(1).

        If anything, a standard for settlements should require more
    analysis than this, as the Tunney Act has been relatively ineffective.
    In particular, any approach based on the Tunney act should allow third
    parties to intervene to challenge the FTC's assertions about the public
    interest.\234\ This reform could go a long way toward inspiring the
    agency to perform more rigorous analysis.
    ---------------------------------------------------------------------------
        \234\ The act currently provides that ``Nothing in this section
    shall be construed to require the court to conduct an evidentiary
    hearing or to require the court to permit anyone to intervene.'' 15
    U.S.C. Sec. 16(b)(2).
    ---------------------------------------------------------------------------
    Competition Advocacy
        The FTC occupies a unique position in its role as the Federal
    government's competition scold. Despite the absence of direct legal
    authority over federal, state and local actors (which limits the
    efficacy of competition advocacy efforts), some have argued that ``the
    commitment of significant Commission resources to advocacy is
    nonetheless warranted by the past contributions of competition
    authorities to the reevaluation of regulatory barriers to rivalry, and
    by the magnitude and durability of anticompetitive effects caused by
    public restraints on competition.'' \235\
    ---------------------------------------------------------------------------
        \235\ Ernest Gellhorn, & William E. Kovacic, Analytical Approaches
    and Institutional Processes for Implementing Competition Policy Reforms
    by the Federal Trade Commission (Dec. 12, 1995), available at https://
    www.ftc.gov/system/files/documents/public_statements/418071/951212
    comppolicy.pdf.
    ---------------------------------------------------------------------------
        The FTC performs two different, but related, kinds of ``competition
    advocacy'':

      1.  Competition advocacy litigation: The Bureau of Competition
            occasionally brings antitrust cases against nominally public
            bodies that the FTC believes are ineligible for state action
            immunity, either because they are effectively operating as
            marketplace participants (e.g., state-run hospitals) or because
            state-created regulatory boards have been so completely coopted
            by private actors that they operate as private cartels, lacking
            sufficiently clear statement of legislative intent to maintain
            their state action immunity.

      2.  Competition advocacy filings: The Office of Policy Planning files
            comments with state, local, tribal and Federal lawmakers and
            regulators as to the impact of proposed (or existing)
            legislation or regulation upon consumers and competition.

        In 2004, James Cooper, Paul Pautler and Todd Zywicki (all FTC
    veterans) provided an empirical basis for comparing the FTC's level of
    activity on competition advocacy filings.\236\ Their analysis included
    this chart:
    ---------------------------------------------------------------------------
        \236\ James C. Cooper, Paul A. Pautler & Todd J. Zywicki, Theory
    and Practice of Competition Advocacy at the FTC at 3, available at
    https://www.ftc.gov/sites/default/files/documents/public_events/
    FTC%2090th%20Anniversary%20Symposium/040910zywicki.pdf.
    ---------------------------------------------------------------------------
                    FTC Advocacy Filings, 1980 to 2004\237\
    ---------------------------------------------------------------------------
        \237\ Id.

        Since 2009, the FTC has averaged just nineteen competition advocacy
    filings per year.\238\ On high-tech matters, the Commission has been
    particularly inactive, making just four filings on ride-sharing,\239\
    four on direct sale of cars to consumers (i.e., online),\240\ and none
    on house-sharing. It has also made few other broadly tech-related
    miscellaneous filings to other Federal agencies on privacy and data
    security, vehicle-to-vehicle communications, mobile financial services,
    and the National Broadband Plan.
    ---------------------------------------------------------------------------
        \238\ A search of the FTC's Advocacy Filings reveals that between
    January 2009 and January 2016, 115 separate documents have been filed.
    See Fed Trade Comm'n, Advocacy Filings available at https://
    www.ftc.gov/policy/advocacy/advocacy-filings.
        \239\ Fed Trade Comm'n, ``Transportation'' Advocacy Filings,
    available at https://www.ftc.gov/policy/advocacy/advocacy-
    filngs?combine=&field matter number value=&field advocacy document
    terms tid=5283&field date
    value%5Bmin%5D%5Bdate%5D=January%2C+2009&field date
    value%5Bmax%5D%5Bdate%5D=January%2C+2016&items per page=100.
        \240\ Fed Trade Comm'n, ``Automobiles'' Advocacy Filings, available
    at https://goo.gl/lq9ACP.
    ---------------------------------------------------------------------------
        The FTC held a workshop on the sharing economy in June 2015,\241\
    but has since missed the opportunity to do significant competition
    advocacy work in the area, despite growing protectionist state and
    local regulation aimed at upstarts like Uber, Lyft, Airbnb and others.
    Recent legislation in Austin, Texas, is sadly illustrative. An Austin
    City Council ordinance,\242\ essentially regulating ride-sharing
    services out of existence, was approved by (the few) voters who showed
    up to vote in a referendum.\243\ This type of overly broad law
    regulating innovative technology is exactly the sort of thing the FTC
    should be taking initiative to advocate against, and it is unfortunate
    that, in the face of it, the FTC's competition advocacy has receded.
    ---------------------------------------------------------------------------
        \241\ Fed. Trade Comm'n, The ``Sharing'' Economy: Issues Facing
    Platforms, Participants, and Regulators (Jun. 9, 2015), available at
    https://www.ftc.gov/news-events/events-calendar/2015/06/sharing-
    economy-issues-facing-platforms-participants-regulators
        \242\ Austin, Texas, Ordinance No. 20151217-075 (2015), available
    at http://www.austin
    texas.gov/edims/document.cfm%3Fid=245769.
        \243\ Jared Meyer, The Reverse of Progress. Austin's new rules
    strangle Uber, Lyft--and the ridesharing economy, U.S. News & World
    Report (May 18, 2016), available at http://www.usnews.com/opinion/
    articles/2016-05-18/austins-very-un-progressive-example-on-uber-and-
    lyft.
    ---------------------------------------------------------------------------
        By contrast, in the early 2000s, OPP's State Action Task Force and
    Internet Task Force made a concerted effort to challenge
    anticompetitive state and local regulations that hindered online
    commerce through litigation, testimony and comments. The FTC started
    several campaigns, including one challenging rules making it harder to
    participate in e-commerce. Unlike the current Commission's stunted
    approach, the early 2000s FTC started with a workshop,\244\ released
    reports explaining the problem the FTC's planned approach,\245\ and
    then went on to systematically challenge e-commerce-related regulations
    (among other things) inconsistent with consumer welfare. Filings
    included:
    ---------------------------------------------------------------------------
        \244\ Fed. Trade Comm'n Workshop, Possible Anticompetitive Efforts
    to Restrict Competition on the Internet, Oct. 8-10, 2002, available at
    https://www.ftc.gov/news-events/events-calendar/2002/10/possible-
    anticompetitive-efforts-restrict-competition-internet.
        \245\ Fed. Trade Comm'n, Report of the State Action Task Force
    (2003), available at https://www.ftc.gov/sites/default/files/documents/
    advocacy_documents/report-state-action-task-force/
    stateactionreport.pdf; Fed. Trade Comm'n, Possible Anticompetitive
    Barriers to E-Commerce: Wine (2003), 3available at https://www.ftc.gov/
    sites/default/files/documents/advocacy_documents/ftc-staff-report-
    concerning-possible-anticompetitive-barriers-e-commerce-wine/
    winereport2.pdf; Fed. Trade Comm'n, Possible Barriers To E-Commerce:
    Contact Lenses: A Report From The Staff of the Federal Trade Commission
    (Mar. 29, 2004), available at https://www.ftc.gov/sites/default/files/
    documents/advocacy_documents/possible-anticompetitive-barriers-e-
    commerce-contact-lenses-report-staff-ftc/040329clreportfinal.pdf.

       Comment on Ohio legislation to allow direct shipment of wine
            to Ohio consumers;\246\ and on similar New York
            legislation;\247\
    ---------------------------------------------------------------------------
        \246\ Comment on Proposed Direct Shipment Legislation of the
    Federal Trade Commission to the Ohio State Senate (2006), available at
    https://www.ftc.gov/sites/default/files/documents/advocacy_documents/
    ftc-staff-comment-honorable-eric-d.fingerhut-concerning-ohio-s.b.179-
    allow-direct-shipment-wine-ohio-consumers/
    v060010commentreohiosb179directshipmentofwine.pdf
        \247\ Letter of the Federal Trade Commission regarding Assembly
    bill 9560-A, Senate bills 6060-A and 1192 to the New York State
    legislature (2004), https://www.ftc.gov/sites/default/files/documents/
    advocacy_documents/ftc-staff-comment-honorable-william-magee-et-
    al.concerning-new-york.b.9560-s.b.606-and-s.b.1192-allow-out-state-
    vendors-ship-wine-directly-new-york-consumers/v040012.pdf

       Congressional Testimony regarding online wine sales;\248\
    ---------------------------------------------------------------------------
        \248\ Prepared Statement of Todd Zywicki, Fed. Trade Comm'n, before
    the Subcommittee on Commerce, Trade, and Consumer Protection, Committee
    on Energy and Commerce United States House of Representatives (Oct. 13,
    2003), available at https://www.ftc.gov/sites/default/files/documents/
    advocacy_documents/ftc-statement-u.s.house-representatives-energy-and-
    commerce-concerning-e-commerce-wine-sales-and-direct-shipment/
    031030ecommercewine.pdf

       Comment on Arkansas legislation regarding online contact
            sales;\249\ and
    ---------------------------------------------------------------------------
        \249\ Letter of the Federal Trade Commission regarding Arkansas HB
    2286 to the Arkansas House of Representatives (2015), available at
    https://www.ftc.gov/sites/default/files/documents/advocacy_documents/
    ftc-staff-comment-honorable-doug-matayo-concerning-arkansas-h.b.
    2286-and-fairness-contact-lens-consumers-act-and-contact-lens-rule/
    041008matayocomment.pdf.

       Comment on Connecticut regulation of contact sales.\250\
    ---------------------------------------------------------------------------
        \250\ Comments of the Staff of the Federal Trade Commission In Re:
    Declaratory Ruling Proceeding on the Interpretation and Applicability
    of Various Statutes and Regulations Concerning the Sale of Contact
    Lenses (2002), available at https://www.ftc.gov/sites/default/files/
    documents/advocacy_documents/ftc-staff-comment-connecticut-board-
    examiners-opticians-intervenor-re-declaratory-ruling-proceeding/
    v020007.pdf

        The current FTC has many ripe targets for public interest advocacy
    around the Nation as incumbents are, predictably, using regulation to
    try to stop Internet- and app-based competition, especially disruptive
    new ``sharing economy'' business models.
    Value of the Idea: Competition Advocacy Is the Most Cost-Effective Way
            to Serve
            Consumers
        As Cooper, Pautler & Zywicki explain:

            The economic theory of regulation (``ETR'') posits that because
            of relatively high organizational and transaction costs,
            consumers will be disadvantaged relative to businesses in
            securing favorable regulation. This situation tends to result
            in regulations--such as unauthorized practice of law rules or
            per se prohibitions on sales-below-cost--that protect certain
            industries from competition at the expense of consumers.
            Competition advocacy helps solve consumers' collective action
            problem by acting within the political system to advocate for
            regulations that do not restrict competition unless there is a
            compelling consumer protection rationale for imposing such
            costs on citizens. Furthermore, advocacy can be the most
            efficient means to pursue the FTC's mission, and when antitrust
            immunities are likely to render the FTC impotent to wage ex
            post challenges to anticompetitive conduct, advocacy may be the
            only tool to carry out the FTC's mission.\251\
    ---------------------------------------------------------------------------
        \251\ Cooper, Pautler & Zywicki, Theory and Practice of Competition
    Advocacy at the FTC supra note 236, at 2.

        Competition advocacy is probably the most cost-effective way the
    FTC can promote consumer welfare. Anticompetitive practices and
    agreements backed up by the power of the state are much less likely to
    be corrected by the power of competition than those that exist in the
    marketplace, and antitrust law cannot be used to remove such barriers
    to competition. The only way for the FTC to even get at such conduct is
    through its competition advocacy arm.
    Recommendation: Clarify Section 6(f) & the FTC May File Unsolicited
            Comments
        The FTC currently relies on Sections 6(a) (information gathering)
    and 6(f) (issuance of reports) as the basis for its competition
    advocacy filings.\252\ But as discussed above,\253\ Section 6(f) could
    be read to allow the FTC to make recommendations for legislation only
    to Congress, not to states or local governments. This is the kind of
    small discontinuity between the statute's plain meaning and the
    agency's practice (on an issue that enjoys broad bipartisan support)
    that should be addressed by Congress in regular reauthorization.
    ---------------------------------------------------------------------------
        \252\ See, e.g., id. at 1, n.3:

        The legal authority for competition advocacy is found in Section 6
    of the FTC Act, which allows the FTC to ``gather and compile
    information'' that concerns persons subject to the FTC Act, and ``to
    make public such portions of the information obtained'' that are ``in
    the public interest.''

        (Quoting 15 U.S.C. Sec. 46(a), (f) (2005)).
        \253\ See supra 61.
    ---------------------------------------------------------------------------
        In the same vein, we gather that, if only by standing convention,
    the FTC does not file comments with state and local lawmakers or
    regulators unless invited to do so by someone on the relevant body.
    This is undoubtedly well-intentioned, perhaps grounded in some kind of
    sense of federalism, but it may have the perverse result of denying
    consumers the benefit of the FTC's competition-advocacy work where it
    is most needed: when state regulators are so captured by incumbents, or
    otherwise blinded to the benefits of new technologies, that they will
    resent the FTC's comment as an intrusion upon their decision-making.
        We urge Congress to kill two birds with one stone by amending
    Section 6(f) to add the following bolded text (and, for clarity's sake,
    roman numeral subsection numbers):

            To (i) make public from time to time such portions of the
            information obtained by it hereunder as are in the public
            interest; and to (ii) make annual and special reports to the
            Congress and to submit therewith recommendations for additional
            legislation; and to (iii) file recommendations for legislation
            or regulatory action with state, local, tribal and Federal
            bodies; and to (iv) provide for the publication of its reports
            and decisions in such form and manner as may be best adapted
            for public information and use.
    Recommendation: Create an Office of Bureau of Competition Advocacy with

            Dedicated Funding
        The FTC's Competition advocacy filing function has languished, in
    part, because while competition advocacy litigation resides inside the
    Bureau of Competition, the filings are primarily the responsibility of
    the Office of Policy Planning (OPP), a relatively tiny organization
    attached to the Chairman's office, which has a staff of just over a
    dozen compared to 285 for the Bureau of Competition, 331 for the Bureau
    of Consumer Protection, and 114 for the Bureau of Economics.\254\
    ---------------------------------------------------------------------------
        \254\ Cf. Fed. Trade Comm'n, Federal Trade Commission Office of
    Policy Planning Organizational Chart, https://www.ftc.gov/system/files/
    attachments/office-policy-planning/opp-org-chart-may2016.pdf; Fed.
    Trade Comm'n, Shutdown of Federal Trade Commission Operations Upon
    Failure of the Congress to Enact Appropriations, https://www.ftc.gov/
    system/files/attachments/office-executive-director/
    130925ftcshutdownplan.pdf.
    ---------------------------------------------------------------------------
        Congress should seriously consider creating an independent office
    of Competition Advocacy, which would manage competition-advocacy
    filings, and share joint responsibility for competition-advocacy
    litigation with the Bureau of Competition. In particular, this would
    mean giving this new Bureau a line item in the FTC's budget.
    Recommendation: In the Alternative, Reconstitute the Task Force
        As noted above, the Internet Task Force, which was spun off from
    the broader State Action Task Force, had considerable effect through
    its research, reports, and associated filings. A standing Task Force of
    this nature could provide dividends by picking up where the Sharing
    Economy Workshop left off and studying the effects of regulation on the
    sharing economy around the Nation. A well-done report could then be
    followed by strategic litigation, amicus briefs, and other filings in
    order to promote sound public policy and combat the Internet-age
    protectionism that is slowing down innovation and competition and the
    attendant benefit to consumers.
    Expanding FTC Jurisdiction
        Section 5 of the FTC Act empowers the Commission to prevent unfair
    and deceptive acts and practices by nearly all American businesses (and
    business people). The exceptions are few: ``banks, savings and loan
    institutions . . ., Federal credit unions . . ., common carriers
    subject to the Acts to regulate commerce, air carriers and [certain
    meat packers and stock-yards]. . . .'' One important limitation is that
    the FTC Act does not expressly give the Commission jurisdiction over
    nonprofit organizations. Nevertheless, courts have held that nonprofit
    status is not in itself sufficient to exempt an organization from FTC
    jurisdiction.\255\ In Cal Dental Ass'n v. FTC, the Supreme Court noted
    that the FTC has jurisdiction over both `` `an entity organized to
    carry on business for its own profit' . . . [as well as] one that
    carries on business for the profit `of its members.' '' \256\ Thus,
    various types of nonprofits--notably trade associations--can be reached
    by the FTC depending on their activities, but ``purely charitable''
    organizations remain outside of the FTC's enforcement purview.\257\
    ---------------------------------------------------------------------------
        \255\ See, e.g., Community Blood Bank v. FTC, 405 F.2d 1011 (8th
    Cir. 1969).
        \256\ Cal. Dental Ass'n v. FTC, 526 U.S. 756, 766 (1999).
        \257\ See Statement of William C. Macleod, Dir. of FTC Bureau of
    Consumer Protection, Before The U.S. House of Representatives Committee
    on Energy & Commerce; Subcommittee on Transportation & Hazardous
    Materials; Hearing On Deceptive Fundraising By Charities (Jul. 28,
    1989), available at http://www.freespeechcoalition.org/macleod.htm.
    ---------------------------------------------------------------------------
        Subcommittee Democrats have revived two sensible proposals from
    2008 to expand the FTC's jurisdiction. Both have long enjoyed
    bipartisan support, and have been endorsed by the Commission under both
    Republican and Democratic chairmen.
    FTC Jurisdiction over Common Carriers
    The Protecting Consumers in Commerce Act of 2016
        Jerry McNerney's (D-CA) bill (H.R. 5239)\258\ would allow the FTC
    to regulate common carriers currently regulated by the Federal
    Communications Commission. In particular, this would ensure that the
    FTC and FCC have dual jurisdiction over broadband--effectively
    restoring the jurisdiction the FTC lost when the FCC ``reclassified''
    broadband in 2015.
    ---------------------------------------------------------------------------
        \258\ Protecting Consumers in Commerce Act of 2016, H.R. 5239,
    114th Cong. (2016), available at https://www.congress.gov/bill/114th-
    congress/house-bill/5239/text.
    ---------------------------------------------------------------------------
        The FCC recently issued a controversial NPRM proposing privacy and
    data security rules for broadband that are significantly different from
    the approach the FTC has taken. This bill would moot the need for new
    FCC privacy and data security rules as a ``gap filler.'' The bill would
    also allow the FTC to police net neutrality concerns, interconnection
    and other broadband practices (to the extent it finds unfair or
    deceptive practices) even if the FCC's Open Internet Order fails in
    pending litigation.
    Value of the Bill: Reclassification of Broadband by the FCC Should Not
            Remove FTC Jurisdiction
        There has long been unusual bipartisan agreement on ending the
    common carrier exemption. This was proposed by Sen. Byron Dorgan's
    proposed FTC Reauthorization Act of 2002,\259\ and supported by
    Republican Commissioner Thomas Leary and Democrat Commissioner Sheila
    Anthony.\260\ Sen. Dorgan last proposed the same reform in 2008.\261\
    More recently, in 2015, Democrat Chairman Edith Ramirez and Republican
    Commissioner Josh Wright supported this reform.\262\
    ---------------------------------------------------------------------------
        \259\ Federal Trade Commission Reauthorization Act of 2002, S.
    2946, 104th Cong. (2002), available at https://www.congress.gov/bill/
    107th-congress/senate-bill/2946/text.
        \260\ Additional Statement of Commissioner Thomas B. Leary, Hearing
    Before the H. Subcomm. on Commerce, Trade and Consumer Protection of
    the H. Comm. on Energy and Commerce, 108th Cong. (2003), available at
    https://www.ftc.gov/sites/default/files/documents/public_statements
    /prepared-statement-federal-trade-commission-reauthorization/
    030611learyhr.pdf; Federal Trade Commission Testifies Before Senate in
    Support of Reauthorization Request for Fiscal Years 2003 to 2005,
    available at https://www.ftc.gov/es/node/63553.
        \261\ Federal Trade Commission Reauthorization Act of 2008, S. 2831
    Sec. 14, 110th Cong. (2008), available at https://www.govtrack.us/
    congress/bills/110/s2831/text
        \262\ Prepared Statement of Commissioner Joshua D. Wright, Federal
    Trade Commission: Wrecking the Internet to Save It? The FCC's Net
    Neutrality Rule Before the H. Comm. on the Judiciary. 114th Cong.
    (2015), available at https://www.ftc.gov/system/files/documents/
    public_state
    ments/632771/150325wreckinginternet.pdf; Ramirez urges repeal of common
    carrier exemption, FTC WATCH, available at http://www.ftcwatch.com/
    ramirez-urges-repeal-of-common-carrier-exemption/.
    ---------------------------------------------------------------------------
        Section 5 jurisdiction excludes ``common carriers subject to the
    Acts to regulate commerce.'' \263\ The bill simply edits the definition
    of ``Acts to regulate commerce'' in Section 4 to remove the
    Communications Act.\264\ Thus, the FTC could regulate common carriers
    regulated by the FCC but not transportation common carriers.
    ---------------------------------------------------------------------------
        \263\ 15 U.S.C. Sec. 45(a)(2).
        \264\ Cf. 15 U.S.C. Sec. 44.
    ---------------------------------------------------------------------------
        Former Commissioner Joshua Wright summarized the many advantages of
    keeping the FTC as a cop on the broadband beat:

            The FTC has certain enforcement tools at its disposal that are
            not available to the FCC. Unlike the FCC, the FTC can bring
            enforcement cases in Federal district court and can obtain
            equitable remedies such as consumer redress. The FCC has only
            administrative proceedings at its disposal, and rather than
            obtain court-ordered consumer redress, the FCC can require only
            a ``forfeiture'' payment. In addition, the FTC is not bound by
            a one-year statute of limitations as is the FCC. The FTC's
            ability to proceed in Federal district court to obtain
            equitable remedies that fully redress consumers for the
            entirety of their injuries provides comprehensive consumer
            protection and can play an important role in deterring consumer
            protection violations.\265\
    ---------------------------------------------------------------------------
        \265\ Prepared Statement of Commissioner Joshua D. Wright, supra,
    available at https://www.ftc.gov/system/files/documents/
    public_statements/632771/150325wreckinginternet.pdf (internal citations
    omitted).
    ---------------------------------------------------------------------------
    Recommendation: Pass the Protecting Consumers in Commerce Act to End
            the
            Exemption for Telecom Common Carriers
        Ending the common carrier exemption for telecom companies is long
    overdue. ``As the telecommunications and Internet industries continue
    to converge, the common carrier exemption is likely to frustrate the
    FTC's efforts to combat unfair or deceptive acts and practices and
    unfair methods of competition in these interconnected markets.'' \266\
    Moreover, the uncertainty surrounding the application of the exemption
    to new technologies, as well as the long-standing uncertainty around
    application of the exemption to non-common-carrier activities carried
    out by common carriers introduce needless administrative costs.
    ---------------------------------------------------------------------------
        \266\ Fed Trade Comm'n, Broadband Connectivity Competition Report,
    41 (2007), available at https://www.ftc.gov/sites/default/files/
    documents/reports/broadband-connectivity-competition-policy/
    v070000report.pdf.
    ---------------------------------------------------------------------------
    Recommendation: Require the FCC to Terminate Its Privacy Rulemaking
        With respect to the common carrier exception, the fortunes of the
    FTC are tied to those of the FCC; adopting optimal policy for one
    requires adopting complimentary policy for the other. The conclusions
    above are complicated by the FCC's ongoing efforts to exercise the
    exclusive authority it claimed when it reclassified Internet service
    providers as common carriers, particularly with respect to privacy and
    similar matters.\267\ Because the FCC's rationale for its proposed
    privacy rules is to fill the gap it created by ``reclassifying''
    broadband and thus removing it from the FTC's jurisdiction, enactment
    of this legislation would moot the need for new FCC rules. Accordingly,
    this bill should include a provision directing the FCC to terminate
    that rulemaking--so that the FTC may resume its former role in policing
    broadband privacy and data security without unnecessary and costly
    duplicative regulations.
    ---------------------------------------------------------------------------
        \267\ Protecting the Privacy of Customers of Broadband and Other
    Telecommunications Services, Notice of Proposed Rulemaking, WC Docket
    No. 16-106 (rel. Apr. 1, 2016), available at https://apps.fcc.gov/
    edocs_public/attachmatch/FCC-16-39A1_Rcd.pdf.
    ---------------------------------------------------------------------------
        This situation is very much unlike that in the 1980 FTC
    Improvements Act, by which Congress both tightened the FTC's Section 5
    rulemaking processes (as instituted in 1975) and also ended the FTC's
    children's advertising rulemaking.\268\ In signing the bill, President
    Carter lauded the former but objected to the latter:
    ---------------------------------------------------------------------------
        \268\ FTC Improvements Act Section 11 added the following language
    to 17 U.S.C. Sec. 57a: ``The Commission shall not have any authority to
    promulgate any rule in the children's advertising proceeding pending on
    the date of the enactment of the Federal Trade Commission Improvements
    Ante, p. 374. Act of 1980 or in any substantially similar proceeding on
    the basis of a determination by the Commission that such advertising
    constitutes an unfair act or practice in or affecting commerce.''

            We need vigorous congressional oversight of regulatory
            agencies. But the reauthorization bills passed by the Senate
            and the House went beyond such oversight and actually required
            termination of specific, major, ongoing proceedings before the
            Commission. I am pleased that the conferees have modified these
            provisions. If powerful interests can turn to the political
            arena as an alternative to the legal process, our system of
            justice will not function in a fair and orderly fashion.\269\
    ---------------------------------------------------------------------------
        \269\ Carter, supra note 19.

        President Carter had a point, in general. But in this case,
    Congress would not be telling an agency to stop a pending rulemaking
    because of a policy difference; it would be telling the FCC to stop a
    rulemaking that it claims is necessary only because of a regulatory
    vacuum of its own creation.
        If the FCC insists on issuing its own rules, the bill will result
    in overlapping jurisdiction, which could create problems of its own:
    forum-shopping, inconsistent results, and politicization of the
    enforcement process. The Memorandum of Understanding reached between
    the two agencies on how to handle enforcement where their authority
    does overlap will do little to minimize potential conflicts.\270\ It
    would be particularly incongruous to enact legislation authorizing
    overlapping and conflicting jurisdiction while Congress is also
    considering the SMARTER Act, aimed at mitigating exactly such
    problematic overlap in the antitrust enforcement authority of the FTC
    and DOJ.\271\ None of these concerns are inherent reasons not to
    restore the FTC's jurisdiction; after all, the FTC is the better
    regulator, in large part because applying standards of general
    applicability makes the FTC a more difficult agency to capture than a
    sector-specific regulator like the FCC. But these concerns do make it
    important that passage of this bill be tied to ending the FCC's foray
    into privacy and data-security regulation.
    ---------------------------------------------------------------------------
        \270\ Memorandum of Understanding on Consumer Protection Between
    the Federal Trade Commission and the Federal Communications Commission
    (Nov. 2015), available at https://www.ftc.gov/system/files/documents/
    cooperation_agreements/151116ftcfcc-mou.pdf.
        \271\ SMARTER Act, supra note 228.
    ---------------------------------------------------------------------------
    FTC Jurisdiction over Tax-Exempt Organizations & Nonprofits
    The Tax Exempt Organizations Act
        Representative Rush's (D-IL) bill (H.R. 5255) \272\ would add tax-
    exempt, 501(c)(3) nonprofits to the definition of ``corporation''
    subject to the FTC Act in Section 4 (15 U.S.C. Sec. 44). It would not,
    however, amend Section 4 to remove the language that limits the FTC's
    jurisdiction to corporations that ``carry on business for [their] own
    profit or that of [their] members.'' Thus, the FTC would still be
    limited to policing for-profit activities but would have an easier time
    establishing that a nonprofit was essentially conducting for-profit
    activities.
    ---------------------------------------------------------------------------
        \272\ A Bill to Amend the Federal Trade Commission Act to Permit
    the Federal Trade Commission to Enforce Such Act Against Certain Tax-
    exempt Organizations, H.R. 5255, 114th Cong. (2016) available at
    https://www.congress.gov/bill/114th-congress/house-bill/5255/text.
    ---------------------------------------------------------------------------
    Value of the Bill: Would Reduce Litigation Expenses for the FTC
        This bill does precisely the same thing proposed by Sen. Byron
    Dorgan's FTC Reauthorization Act of 2008.\273\ The Republican-led FTC
    supported this provision at the time.\274\
    ---------------------------------------------------------------------------
        \273\ Federal Trade Commission Reauthorization Act of 2008, supra
    note 261, Sec. 6, available at https://www.govtrack.us/congress/bills/
    110/s2831/text.
        \274\ Prepared Statement of the Federal Trade Commission: Hearing
    Before the S. Comm. on Commerce, Science, and Transportation. 110th
    Cong. (2008), 19, available at https://www
    .ftc.gov/sites/default/files/documents/public_statements/ftc-testimony-
    reauthorization/p034101
    reauth.pdf.
    ---------------------------------------------------------------------------
        In 2008, in supporting Sen. Dorgan's version of this bill, the FTC
    explained the advantage of this reform, even though it would not
    technically change the substance of the FTC's jurisdiction:

            The proposed legislation would also help increase certainty and
            reduce litigation costs in this area. Although the FTC has been
            successful in asserting jurisdiction against ``sham''
            nonprofits and against non-profit trade associations, the
            proposed legislation would help avoid protracted factual
            inquiries and litigation battles to establish jurisdiction over
            such entities.\275\
    ---------------------------------------------------------------------------
        \275\ Id. at 16.

        We agree with the FTC's 2008 assessment.
    Recommendation: Extend Jurisdiction to Tax-Exempt Entities, Including
            Trade
            Associations
        In 2008, in supporting Sen. Dorgan's version of this bill, the FTC
    also said:

            The Commission would be pleased to work with Congressional
            staff on crafting appropriate language. The Commission notes
            that, as drafted, Section 6 would reach only those non-profit
            entities that have tax-exempt status under section 501(c)(3) of
            the Internal Revenue Code. The Commission would benefit from
            broadening this provision to cover certain other nonprofits,
            such as Section 501(c)(6) trade associations. The Commission
            has previously engaged in protracted litigation battles to
            determine whether such entities are currently covered under the
            FTC Act. See, e.g., California Dental Ass'n v. FTC, 526 U.S.
            756, 765-69 (1999) (holding that FTC Act applies to
            anticompetitive conduct by non-profit dental association whose
            activities provide substantial economic benefits to for-profit
            members); American Medical Ass'n v. FTC, 638 F.2d 443, 447-448
            (1980) (finding FTC jurisdiction over non-profit medical
            societies whose activities ``serve both the business and non-
            business interests of their member physicians'').\276\
    ---------------------------------------------------------------------------
        \276\ Id. at 18 n.49.
    ---------------------------------------------------------------------------
    Recommendation: Extend Jurisdiction to All Non-Profits
        We likewise recommend expanding the bill to encompass all nonprofit
    corporations, regardless of their tax-exempt status.\277\ The logic of
    the FTC's jurisdiction doesn't turn on the tax-exempt status of
    organizations, which, for these purposes, is essentially a meaningless
    dividing line between entities. It makes little sense to include tax-
    exempt nonprofits within the FTC's ambit while excluding nonprofits
    without Federal tax-exempt status.
    ---------------------------------------------------------------------------
        \277\ The nonprofit designation is a creature of state
    incorporation law, and obligates corporations to adopt certain
    governance rules and structures. Federal tax-exempt status is a
    creature of Federal tax law, and, while it obligates companies to limit
    their corporate purpose (e.g., to education, religious activities,
    etc.), it doesn't appreciably affect their governance structure.
    Companies can be nonprofit but not tax-exempt, although all tax-exempt
    companies are nonprofit.
    ---------------------------------------------------------------------------
    Rulemaking
        The FTC makes rules in two ways: (1) under Section 5, through the
    process created by Congress in 1980 to require additional economic
    rigor and evidence; and (2) under narrow grants of standard APA
    rulemaking authority specific to a particular issue.
    Economic Analysis in All FTC Rulemakings
    No Bill Proposed
    Recommendation: Require BE to Comment on Rulemakings
        The RECS Act, discussed below, would require the FTC to include BE
    analysis of any recommendations it makes for rulemakings. However, this
    would not apply to the FTC's own rulemakings because that bill is
    focused on the FTC's statutory authority to make recommendations to
    Congress, other agencies, and state and local governments.
        Requiring regulatory agencies to do cost-benefit analysis has been
    uncontroversial for decades, dating back at least to the Carter
    Administration. Indeed, in 2011, shortly after President Obama issued
    Executive Order 13563,\278\ his version of President Clinton's 1993
    Executive Order 12866\279\ applying to Executive Branch agencies, he
    issued a second order, Regulation and Independent Regulatory Agencies,
    Executive Order 13579.\280\ The key difference between the two is that
    the President said Executive agencies ``must'' do cost-benefit analysis
    for each new regulation, but that independent agencies ``should''
    undertake retrospective analysis of its rules and periodically update
    them.
    ---------------------------------------------------------------------------
        \278\ Exec. Order No. 13,563, 3 C.F.R. 13563 (2012) available at
    https://www.whitehouse.gov/the-press-office/2011/01/18/executive-order-
    13563-improving-regulation-and-regulatory-review.
        \279\ Exec. Order No. 12,866 3 C.F.R. 12866 (1993) available at
    https://www.whitehouse.gov/sites/default/files/omb/inforeg/eo12866/
    eo12866_10041993.pdf.
        \280\ Exec. Order No. 13,579, 3 C.F.R. 13579 (2012) available at
    https://www.whitehouse.gov/the-press-office/2011/07/11/executive-order-
    13579-regulation-and-independent-regulatory-agencies.
    ---------------------------------------------------------------------------
        FTC Chairman Jon Leibowitz fully endorsed the idea in the White
    House's blog about the Order:

            President Obama deserves enormous credit for ensuring
            regulatory review throughout the Federal government, including
            at independent agencies. Although regulations are critically
            important for protecting consumers, they need to be reviewed on
            a regular basis to ensure that they are up-to-date, effective,
            and not overly burdensome. For all agencies--independent or
            not--periodic reviews of your rules is just good government.
            The announcement raises the profile of this issue, and I think
            that's a constructive step.\281\
    ---------------------------------------------------------------------------
        \281\ Cass Sunstein, The President's Executive Order on Improving
    and Streamlining Regulation by Independent Regulatory Agencies,
    Whitehouse.Gov Blog (Jul. 11, 2011), https://www
    .whitehouse.gov/blog/2011/07/11/president-s-executive-order-improving-
    and-streamlining-regulation-independent-regula.

        The chief (indeed, perhaps the only) reason for the difference is
    that the President has no authority over independent agencies, which
    are creatures and servants of Congress. The bipartisan Independent
    Agency Regulatory Analysis Act of 2015 (S. 1607) would solve this
    problem, giving the President the authority to set cost-benefit
    standards for independent agencies as well.\282\ We fully support that
    bill and believe this requirement should apply to all independent
    agencies. But there is no reason to wait for passage of the more
    comprehensive bill. The FTC in particular would benefit from a
    commitment to cost-benefit analysis in its rulemakings immediately.
    ---------------------------------------------------------------------------
        \282\ Independent Agency Regulatory Analysis Act of 2015, S. 1607,
    114th Cong. (2015), available at https://www.congress.gov/bill/114th-
    congress/senate-bill/1607/text.
    ---------------------------------------------------------------------------
        Of course, it is true that the Commission has abandoned using its
    Section 5 rulemaking power (precisely because it reflects the Carter-
    era commitment to cost-benefit analysis). But the Commission does
    continue to make rules under a variety of issue-specific statutes such
    as several of those now pending before the House Energy and Commerce
    Committee, Subcommittee on Commerce, Manufacturing and Trade in May
    2016.\283\ As the chief example of the need for greater economic rigor
    in FTC rulemakings, we note the FTC's 2012 COPPA rulemaking: the agency
    expanded the definition of ``personal information,'' thus greatly
    expanding the number of children's-oriented media subject to the rule,
    with no meaningful analysis of what this would do to children's media.
    ---------------------------------------------------------------------------
        \283\ See Press Release, HEARING: SubCMT to Review 17 Bills
    Modernizing the FTC for the 21st Century NEXT WEEK, The Energy And
    Commerce Committee (May 17, 2016), https://energycommerce.house.gov/
    news-center/press-releases/hearing-subcmt-review-17-bills-modernizing-
    ftc-21st-century-next-week.
    ---------------------------------------------------------------------------
        Despite loud protests from small operators that the rule might
    cause them to cease offering child-oriented products, the FTC produced
    a meaningless estimate that the rule would cost $21.5 million in the
    aggregate.\284\ Of course, the real cost of the new rule is not the
    direct compliance cost but the second-order effects of the number of
    providers who exit the children's' market, reduce functionality, slow
    innovation or raise prices--none of which did the FTC even attempt to
    estimate. This was a clear failure of economic analysis.
    ---------------------------------------------------------------------------
        \284\ 78 Fed. Reg. 4002 available at https://www.ftc.gov/system/
    files/documents/federal_
    register_notices/2013/01/2012-31341.pdf
    ---------------------------------------------------------------------------
        We also note Commissioner Ohlhausen's 2015 dissent from the
    Commission's vote to update the Telemarketing Sales Rule to ban
    telemarketers from using four ``novel'' payment methods. Ohlhausen
    cited no less an authority than the Federal Reserve Bank of Atlanta
    (FRBA), which is not merely one of twelve Federal Reserve Branches, but
    the one responsible for ``operat[ing] the Federal Reserve System's
    Retail Payments Product Office, which manages and oversees the check
    and Automated Clearing House (ACH) services that the Federal Reserve
    banks provide to U.S. financial institutions.'' \285\ Ohlhausen
    explained:
    ---------------------------------------------------------------------------
        \285\ Separate Statement of Commissioner Maureen K. Ohlhausen,
    Dissenting in Part, In the Matter of the Tel-emarketing Sales Rule,
    Project No. R411001, at n. 3 (Nov. 18, 2015), available at https://
    www.ftc.gov/system/files/documents/public_statements/881203/
    151118tsrmkospeech
    .pdf.

            The amendments do not satisfy the third prong of the unfairness
            analysis in Section 5(n) of the FTC Act, which requires us to
            balance consumer injury against countervailing benefits to
            consumers or competition. Although the record shows there is
            consumer injury from the use of novel payment methods in
            telemarketing fraud, it is not clear that this injury likely
            outweighs the countervailing benefits to consumers and
    ---------------------------------------------------------------------------
            competition of permitting novel payments methods. . . .

            In sum, the FRBA's analysis of the prohibition of novel
            payments in telemarketing indicates that any reduction in
            consumer harm from telemarketing fraud is outweighed by the
            likely benefits to consumers and competition of avoiding a
            fragmented law of payments, not limiting the use of novel
            payments prematurely, and allowing financial regulators working
            with industry to develop better consumer protections.\286\
    ---------------------------------------------------------------------------
        \286\ Id. at 1-2.

        Again, it appears that the Commission majority failed to undertake
    an economically rigorous analysis of the sort BE would likely perform,
    in this case failing to properly weigh injury and countervailing
    benefits as Section 5(n) requires.
        At a minimum, the Commission would have done well to solicit
    further public comment on its rule, heeding the experience of past
    chairmen, as summarized by Former Chairman Tim Muris:

            By their nature, however, rules also must apply to legitimate
            actors, who actually deliver the goods and services they
            promise. Remedies and approaches that are entirely appropriate
            for bad actors can be extremely burdensome when applied to
            legitimate businesses, and there is usually no easy or
            straightforward way to limit a rule to fraud. Rather than
            enhancing consumer welfare, overly burdensome rules can harm
            the very market processes that serve consumers' interests. For
            example, the Commission's initial proposal for the
            Telemarketing Sales Rule was extremely broad and burdensome,
            and one of the first acts of the Pitofsky Commission was to
            narrow the rule. More recently, the Commission found it
            necessary to re-propose its Business Opportunity Rule, because
            the initial proposal would have adversely affected millions of
            self-employed workers.\287\
    ---------------------------------------------------------------------------
        \287\ Statement of Timothy J. Muris, supra note 14, at 24.
    ---------------------------------------------------------------------------
    Issue-Specific Rulemakings
    Several Bills Proposed
        Congress has long enacted legislation tasking the FTC with enacting
    regulations in a specific area through standard rulemaking under the
    Administrative Procedure Act. This, in effect, has allowed the FTC to
    avoid having to conduct rulemakings under the Magnuson-Moss Act of 1975
    (as amended in 1980). The result has been that there may not be anyone
    left at the FTC who has ever conducted a Section 5 rulemaking. This
    contributes to the common misconception that the FTC lacks rulemaking
    authority--something the Chairman and other Commissioners have said
    casually. Of course, they mean that the FTC lacks APA rulemaking
    authority, and that they believe Section 5 rulemaking is too difficult.
        But this belief is unfounded. There is good reason to think that
    the FTC could have conducted a Section 5 rulemaking to address
    telemarketing complaints, for example, in about the same amount of time
    it took Congress to pass the Do Not Call Act and for the FTC to conduct
    an APA rulemaking, and perhaps even less. As Former Chairman Tim Muris
    explained, in 2010:

            The Commission's most prominent rulemaking endeavor, the
            creation of the National Do Not Call Registry, could have
            proceeded in a timely fashion under Magnuson-Moss procedures.
            It took two years from the time the rule was first publicly
            discussed until it was implemented. Although it would have been
            necessary to structure the proceedings differently, there would
            have been little, if any, additional delay from using Magnuson-
            Moss procedures.\288\
    ---------------------------------------------------------------------------
        \288\ Id. at 27.

        This is not idle speculation. Muris actually ran the FTC during its
    creation of the Do Not Call registry. Attempting a Section 5 rulemaking
    would have been a valuable experience for the FTC, and it might have
    avoided some of the unintended consequences of ex ante legislation.
        We make two broad recommendations applicable to all six rulemaking
    bills.
    Recommendation: Require the FTC to Conduct Section 5 Rulemakings &
            Report on the Process
        The FTC would greatly benefit from conducting a Section 5
    rulemaking. Congress should direct the FTC to conduct such a rulemaking
    on at least one, and preferably two or three, of the issues to be
    addressed by these proposed issue-specific bills. Having multiple
    rulemakings would produce a more representative experience with the
    FTC's Section 5 rulemaking powers. However many Section 5 rulemakings
    the FTC does, Congress should direct the FTC to report back in, say,
    three years as to the state of these rulemakings and the FTC's general
    experience with its Section 5 rulemaking procedures. This is the only
    way Congress will ever be able to make informed decisions about how
    existing Section 5 rulemaking processes might be expedited or
    streamlined without removing the safeguards that Congress rightly
    imposed to prevent the FTC from abusing its rulemaking powers.
        Any reconsideration of the FTC's Section 5 rulemaking processes
    should be undertaken with the utmost caution. Unfairness is a uniquely
    elastic concept, which requires unique procedural safeguards if it is
    to serve as the basis for rulemaking. If anything, FTC's approach to
    enforcing Section 5 in high tech matters over the last 15-20 years
    reconfirms the need for safeguards: in its ``common law of consent
    decrees,'' the FTC has paid little more than lip service to the
    balancing test inherent in unfairness, and has increasingly nullified
    the materiality requirement at the heart of the deception policy
    statement.
    Recommendation: Include Periodic Re-Assessment Requirements in Any New
            Grants of APA Rulemaking Authority
        It is impossible to predict the unintended consequences of any of
    the proposed issue-specific bills granting the FTC new rulemaking
    authority.\289\ However narrowly targeted they may seem, they may wind
    up constraining new technologies or business models that would
    otherwise serve consumers.
    ---------------------------------------------------------------------------
        \289\ See Press Release, #SubCMT Releases Reform Package to
    Modernize the FTC and Promote Innovation, The Energy and Commerce
    Committee (May 5, 2016), https://energycommerce
    .house.gov/news-center/press-releases/subcmt-releases-reform-package-
    modernize-ftc-and-promote-innovation.
    ---------------------------------------------------------------------------
        Consider the Video Privacy Protection Act of 1988 (``VPPA''), which
    barred ``wrongful disclosure of video tape rental or sale records.''
    \290\ After the experience of Judge Robert Bork, whose video rental
    records were made an issue at his (failed) Supreme Court confirmation
    hearings, this quick-fix bill must have seemed utterly uncontroversial.
    Yet it proved overly rigid in the digital age. In 2009, an anonymous
    plaintiff sued Netflix over its release of data sets for the Netflix
    Prize, alleging that the company's release of the information
    constituted a violation of the VPPA.\291\ In 2011 Netflix launched a
    feature integrating its service with Facebook--everywhere except in the
    U.S., citing the 2009 lawsuit and concerns over the VPPA. After two
    years, President Obama signed legislation (H.R. 6671) amending the VPPA
    to allow Netflix and other video companies to give consumers the option
    of sharing information about their viewing history on social networking
    sites like Facebook.\292\ Despite this amendment, the VPPA continues to
    threaten to overly restrict novel online transactions that were never
    contemplated or intended by the drafters of the statute.\293\
    ---------------------------------------------------------------------------
        \290\ Video Privacy Protection Act of 1988, Pub. L. 100-618, 102
    Stat. 3195 (Nov. 5, 1988), available at https://www.gpo.gov/fdsys/pkg/
    STATUTE-102/pdf/STATUTE-102-Pg3195.pdf.
        \291\ See Kristian Stout, Pushing Ad Networks Out of Business:
    Yershov v. Gannett and the War Against Online Platforms, Truth on the
    Market (May 10, 2016), https://truthonthemarket
    .com/2016/05/10/pushing-ad-networks-out-of-business-yershov-v-gannett-
    and-the-war-against-online-platforms/.
        \292\ Video Privacy Protection Act Amendments Act of 2012, H.R.
    6671, 112th Cong (2012), available at https://www.congress.gov/bill/
    112th-congress/house-bill/6671?q=%7B%22search
    %22%3A%5B%22%5C%22hr6671%5C%22%22%5D%7D&resultIndex=1.
        \293\ See Stout, supra note 291.
    ---------------------------------------------------------------------------
        The VPPA is just one of many laws that have proven unable to keep
    up with technological change (the 1996 Telecommunications Act,
    (largely) a classic example of the Rulemaking Model, comes readily to
    mind). To protect against this inevitability, Congress should include
    regular review of legislation as a ``safety hatch.'' The 1998
    Children's Online Privacy Protection Act (COPPA) included this review
    provision:

            Not later than 5 years after the effective date of the
            regulations initially issued under . . . this title, the
            Commission shall--

            (1) review the implementation of this chapter, including the
            effect of the implementation of this chapter on practices
            relating to the collection and disclosure of information
            relating to children, children's ability to obtain access to
            information of their choice online, and on the availability of
            websites directed to children; and (2) prepare and submit to
            Congress a report on the results of the review under paragraph
            (1).\294\
    ---------------------------------------------------------------------------
        \294\ 15 U.S.C. Sec. 6506.

        In principle, this is the right idea. However, in practice, this
    requirement has proven ineffective. The FTC's review of COPPA included
    little meaningful analysis of the cost of COPPA.\295\ Indeed, the FTC
    used the discretion afforded it by Congress in the statute to expand
    the definition of the term ``personal information'' in ways that appear
    to have reduced the availability, affordability and diversity of
    children's media--yet without any economic analysis by the Commission.
    ---------------------------------------------------------------------------
        \295\ See supra note 284.
    ---------------------------------------------------------------------------
        At a minimum, Congress should include something like the following
    in any issue-specific grant of new APA rulemaking authority it enacts:

            Not later than 5 years after the effective date of the
            regulations initially issued under . . . this title, and every
            5 years thereafter, the Commission shall--

            (1) direct the Bureau of Economics, with the assistance of the
            Office of Technology Research and Investigation, to review the
            implementation of this chapter, including the effect of the
            implementation of this chapter on practices relating to
            [affected industries]; and

            (2)  prepare and submit to Congress a report on the results of
            the review under paragraph (1).
    Conclusion
        The letter by which the FTC submitted the Unfairness Policy
    Statement to the Chairman and Ranking Member of the Senate Commerce
    Committee in December 1980 concludes as follows:

            We hope this letter has given you the information that you
            require. Please do not hesitate to call if we can be of any
            further assistance. With best regards,

            /s/ Michael Pertschuk, Chairman\296\
    ---------------------------------------------------------------------------
        \296\ Fed. Trade Comm'n, FTC Policy Statement on Unfairness (Dec.
    17, 1980), available at https://www.ftc.gov/public-statements/1980/12/
    ftc-policy-statement-unfairness

        We believe it's high time Congress picked up the phone.
        To be effective, any effort to reform the FTC would require a
    constructive dialogue with the Commission--not just those currently
    sitting on the Commission, but past Commissioners and the agency's
    staff, including veterans of the agency. Along with the community of
    practitioners who navigate the agency on behalf of companies and civil
    society alike, all of these will have something to add. We do not
    presume to fully understand the inner workings of the Commission as
    only veterans of the agency can. Nor do we presume that the ideas
    presented here are necessarily the best or only ones to accomplish the
    task at hand. But reform cannot be effective if it begins from the
    presumption that today's is the ``best of all possible FTCs,'' or that
    any significant reform to the agency would cripple it.
        Unfortunately, many of those who would tend to know the most about
    the inner workings of the agency are also the most blinded by status
    quo bias, the tendency not just to take for granted that the FTC works,
    and has always worked, well, but to dismiss proposals for change as an
    attacks upon the agency. It would be ironic, indeed, if an agency that
    wields its own discretion so freely in the name of flexibility and
    adaptation were itself unwilling to adapt.
        We believe that reforms to push the FTC back towards the
    Evolutionary Model can be part of a bipartisan overhaul and
    reauthorization of the agency, just as they were in 1980 and 1994. At
    stake is much more than how the FTC operates; it is nothing less than
    the authority of Congress as the body of our democratically elected
    representatives to steer the FTC. Congress should not, as Justice
    Scalia warned in 2014 in UARG v. EPA, willingly ``stand on the dock and
    wave goodbye as [the FTC] embarks on this multiyear voyage of
    discovery.'' \297\
    ---------------------------------------------------------------------------
        \297\ Util. Air Regulatory Grp. v. EPA, 134 S. Ct. 2427, 2446
    (2014).
    ---------------------------------------------------------------------------
                                     ______

               American Bar Association Section of Antitrust Law
      PRESIDENTIAL TRANSITION REPORT: THE STATE OF ANTITRUST ENFORCEMENT--
                                  JANUARY 2017
        The views expressed herein are on behalf of the American Bar
    Association Section of Antitrust Law. They have not been approved by
    the House of Delegates or the Board of Governors of the American Bar
    Association, and unless otherwise noted, should not be construed as
    representing the policy of the American Bar Association.

    I. INTRODUCTION

    II. EXECUTIVE SUMMARY

            A. Enforcement Matters

            B. Legal Doctrine

            C. Industry-Specific Issues

            D. International Matter

    III. ENFORCEMENT MATTERS

            E. Agency Enforcement and Policy

            F. Cartel Enforcement

            G. Civil Enforcement and Litigation

            H. Mergers

            I. Consumer Protection

    IV. LEGAL DOCTRINE

            J. Monopoly

            K. Antitrust and Intellectual Property

    V. INDUSTRY-SPECIFIC ISSUES

            L. Financial Sector

            M. Healthcare Industry

    VI. INTERNATIONAL

            N. Establishing U.S. Focus and Leadership in International
            Antitrust Policy

            O. Clarify the Jurisdictional Character of the FTAIA

            P. Encourage Direct Agency Intercession in Foreign Agency
            Proceedings

            Q. Engage in a Critical Self-Assessment of U.S. Antitrust
            Procedures

    VII. CONCLUSION
                                     ______

    I. INTRODUCTION
        The Section of Antitrust Law of the American Bar Association (the
    ``Section'') is pleased to offer its views regarding the current state
    of Federal antitrust and consumer protection enforcement and its
    recommendations for ways the new administration might consider further
    strengthening policy and enforcement to deal with new challenges on the
    horizon. The views and recommendations contained in this Report are
    those of the Section. They have not been approved by the House of
    Delegates or the Board of Governors of the American Bar Association,
    and unless otherwise noted, should not be construed as representing the
    policy of the American Bar Association.
        This will be the eighth sequential Presidential Transition Report
    prepared by the Section. Section Chairs, Roxann E. Henry (2015-16) and
    William MacLeod (2016-17), appointed this Presidential Transition Task
    Force of 20 lawyers, professors, and economists in May 2016.\1\ The
    membership of the Task Force mirrors the deep expertise, diversity of
    viewpoint and breadth of experience of the Section's 6,900 members. The
    Task Force includes attorneys in private practice representing
    defendants and plaintiffs; a member of the Federal judiciary; and
    antitrust law and economics scholars from the Nation's leading
    universities. More than half of the members have served in senior
    leadership positions in the Antitrust Division of the Department of
    Justice (the ``Division'') or the Federal Trade Commission (the
    ``FTC'') (collectively, the ``Agencies''), including several former
    Assistant Attorneys General and Commissioners. Members of the Task
    Force have served in every Administration extending back more than four
    decades. Task Force members have also made significant contributions to
    the body of scholarly literature in the fields of competition and
    consumer protection law, and have been active in the international
    competition community, including as advisors to foreign competition
    authorities and the International Competition Network (ICN).
    ---------------------------------------------------------------------------
        \1\ The 2016 Presidential Transition Task Force was co-chaired by
    Theodore Voorhees and Leah Brannon. Samantha Knox served as the
    Reporter and Organizer of the Task Force. The Task Force members
    included Roxane Busey, Mary Ellen Callahan, Dennis Carlton, Michael A.
    Carrier, Paul T. Denis, Douglas H. Ginsburg, Louis Kaplow, Donald C.
    Klawiter, William Kovacic, Jon Leibowitz, Abbott B. Lipsky, Jr., A.
    Douglas Melamed, Fiona Scott Morton, James H. Mutchnik, Richard Parker,
    Lydia Parnes, James Rill, and Joel Winston. Megan Browdie served as the
    Young Lawyer Representative to the Task Force. The views and
    conclusions of Task Force Members that are reflected in this Report
    have been provided in their individual capacities and should not be
    attributed in any way to their law firms, clients or academic
    institutions, as applicable.
    ---------------------------------------------------------------------------
        The Task Force Members represent a diverse range of political,
    ideological, and professional views, and the Report is the result of an
    often vibrant and spirited debate among the members. In keeping with
    the strong philosophy favoring action by consensus that animates all
    Section reports and publications, all Members worked hard to
    accommodate one another's perspectives, with the result that some of
    the findings and conclusions offered herein would not have been written
    in exactly the same way by any individual member writing alone. This
    being said, the Report has been endorsed by all Task Force members and
    was approved by the Section's Council.
    II. EXECUTIVE SUMMARY
        Antitrust figured prominently in the 2016 Election: for the first
    time in recent memory, both major parties prominently featured their
    respective viewpoints on competition and consumer protection policy.
    Campaign commentary included sharp criticism of an alleged absence of
    vigor and overall ineffectiveness in current patterns of antitrust
    enforcement, with comments calling for sharp, even radical
    reorientation of enforcement policy, especially in the review of
    proposed mergers and treatment of large industrial firms. As will be
    seen in this Report, the Section does not share these views about the
    current state of antitrust enforcement policy. To the contrary,
    although dynamic market forces will always pose challenges for
    government enforcement policy, and enforcement efforts must adapt to
    meet those challenges, the Section's view is that the Nation's system
    of competition enforcement has been in good hands, that an arc of
    continuous improvement and advancement can be discerned that stretches
    back over many years and multiple administrations, and that enforcement
    policy should remain firmly tethered to its statutory basis.
        This Report is divided into four sections. First, the Report
    focuses on the current state of antitrust and consumer protection
    enforcement under the stewardship of the Agencies. This section reviews
    cartel, civil, merger, and consumer protection enforcement, with an
    emphasis on issues that are likely to present the most significant
    challenges over the next four years. In its second section, the Report
    addresses some of the most important and challenging doctrinal
    questions facing the Agencies and courts today. Section three of the
    Report discusses some of the unique competition issues that will be
    facing two key industrial sectors: healthcare and financial services.
    Finally, the last section of the Report discusses challenges facing the
    Administration, the Agencies, and U.S. firms in the international arena
    as competition enforcement regimes proliferate and continue to evolve
    throughout the world.
    A. Enforcement Matters
        The Agencies have a broad range of policy tools at their disposal
    and for the most part have been making good use of them. Agency
    guidance plays an important role in ensuring that markets function
    efficiently and competitively. The Section encourages the Agencies to
    continue providing this guidance in written form, including formal
    guidance documents, agency reports, closing statements, speeches by top
    agency officials, and the like. Written guidance from the Agencies is
    especially important in connection with novel market conditions and
    forms of behavior as well as in circumstances where there has been a
    shift in the Agencies' enforcement policies and priorities. Further
    guidance is particularly needed on vertical issues arising in the
    context of mergers, resale price maintenance, state action, and
    intellectual property (``IP''). The Section encourages the Agencies to
    continue to use litigation as a policy tool to clarify important
    issues. The Agencies should continue to review and comment on
    legislation and regulations that affect competition policy, agency
    jurisdiction, and the abilities of agencies to effectuate their
    missions.
        The Section commends the Division for the continued success of its
    cartel enforcement program, and encourages the Division to build on
    this success by providing increased transparency and ongoing practical
    guidance on its Corporate and Individual Leniency Programs, and
    promoting the adoption of similar leniency programs throughout the
    world. This initiative could alleviate our concern that the sentencing
    and fining processes in international cartel investigations have grown
    too complex to understand, and encourages the Division to closely
    examine its policies and procedures for ``volume of commerce'' (VOC)
    determinations.
        Also needed is further guidance in the wake of the Yates
    Memorandum. The Section commends the Division for recognizing the
    importance of corporate compliance measures in several recent
    sentencing proceedings, and encourages the Division to pursue an open
    dialogue with the bar and business community about model ``robust''
    compliance programs and effective detection and screening techniques.
    The Division should also consider exploring proactive methods of cartel
    detection in partnership with federal, state, and local law enforcement
    agencies.
        The Section commends the Agencies' recent focus on litigating cases
    and being ``trial ready.'' To enhance this facet of enforcement, we
    propose that the Agencies form a working group to identify procedural
    and structural measures that could improve antitrust litigation in
    Federal court. Potential reforms might include structuring trials by
    issue (instead of by party) and greater use of court-appointed experts.
        In the merger enforcement area, the Section focuses on the need for
    increased transparency, including in merger trials, and increased
    utilization of closing statements for merger investigations not
    resulting in agency action. The Section also recommends that the
    Agencies make greater use of merger retrospectives to evaluate the
    effectiveness of merger policy, tools, and remedies. These studies
    should focus on both price and output effects, and should evaluate the
    efficacy of tools and models used to evaluate mergers. Finally, the
    Section reiterates the need for process symmetry between the Division
    and the FTC in merger enforcement litigation.
        In consumer protection, law enforcement and the regulatory
    landscapes have changed significantly over the last four years. This
    Report notes numerous initiatives of the FTC, as well as actions of the
    Consumer Financial Protection Bureau (CFPB) and the Federal
    Communications Commission (FCC), that have enhanced protection of the
    Nation's consumers. However, the overlapping jurisdictions of the FTC,
    CFPB, and FCC give rise to risks of inconsistent regulatory approaches
    that cause confusion and complicate compliance, particularly with
    respect to privacy protection. Such inconsistencies could undermine the
    objectives the Agencies seek to advance.
        The Section urges the FTC, FCC, and CFPB to take action to address
    these risks, including by supporting repeal of the common carrier
    exception in the FTCA and by adopting consistent privacy protection
    frameworks. The Section urges the FTC and CFPB to adopt reforms to
    enhance the transparency and fairness of the enforcement process,
    including dedicating resources to cases involving significant consumer
    harm, using civil investigative demands more judiciously, adopting
    internal guidelines for staff in communicating with investigation
    targets, reducing burdens of ``boilerplate'' order provisions,
    tailoring monetary relief to the injury caused and the defendant's
    culpability, and providing targets with the opportunity to meet with
    decision makers. Finally, the Section notes the need for additional
    guidance and harmonization on topics relating to abusive and unfair
    practices (CFPB's and FTC's respective standards), data security,
    monetary remedies, advertising interpretation, and ``clear and
    conspicuous'' disclosure requirements.
    B. Legal Doctrine
        The Agencies will play a pivotal role in shaping legal doctrine
    over the next four years. The Report identifies needs in key
    substantive areas--better delineation of problematic exclusionary
    conduct that may have adverse market effects--where the Agencies can
    reduce legal uncertainty and avoid conflicts by offering sound policy
    leadership.
        With respect to exclusionary conduct, the Section sees three areas
    that could benefit from further Agency attention and guidance. First,
    two-sided markets are increasingly important in today's economy, but
    have received relatively little attention in recent court decisions and
    Agency statements. Second, there is need for further clarification
    concerning the legal analysis of contracts that reference rivals.
    Third, further guidance would be helpful in assessing the potential
    anticompetitive and procompetitive effects of tying and bundling
    arrangements, particularly in light of recent conflicting decisions
    issued by the Third and Ninth Circuits.
        With regard to patent matters, the Section recommends that the
    Agencies gather and analyze further evidence related to activity that
    may have competitive significance--for example with respect to patent
    assertion entities and potential holdups and holdouts--and share their
    assessments of competitive effects with the public and other government
    agencies. The Section also encourages the Agencies to consider the
    multinational implications of actions that alter patent rights and
    remedies.
    C. Industry-Specific Issues
        In certain industries, unique challenges and complexities arise
    when analyzing questions of competition law. The Obama Administration
    focused a large portion of its antitrust enforcement efforts on the
    healthcare and financial sectors. The Report addresses some of the key
    issues in these sectors facing the incoming Administration.
        With respect to the financial sector, when evaluating proposals for
    new or revised regulations that will be administered by other agencies,
    the Section encourages the Agencies to consider the adverse effect that
    regulations might have on competition, particularly with respect to the
    burdens the regulations may impose on smaller firms. As for mergers of
    financial institutions, the Section believes that the Agencies should
    not alter their legal standards in order to benefit equity holders of
    banks. Finally, further clarification is needed regarding the
    Division's treatment of cases involving alleged interference with
    financial benchmarks and in particular the implications for enforcement
    policy and sentencing where the underlying misconduct could be seen as
    fraud or anticompetitive behavior or a combination of the two offenses.
        With respect to the healthcare industry, the Section encourages the
    Agencies to provide further guidance on their merger analysis,
    including the theories of harm and potential benefits resulting from
    vertical integrations, exclusive contracts, merger-specific
    efficiencies, and the competitive impact of electronic healthcare
    records, and regulatory policies at the state and Federal levels. The
    Section also encourages the FTC to articulate and apply a rule-of-
    reason enforcement policy with respect to reverse payment settlements
    and to assess the implications for competition and consumer protection
    of discouraging purchases or refusing to deal in pharmaceutical
    markets.
    D. International Matters
        The global expansion of competition law regimes has dramatically
    increased the complexity and cost of compliance for U.S. businesses.
    The Section commends the Agencies for working to address these
    challenges through formal and informal cooperation, communication, and
    consensus-building efforts. However, there is much work yet to be done.
    Now, more than ever, it is important for the United States to speak
    with one voice in international antitrust matters. The Section
    encourages the Agencies to work more closely with each other and with
    the Administration to develop and communicate a unified global
    antitrust policy. To accomplish this goal, the Administration may wish
    to consider how the Executive Branch could facilitate more extensive
    coordination between the Agencies and better respond to pressing
    international competition law matters. The Section commends the
    Agencies for their efforts to promote comity through deference to
    foreign authorities' enforcement actions. That said, where appropriate
    legal grounds exist, and where consistent with U.S. policy, the
    Agencies should not hesitate to intervene in foreign enforcement
    proceedings where it appears that U.S. firms are being subjected to
    rules or policies that are antithetical to U.S. antitrust law,
    particularly where serious due process concerns are at stake. Finally,
    in the wake of recent Federal appellate decisions opining that the
    Federal Trade and Antitrust Improvements Act (FTAIA) is a substantive
    element of a Sherman Act claim, the Section recommends that the
    Agencies clarify that the FTAIA places a jurisdictional limit on
    Sherman Act enforcement.
    III. ENFORCEMENT MATTERS
    A. Agency Enforcement and Policy
    1. Guidance
        Where there are uncertainties in the Agencies' enforcement policies
    or priorities, it is often essential for the Agencies to provide
    guidance. The formal guidance can take the form of formal guidance
    documents (such as the Horizontal Merger Guidelines of 2010) or FTC
    opinions. Informal guidance can take the form of agency reports,\2\
    speeches by key agency personnel, amicus briefs, decisions to litigate,
    or closing statements. Agency guidance is important and beneficial for
    multiple reasons, such as providing clarity for businesses, moving
    competition policy in the right direction, and ensuring a U.S.
    perspective on the international arena. Agency guidance is also
    particularly useful to communicate a shift in enforcement policy or
    practice.\3\
    ---------------------------------------------------------------------------
        \2\ See, e.g., Fed. Trade Comm'n, Patent Assertion Entity Activity:
    An FTC Study 8-13 (2016) (hereinafter FTC PAE Study), available at
    www.ftc.gov/system/files/documents/reports/patent-assertion-entity-
    activity-ftc-study.
        \3\ The recent guidance issued by the Division and the FTC
    communicating the decision to treat wage-fixing and no-poaching
    agreements as criminal violations going forward provides an excellent
    example of this. See Dep't of Justice, Antitrust Div., Fed. Trade
    Comm'n, Antitrust Guidance for Human Resource Professionals (Oct.
    2016), available at www.ftc.gov/system/files/documents/
    public_statements/992623/ftc-doj_hr_guidance_final_10-20-16.pdf.
    ---------------------------------------------------------------------------
        Furthermore, uncertainty as to the boundaries of antitrust laws may
    chill potentially procompetitive conduct or enable potentially
    anticompetitive behavior to continue unchecked. Businesses may be less
    willing to engage in novel business activities that could benefit
    consumers.\4\ Moreover, agency guidance and enforcement not only define
    the boundaries of how the Agencies view and enforce the law, but may
    also impact how courts rule in litigation.
    ---------------------------------------------------------------------------
        \4\ Cf. Verizon Commc'ns, Inc. v. Law Offices of Curtis V. Trinko,
    LLP, 540 U.S. 398, 414 (2004) (discussing how mistaken inferences of
    conduct can chill potentially procompetitive business activity).
    ---------------------------------------------------------------------------
        Guidance also ensures a place for the U.S. perspective on the
    international stage. Because so many foreign antitrust authorities look
    to the Agencies for leadership and study U.S. enforcement decisions and
    cases, clearly articulated guidance helps achieve uniformity across
    jurisdictions. Moreover, an international presence and influence as to
    antitrust policy is particularly critical in an era in which some
    foreign competition agencies use the pretense of antitrust enforcement
    as a cover to mask decisions that are actually based on industrial
    policy or protectionism.
        Speeches, while not binding on the Agencies or as long-lasting as
    more formal agency documents, can give advance notice of enforcement
    priorities and the views of agency leadership regarding how best to
    analyze certain forms of conduct. For instance, in her first speech as
    Acting Assistant Attorney General, Renata Hesse offered important
    insights into the use of bargaining models in analyzing vertical
    mergers and the Division's skepticism of procompetitive claims in
    horizontal mergers.\5\ Indeed, for changes in agency thinking, an
    agency speech or other non-enforcement guidance can be the fairer
    approach, at least in the first instance, than initially embarking on
    litigation.
    ---------------------------------------------------------------------------
        \5\ See Renata Hesse, Acting Ass't Att'y Gen., U.S. Dep't of
    Justice, Antitrust Div., And Never the Twain Shall Meet?: Connecting
    Popular and Professional Visions for Antitrust Enforcement, Opening
    Remarks at the 2016 Global Antitrust Enforcement Symposium 15 (Sept.
    20, 2016), available at www.justice.gov/opa/speech/acting-assistant-
    attorney-general-renata-hesse-antitrust-division-delivers-opening.
    ---------------------------------------------------------------------------
        Business review letters from the Division and advisory opinions
    from the FTC serve as another avenue for providing guidance on novel
    conduct. More important, by setting forth the respective agency's
    reasoning for how it views proposed conduct, these documents in effect
    make a policy statement as to what characteristics of the conduct are
    considered to be beneficial or harmful for consumers.
    2. Inter-Agency Coordination
        The Section commends the coordination between the Agencies,
    especially when issuing guidance. Inter-agency coordination will ensure
    that the benefits that result from issuing guidance, discussed above,
    are fully recognized. With respect to enforcement, greater coordination
    will not only make the Agencies more effective but also help achieve
    uniformity within the United States and provide a consistent message
    internationally.
        The Section believes that the necessary level of coordination can
    be accomplished in a variety of ways. For example, joint workshops
    provide a useful and convenient opportunity to clarify enforcement
    community thinking. To be most effective, such workshops should ideally
    be linked to some internal implementation mechanism coordinated between
    both agencies. Annual joint agency statements at key antitrust bar
    events, such as the ABA Enforcers' Roundtable or the Global Antitrust
    Enforcement Symposium, discussing the themes and goals of the Agencies
    going forward provide other meaningful opportunities for clarifying
    agency policies and intentions in a coordinated way.
    3. Litigation as a Policy Tool
        The Section recommends using litigation on important antitrust
    issues as a complement to public guidance and policy development.
    Litigation serves a critically important role in developing the law.
    Therefore, it is important for agencies to litigate their own cases (as
    opposed to leaving it to ``private attorneys general'' \6\ to challenge
    potential antitrust violations).
    ---------------------------------------------------------------------------
        \6\ See, e.g., Hawaii v. Standard Oil, 405 U.S. 251, 262 (1972)
    (``By offering potential litigants the prospect of a recovery in three
    times the amount of their damages, Congress encouraged these persons to
    serve as `private attorneys general.' '').
    ---------------------------------------------------------------------------
        Private litigation does not always protect consumers and it often
    results in damage recovery for past practices, rather than injunctive
    relief that would stop the consumer harm from occurring. To further the
    antitrust laws' core tenet of benefiting consumers, it is important for
    the Agencies to be seen as a leader in taking cases to court.
    Litigating cases also tests the current boundaries of the antitrust
    laws in a way that guidance alone cannot. In short, the primary benefit
    of a litigated decision with respect to shaping antitrust policy is
    that its outcome is an analysis and balancing of opposing arguments,
    such that the decision explains both what conduct is deemed legal and
    what is deemed illegal.\7\
    ---------------------------------------------------------------------------
        \7\ See Jan M. Rybnicek & Joshua D. Wright, Defining Section 5 of
    the FTC Act: The Failure of the Common Law Method and the Case for
    Formal Agency Guidance, 21 Geo. Mason L. Rev. 1287, 1311 (2014).
    ---------------------------------------------------------------------------
        The Section notes that there have been some recent expressions of
    concern that the Agencies may have become risk averse to litigation,
    especially with respect to conduct cases.\8\ While the Section lacks
    the information to agree or disagree, we believe the Agencies should
    demonstrate a willingness to take intelligent risks if the payoff
    enhances consumer welfare and moves the law in the proper direction.
    Even losing a case can have a beneficial effect on antitrust policy,
    for example, by contributing to a better understanding of the
    boundaries of what is considered acceptable competitive conduct.
    ---------------------------------------------------------------------------
        \8\ See, e.g., Org. for Econ. Cooperation and Dev., Competition
    Committee, Commitment Decisions in Antitrust Cases: Note by the United
    States 7 (2016), available at www.justice.gov/atr/file/873491/download
    (citing a total of only six civil non-merger cases with litigated
    outcomes between January 1, 2011 and April 30, 2016).
    ---------------------------------------------------------------------------
    4. Specific Areas Where Guidance Could Be Useful
        There are a number of areas within competition law where additional
    guidance could be especially helpful. As economic and commercial
    realities develop, so too must application of the antitrust laws in
    these areas. Several important, illustrative areas of antitrust law
    that could benefit from additional guidance are discussed below.
    a. Vertical Issues
        Non-horizontal merger enforcement is one particular area that would
    benefit from agency guidance, given the recent increase in industry
    consolidation and vertical mergers. These mergers have attracted
    considerable attention recently.\9\ The last such guidelines were
    issued in 1984, and there have been substantial changes in antitrust
    policy and the application of modern economics thinking since then.\10\
    The 2010 Horizontal Merger Guidelines do not address vertical or
    conglomerate mergers. The uncertainty in thinking about non-horizontal
    mergers becomes particularly apparent when one compares Acting
    Assistant Attorney General Renata Hesse's recent comment, noted
    previously, that ``the Antitrust Division and the FTC have become
    justifiably more skeptical about the promise of procompetitive benefits
    of mergers,'' \11\ with the 1984 Guidelines' statement that
    ``substantial economies are afforded by vertical integration [and thus]
    the [agencies] will give relatively more weight to expected
    efficiencies in determining whether to challenge a vertical merger.''
    \12\
    ---------------------------------------------------------------------------
        \9\ See also Peter Navarro, Senior Economic Advisor, Trump
    Campaign, Statement on Monopoly Power of New Media Conglomerates, Oct.
    23, 2016, available at https://www.donaldjtrump
    .com/press-releases/statement-on-monopoly-power-of-new-media-
    conglomerates (``AT&T, the original and abusive ``Ma Bell'' telephone
    monopoly, is now trying to buy Time Warner. . . . Donald Trump would
    never approve such a deal because it concentrates too much power in the
    hands of the too and powerful few.''); Ryan Knutson, Trump Says He
    Would Block AT&T-Time Warner Deal, The Wall Street Journal, Oct. 22,
    2016, available at http://www.wsj.com/articles/trump-says-he-would-
    block-at-t-time-warner-deal-1477162214; S. Elizabeth Warren, Reigniting
    Competition in the American Economy, Keynote Remarks at New America's
    Open Markets Program Event 6 (June 29, 2016), available at
    www.warren.senate.gov/files/documents/2016-6-
    29_Warren_Antitrust_Speech.pdf (advocating for increased scrutiny of
    vertical mergers and for a revision of the non-horizontal merger
    guidelines).
        \10\ See U.S. Dep't of Justice, Press Release, Department of
    Justice and Federal Trade Commission Issued Revised Horizontal Merger
    Guidelines: 2010 Guidelines More Accurately Represent Agencies' Merger
    Review Process, August 19, 2010, available at https://www.justice.gov/
    opa/pr/department-justice-and-federal-trade-commission-issue-revised-
    horizontal-merger-guidelines (describing ``several important ways'' in
    which new guidelines differed from previous guidelines).
        \11\ Hesse, supra note 5, at 15 (emphasis added).
        \12\ U.S. Dep't Of Justice & Fed. Trade Comm'n, Non-Horizontal
    Merger Guidelines Sec. 4.24 (1984), available at www.justice.gov/atr/
    non-horizontal-merger-guidelines.
    ---------------------------------------------------------------------------
        Another important vertical issue, resale price maintenance (RPM),
    historically received a fair amount of attention through litigated
    cases. However, despite being the subject of two important Supreme
    Court cases that have ushered in the use of rule of reason analysis to
    this practice,\13\ RPM is an area of Federal antitrust law that has
    received little apparent attention in recent years.\14\ Recognizing
    that the current state of RPM law in both minimum and maximum price
    contexts requires sophisticated balancing of pro- and anti-competitive
    tendencies, the dearth of guidance from the Agencies in the form of
    either guidelines or litigated cases leaves open important questions in
    an area of law that can have a direct and substantial impact on
    consumers. For example, it would be beneficial for the Agencies to
    provide guidance on how they think about balancing asserted quality and
    service benefits that can flow from maintaining minimum prices for
    certain types of products against the potential that RPM reduces
    competition to the detriment of consumers. Perhaps equally important,
    the Agencies should provide guidance on how they would analyze the
    vigor of interbrand competition in markets where some producers have
    restricted intrabrand competition among distributors of their products.
    ---------------------------------------------------------------------------
        \13\ Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S.
    877, 881 (2007); State Oil Co. v. Khan, 522 U.S. 3, 22 (1997).
        \14\ The last government action against RPM was brought almost 20
    years ago and the last speech by an agency head was in 2009. See United
    States v. Ixtlera de Santa Catarina, 1996 WL 925857 (E.D. Pa. 1996);
    Christine Varney, Ass't Att'y Gen., U.S. Dep't of Justice, Antitrust
    Div., Antitrust Federalism: Enhancing Federal/State Cooperation,
    Remarks as Prepared for the National Association of Attorneys General
    Columbia Law School State Attorneys General Program (Oct. 7, 2009),
    available at www.justice.gov/atr/speech/antitrust-federalism-enhancing-
    federalstate-cooperation.
    ---------------------------------------------------------------------------
    b. Intellectual Property
        Much valuable work could be devoted to providing guidance at the
    intersection of antitrust and intellectual property laws. The Agencies'
    efforts in updating the Antitrust Guidelines for Intellectual Property
    are timely, especially in light of recently issued IP guidelines by
    several foreign jurisdictions (some of which diverge from generally
    accepted antitrust principles in the United States). For example, China
    has issued two separate sets of IP guidelines that conflict in several
    important areas with each other and with the position of other
    antitrust agencies, including in the United States.\15\ As noted
    previously, guidelines from the Division and FTC are critical for
    providing clarity in the international arena, and may help to achieve
    international conformity on important cross-border antitrust issues.
    ---------------------------------------------------------------------------
        \15\ Compare, Anti-Monopoly Guideline on Abuse of Intellectual
    Property Rights (promulgated in draft form by the Anti-Monopoly Comm'n
    of the State Council, Nat'l Dev. and Reform Comm'n, Dec. 31, 2015)
    (China), available at http://www.aipla.org/committees/committee
    _pages/Standards_and_Open_Source/Committee%20Documents/
    IPR%20Guideline%20%28draft
    %29%2020151231-EN.pdf with Provisions on Prohibition of Abuse of
    Intellectual Property Rights to Eliminate or Restrict Competition
    (promulgated on Apr. 7, 2015 by the State Admin. for Indus. and
    Commerce) (China), available at http://www.linklaters.com/pdfs/mkt/
    beijing/19848090.pdf.
    ---------------------------------------------------------------------------
        The Agencies have issued policy statements regarding Standard
    Essential Patents (SEPs), such as the joint statement issued by the
    Division and the Patent and Trademark Office on remedies for SEP
    violations subject to Fair, Reasonable and Non-Discriminatory (FRAND)
    commitments.\16\ These have been helpful, although certain aspects of
    those reports raise issues that merit additional analysis regarding the
    legal rights of the parties involved. The Section applauds the FTC's
    recent 6(b) Study on patent assertion entities that recommends, among
    other things, litigation reforms that lower the costs and burdens of
    defending an infringement suit but preserve the patent system's
    beneficial role in promoting innovation and consumer welfare.\17\ The
    Section encourages the Agencies to continue undertaking studies of
    competitive issues in the IP arena designed to provide guidance where
    the potential exists for competitive harm. Likewise, clarification of
    enforcement policy for the intersection between IP and antitrust would
    be welcome where uncertainty remains concerning the agencies' views of
    the boundaries their policies.
    ---------------------------------------------------------------------------
        \16\ U.S. Dep't of Justice & U.S. Patent & Trademark Office, Policy
    Statement on Remedies for Standards-Essential Patents Subject to
    Voluntary F/RAND Commitments (Jan. 8, 2013), available at
    www.justice.gov/sites/default/files/atr/legacy/2014/09/18/290994.pdf.
    The Section notes that the proposed revisions to the IP Licensing
    Guidelines do not include a discussion of SEPs.
        \17\ FTC PAE STUDY, supra note 2. This study is the FTC's ``first
    use of its Section 6(b) authority to investigate transactions in the
    [IP] marketplace.'' Id. at 14.
    ---------------------------------------------------------------------------
        A further discussion of antitrust policy as it relates to IP issues
    is contained in Section IV-B infra.
    c. State Action Doctrine
        To its credit, the FTC has secured important decisions limiting the
    scope of the state action doctrine in two recent cases before the
    Supreme Court, Phoebe Putney \18\ and North Carolina Dental Board.\19\
    In the aftermath of North Carolina Dental Board and in response to the
    request for advice from state officials and others as to what
    constitutes antitrust compliance for state regulatory occupations, the
    FTC staff provided guidance on two issues: (1) When does a state
    regulatory board require active supervision by the state to invoke the
    state action defense? and (2) What factors are relevant to determining
    whether the active supervision requirement is satisfied? \20\
    ---------------------------------------------------------------------------
        \18\ FTC v. Phoebe Putney Health Sys., 133 S. Ct. 1003 (2013).
        \19\ FTC v. N.C. State Bd. of Dental Exam'rs, 135 S. Ct. 1101
    (2015).
        \20\ Fed. Trade Comm'n, FTC Staff Guidance on Active Supervision of
    State Regulatory Boards Controlled by Market Participants (Oct. 2015),
    available at www.ftc.gov/system/files/attachments/competition-policy-
    guidance/active_supervision_of_state_boards.pdf. At least two states,
    California and Oklahoma, have also issued guidance. See California
    Attorney General Opinion No. 15-402 (Sept. 10, 2015), Oklahoma
    Executive Order 2015-33 (July 17, 2015); Letter from E. Scott Pruitt,
    Att'y Gen. of Okla., to All Boards and Commissions with Active Market
    Participant Majorities (Aug. 17, 2015).
    ---------------------------------------------------------------------------
        While the above Guidance clarified some of the issues raised by the
    Supreme Court's ruling on what constitutes active supervision, the
    approach taken by the FTC seems to be a statement of best practices and
    a safe harbor for state supervision of licensing boards. The factors
    articulated may be viewed as relevant by the FTC staff in interpreting
    the ``constant requirements'' of active supervision as set forth in
    North Carolina Dental Board and other Supreme Court precedents.\21\
    ---------------------------------------------------------------------------
        \21\ See Comm'r Maureen K. Ohlhausen, Reflections on the Supreme
    Court's North Carolina Dental Decision and the FTC's Campaign to Rein
    in State Action Immunity, Remarks before the Heritage Foundation (Mar.
    31, 2015), available at www.ftc.gov/system/files/documents/
    public_statements/634091/150403heritagedental.pdf; State Bd. of Dental
    Exam'rs, 135 S. Ct. at 1116-17.
    ---------------------------------------------------------------------------
        There continues to be confusion about the Supreme Court's ruling in
    North Carolina Dental Board and, at least with respect to licensing
    boards, concern by members of such boards about their potential
    antitrust exposure as individuals. A variety of cases alleging
    antitrust violations have been brought.\22\ As the FTC Staff Guidance
    notes, some cases raise issues that are unlikely to be found to have an
    anticompetitive effect on competition, as opposed to individual
    competitors. The agencies have filed amicus briefs in at least two
    recent Federal cases and have at least one pending investigation in
    this area.\23\
    ---------------------------------------------------------------------------
        \22\ See, e.g., Teladoc v. Texas Medical Board, No. 1-15-CV-343,
    112 F. Supp. 3d 529 (W.D. Tex. 2015) (granting motion for preliminary
    injunction against anticompetitive rulemaking by self-interested
    licensing board); Robb v. Conn. Bd. of Veterinary Med., 157 F. Supp. 3d
    130 (D. Conn. 2016) (motion to dismiss granted in antitrust suit by
    veterinarian over his vaccination procedures); Axcess Med. Clinic v.
    Miss. Bd. of Med. Licensure, No. 3:15-cv-307 (S.D. Miss. 2015) (suit
    brought challenging board's finding of unauthorized practice of
    medicine by non-physician owners of pain management practice)
    (subsequently dismissed); Henry et al., v. N.C. Acupuncture Licensing
    Bd. et al., No. 1:15-cv-831 (M.D.N.C. 2015) (suit by physical
    therapists and patients regarding cease and desist letter from the
    board regarding dry needling services).
        \23\ Brief for Amicus United States of America, Solarcity v. Salt
    River Project Agricultural Improvement and Power District, No. 15-17302
    (9th Cir. Jun. 7, 2016); Brief for the United States and Fed. T.
    Comm'n, Teladoc, No. 16-50017 n.1 (5th Cir. Sept. 9, 2016) (disclosing
    parallel FTC investigation).
    ---------------------------------------------------------------------------
    5. Legislation, Regulation, and Executive Action
        The Agencies have long advocated against efforts by regulators to
    limit the application of the antitrust laws. The Section encourages the
    Agencies to continue to review and comment on Federal legislation and
    regulations that affect competition policy, agency jurisdiction, and
    procedures,\24\ or the ability of agencies to effectuate their missions
    (including agency budgets).
    ---------------------------------------------------------------------------
        \24\ For example, the SMARTER Act would: (1) create identical
    standards for the FTC and Division for obtaining a preliminary
    injunction against a proposed merger or acquisition; and (2) eliminate
    the FTC's ability to pursue administrative adjudication to challenge a
    proposed transaction when it seeks a preliminary injunction in court.
    H.R. 2745, 114th Cong. (2016).
    ---------------------------------------------------------------------------
        The Agencies should also continue to be vigilant in monitoring
    state actions and regulations that may be anticompetitive or designed
    to protect incumbent firms from competition. The Agencies should
    continue to provide their expert input with respect to state laws that:
    (1) involve occupational licensing;\25\ (2) add unnecessary new
    barriers to entry to platform and sharing companies, like Uber or
    AirBnB;\26\ (3) place anachronistic distribution requirements on
    innovative, vertically integrated companies (e.g., laws to exclude car
    manufacturers from operating in states without physical dealer
    locations);\27\ and (4) circumvent the antitrust laws in the healthcare
    area, including, but not limited to, Certificate of Public Advantage
    (COPA) laws and Certificate of Need (CON) laws.\28\
    ---------------------------------------------------------------------------
        \25\ E.g., Competition and the Potential Costs and Benefits of
    Professional Licensure, before the H. Comm. on Small Bus., 113th Cong.
    (2014) (statement of Andrew Gavil, Dir. Office of Policy Planning, Fed.
    Trade Comm'n) (providing an overview of the FTC's advocacy efforts in
    the area of occupational licensing).
        \26\ E.g., Workshop Transcript, The ``Sharing'' Economy: Issues
    Facing Platforms, Participants, and Regulators (June 9, 2015),
    available at www.ftc.gov/system/files/documents/public_events/636241/
    sharing_economy_workshop_transcript.pdf (examining competition,
    consumer protection, and economic issues arising in the sharing
    economy).
        \27\ E.g., Workshop Transcript, Auto Distribution: Current Issues
    and Future Trends (Jan. 19, 2016), available at https://www.ftc.gov/
    system/files/documents/public_events/895193/auto_
    distribution_transcript.pdf (including a discussion of restrictions on
    manufacturers' ability to engage in direct selling and new
    technological developments affecting distribution, among other topics).
        \28\ E.g., Fed. Trade Comm'n & Dep't of Justice, Antitrust Div.,
    Joint Statement on Certificate-of-Need Laws and South Carolina House
    Bill 3250 (2016), available at www.ftc.gov/system/files/documents/
    advocacy_documents/joint-statement-federal-trade-commission-antitrust-
    division-u.s.department-justice-certificate-need-laws-south-carolina-
    house-bill-3250/160111ftc-doj-sclaw.pdf (advocating for repeal of South
    Carolina's CON law). The FTC has also submitted comments in opposition
    to New York, Virginia, Tennessee, West Virginia, and Alabama COPA laws.
    See, e.g., Comment by the FTC regarding Certificate of Public Advantage
    Applications Filed pursuant to New York Public Health Law, 10 NYCRR,
    Subpart 83-1 (Apr. 22, 2015), available at https://www.ftc.gov/system/
    files/documents/advocacy_documents/ftc-staff-comment-center-health-
    care-policy-resource-development-office-primary-care-health-systems/
    150422newyorkhealth.pdf.
    ---------------------------------------------------------------------------
        To effectively and efficiently perform their antitrust and consumer
    protection missions, the Agencies must receive sufficient funding to
    attract and retain competent staff, conduct investigations, and engage
    in all the other enforcement activities on which consumer welfare
    depends. Given that the U.S. economy and population are projected to
    grow, it is plausible that the Agencies would need more resources to
    enable them to continue to effectively carry out their role in
    protecting consumers, but as always in the competition for
    appropriations, a compelling argument must be articulated. We encourage
    the Agencies to advocate for the resources they require, and to ensure
    that the quality of their work is not undermined by the quantity of
    demands placed upon them.
        Finally, the Section notes that, on April 15, 2016, President Obama
    issued an Executive Order (E.O.) requiring executive agencies to
    ``identify specific actions that they can take in their areas of
    responsibility to build upon efforts to detect [competitive] abuses . .
    . [and] address undue burdens on competition.'' \29\ This E.O. opens
    opportunities for the Agencies to ensure that sound competition policy
    is appropriately and effectively recognized and utilized by executive
    agencies and departments. The Division and FTC should participate in
    the antitrust reviews. Their advocacy would enhance the regulatory
    impact analyses that agencies are already required to undertake. In
    light of this mandate, the Administration may also consider whether a
    public competitive impact analysis should be undertaken in connection
    with proposed regulations.\30\
    ---------------------------------------------------------------------------
        \29\ Exec. Order 13,725, 81 Fed. Reg. 23,417 (Apr. 15, 2016),
    available at www.whitehouse.gov/the-press-office/2016/04/15/executive-
    order-steps-increase-competition-and-better-inform-consu
    mers.
        \30\ Such requirement would be similar to the regulatory impact
    analysis that is already required of executive agencies undertaking new
    regulatory initiatives. See Exec. Order 12,866, 58 Fed. Reg. 51,735
    (Sept. 30, 1993); Office of Mgmt. & Budget, Exec. Office of the
    President, Circular A-4, Regulatory Analysis (2003).
    ---------------------------------------------------------------------------
    B. Cartel Enforcement
    1. Introduction
        Over the past two decades, the Division has transformed cartel
    enforcement for the better. The Division's enforcement efforts have had
    unparalleled success, an accomplishment that has had dramatic global
    implications. Today, more than 120 countries have cartel enforcement
    regimes; bid-rigging, market allocation and price-fixing are now
    criminal offenses in more than 20 of these jurisdictions. From the
    lysine and citric acid cases that first raised the specter of parallel
    enforcement actions, and the nine-digit fines and substantial jail
    sentences, to the more recent, sprawling automotive parts
    investigations, prosecution and defense of international cartel
    investigations have grown increasingly complex in the United States and
    in jurisdictions around the world.
        Over the last decade, the Division has collected more than $11
    billion in criminal fines and penalties; 98 percent of these fines were
    collected in connection with prosecution of international cartels.\31\
    The average corporate fine has also increased over the last decade.
    Until 1994, the largest corporate fine imposed for a single Sherman Act
    violation was $6 million.\32\ Today, fines of $10 million or more are
    commonplace, including fines in excess of $100 million.\33\ More than
    sanctions, these amounts represent a fraction of the value to consumers
    of this enforcement activity.
    ---------------------------------------------------------------------------
        \31\ U.S. Dep't of Justice, Congressional Submission FY 2017
    Performance Budget 4, available at www.justice.gov/jmd/file/821001/
    download.
        \32\ Id.
        \33\ U.S. Dep't of Justice, Sherman Act Violations Yielding a
    Corporate Fine of $10 Million or More (Sept. 12, 2016), available at
    www.justice.gov/atr/sherman-act-violations-yielding-corporate-fine-10-
    million-or-more.
    ---------------------------------------------------------------------------
        The Section commends the Division on its remarkable successes, and
    offers several recommendations to ensure that the criminal enforcement
    program remains vibrant and effectively deters future violations.
    2. Corporate and Individual Leniency Policies
        The Division adopted the current version of its Corporate and
    Individual Leniency Policies in 1993, and these policies remain the
    mainstay of the Division's anti-cartel enforcement efforts.\34\
    ---------------------------------------------------------------------------
        \34\ See, e.g., Scott Hammond, Deputy Ass't Att'y Gen., Antitrust
    Div., U.S. Dep't of Justice, The Evolution of Criminal Antitrust
    Enforcement Over the Last Two Decades, Remarks at the 24th Annual Nat'l
    Institute on White Collar Crime (Feb. 25, 2010), available at
    www.justice.gov/atr/file/518241/download.
    ---------------------------------------------------------------------------
        These policies work because they are transparent and because the
    Division promotes them widely and implements them carefully and
    consistently.\35\ The Section encourages the Division to maintain these
    efforts, seek out opportunities to promote the Leniency Policies, and
    clarify any uncertainties through public statements. Practical guidance
    in the form of a ``case study'' addressing requirements or expectations
    for securing first-in conditional leniency (e.g., timing, document
    productions, proffers, and employee interviews) and unconditional
    leniency (e.g., full or partial restitution) would further the bar's
    and the business community's understanding of the Leniency Programs and
    what applicants should expect when seeking conditional and, ultimately,
    unconditional leniency. The Section encourages the Division to continue
    its efforts to increase transparency and provide information about its
    operations.
    ---------------------------------------------------------------------------
        \35\ Id.
    ---------------------------------------------------------------------------
        The Division has played, and continues to play, a leading role in
    developing cartel prosecution processes, including the development and
    operation of its own leniency programs for corporations and
    individuals. The Section commends the Division for making these
    developments transparent to the world through its prosecutions,
    speeches, policy statements, and model agreements.\36\ The Division
    also takes seriously its emissary responsibilities by having its most
    senior and experienced prosecutors attend antitrust conferences, such
    as the International Cartel Workshop, the Organisation for Economic Co-
    operation and Development (OECD), and the ICN. The Division also meets
    formally and informally with prosecutors and enforcers the world over.
    Leniency has become the hallmark of nearly every cartel enforcement
    regime around the world; more than 50 countries have adopted leniency
    programs.\37\ We encourage the Division to remain engaged with these
    activities and events in order to promote the adoption and operation of
    transparent (and ultimately mutually beneficial) leniency programs
    throughout the world.
    ---------------------------------------------------------------------------
        \36\ See, e.g., Scott Hammond, Deputy Ass't Att'y Gen., U.S. Dep't
    of Justice, Antitrust Div., Cornerstones of an Effective Leniency
    Program, Presented before the ICN Workshop on Leniency Programs (Nov.
    22-23, 2004), available at www.justice.gov/atr/speech/cornerstones-
    effective-leniency-program.
        \37\ See, e.g., Hammond, supra note 35.
    ---------------------------------------------------------------------------
    3. Sentencing Complexities
        A concern is spreading among the members of the antitrust defense
    bar that sentencing and fining processes for cartel prosecutions here
    and abroad are becoming too complex to understand. The ranges of
    imposed sentences and fines are so broad that it is unclear as to how
    such outcomes were determined. Transparent and fair outcomes following
    cartel investigations are important for the companies and individuals
    that find themselves in such matters. If the resolution (i.e., jail
    time to be served and the fines to be paid) cannot be understood or is
    perceived to be unfair, companies and individuals may choose not to
    cooperate. In the past, the Division has consistently provided guidance
    and transparency with respect to its sentencing policies and
    procedures, including the interpretation and implementation of the
    Sentencing Guidelines.\38\ The Section encourages the Division to
    reexamine the fundamental building blocks of the sentencing process,
    including, most importantly, the volume of commerce (VOC)
    determinations in domestic and international cartel cases. VOC
    determinations can present highly troubling risks of ``double
    counting'' and unfair sentencing outcomes in international cartel
    cases. These risks are heightened in cases involving component products
    and in cases where enforcers in different jurisdictions adopt differing
    approaches to calculating the relevant VOC. The Section encourages the
    Division to adopt measures for treating VOC determinations consistently
    across its cases and to promote greater coordination and consistency
    among enforcers making VOC determinations in international cartel
    cases. If, upon a closer review, the Division identifies gaps in its
    prior guidance, the Section encourages the Division to issue general
    statements of enforcement policy about VOC determinations or any other
    factor in the sentencing process.\39\
    ---------------------------------------------------------------------------
        \38\ For example, the Division recently released updated annotated
    versions of the model corporate and individual plea agreements; the
    Section commends the Division for continuing to offer such practical
    and helpful guidance. See U.S. Dep't of Justice, Antitrust Div., Model
    Annotated Corporate Plea Agreement (Aug. 29, 2016), available at
    https://www.justice.gov/atr/file/889021/download; U.S. Dep't of
    Justice, Antitrust Div., Model Annotated Individual Plea Agreement
    (Aug. 29, 2016), available at https://www.justice.gov/atr/file/888481/
    download. See also United States v. Kabaya Indus. Co., Ltd. d/b/a KYB
    Corp., NO. 1:15-cr-98 (S.D. Ohio 2015); Gary R. Spratling, Deputy Ass't
    Att'y Gen., Antitrust Div., U.S. Dep't of Justice, Transparency in
    Enforcement Maximizes Cooperation from Antitrust Offenders, Address at
    Fordham University School of Law (Oct. 15, 1999), available at https://
    www.justice.gov/atr/speech/transparency-enforcement-maximizes-
    cooperation-antitrust-offenders; Hammond, supra note 35.
        \39\ In the 2012 Presidential Transition Report, the Section
    recommended that ``given the rapidly expanding state of global cartel
    enforcement, consideration might be given to whether it would be
    worthwhile for the Division to coordinate with foreign jurisdictions on
    how VOC calculations are handled in order to create a uniform approach
    and more effectively allocate VOC among relevant jurisdictions.'' The
    Section renews this recommendation.
    ---------------------------------------------------------------------------
    4. Individual Responsibility
        The Division has always focused considerable attention on the role
    of individual executives in antitrust enforcement and over the years
    has developed an aggressive and increasingly well-calibrated record of
    incarceration of the executives who most heavily participated in and
    personally directed the illegal conduct. The United States is sending
    twice as many individuals to prison for cartel offenses as it did in
    the 1990s.\40\ During this period, average prison terms have grown to
    two years.\41\ The Division has been especially successful at building
    cases against foreign executives in international cartel cases. To
    date, nearly 90 foreign defendants have served or have been sentenced
    to serve prison sentences in the U.S. for antitrust violations.\42\
    ---------------------------------------------------------------------------
        \40\ U.S. Dep't of Justice, Antitrust Div., Division Update Spring
    2015, available at www.justice.gov/atr/division-update/2015/criminal-
    program-update.
        \41\ U.S. Dep't of Justice, Antitrust Div., Division Update Spring
    2016, Criminal Enforcement Trends Charts, available at www.justice.gov/
    atr/criminal-enforcement-fine-and-jail-charts.
        \42\ FY 2017 Performance Budget, supra note 32.
    ---------------------------------------------------------------------------
        In the wake of the Yates Memo,\43\ the Division has intensified its
    focus on holding individuals accountable.\44\ In relevant part, the
    Yates Memo requires the cooperating corporation to provide all
    information against its own culpable executives in order to obtain
    corporate credit in plea (and potentially leniency) negotiations. The
    Yates Memo provides that the Department will not release executives as
    part of a cooperation deal with a corporation or resolve matters with
    the corporation until the Department has a clear plan to resolve
    actions against the individuals. Finally, the Yates Memo instructs the
    Department to pursue prosecution of executives in both civil and
    criminal cases.
    ---------------------------------------------------------------------------
        \43\ See Memorandum of Deputy Att'y Gen. Sally Quinn Yates,
    Individual Accountability for Corporate Wrongdoing (Sept. 9, 2015),
    available at www.justice.gov/dag/file/769036/download.
        \44\ See, e.g., Brent Snyder, Deputy Ass't Att'y Gen., U.S. Dep't
    of Justice, Antitrust Div., Individual Accountability for Antitrust
    Crimes, Remarks at the Yale Global Antitrust Enforcement Conference
    (Feb. 19, 2016), available at www.justice.gov/opa/speech/deputy-
    assistant-attorney-general-brent-snyder-delivers-remarks-yale-global-
    antitrust.
    ---------------------------------------------------------------------------
        The Section encourages the Division to provide clear and
    transparent guidance as to how the Yates Memo will affect Division
    enforcement and prosecution efforts. Specifically, further guidance is
    needed on the definition and identification of the ``highest ranking,
    most culpable employee,'' and how and when the Division will negotiate
    ``carve-in'' and ``carve-out'' determinations. The Section also urges
    the Division to provide explicit guidance addressing when, if ever,
    individuals would be charged in civil antitrust enforcement actions and
    explain the rationale for that practice.
    5. Compliance Programs and Sentencing Credit
        The Section commends the Division's recognition of companies'
    compliance efforts in recent public statements and sentencing
    proceedings.\45\ To date, the Division has offered sentencing benefits
    to corporate defendants that implemented more robust antitrust cartel
    compliance measures after their prior misconduct had been
    discovered.\46\ The Section applauds this development and believes that
    it brings the Division closer in line with the provisions of the United
    States Sentencing Guidelines.\47\ The Section encourages the Division
    to expand its review of compliance programs in place prior to the
    occurrence of the misconduct, and to consider providing appropriate
    credit for robust compliance programs. Such recognition would reward
    companies that go well beyond adopting corporate statements and
    conducting online training, and encourage more companies to engage in
    sample audits of behavior, review trade association travel and agendas,
    document investigative and disciplinary procedures, monitor e-mail
    traffic for competitor contacts, and adopt a ``tone at the top'' that
    deters competitor misconduct. The Section respectfully suggests that
    the opportunity to earn sentencing credit for robust compliance
    programs would be a very attractive ``carrot'' that would foster
    compliance well beyond individual enforcement actions.\48\
    ---------------------------------------------------------------------------
        \45\ See, e.g., Brent Snyder, Deputy Ass't Att'y Gen., U.S. Dep't
    of Justice, Antitrust Div., Remarks at the Sixth Annual Chicago Forum
    on Int'l Antitrust, (Jun. 8, 2015) available at https://
    www.justice.gov/opa/speech/deputy-assistant-attorney-general-brent-
    snyder-delivers-remarks-sixth-annual-chicago.
        \46\ United States v. Kayaba Indus. Co., Ltd. d/b/a/KYB Corp., No.
    1:15-cr-98 (S.D. Ohio 2015).
        \47\ U.S. Sentencing Guidelines Manual Sec. Sec. 8B2.1, 8D1.4 (U.S.
    Sentencing Comm'n 2013).
        \48\ Cf. Brent Snyder, Deputy Ass't Att'y Gen., Compliance Is a
    Culture, Not Just a Policy, Remarks as Prepared for the International
    Chamber of Commerce and United States Council of International Business
    Joint Antitrust Compliance Workshop (Sept. 9, 2014), available at
    www.justice.gov/atr/file/517796/download.
    ---------------------------------------------------------------------------
        As a way to proceed, the Section recommends that the Division
    pursue an open dialogue with the bar and business community regarding
    adoption of ``robust'' and effective compliance methods and improved
    detection and screening techniques. A first step might be a Division-
    hosted roundtable discussion that compares and contrasts what works and
    what does not work, what is ``exemplary'' vs. ordinary, and what could
    be scored positively under the United States Sentencing Guidelines and
    by the Division. Another step could be a request for comments from the
    antitrust bar and business community in order to develop antitrust-
    specific minimum compliance guidelines and identify those exemplary
    compliance measures which could support a reduction in sentencing upon
    the detection of offense.
    6. Cartel Detection
        Cartels are among the greatest threats to a competitive economy,
    and effective cartel enforcement in the United States is one of the
    most important missions of modern antitrust law.\49\ The Division's
    successes in pursuing this mission have depended in large part on the
    contributions of leniency applicants and other informants.\50\ To
    expand on the success of its program, the Section encourages the
    Division to be more proactive in identifying possible cartels. Such
    activity might include the examination of empirical evidence to see
    where cartel pricing may exist, intersected with or supplemented by
    examination of settings particularly conducive to collusion. Detection
    would be enhanced through greater outreach to industry trade groups,
    large buyers, or others that may be in a position to observe suspicious
    activity. What, if any, enforcement action would then be appropriate
    will depend on the magnitude of possible overcharges, the nature and
    extent of preliminary indications that illegal activity may be taking
    place, and the feasibility of focused follow-on activity (rather than
    fishing expeditions) that might identify whether, in fact, serious
    violations have occurred.
    ---------------------------------------------------------------------------
        \49\ See, e.g., Thomas O. Barnett, Ass't Att'y Gen., Antitrust
    Div., U.S. Dep't of Justice, Global Antitrust Enforcement, Speech at
    Georgetown Law Center Global Antitrust Enforcement Symposium (Sept. 26,
    2007), https://www.justice.gov/atr/speech/global-antitrust-enforcement;
    Antitrust Modernization Comm'n, Report and Recommendations 247 (2007),
    available at http://govinfo.library.unt.edu/amc/report_recommendation/
    amc_final_report.pdf.
        \50\ See, e.g., Hammond, supra note 35.
    ---------------------------------------------------------------------------
        The Division's outreach and education efforts with federal, state
    and local law enforcement agencies and state attorneys general have
    been helpful. These ``on-the-ground'' agencies are well-suited to
    detect cartels and to learn about potential antitrust misconduct, for
    example, in association with local procurements. In the past, the
    Division's close relationships with these local agencies generated many
    long-standing and important prosecutions successes, such as with the
    school milk and school bus conspiracies.\51\ Military procurement
    cartel cases were also built in cooperation with Department of Defense
    Inspector Generals and related investigators.\52\
    ---------------------------------------------------------------------------
        \51\ See R. Lanzillotti, The Great School Milk Conspiracies of the
    1980s, 11 Rev. of Indus. Org. 413 (1996); Press Release, U.S. Dep't of
    Justice, Justice Department Reaches Settlement with Dean Foods Company
    (Mar. 29, 2011), available at https://www.justice.gov/opa/pr/justice-
    department-reaches-settlement-dean-foods-company; Press Release, U.S.
    Dep't of Justice, Five School Bus Owners Indicted for Bid-Rigging and
    Fraud Conspiracies at Puerto Rico Public School Bus Auction (May 21,
    2015), available at https://www.justice.gov/opa/pr/five-school-bus-
    owners-indicted-bid-rigging-and-fraud-conspiracies-puerto-rico-public-
    school; Anne K. Bingham, Ass't Att'y Gen., and Gary R. Spratling,
    Deputy Ass't Att'y Gen., Antitrust Div., U.S. Dep't of Justice,
    Criminal Antitrust Enforcement, Presentation before the Criminal
    Antitrust Law and Procedure Workshop, ABA Section of Antitrust Law
    (Feb. 23, 1995), available at https://www.justice.gov/atr/speech/
    criminal-antitrust-enforcement-joint-address-aag-anne-k-bingaman-and-
    daag-gary-rspratling.
        \52\ Press Release, U.S. Dep't of Justice, Navy Civilian Engineer
    Pleads Guilty to Attempted Espionage (June 15, 2015), available at
    https://www.justice.gov/opa/pr/navy-civilian-engineer-pleads-guilty-
    attempted-espionage; Press Release, U.S. Dep't of Justice, Former U.S.
    Navy Contractor Pleads Guilty to False Statement Charges (Feb. 23,
    2016), available at https://www.justice.gov/usao-mdpa/pr/former-us-
    navy-contractor-pleads-guilty-false-statement-charges; Scott D.
    Hammond, Ass't Att'y Gen., Antitrust Div., U.S. Dep't of Justice,
    Detecting and Deterring Cartel Activity through Effective Leniency
    Program, Speech Before the International Workshop on Cartels (Nov. 21-
    22, 2000), available at https://www.justice.gov/atr/speech/detecting-
    and-deterring-cartel-activity-through-effective-leniency-program.
    ---------------------------------------------------------------------------
    7. Prohibitions on Leniency Disclosures
        The Section commends the Division on its realistic and balanced
    view regarding the demands on public and even private companies to make
    appropriate constituent (e.g., employee, shareholder, and auditor)
    disclosures about antitrust events, including the application for, and
    the receipt of, conditional leniency or the service of a grand jury
    subpoena at the outset of an investigation. The Division recognizes
    that its immediate investigative interests must be balanced against the
    obligations of its investigative subjects and targets to serve the
    important public interest of keeping constituents, including actual and
    prospective shareholders, informed of material developments.\53\ By
    contrast, leniency programs in other jurisdictions like the European
    Commission go further in restricting a cooperating company's ability to
    disclose the existence and content of a leniency application, and
    statements submitted may not be used for any other purpose other than
    the Commission's own cartel proceedings.\54\ The Section believes that
    confidentiality restrictions imposed by other competition authorities
    deprive U.S. firms of the opportunity to satisfy investor or other
    constituent needs for material information, and may conflict with U.S.
    securities law requirements. The Section encourages the Division to
    provide private or public consultative guidance to these other
    jurisdictions regarding confidentiality restrictions (whether outright
    bans or prior-consent requirements) in leniency programs that would
    force a company to choose between the benefits of the program and the
    need to inform constituents of material developments.
    ---------------------------------------------------------------------------
        \53\ Scott Hammond, Ass't Att'y Gen., Antitrust Div., U.S. Dep't of
    Justice, An Update of the Antitrust Division's Criminal Enforcement
    Program, Speech Before the ABA Section of Antitrust Law Cartel
    Enforcement Roundtable (Nov. 16, 2005), available at https://
    www.justice.gov/atr/speech/update-antitrust-divisions-criminal-
    enforcement-program.
        \54\ See European Commission, Competition, Cartels, http://
    ec.europa.eu/competition/cartels/leniency/leniency.html.
    ---------------------------------------------------------------------------
    C. Civil Enforcement and Litigation
        Antitrust litigation is notoriously complex--a daunting exercise
    for the litigants and the courts. The typical case involves substantial
    testimony from economists and other experts, esoteric theories,
    hypothetical constructs, and predictions about the future, all before a
    judge who may never have encountered such a case before. The stakes can
    be extraordinarily high, with billions of dollars and the structures of
    industries riding on the decisions. The quality of court decisions
    regarding mergers and other antitrust cases is central to the Agencies'
    work, valuable to businesses seeking to better understand what types of
    conduct are lawful, and critical to the economy that depends on the
    right outcomes. Accordingly, improvements in the quality of
    adjudication could yield substantial payoffs.
        The Section proposes that the Agencies launch a joint project to
    identify and recommend potential improvements in the conduct of
    antitrust civil litigation in the Federal courts. We recommend that the
    Agencies convene a working group that includes their most experienced
    litigators, members of the private bar, economic consultants, and
    Federal judges to formulate proposals regarding the conduct of complex
    antitrust adjudication. Involvement of these stakeholders in the
    formulation of the proposals will enhance their credibility as balanced
    enhancements to the litigation process and increase the likelihood of
    their adoption and success. The Agencies could use the recommendations
    from the working group to suggest alternative modes of proceeding in
    future cases. Lessons learned from these experiences could enable more
    informed decisions about the efficacy of the techniques implemented,
    what refinements or supplements may be warranted, and which innovations
    should be implemented more broadly.
        The Section notes that the Agencies are in a unique position both
    to convene such a working group and to foster the implementation of new
    approaches to litigation. For example, if a particular proposal were to
    be endorsed, the Agencies could announce, in advance, their intention
    to recommend it to judges in the next set of cases they bring. This
    approach would avoid the concern that the Agencies were proposing
    procedural suggestions opportunistically.
        Topics that may merit exploration and discussion include the
    sequencing of presentations at trial and increased use of court-
    appointed experts.\55\ With respect to the first possible topic, the
    working group might explore alternative trial structures, including the
    organization of trial presentations by issue, rather than by party
    (e.g., where the plaintiff or government presents its entire case,
    followed by defendant). Similarly, experts' appearances could be broken
    up and sequenced so that testimony addressing a particular question
    might be followed immediately by the opposing expert's testimony on the
    same topic, with rebuttal right after that. Another emerging concept
    that has faced some resistance but nevertheless warrants
    experimentation and further study involves having experts appear side
    by side so that questions may be put to both experts simultaneously and
    to allow for direct exchanges between the experts.\56\
    ---------------------------------------------------------------------------
        \55\ While the Section provides these two topics by way of example,
    and recommends that these and other issues be the subject of further
    exploration and discussion, the Section has not considered the merits
    of these proposals and does not take a position on their adoption.
        \56\ Other jurisdictions have experimented with a form of this
    approach, sometimes referred to by supporters and critics alike as
    ``hot tubbing.'' Civil Justice Council, Concurrent Expert Evidence and
    `Hot-Tubbing' in English Litigation Since the `Jackson Reforms': A
    Legal and Empirical Study (July 2016); Steven Rares, Using the ``Hot
    Tub''--How Concurrent Expert Evidence Aids Understanding Issues, 95 J.
    Intell. and Indust. Prop. Soc'y of Australia and New Zealand 28 (2013).
    Some commentators have advocated for its adoption in the United States.
    See Scott Welch, From Witness Box to the Hot Tub: How the ``Hot Tub''
    Approach to Expert Witnesses Might Relax an American Finder of Fact, 5
    J. Int'l Comm. L. and Tech. 154 (2010) (``The Australian concurrent
    evidence procedure, informally known as ``hot tubbing,'' may provide an
    excellent opportunity for a court to more thoroughly understand the
    issues between, and testimony of, expert witnesses.'').
    ---------------------------------------------------------------------------
        With respect to the second possible topic, the working group might
    explore ways in which the parties and the court could make greater use
    of court-appointed experts.\57\ A court-appointed expert might
    supplement parties' experts, either operating independently or acting
    after the two sides' expert reports have been submitted. A court-
    appointed expert might also be used to aid in the conduct of trial. For
    example, if the two parties' experts were to testify side by side, a
    court-appointed expert might help to question them or join the group in
    the discussion, offering opinions in addition to posing queries.\58\
    Court-appointed experts might also assist in the structuring of
    litigation. Court-appointed experts might be able to identify an issue
    that, if addressed early, may more quickly and efficiently resolve a
    dispute or narrow disagreement. Before trial, they might distinguish
    issues on which the contesting experts largely agree and focus the
    trial on areas where disagreement remains. After trial, they might
    articulate significant areas of remaining disagreement and provide a
    common template for addressing them in post-trial briefings.
    ---------------------------------------------------------------------------
        \57\ See J. Gregory Sidak, Court-Appointed Neutral Economic
    Experts, 9(2) J. Competition L. & Econ., 359-394 (2013) (arguing that
    ``wider use of Rule 706 would assist the judge and jury and would
    facilitate the prompt settlement of intellectual property, antitrust,
    securities, contract, business tort, and other complex disputes.'').
        \58\ Garry Downes, Problems with Expert Evidence: Are Single or
    Court-Appointed Experts the Answer?, 15 J. Judicial Admin. 185 (2006).
    ---------------------------------------------------------------------------
        The Section, in proposing that the working group convened by the
    Agencies consider these and other topics, is motivated in part by
    positive reports on the use of related techniques in other legal
    systems. For example, in Australia, Canada, and New Zealand, the courts
    sometimes have experts appear together,\59\ and arbitration is often
    successful with a more informal and interactive approach. These other
    models may help generate ideas and give reason to believe that
    alternatives exist that may be superior.
    ---------------------------------------------------------------------------
        \59\ See Rares, supra note 57.
    ---------------------------------------------------------------------------
    D. Mergers
        Antitrust merger enforcement should remain a major focus of the
    Agencies. While there is broad support for the basic framework of U.S.
    antitrust merger analysis, concerns exist with the level of
    transparency into how that framework is being applied by the Agencies,
    the effectiveness of merger policy and the tools used to apply it, and
    the impact of procedural differences between merger litigation
    conducted by the Division and the FTC. The Section recommends that the
    Agencies address concerns about transparency and effectiveness through
    more detailed use of Competitive Impact Statements and Aids to Analysis
    of Public Comment, increased utilization of closing statements, and
    public presentation of detailed merger retrospective studies. To
    address concerns over procedural differences between the two Federal
    enforcement agencies in merger litigation, the Section recommends that
    the Administration endorse legislation that would require the FTC to
    invoke Section 15 of the Clayton Act, 15 U.S.C. Sec. 25, to challenge
    unconsummated mergers in Federal court.
    1. Increased Transparency
        While the Agencies traditionally have maintained a shared
    commitment to providing transparency in their approach to merger
    enforcement, the Section believes that there would be substantial
    public benefit if the Agencies were to provide even greater
    transparency into their thinking about merger enforcement practices and
    standards. Transparency increases public confidence in merger
    enforcement decisions, enables more rigorous assessment of the
    effectiveness of merger policy, and contributes to general deterrence
    of transactions the Agencies believe to be anticompetitive by enabling
    merging parties and their counsel to self-police against more clearly
    revealed standards (thus also conserving agency resources). By
    increasing transparency in U.S. merger enforcement, the Agencies will
    also be modeling best practices that can be adopted by enforcement
    authorities around the world--authorities that play an increasingly
    significant role in multi-jurisdictional merger review.
        Litigated merger cases present great opportunities for
    transparency, as the Agencies must prove their cases in court, but
    there are ways in which the merger litigation process might be improved
    to increase transparency. The Section recommends that the Agencies,
    while protecting legitimate interests in the confidentiality of
    commercially and competitively sensitive business information, should
    encourage the courts (1) to conduct merger trials in open court, and
    (2) to require public versions of expert reports so that analytical
    models, empirical methods, and their application can be evaluated.
        The inclusion of more detailed discussions of analytical models and
    empirical methods in some Division Competitive Impact Statements and
    FTC Aids to Analysis of Public Comment has fostered greater
    transparency into the thinking behind settled merger investigations.
    More often than not, however, those important documents merely
    reiterate points made in the complaint without offering greater insight
    into the foundations for those allegations. The Section recommends that
    the Agencies further enhance transparency by making greater use of
    Competitive Impact Statements and Aids to Analysis of Public Comment to
    reveal the foundations both for complaint allegations and remedies
    accepted.
        Increased utilization of closing statements for those merger
    investigations not resulting in agency action is perhaps the greatest
    source of incremental transparency in that public knowledge of those
    matters is the weakest. After averaging over three closing statements
    per year in investigations of Hart-Scott-Rodino (HSR) reportable
    transactions closed between 2011 and 2013, the Agencies have issued
    only three closing statements in total for investigations of HSR
    reportable transactions closed between 2014 and the present, and none
    this year.\60\ The Section recommends that the Agencies commit to
    issuing more frequent closing statements in most Hart-Scott-Rodino
    reportable second request investigations not resulting in a contested
    complaint or consent order, particularly to clarify important
    considerations of enforcement policy or implementation. Over time, the
    Agencies should consider issuing closing statements in all Hart-Scott-
    Rodino reportable second request investigations. In the past four
    Fiscal Years, the Agencies have commenced fewer than fifty second
    request investigations per year, more than half of which resulted in
    contested complaints or consent orders, so this suggestion would
    require issuing only fewer than twenty-five closing statements per
    year.\61\ By way of comparison, the European Commission issued the
    equivalent of closing statements in roughly seventy transactions per
    year over the past four calendar years.\62\
    ---------------------------------------------------------------------------
        \60\ The Section calculated the above-referenced data as of October
    17, 2016. See Press Releases, Antitrust Div., Dep't of Justice,
    available at www.justice.gov/justice-news?keys=&component=
    376&topic=All&date[value][month]=&date[value][year]=&items_per_page=25
    and Press Releases, Fed. Trade Comm'n Press Releases, available at
    www.ftc.gov/news-events/press-releases.
        \61\ See Fed. Trade Comm'n And Dep't of Justice, Hart-Scott-Rodino
    Ann. Rep. App'x A (FY 2015), available at www.ftc.gov/system/files/
    documents/reports/federal-trade-commission-bureau-competition-
    department-justice-antitrust-division-hart-scott-rodino/
    160801hsrreport.pdf.
        \62\ See European Commission Merger Statistics 2016, available at
    http://ec.europa.eu/competition/mergers/statistics.pdf.
    ---------------------------------------------------------------------------
        Finally, the Section recommends that retrospective analysis of past
    enforcement decisions--challenges brought, transactions remedied by
    consent, and those cleared without agency action--should be performed
    and the results published with greater frequency in order to enhance
    transparency. As discussed in more detail infra, transparency would be
    enhanced by the Agencies presenting retrospectives in open workshops
    that include detailed presentation and discussion of the methods and
    models employed in past enforcement decisions and how those methods and
    models were implemented.
    2. Evaluating the Effectiveness of Enforcement Policy, Tools and
            Remedies
        Despite broad consensus in the antitrust community in support of
    the basic framework of antitrust merger analysis, questions have been
    raised about the effectiveness of merger policy, linking merger policy
    to various measures of industry concentration regarded as indicators of
    declining competition.\63\ The Section recommends that the Agencies
    utilize retrospective analysis of past merger enforcement decisions to
    lead a detailed examination of how well merger policy has worked and
    whether the tools being used to evaluate and remedy mergers are
    adequate.
    ---------------------------------------------------------------------------
        \63\ See Council of Econ. Advisers, Issues, Brief, Benefits of
    Competition and Indicators of Market Power 9 (Updated May 2016),
    available at www.whitehouse.gov/sites/default/files/page/files/
    20160502_competition_issue_brief_updated_cea.pdf.
    ---------------------------------------------------------------------------
        There is growing literature on the effect of past mergers. Most
    merger retrospective studies focus on price effects, but interpretation
    of the results of those studies may be confounded by quality effects
    arising from the merger under study or other efficiencies that benefit
    consumers. For this reason, it is the combination of higher prices and
    reduced output that is required to conclude that a merger was anti-
    competitive.\64\ The Section encourages the Agencies to support and
    undertake merger retrospective studies with price and output effects as
    part of the study.
    ---------------------------------------------------------------------------
        \64\ See Dennis W. Carlton, Why We Need to Measure the Effect of
    Merger Policy and How to Do It, 5 Competition Pol'y Int'l 1 (2009).
    ---------------------------------------------------------------------------
        Price and output are not the only factors that should be studied to
    assess a merger's effect. Particularly given the increased emphasis in
    recent enforcement decisions on the innovation effects of mergers, the
    Section recommends that post-merger effects on new product
    introductions, research and development, and other measures of
    innovation should also be analyzed as part of merger retrospective
    studies. The impact of mergers and merger enforcement on the behavior
    of firms in the industry should also be part of the Agencies' merger
    retrospective studies, particularly whether enforcement in an industry
    might deter future efficient mergers that might otherwise go forward.
    In sum, the Section recommends that the Agencies undertake merger
    retrospectives that take into account not just the effect of mergers on
    price, but also the effects of mergers on output, product innovation,
    and future merger activity.
        In order to assess the adequacy of the tools used to evaluate
    mergers, there also needs to be an assessment of the accuracy of those
    tools in predicting merger outcomes. The Section recommends that the
    Agencies develop a clear record for each merger of what tools and
    models were used along with the models' associated assumptions and
    predictions. With this record in place, the Agencies could then revisit
    those analyses post-merger in order to determine which models and
    assumptions worked best. For example, the Agencies could examine how
    well econometric merger simulation models do in predicting post-merger
    prices, output, and market shares and which assumptions (e.g., assumed
    efficiencies, assumed strategies employed by the firms, the instability
    or imprecision of the parameters estimated in the demand system, or the
    failure to account for new product introductions) in retrospect were
    ones that were shown later to be false. The Agencies could also examine
    whether static merger simulation models were more useful than crude
    analysis where price is assumed to be a function of market
    concentration. Similarly, the Agencies could determine the performance
    of gross upward pricing pressure indices (GUPPIs) compared to market
    shares or static simulation models.
        Problematic mergers can be remedied by a variety of means,
    including structural solutions--divestitures handled either prior or
    subsequent to the merger being remedied--and behavioral solutions,
    though the latter are more controversial. Appropriately, the Agencies
    regularly question the efficacy of merger remedies,\65\ and
    occasionally review them retrospectively. Maintaining confidence in
    merger remedies should remain a priority of the Agencies. The Section
    recommends another retrospective study of the effectiveness of the
    various remedies used. Among other issues, we recommend considering
    divestitures to ``upfront buyers,'' divestitures handled by the parties
    or third-party trustees post-merger, and behavioral remedies, in order
    to make sure that remedies are appropriate to the transaction and
    effective at preserving competition.\66\ When the remedies involve
    behavioral restrictions on information sharing and require monitoring
    by the Agencies, the Section endorses evaluation of the effectiveness
    of such remedies on an ongoing basis.
    ---------------------------------------------------------------------------
        \65\ See Renata Hesse, Acting Ass't Att'y Gen., Antitrust Div.,
    U.S. Dep't of Justice, And Never the Twain Shall Meet?: Connecting
    Popular and Professional Visions for Antitrust Enforcement, Opening
    Remarks at the 2016 Global Antitrust Enforcement Symposium 15 (Sept.
    20, 2016), available at www.justice.gov/opa/speech/acting-assistant-
    attorney-general-renata-heese-antitrust-division-delivers-opening.
        \66\ See id.; see also Edith Ramirez, Chairwoman, Fed. Trade
    Comm'n, Keynote Remarks at the Tenth Annual Global Antitrust
    Enforcement Symposium 8-9 (Sept. 20, 2016), available at https://
    www.ftc.gov/system/files/documents/public_statements/985423/
    ramirez_global_antitru
    st_enforcement_symposium_keynote_remarks_9-20-16.pdf.
    ---------------------------------------------------------------------------
    3. Process Symmetry Between Division and FTC in Merger Enforcement
            Litigation
        The Section has previously identified the need for greater process
    symmetry in the standards for the grant of a preliminary injunction
    motion in merger challenges brought by the Division and the FTC.\67\
    The Section recommended administrative action or amendment of Section
    13(b) of the FTC Act to ensure that it is applied consistently with
    traditional equitable standards for injunctive relief applicable to the
    Division, noting that the outcome of challenges to proposed mergers
    should depend on the merits of the proposed transaction and the
    competitive issues it raises, not on procedural differences depending
    on which Agency happens to draw the case.\68\ The Section did not,
    however, address the issue of merger challenges through administrative
    proceedings under Part 3 of the Commission's Rule of Practice, another
    procedural difference from DOJ enforcement practice regarded by some as
    potentially outcome determinative.
    ---------------------------------------------------------------------------
        \67\ See Am. Bar Ass'n, Section of Antitrust Law, Presidential
    Transition Report: The State of Antitrust Enforcement 2012 at 9-10
    (Feb. 2013) [hereinafter 2012 Presidential Transition Report],
    available at http://www.americanbar.org/content/dam/aba/administrative/
    antitrust_law/at_comments_presidential_201302.authcheckdam.pdf.
        \68\ Id.
    ---------------------------------------------------------------------------
        Since the Section published its recommendation, the SMARTER Act was
    introduced in Congress and passed the House of Representatives to
    harmonize preliminary injunction standards and require the FTC to
    resolve challenges to unconsummated mergers in Federal court,
    consistent with the 2007 recommendation of the Antitrust Modernization
    Commission.\69\ Accordingly, the Section recommends that the
    Administration support legislation that would require the FTC to invoke
    Section 15 of the Clayton Act, 15 U.S.C. Sec. 25, to challenge
    unconsummated mergers in Federal court, a recommendation that is
    consistent with the 2007 recommendation of the Antitrust Modernization
    Commission. In making this recommendation, the Section neither endorses
    nor opposes the approach to these issues taken in the SMARTER Act.
    ---------------------------------------------------------------------------
        \69\ See The Standard Merger and Acquisition Reviews Through Equal
    Rules Act of 2015, H.R. 2745 114th Cong. (as passed by the House, March
    23, 2016), available at www.congress.gov/bill/114th-congress/house-
    bill/2745; Antitrust Modernization Comm'n, Report and Recommendations
    131-32, 138-41 (Apr. 2007), available at http://gov
    info.library.unt.edu/amc/report_recommendation/amc_final_report.pdf.
    ---------------------------------------------------------------------------
    E. Consumer Protection
    1. Introduction
        For decades, the FTC has been the Nation's premier consumer
    protection agency. Since the publication of the ABA Report in 1969,\70\
    in which the Agency was criticized for its passivity and neglect, the
    FTC has been a vigorous and effective agency, boasting an aggressive
    enforcement program to stop unfair or deceptive acts or practices.\71\
    In the 1980s, the FTC promulgated three seminal documents--the
    Deception,\72\ Unfairness,\73\ and Advertising Substantiation \74\
    Policy Statements--that ever since have defined the parameters under
    which the agency exercises its enforcement authority. In particular,
    the Deception and Unfairness Policy Statements have served to focus the
    FTC's actions on practices that are, or are likely to be, harmful to
    consumers.\75\
    ---------------------------------------------------------------------------
        \70\ Am. Bar Ass'n, Report of the ABA Commission to Study the
    Federal Trade Commission (1969) [hereinafter Kirkpatrick Report]. The
    Kirkpatrick Report was commissioned by President Nixon in response to a
    scathing critique of the FTC by a Ralph Nader-sponsored group of law
    students. See E. Cox, R. Fellmeth & J. Schulz, The Consumer and the
    Federal Trade Commission (1969).
        \71\ See Fed. Trade Comm'n, Strategic Plan for Fiscal Years 2014 to
    2018 10 (April 30, 2014), available at www.ftc.gov/system/files/
    documents/reports/2014-2018-strategic-plan/spfy14-fy18
    .pdf.
        \72\ Fed. Trade Comm'n, FTC Policy Statement on Deception (Oct. 14,
    1983), available at https://www.ftc.gov/system/files/documents/
    public_statements/410531/831014deceptionstmt
    .pdf.
        \73\ Fed. Trade Comm'n, FTC Policy Statement on Unfairness (Dec.
    17, 1980), available at https://www.ftc.gov/public-statements/1980/12/
    ftc-policy-statement-unfairness.
        \74\ Fed. Trade Comm'n, FTC Policy Statement Regarding Advertising
    Substantiation (Mar. 11, 1983), available at https://www.ftc.gov/
    public-statements/1983/03/ftc-policy-statement-regarding-advertising-
    substantiation.
        \75\ The Deception Statement defines deception as a representation,
    omission, or practice that is likely to mislead consumers acting
    reasonably under the circumstances, in a material way (i.e., in a way
    that is likely to cause consumer injury). The Unfairness Statement
    defines an unfair act or practice as one that causes, or is likely to
    cause, substantial consumer injury that is not reasonably avoidable by
    consumers and is not outweighed by benefits to consumers and
    competition. In 1984, Congress enshrined the unfairness definition into
    the FTC Act as Section 5(n), 15 U.S.C. Sec. 45(n). The Deception
    Statement's focus on ``consumers acting reasonably'' and the Unfairness
    Statement's requirement that the injury from the practice not be
    reasonably avoidable by consumers recognize the role that consumers
    themselves play in avoiding harm.
    ---------------------------------------------------------------------------
        The Section has long recognized the FTC's key role in protecting
    consumers from harm, noting in both its 2008 and 2012 Transition
    Reports that the FTC's consumer protection mission has exceeded its
    competition mission in resources,\76\ activity, and public attention.
    This remains true today.\77\ While the Section has recommendations for
    improvement, the Section acknowledges and applauds the impressive
    contributions of the FTC's consumer protection mission to consumer
    welfare and a competitive economy.\78\ Indeed, for over 30 years, FTC
    enforcement efforts have protected consumers from a wide variety of
    fraudulent, misleading, and unfair practices and have returned many
    hundreds of millions of dollars to victims injured by these practice.
    ---------------------------------------------------------------------------
        \76\ See Presidential Transition Report, supra note 68, at 21 n.48
    (February 2013).
        \77\ The FTC reportedly allotted $165,879,000, and $175,043,000, to
    its consumer protection mission in FY 2015 and 2016, respectively. The
    allotments exceeded those for competition, which were $127,121,000 and
    $134,163,000, respectively. See Fed. Trade Comm'n, Congressional Budget
    Justification Summary for FY 2016 38, available at www.ftc.gov/system/
    files/documents/reports/fy-2016-congressional-budget-justification/
    2016-cbj.pdf.
        \78\ For example, the FTC recently settled one of the largest
    actions brought to date against charity fraud. Between March 2016 and
    May 2016, the FTC settled charges against four sham charities that
    claimed to help cancer patients, but instead spent $187 million of
    donors' money on their operators, families and friends, and
    fundraisers. Under the settlement, the sham charities were permanently
    dissolved and their assets liquidated, and a multimillion dollar
    penalty issued. See Press Releases, Fed. Trade Comm'n, FTC, States
    Settle Claims Against Two Entities Claiming to Be Cancer Charities;
    Orders Require Entities to Be Dissolved and Ban Leader from Working for
    Non-Profits (Mar. 30, 2016), available at www.ftc.gov/news-events/
    press-releases/2016/03/ftc-states-settle-claims-against-two-entities-
    claiming-be-cancer. 2015 was also a record year of debt collection
    enforcement, with twelve cases brought against fifty-two defendants and
    nine settlements reaching nearly $94 million in judgments. See Fed.
    Trade Comm'n, Annual Highlights 2015, Enforcement, available at
    www.ftc.ogv/reports/annual-highlights-2015. The FTC also continues to
    target deceptive health claims, settling a complaint in July 2016
    against the marketers of a powdered drink mix touted as enabling
    opiate-addicted consumers to overcome addiction and withdrawal. The
    terms of the settlement require the company to discontinue all
    deceptive claims, and to pay $235,000 as redress or disgorgement. See
    Press Release, Fed. Trade Comm'n, Sellers of At-Home Treatment for
    Opioid Withdrawal and Addiction Barred from Making Deceptive Claims
    (July 6, 2015), available at www.ftc.gov/news-events/press-releases/
    2016/07/sellers-home-treatment-opioid-withdrawal-addiction-barred-
    making.
    ---------------------------------------------------------------------------
        The FTC, however, is no longer the proverbial primary ``cop on the
    consumer protection beat.'' The past four years have witnessed
    considerable change in the consumer protection law enforcement and
    regulatory landscape, with both the CFPB and the FCC playing
    increasingly important roles in consumer protection enforcement; the
    three agencies have overlapping jurisdiction. Accordingly, the Report
    includes recommendations for those agencies as well.
    2. Overlapping Privacy Jurisdiction
        The overlapping jurisdiction of the FTC, the FCC, and the CFPB
    presents the very real possibility of inconsistent approaches, nowhere
    more noticeably than in the privacy arena. This was underscored most
    recently when the FCC adopted its 2015 Open Internet Order and
    reclassified the provision of Internet broadband access as a
    ``telecommunications service'' under Title II of the Telecommunications
    Act.\79\ The provision of broadband service by Internet service
    providers (ISPs) is now deemed a common carrier service. As such, it is
    exempt from the FTC's jurisdiction pursuant to the common carrier
    exemption in the FTC Act. Further, the Court of Appeals for the Ninth
    Circuit recently held in FTC v. AT&T Mobility,\80\ that common carriers
    are exempt from the FTC's jurisdiction even in their provision of non-
    common carrier services.\81\ However, the FCC's authority over non-
    common carrier services is limited, leaving a potential regulatory gap
    for non-common carrier services offered by common carriers. Thus,
    similar activities engaged in by different entities, one of which has
    common carrier status, may be regulated differently. Over the years,
    the FTC has urged Congress to repeal the common carrier exemption.\82\
    The Section believes that this exemption is outdated and urges the FTC
    and the FCC to support its repeal.
    ---------------------------------------------------------------------------
        \79\ Protecting and Promoting the Open Internet, GN Docket No. 14-
    28, Report and Order on Remand, Declaratory Ruling, and Order, 30 FCC
    Rcd. 5601 (2015) (hereinafter 2015 Open Internet Order).
        \80\ FTC v. AT&T Mobility, No. 15-16585, 2016 WL 4501685 (9th Cir.
    Aug. 29, 2016).
        \81\ The FTC Act specifically exempts ``common carriers subject to
    the Acts to regulate commerce'' from the Commission's jurisdiction. 15
    U.S.C. Sec. 45(a)(2). The Commission has taken the position that common
    carriers are exempt from its jurisdiction only to the extent that they
    are engaged in common carrier activities (an ``activity-based
    exemption''). However, the Ninth Circuit held that common carriers are
    entitled to that exemption by virtue of their status (a ``status-based
    exemption''). AT&T Mobility, 2016 WL 4501685, at *4. In October 2016,
    the FTC petitioned the Ninth Circuit for a rehearing en banc,
    challenging the dismissal of the agency's suit under Section 5.
    Petition for Rehearing En Banc, AT&T Mobility, 2016 WL 4501685 (filed
    Oct. 13, 2016).
        \82\ See Oversight of the Fed. Trade Comm'n Before the S. Comm. on
    Commerce, Science, and Transp., 114 Cong. 25 (2016) (Statement of the
    FTC), available at www.ftc.gov/system/files/documents/
    public_statements/986433/
    commission_testimony_oversight_senate_09272016.pdf; Maureen K.
    Ohlhausen, Commissioner, Fed. Trade Comm'n, 100 is the New 30:
    Recommendations for the FTC's Next 100 Years, Address at the GCR
    Antitrust Law Leaders' Forum 2014 12-14 (Feb. 7, 2014), available at
    www.ftc.gov/system/files/documents/public_statements/100-new-30-
    recommendations-ftcs-next-100-years/140207gcrantitrust-mko.pdf;
    Consumer Online Privacy: Hearing Before the S. Comm. on Commerce,
    Science, and Transp., 111th Cong. 24-26 (2010) (Statement of the FTC),
    available at www.ftc.gov/os/testimony/100727consumer
    privacy.pdf; H.R. 3402, The Calling Card Consumer Protection Act:
    Hearing Before the Subcommittee on Commerce, Trade, and Consumer
    Protection of the Committee on Energy and Commerce, 110th Cong. 12-13
    (2008), available at www.ftc.gov/os/2008/09/P074406prepaidcc.pdf.
    ---------------------------------------------------------------------------
        The potential for inconsistent regulatory approaches is
    significant, as witnessed by the FCC's recently adopted Privacy
    Rules.\83\ The FCC's rules take a different approach from the FTC in
    determining what data is considered sensitive and, therefore, subject
    to enhanced consent. The FTC has required affirmative or opt-in consent
    only for uses of certain sensitive types of data including financial,
    health, precise geolocation and children's data, for example. The FCC's
    approach, on the other hand, largely treats as sensitive other types of
    data that the FTC has not historically considered sensitive, namely web
    browsing data and application usage history, and requires opt-in
    consent for the use of such data. Thus, non-broadband providers subject
    to FTC authority may collect and use web browsing and application usage
    data while broadband providers are subject to different requirements
    for such data. The Section believes these inconsistent approaches
    warrant ongoing attention and urges the agencies to consider whether
    these differing approaches have a detrimental effect on competition and
    consumer welfare.
    ---------------------------------------------------------------------------
        \83\ See Protecting the Privacy of Customers of Broadband and Other
    Telecommunications Services, 81 ed. Reg. 23360 (Proposed Apr. 20,
    2016), available at www.gpo.gov/fdsys/pkg/FR-2016-04-20/pdf/2016-
    08458.pdf.
    ---------------------------------------------------------------------------
        The overlapping privacy jurisdiction and related inconsistent
    approaches to privacy enforcement also create confusion among other
    nation-states when U.S. privacy law is relevant, for example, as part
    of cross-border data transfers. The European Union's (EU) data
    protection law prohibits companies from transferring the personal data
    of EU data subjects to countries outside of the European Economic Area
    (EEA) unless those countries have ``adequate'' privacy laws.\84\
    Adequacy is often correlated to an umbrella privacy law that mirrors
    the EU approach; the United States, however, takes a sectoral approach
    to privacy. Until October 2015, U.S. companies that certified to the
    EU-U.S. Safe Harbor Framework could rely on that Framework as a valid
    legal basis for transferring the data of EU data subjects to the United
    States.\85\ Based in part on its negative perception of the U.S.
    sectoral approach to privacy, the European Court of Justice issued a
    decision in 2015 finding that the EU-U.S. Safe Harbor insufficiently
    protected EU residents' personal data.\86\ Following this decision, the
    EU and the United States negotiated the Privacy Shield, a new legal
    basis for U.S. companies to rely on when transferring personal data
    from the EEA to the United States. The Privacy Shield has already
    attracted critics, however, and some commentators worry that the
    inconsistent privacy enforcement frameworks among the FTC, the FCC, and
    the CFPB may weaken the Privacy Shield's effectiveness.\87\ Reducing
    the ability for U.S. companies to transfer personal data effectively
    and appropriately could impact the U.S.'s competitive posture. Although
    the Section is not advocating for an umbrella privacy law at this time,
    it does observe that the inconsistent privacy approaches pose a risk of
    harm to U.S. companies and competition internationally. More
    consistency among the regulatory approaches would likely yield reduced
    compliance costs and promote competitiveness with resulting benefit to
    consumers.\88\
    ---------------------------------------------------------------------------
        \84\ Council Directive 95/46 of the European Parliament and of the
    Council of Oct. 24, 1995 on the Protection of Individuals with Regard
    to the Processing of Personal Data and on the Free Movement of Such
    Data, 1995 O.J. (L 281) 31 (EU).
        \85\ Under the US-EU Safe Harbor, transfer of personal data from
    the EU to a U.S. organization was lawful if the U.S. organization
    receiving the data has unambiguously and publicly disclosed its
    commitment to comply with the ``Safe Harbor Privacy Principles'' as set
    out in the Commission Decision 2000/520, 2000 O.J. (L215) 7 (EC),
    available at http://eurlex.europa.eu/LexUriServ/
    LexUriServ.do?uri=CELEX%3A32000D0520%3AEN%3AHTML. The FTC has brought
    enforcement actions against companies who have falsely claimed that
    they were certified members of the Safe Harbor Framework when their
    certifications had lapsed or they had never applied for membership in
    the program at all. Press Release, Fed. Trade Comm'n, Thirteen
    Companies Agree to Settle Charges They Falsely Claimed To Comply with
    International Safe Harbor Framework (Aug. 17, 2015), available at
    www.ftc.gov/news-events/press-releases/2015/08/thirteen-companies-
    agree-settle-ftc-charges-they-falsely-claimed.
        \86\ Maximillian Schrems v. Data Prot. Comm'r, Case C-362/14,
    available at curia.europa.eu/juris/
    document.jsf?docid=169195&doclary=en.
        \87\ See, e.g., Nancy Libin The FCC's Privacy Problem, THE HILL,
    Sept. 22, 2016, available at http://thehill.com/blogs/congress-blog/
    technology/297199-the-fccs-privacy-problem.
        \88\ Fed. Trade Comm'n, Protecting Consumer Privacy in an Era of
    Rapid Change: Recommendations for Businesses and Policymakers 9 (2012),
    available at https://www.ftc.gov/sites/default/files/documents/reports/
    federal-trade-commission-report-protecting-consumer-privacy-era-rapid-
    change-recommendations/120326privacyreport.pdf.
    ---------------------------------------------------------------------------
    3. Enforcement
        Although the FTC has many tools at its disposal to foster
    compliance with the law, it is, at its core, an enforcement agency. The
    Section recommends that the FTC adopt a number of reforms to help it
    deploy its limited enforcement resources in a manner that enhances the
    impact of its actions while, at the same time, treating target
    companies in a way that is fair and proportionate to the alleged
    offenses. Where appropriate, the Report includes parallel
    recommendations relating to the CFPB and the FCC.
        The Section recommends that the FTC adopt reforms to enhance the
    transparency and fairness of the enforcement process. Government
    investigations and enforcement actions are inherently different from
    private disputes. They are not contests between equals--federal
    agencies have enormous advantages in terms of resources and power.
    Businesses, especially smaller companies and their principals, simply
    cannot afford in many cases to take on the risks and costs of defending
    themselves during an investigation or when confronted with a complaint
    and order. Unless they are careful in how they use their leverage, the
    agencies may cause unintended damage to companies and the marketplace
    without corresponding benefits to consumers or competition. It is
    critical that the process be fair and transparent.
        Case selection: The FTC and CFPB have broad prosecutorial
    discretion in choosing targets for their law enforcement actions. The
    Section recommends that the agencies focus their limited enforcement
    resources on cases involving significant consumer harm. This has not
    always been the case. Recently, for example, the CFPB has brought
    actions for technical violations of certain statutes against very small
    companies, in many cases where the challenged practices--and even the
    companies themselves--had ceased. The consumer injury in those cases
    appeared to be minimal, and it was not otherwise apparent what public
    policy goals the cases served.\89\ From time to time, the FTC also has
    prosecuted small companies for minor violations.\90\ The agencies
    should recognize the enormous impact their law enforcement actions can
    have, especially on small businesses that, as a result, often lose the
    assets, customers, business partners, and financing they need to
    survive.
    ---------------------------------------------------------------------------
        \89\ See, e.g., In the Matter of Presto Auto Loans, Inc., File NO.
    2016-CFPB-0021 (Sept. 20, 2016), available at https://s3.amazonaws.com/
    files.consumerfinance.gov/f/documents/2016-CFFPB-
    0021_Document_001_09202016.pdf.
        \90\ See, e.g., Nomi Techs., Inc., Docket No. C-4538, 2015 WL
    5304114 (F.T.C. Aug. 28, 2015). The dissenting statements of
    Commissioners Ohlhausen and Wright criticized the majority's decision
    to bring the case despite the technical nature of the violations and
    the absence of evidence of consumer harm. See id at *5, *8. In 1997,
    the FTC published its Compliance Assistance and Civil Penalty Leniency
    Policies for Small Entities, which establish a ``variety of mechanisms
    available for small business to obtain'' compliance advice and describe
    the ``FTC's approach to reducing or waiving civil penalties for small
    entities in various mitigating circumstances.'' 62 Fed. Reg. 16809
    (Apr. 8, 1997). Although the Policies only apply to civil penalties and
    not to other remedies the FTC can pursue, they evidence the importance
    of the FTC carefully considering the impact of its actions on small
    businesses. The FTC recently reaffirmed the Policies in announcing
    dramatic increases in the maximum civil penalties it can seek for
    violations of various laws and rules enforced by the FTC. Adjustment of
    Civil Monetary Penalty Amounts, 81 Fed. Reg. 42476 (June 30, 2016).
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        Civil Investigative Demands: FTC investigations (like those of the
    CFPB) often begin with the issuance of civil investigative demands
    (CIDs). The Section recommends that the agencies use this powerful tool
    judiciously to avoid unnecessary costs to companies and individuals who
    receive them.
        The FTC has broad, but not unfettered, authority to conduct
    investigations and compel the production of documents and information.
    The Section recognizes that CIDs must be written broadly enough to
    ensure that the documents and information necessary to carry out the
    investigation are produced, especially when the agency is unfamiliar
    with how the company compiles and maintains its records. Nevertheless,
    there has been a trend in recent years toward generic and overly-broad
    CIDs that are not tailored to the nature of the business or the
    practices at issue. The result in many cases has been that companies
    have incurred astronomical costs in responding. While the agency staff
    is willing to some extent to negotiate narrower terms and/or extend
    production deadlines, small companies and individuals in particular may
    end up facing resource demands they cannot afford. Just the legal fees
    alone that targets incur in negotiating the terms of the CID and making
    the production can be prohibitive. This problem has been exacerbated by
    the FTC's and CFPB's adoption of specific electronic submission
    standards that require formats that frequently are different from those
    used by the company in the ordinary course of business. As a result,
    the company may be forced to hire third-party contractors--at
    substantial cost--to transfer the records into the required format.
        Although a company can file a petition to quash or limit a CID,
    these petitions are made public--which imposes considerable
    reputational costs on a company--and are rarely granted. Rather than
    casting a net designed to bring in every possible fish, the Agencies
    should, in the first instance, issue CIDs that are more narrowly
    focused, with the option of following up with additional CIDs should
    that be necessary.\91\
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        \91\ Some recent CIDs have sought all information that might
    possibly relate to violations of virtually every consumer protection
    law that might apply. Although the FTC does not need ``reason to
    believe'' a specific violation has occurred before commencing an
    investigation, it should minimize the use of these types of fishing
    expeditions.
    ---------------------------------------------------------------------------
        Information sharing in investigations: The extent to which FTC
    staff is willing to reveal to an investigational target the practices
    about which they have concerns and the legal theories underlying those
    concerns varies widely from case to case. In some cases, the staff has
    encouraged open discussions at an early stage of the investigation so
    that the company understands the nature of, and theories underlying,
    the investigation and has an opportunity to provide countervailing
    evidence or arguments before decisions are made. In other cases, the
    company only finds out what the matter is about when confronted with a
    proposed complaint and order that has been authorized by the Director
    of the Bureau of Consumer Protection (BCP). Even at this point, the
    company may not be told what the real basis for the charges is, and the
    proposed pleadings may not make it clear. In these cases, the company
    is at a severe disadvantage and is forced to decide how to respond
    based on incomplete information. The need for greater transparency
    begins with the resolution issued by the Commission authorizing the use
    of compulsory process. The resolution ostensibly is designed to give
    the CID recipient notice of the nature of the investigation. In
    practice, the ``omnibus'' resolutions the FTC commonly uses are broad
    and generic and provide little guidance or any real boundaries on the
    scope of the investigation.
        In litigation, where pleadings precede discovery, parties have
    access to the basis for information demands. That context is
    fundamental to the process whereby parties invoke and courts apply the
    balancing test of relevance and burden that governs discovery under the
    Federal Rules of Civil Procedure. Subjects of government investigations
    should also have the information necessary to understand demands that
    can impose significant costs and consequences. The Section recommends
    that the FTC adopt internal guidelines for staff on communicating with
    investigational targets about the contemplated law enforcement action.
    Absent compelling circumstances indicating otherwise, staff should be
    as transparent as possible, as early as possible in the process, and
    should encourage a dialogue on the substantive issues. This is not only
    fairer to the company, but is likely to result in enforcement
    recommendations that are more thoughtful and better supported. This
    will also help focus the investigation (and remediation) more
    effectively, avoiding the broad CID requests and responses addressed
    above.
        The Section recommends that the CFPB adopt similar guidelines. The
    CFPB often uses its Notice of Opportunity to Respond and Advise (NORA)
    process to notify companies in general terms of the allegations against
    them. As is the case with the FTC's consent authority process, however,
    the NORA notification takes place after staff and their supervisors
    have conducted extensive and expensive investigation, after they have
    concluded that the case should be prosecuted, but before respondents
    have understood the nature of the concerns. These decisions are rarely
    reversed. In addition, sending a NORA is discretionary with CFPB staff.
    In some recent cases, CFPB staff has not only declined to provide
    NORAs, but never even notified the companies of their interest in the
    matter before serving them with Notices of Charges that it had filed in
    its administrative tribunal and issuing a press release. By doing so,
    the staff deprived the companies of the opportunity to provide
    information that might have caused the staff to reconsider its decision
    to file the cases in the first instance and the opportunity to avoid
    the costs of unnecessary demands, as well as the opportunity to settle
    the charges pre-filing and pre-press release.\92\
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        \92\ An executive order issued by President Clinton in 1996 [Exec.
    Order No. 12,988, 61 Fed. Reg. 4729 (Feb. 5, 1996)] requires Federal
    agencies that conduct or otherwise participate in Federal civil
    litigation on behalf of the U.S. government, before filing cases in
    court or administratively, to make a reasonable effort to notify all
    parties about the nature of the dispute and to attempt to achieve a
    settlement. There are several, narrow exceptions to this requirement,
    including cases involving forfeiture or bankruptcy, when the assets or
    defendants themselves are subject to dissipation or flight, or when
    ``exigent circumstances make providing the notice impracticable or such
    notice would otherwise defeat the purpose of the litigation,'' such as
    in cases seeking a temporary restraining order or preliminary
    injunction. Id.
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        Order Provisions: One manifestation of the burden of contesting FTC
    investigations is in the consent orders that the FTC imposes on alleged
    violators. Resource-constrained companies and individuals without a
    realistic recourse to litigation may have to accept orders that impose
    burdens unnecessary to achieve legitimate remedial purposes. The
    burdens can be unduly harsh, raising competitors' costs and even
    threatening companies' existence. Moreover, they can acquire the mantle
    of precedent over time, making it very difficult for a company to argue
    for treatment different from that accorded to others. Accordingly, the
    Section recommends that the FTC consider:

       Reducing the burden of standard ``boilerplate'' order
            provisions: FTC orders contain a number of administrative
            provisions that are, more or less, the same in every order. For
            example, since 1996--the past 20 years--the FTC has required
            companies signing administrative orders to agree to an order
            duration of 20 years (longer, if there are subsequent
            violations) and Federal court orders that last in
            perpetuity.\93\ This can create a severe burden on the
            companies involved, given the breadth and vagueness of
            ``fencing in'' order provisions \94\ as well as burdensome
            affirmative obligations.\95\ Especially in areas where
            technology is rapidly evolving, order provisions that make
            sense when they are entered may no longer be appropriate in 10
            years, let alone 20 years later, and may serve to chill
            innovative and useful corporate practices. Although FTC rules
            allow for a petition to modify an order based on ``changed
            conditions of law or fact'' or ``that the public interest so
            requires,'' \96\ in practice the standard for an order
            modification is very high and the process is often protracted
            and costly. CFPB orders typically sunset after five years. The
            Section recommends that the FTC adopt a comparable sunset
            period for both administrative and district court orders, at
            least where there are no extenuating circumstances (such as
            fraud or recidivism) justifying a longer duration.
    ---------------------------------------------------------------------------
        \93\ See Press Release, Fed. Trade Comm'n, FTC Rule Incorporating
    Sunset Policy for Existing Administrative Orders in Consumer Protection
    and Antitrust Cases (Nov. 20, 1995), available at www.ftc.gov/news-
    events/press-releases/1995/11/ftc-rule-incorporating-sunset-policy-
    existing-administrative. The Commission justified keeping Federal court
    orders unlimited because ``many of these orders are against defendants
    involved in hard-core fraud.'' Id. As explained in the text, the FTC
    now files most of its cases in Federal court, including non-fraud
    cases.
        \94\ Most orders include ``fencing-in'' relief that extends beyond
    prohibiting the violations alleged in the complaint to reach
    purportedly related practices. For instance, the Commission typically
    will seek against a company that is alleged to have made
    unsubstantiated claims about the efficacy of a particular dietary
    supplement for treating or preventing a specific health condition an
    order that requires scientific substantiation for any claim about the
    health benefits, efficacy, or performance of any food, drug, or dietary
    supplement. E.g., POM Wonderful v. FTC, 777 F.3d 478, 505 (D.C. Cir.
    2015). The company under order is often left guessing, at the peril of
    civil penalties or a contempt citation for an order violation, at which
    implied claims the FTC will find in future advertising and what
    substantiation for those claims it will deem sufficient.
        \95\ For example, data security orders typically require expensive
    biennial security audits. E.g., In the Matter of Snapchat, Inc., Docket
    No. C-4501, 2014 WL 1993567, at *14 (F.T.C. May 8, 2014).
        \96\ FTC Rule of Practice Sec. 2.51, 16 C.F.R. Sec. 2.51 (2016).

        Similarly, FTC administrative and Federal court orders include
            provisions (the so-called ``Scofflaw'' provisions) that require
            the respondent/defendant to distribute the order to various
            individuals, keep records, report changes such as asset sales,
            mergers or bankruptcy, and file compliance reports.\97\ Some of
            these provisions last for the duration of the order, while
            others sunset after various numbers of years ranging from three
            to twenty, depending on the case.\98\ The Federal court
            boilerplate traditionally has imposed additional Scofflaw
            provisions beyond those in administrative orders that, for
            example, give the FTC the right to gather information in
            various ways. Some of these additional provisions are
            burdensome and intrusive. For example, one Federal court
            order's Scofflaw provision permits the FTC to contact the
            defendant directly, and not through counsel, about order-
            related matters (although counsel may be present during FTC
            ``interviews''). Provisions such as these were drafted
            originally to ensure sufficient oversight of defendants that
            were engaged in fraud. The FTC increasingly has filed cases,
            including routine non-fraud cases, in Federal court, however.
            But, rather than ameliorating the harsh Federal court Scofflaw
            provisions, the FTC has imported them into some administrative
            orders.\99\ The Section recommends that the FTC reconsider this
            approach so that burdensome Scofflaw provisions are not imposed
            on respondents or defendants engaged in legitimate businesses.
    ---------------------------------------------------------------------------
        \97\ A recent addition to the CFPB's boilerplate requires
    defendants, before transferring or selling any of their ``operations''
    to a third party, to notify the purchaser of the existence of the CFPB
    order, and obtain the purchaser's written agreement to comply with the
    order. See, e.g., In the Matter of TMX Finance LLC, File No. 2016-CFPB-
    0022 (Sept. 26, 2016). Although the term ``operations'' is undefined,
    this provision apparently is designed to avoid the long-standing rule
    that an asset purchaser is not a ``successor or assign'' under an order
    unless the sale was designed to evade the order or the purchaser simply
    continued the seller's business unchanged. As a result of the CFPB's
    new policy, companies under order, for the duration of that order,
    likely cannot sell assets even to bona fide purchasers for anything
    close to their real value, if at all. This is unfairly punitive, and
    the Section recommends that the CFPB eliminate this provision from its
    orders.
        \98\ It is not clear why these time periods vary from case to case
    and provision to provision, but in some instances it may depend on the
    relative knowledge and negotiating skill of the company's counsel.
    Having a shorter overall sunset in all orders could remove the
    inconsistency by making it unnecessary to have separate sunsets for
    each provision.
        \99\ See, e.g., In the Matter of Practice Fusion, Inc., Docket No.
    C-4591, 2016 WL 3345406 (F.T.C. Aug. 16, 2016), available at
    www.ftc.gov/system/files/documents/cases/160816prac
    ticefusiondo.pdf.

       Seeking monetary relief that corresponds more closely to the
            nature of the violations, the extent of consumer injury, and
            the culpability of the respondent/defendant: The FTC has
            increasingly sought strong monetary relief--civil penalties,
            restitution, and/or disgorgement--in ordinary Section 5 cases.
            Historically, the FTC sought restitution or disgorgement mainly
            in cases of fraud or blatant deception with tangible consumer
            injury, and tied the amount sought to the injury or unjust
            enrichment that could be traced to the violations. It now
            appears, however, that the FTC demands monetary relief in
            virtually all cases, even where the violations were
            unintentional and marginal and the injury slight or
            nonexistent. Moreover, staff in consent negotiations commonly
            seek the maximum possible relief regardless of the facts of the
            case or any mitigating circumstances, and without consideration
            of litigation risk. For example, in recent civil penalty cases,
            staff have pursued the defendant's gross revenues without
            consideration of the statutorily imposed civil penalty factors
            that take into account, among other things, the defendant's
            degree of culpability and the nature and seriousness of the
            violations.\100\
    ---------------------------------------------------------------------------
        \100\ For example, the press release issued by the FTC announcing a
    settlement with Consumer Education Group notes that the civil penalty
    (most of which was suspended due to inability to pay) ``is equivalent
    to the revenue defendants obtained through their illegal acts.'' See
    Press Release, Fed. Trade Comm'n, Sales Lead Generators Fined and
    Barred from Violating FTC's Telemarketing Sales Rule (Nov. 1, 2016),
    available at https://www.ftc.gov/news-events/press-releases/2016/11/
    sales-lead-generators-fined-barred-violating-ftcs-telemarketing. The
    CFPB also has insisted on civil monetary penalties in every case. That
    agency, unlike the FTC, has unrestricted civil penalty authority in
    cases alleging unfair or deceptive acts or practices. 15 U.S.C.
    Sec. 5565(c).

        Although the Section believes that the FTC has reason to raise the
    cost of violating the law in appropriate cases, the Section recommends
    that those efforts be tempered by considerations of equity and
    proportionality, as well as the constraints imposed by the statutes and
    case law. Monetary relief in non-fraud cases should not be punitive or
    threaten a company's ability to compete. In evaluating the deterrent
    effect of an order, the Commission should take into account the
    enormous damage an FTC action can cause a defendant, beyond any
    monetary judgment. In an age of instant and comprehensive information,
    whenever interested parties, such as licensing bodies, or prospective
    finance sources or vendors, search for information about individuals or
    companies, those named in FTC cases can be indefinitely branded as
    wrongdoers, even when the alleged violations were never proven in court
    or may have been inadvertent or minor. Seeing the agency's increased
    focus on extending liability to third parties for assisting violators,
    finance sources, vendors, and others may be very reluctant to provide
    the money or services to those facing FTC actions or under an order.
        Meeting Decision Makers: The FTC has well-established ``due
    process'' norms that give targets facing possible enforcement the
    opportunity to meet with division and Bureau managers before a
    complaint recommendation is forwarded to the Commission, and then with
    Commissioners before the complaint is issued or filed.\101\ This
    process generally works well, but could be improved by encouraging
    transparency earlier in the investigation.
    ---------------------------------------------------------------------------
        \101\ An exception is for fraud cases in which the Commission may
    seek ex parte relief.
    ---------------------------------------------------------------------------
        The CFPB, on the other hand, does not appear to have any comparable
    process. With some exceptions, the Assistant Director of Enforcement
    and his superiors have been unwilling to meet with many companies they
    are deciding to prosecute. This can have serious disadvantages:
    companies cannot know that their concerns have been heard (which in
    some cases may make them less willing to settle), and the decision
    makers are denied information that would better inform their decisions.
    The Section recommends that the CFPB adopt standard internal appeal
    procedures like those of the FTC.
        While the FCC has procedural due process measures that resemble
    those of the FTC, there are some important differences in the authority
    delegated to staff. In particular, the Enforcement Bureau has delegated
    authority to propose forfeitures only up to a maximum amount of
    $100,000.\102\ The FCC must vote to approve any forfeiture above
    $100,000. However, the Enforcement Bureau has delegated authority to
    resolve investigations via consent agreements involving any amount of
    money, even in matters that involved an earlier, FCC-voted proposed
    forfeiture. Thus, the Bureau has significant authority to undertake
    enforcement actions and shape enforcement policy on its own, without
    Commission involvement. The Section recommends that the FCC consider
    reducing the delegated authority of the Enforcement Bureau and
    requiring Commission votes on any consent agreements involving payments
    that exceed the Bureau's delegated authority for proposed forfeitures.
    ---------------------------------------------------------------------------
        \102\ 47 C.F.R. Sec. 0.311.
    ---------------------------------------------------------------------------
    4. Guidance
        In addition to law enforcement and rulemaking, one of the principal
    ways the FTC and other agencies that enforce Federal consumer
    protection laws encourage compliance is by providing guidance on their
    legal interpretations and expectations as applied to specific
    industries or practices. The FTC has broad (but not unlimited)
    discretion in choosing strategies for fostering compliance, including
    bringing individual enforcement actions even when the violative
    practices are common throughout an industry.\103\ In many situations,
    however, guidance may be more effective and efficient than enforcement
    in fostering compliance. It also may be fairer to the individual
    defendants, who can suffer catastrophic damage from being the subject
    of government law enforcement simply because they happened to be
    selected among many other possible targets. This is especially true
    when the law is unclear and the practices at issue are long-standing or
    widespread.
    ---------------------------------------------------------------------------
        \103\ E.g., FTC v. Universal-Rundle Corp., 387 U.S. 244, 251
    (1967); but see Johnson Products Co. v. FTC, 549 F.2d 35, 41 (7th Cir.
    1977) (FTC may not issue orders that ``would arbitrarily destroy one of
    many violators in the market,'' citing L.G. Balfour Co. v. FTC, 442
    F.2d 1, 24 (7th Cir. 1971)).
    ---------------------------------------------------------------------------
        Although enforcement actions are a good means of providing
    guidance, their usefulness for this purpose is often limited by the
    information they reveal. Businesses carefully scrutinize complaints and
    orders to glean insights into the agencies' thinking.\104\ In some
    cases, however, the pleadings are not sufficiently clear or detailed in
    identifying the alleged illegal conduct to serve this purpose, and
    businesses are left to ``read the tea leaves'' as to how the agencies
    might view their particular practices.
    ---------------------------------------------------------------------------
        \104\ The FTC and CFPB have taken somewhat different positions on
    whether an order establishes standards for lawful versus unlawful
    conduct that apply beyond the individual case at issue. The FTC
    stresses that its orders often contain fencing-in relief that may go
    beyond what the law requires and may not be required of other
    companies. See Letter from Joel Winston, Fed. Trade Comm'n to Jonathan
    L. Kempner, Mortgage Bankers Assoc. (June 17, 2004), available at
    www.ftc.gov/system/files/documents/advisory_opinions/letter-mortgage-
    bankers-association-regarding-ftc-settlementfairbanks/
    040617staffopltrtomba.pdf. CFPB Director Richard Cordray, on the other
    hand, recently asserted that it would be `` `compliance malpractice'
    for executives not to take careful bearings from the contents of these
    orders about how to comply with the law and treat consumers fairly.''
    See Richard Cordray, Speech at the Consumer Bankers Assoc. (Mar. 9,
    2016), available at www.consumerfinance.gov/about-us/newsroom/prepared-
    remarks-of-cfpb-director-richard-cordray-at-the-consumer-bankers-
    association/.
    ---------------------------------------------------------------------------
        The agencies have issued useful guidance in many areas and in many
    forms, including enforcement policy statements, advisory opinions,
    informal staff opinion letters, warning letters, studies, reports,
    bulletins, speeches, testimony, and business education materials.\105\
    Topics run the gamut from advertising testimonials and endorsements, to
    ``native advertising,'' to motor vehicle financing under the Equal
    Credit Opportunity Act. The Section recommends that the agencies
    provide further guidance on four substantive issues:
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        \105\ Note, however, that the Dodd-Frank Act transferred the FTC's
    authority to ``prescribe rules [or] issue guidelines'' to the CFPB in
    areas of overlapping jurisdiction. 12 U.S.C. Sec. 5581(b)(5). The FTC
    generally has interpreted this transfer to apply only to formal types
    of guidance (such as agency-issued industry guides), rather than, for
    example, staff opinion letters or other less formal guidance.
    ---------------------------------------------------------------------------
    a. The Meaning of ``Abusive''
        The CFPB's abusiveness authority \106\ has been applied in an
    inconsistent manner, and it is often difficult to discern why the CFPB
    has challenged a particular practice as abusive, as opposed to (or in
    addition to) unfair or deceptive. The agency has resisted providing
    additional guidance on this term beyond the statutory definition. The
    Section encourages the CFPB to provide a policy statement on abusive
    acts or practices, similar to those issued by the FTC on unfairness
    \107\ and deception \108\ in the 1980s, which have proven extremely
    useful.
    ---------------------------------------------------------------------------
        \106\ Section 1031 of the Dodd-Frank Act prohibits unfair,
    deceptive, or abusive acts or practices. 12 U.S.C. Sec. 5531.
        \107\ See FTC Policy Statement on Unfairness, supra note 74.
        \108\ See FTC Policy Statement on Deception, supra note 73.
    ---------------------------------------------------------------------------
    b. Monetary Remedies
        The FTC in many cases has not clearly articulated its rationale for
    the type or amount of monetary relief it demands, and in some cases
    where the rationale was evident, the legal theory behind it was
    questionable. For example, as noted earlier, FTC staff have demanded
    civil penalties in rule violation cases based on the defendant's gross
    revenues, a disgorgement measure, rather than the statutorily-imposed
    civil penalty factors. In the interests of greater transparency, the
    Section recommends that the FTC issue a policy statement setting forth
    the theories on which it relies to justify its demands for monetary
    relief.
        The CFPB has taken an even more aggressive approach in seeking
    fines under Dodd-Frank and other statutory authorities. Understanding
    the ways in which the CFPB is analyzing the purported harm would be
    useful for companies to integrate compliance in their operations, and
    gauge the potential risks.
    c. Advertising Interpretation and Disclosures
        The agencies have pursued failure to disclose theories and imposed
    ``clear and conspicuous'' disclosure requirements with increasing vigor
    in recent years. This has created considerable uncertainty for
    businesses in determining what information is sufficiently important
    (e.g., material and necessary to prevent unfairness or deception) that
    it must be disclosed and where the disclosures must appear (e.g., in
    advertising or at point of sale). The different opinions on claim
    interpretation and disclosure clarity at the Commission in POM
    Wonderful were not reconciled in the decision of the D.C. Circuit,
    leaving additional uncertainty as to whether and what kind of
    substantiation is needed for a claim, what claims trigger a disclosure,
    and how much information should be disclosed.
        Especially in the case of short-form broadcast advertising, there
    simply is not sufficient space to include all of the information the
    agencies have deemed necessary in forms of advertising. The need for
    qualifying information is especially important to establish when the
    cost of the qualification is the loss of other information or the loss
    of the advertisement itself. In any medium, increasing the amount of
    information that must be disclosed can obscure the most important
    messages, thus creating a tension with the ``clear and conspicuous''
    objectives of the disclosure.
        Moreover, there is uncertainty on how the ``clear and conspicuous''
    standard will be applied in particular fact situations. While some
    uncertainty is inevitable given the fact-specific nature of deception,
    the Section recommends that the agencies look for additional
    opportunities to clarify their expectations in specific areas through
    guidance and give businesses an opportunity to come into compliance
    before the agencies start bringing enforcement actions.\109\ The
    Section encourages the Commission to explore each element of disclosure
    policy--from the representation that would trigger a disclosure to the
    clarity and prominence of the disclosure--and how the factors vary
    across media.
    ---------------------------------------------------------------------------
        \109\ For example, the FTC has brought twenty-five or so cases in
    the past few years against auto dealers alleging the failure to
    adequately disclose in advertising certain material conditions,
    qualifications, and restrictions on the advertised offer. See generally
    Letter from Malini Mithal, Acting Assoc. Dir., Div. of Fin. Practices,
    FTC to Paul Sanford, Ass't Dir., Supervision Examinations, CFPB (May
    27, 2016), available at https://www.ftc.gov/system/files/documents/
    reports/ftc-enforcement-activities-related-compliance-regulation-z-
    truth-lending-act-regulation-m-consumer/
    160606cfpbrpttila.pdf?utm_source=govdelivery (summarizing recent FTC
    enforcement actions against auto dealers). In most cases, the
    disclosures appeared in the fine print at the bottom of a print ad or
    on the last screen of a television ad, consistent with how auto
    manufacturers and dealers have been advertising for decades. Without
    questioning the merits of these cases, given the uncertainty about the
    agency's disclosure standards and the severe impact on the dealers that
    were unlucky enough to have been singled out, this may have been a
    situation where clearer guidance could have been issued before
    beginning enforcement.
    ---------------------------------------------------------------------------
    IV. LEGAL DOCTRINE
    A. Monopoly
        The Section does not support the aggressive view, espoused recently
    by certain politicians and administration economists, that competition
    has declined in the United States as a result of the increasing
    concentration in key industries, which itself is attributed to the
    reluctance of the Agencies to challenge and the failure of courts to
    block more mergers.\110\ Evidence offered in support of the criticism
    has been vague and anecdotal at best, but the evidence available to
    analysts outside the Agencies does not permit the kind of analysis that
    the Agencies themselves can conduct with the information obtained in
    the course of law enforcement. The Agencies are in a unique position to
    add empirical evidence to the debate. The Section applauds the Agency
    officials who have addressed the criticism. We believe a more
    systematic response would contribute a great deal to public confidence
    in antitrust enforcement. For example, as we noted above, the Agencies
    should address this question in their merger retrospective studies.
    Likewise, the Section recommends that the Agencies use their authority
    to identify and assess conduct that may generate adverse economic
    consequences in the United States. Such an assessment should precede
    any conclusion \111\ that a marked reorientation of enforcement
    emphasis or new legal rules are needed.
    ---------------------------------------------------------------------------
        \110\ Marc Jarsulic, Ethan Gurwitz, Kate Bah, and Andy Green,
    Center for American Progress, Reviving Antitrust: Why Our Economy Needs
    A Progressive Competition Policy (June 2016); S. Elizabeth Warren,
    Reigniting Competition in the American Economy, Keynote Remarks at New
    America's Open Markets Program Event (June 29, 2016), available at
    www.warren.senate.gov/files/documents/2016-6-
    29_Warren_Antitrust_Speech.pdf.
        \111\ Comm'r Terrell McSweeny, U.S. Fed. Trade Comm'n, Making
    Antitrust Work for the 21st Century, Keynote Remarks at Washington
    Center for Equitable Growth (Oct. 6, 2016), available at https://
    www.ftc.gov/system/files/documents/public_statements/988713/mcsweeny_-
    _keynote
    _remarks_at_equitable_growth_10-6-16.pdf; Renata Hesse, Acting Ass't
    Att'y Gen., U.S. Dep't of Justice, Antitrust Div., And Never the Twain
    Shall Meet?: Connecting Popular and Professional Visions for Antitrust
    Enforcement, Opening Remarks at the 2016 Global Antitrust Enforcement
    Symposium (Sept. 20, 2016), available at www.justice.gov/opa/speech/
    acting-assistant-attorney-general-renata-hesse-antitrust-division-
    delivers-opening; Edith Ramirez, Chairwoman, U.S. Fed. Trade Comm'n,
    Keynote Remarks at the 2016 Global Antitrust Enforcement Symposium
    (Sept. 20, 2016), available at https://www.ftc.gov/public-statements/
    2016/09/keynote-remarks-ftc-chairwoman-edith-ramirez; Comm'r Maureen K.
    Ohlhausen, U.S. Fed. Trade Comm'n, Does the U.S. Economy Lack
    Competition, And If So What To Do About It?, Remarks at Hogan Lovells,
    Hong Kong (June 1, 2016), available at https://www.ftc.gov/system/
    files/documents/public_statements/952273/
    160601doesuseconomylackcomp.pdf.
    ---------------------------------------------------------------------------
        It has always been an important responsibility of the Agencies to
    preserve competition and to ensure that anticompetitive exclusion is
    deterred in order to preclude firms from achieving dominant market
    positions by anticompetitive means. Both actual collusion and exclusion
    are harmful to consumers. Thus, the Agencies should identify and attack
    conduct that achieves, enhances, or maintains market power by
    disadvantaging competitors other than by means of efficiency-based
    competition.
        Vigorous enforcement of the competition laws must be balanced with
    the need to encourage truly competitive conduct that benefits consumers
    and achieves cognizable efficiencies. With this in mind, the Section
    respectfully suggests that there are three particularly salient matters
    that deserve close attention and are ripe for close enforcement
    attention, competition advocacy, and Agency guidance in coming years:
    (1) two-sided markets, (2) contracts referencing rivals (CRRs), and (3)
    tying and bundling.
    1. Two-Sided Markets
        Two-sided or multi-sided markets are increasingly important in the
    economy, and raise complicated and unique antitrust issues.\112\ To
    date, these complex issues have not received sufficient attention. The
    Section therefore recommends that the Agencies take steps to provide
    greater guidance and clarity, including by issuing statements of
    enforcement policy and through bringing enforcement actions.
    ---------------------------------------------------------------------------
        \112\ See David S. Evans, Attention Rivalry Among Online Platforms,
    9 J. Competition L. & Econ. 313 (2013).
    ---------------------------------------------------------------------------
        A two-sided market is one in which one firm (often called a
    platform) receives revenues from separate groups that are dependent on
    each other in some way. For example, a newspaper charges readers for
    subscriptions and also charges advertisers for advertisements. The
    newspaper may charge more for advertisements if it has more
    subscribers, and so the two sides are dependent on each other. As this
    example demonstrates, there is a close relationship between two-sided
    markets and markets involving complementary goods. The Section
    recommends that the Agencies clarify whether two-sided markets require
    special antitrust analysis or are a general case of complementary
    products.
        Industries characterized by two-sided or multi-sided markets cannot
    be fully understood without a clear understanding of the interaction
    between the multiple sides. This impacts multiple parts of the
    antitrust analysis, including:

       Analysis of constraints on the exercise of market power.
            While a firm may be able to exercise market power on one side
            of a two-sided market even if the second side is competitive,
            the competitive nature of the second side may also constrain
            the first. For example, the publisher of the only local
            newspaper in a community might be reluctant or unable
            profitably to exercise market power over readers (e.g., by
            charging high prices or reducing the quality of distribution)
            if doing so will reduce readership and thus the amount the
            publisher can charge advertisers that are able to choose
            between the newspaper and other forms of local advertising such
            as radio. Because the price increases could cause both lost
            sales to readers and lost revenues from advertisers, the two-
            sided nature of the market could preclude or limit the exercise
            of market power on either side.

       Analysis of competitive effects. Conversely, conduct that
            might appear anticompetitive if one focuses entirely on one
            side of the market might seem benign or procompetitive when
            both sides of the market are taken into account. For example, a
            newspaper might charge a price below marginal cost in order to
            generate increased readership and thus more advertising
            revenue. The price might appear predatory if the antitrust
            analysis focuses solely on the reader market. However, if the
            other side of the market is taken into account, the conduct
            might appear to be an efficient mans of defraying fixed
            costs.\113\
    ---------------------------------------------------------------------------
        \113\ Similar issues can arise with non-price conduct. See, e.g.,
    Lorain Journal Co. v. United States, 342 U.S. 143 (1951); United States
    v. Microsoft Corp., 253 F.3d 34 (D.C. Cir. 2001); United States v. Visa
    U.S.A., Inc., 344 F.3d 229 (2d Cir. 2003).

        The recent decision in United States v. American Express \114\
    illustrates both the increasing importance of two-sided markets and the
    need for clarification of the applicable legal standards and
    appropriate modes of legal and economic analysis. The court appears to
    take the position that, in a vertical restriction case involving a two-
    sided market, the lawfulness of the allegedly anticompetitive conduct
    depends on the effect of the conduct on the defendant's customers on
    both sides of the market.\115\ The Section recommends that the Agencies
    encourage courts to examine the effect of the conduct on both sides of
    the market as a whole instead of the effects just on the defendant's
    customers.
    ---------------------------------------------------------------------------
        \114\ 838 F.3d 179 (2d Cir. 2016).
        \115\ 838 F.3d at 206.
    ---------------------------------------------------------------------------
    2. Contracts Referencing Rivals (CRRs)
        CRRs contain terms that refer to or depend on information about
    rivals, e.g., their sales, prices or offers. They include provisions
    such as: (1) ``most favored nation'' provisions (MFNs), in which one
    party promises to trade with the other on terms as good as, or
    sometimes better than, the terms on which it trades with other trading
    partners; (2) loyalty or ``market share'' discounts, in which the price
    paid by the buyer depends in part on the percentage of its purchases
    from the seller; (3) exclusive dealing and exclusive distributorship
    agreements, which require one party to deal exclusively with the other
    for certain products or services; and (4) rights of first refusal, by
    which one party promises that the other will have a chance to meet or
    beat any offer the promisor receives from another party.
        CRRs are ubiquitous and can have procompetitive or anticompetitive
    effects depending on the context.\116\ They often promote increased
    output and other efficiencies, such as risk-sharing or aligning
    incentives in the distribution chain. For example, an MFN can
    facilitate efficiency-enhancing transactions where one party is
    concerned that, because of changing circumstances or its lack of
    information about the market, it might wind up being disadvantaged
    compared to rivals. A right of first refusal can provide similar
    benefits. A loyalty discount can align incentives between suppliers and
    distributors in times of unforeseen demand shifts, when quantity
    discounts would not provide suitable incentives if demand increases or
    decreases materially, and can shift some of the risk of falling demand
    from the distributor to the supplier.
    ---------------------------------------------------------------------------
        \116\ See Joshua D. Wright, Comm'r, Fed. Trade Comm'n, Simple but
    Wrong or Complex but More Accurate? The Case for an Exclusive Dealing-
    Based Approach to Evaluating Loyalty Discounts (June 3, 2013),
    available at www.ftc.gov/sites/default/files/documents/public_state
    ments/simple-wrong-or-complex-more-accurate-case-exclusive-dealing-
    based-approach-evaluating-loyalty/130603bateswhite.pdf.
    ---------------------------------------------------------------------------
        CRRs may also have anticompetitive effects. MFNs can deter price
    cuts and raise entry barriers by in effect imposing a tax on lower
    prices offered to other or new trading partners. Loyalty discounts can
    deter purchasers from dealing with rival suppliers if doing so would
    push the percentage purchased from the firm offering the loyalty
    discount below certain thresholds and they can exclude rivals that are
    able to serve only a small part of the buyer's needs. Exclusive dealing
    and, less commonly, exclusive distributorship agreements can exclude
    rivals by restricting their access to customers and input suppliers.
    And right of first refusal provisions can diminish competition by
    deterring rival sellers from trying to sell to the potential customer
    who is subject to that form of contractual restriction.
        The Agencies have been instrumental in conceptualizing the
    competitive impact of CRRs and bringing them to the forefront of
    antitrust dialogue.\117\ But, while economic analysis of CRRs has
    advanced, the appropriate legal analysis remains unclear, in part
    because of problems administering standards implied by some economic
    analyses. For example, the kind of discount attribution test favored by
    some economists for loyalty discounts raises difficult factual issues
    with which courts have had little experience.\118\ Judicial decisions,
    particularly those regarding loyalty discounts, have been
    inconsistent.\119\
    ---------------------------------------------------------------------------
        \117\ See, e.g., Fiona Scott-Morton, Deputy Asst. Att'y Gen., U.S.
    Dep't of Justice, Antitrust Div., Contracts that Reference Rivals,
    Address at the Georgetown University Law Center: Antitrust Seminar
    (April 5, 2012), available at https://www.justice.gov/atr/file/518971/
    download.
        \118\ Benjamin Klein & Andres Lerner, The Economics of Alternative
    Antitrust Standards for Loyalty Contracts, Antitrust L.J. (forthcoming
    2016).
        \119\ Compare Allied Orthopedic Appliance v. Tyco Health Care Group
    LP, 592 F.3d 991 (9th Cir. 2009), with Virgin Atl. Airways v. British
    Airways, 257 F.3d 256 (2d Cir. 2001).
    ---------------------------------------------------------------------------
        The Section recommends that the Agencies look for opportunities to
    advance the evolution of legal doctrine applicable to CRRs through
    enforcement actions, amicus briefs, and perhaps agency guidelines.
    Greater clarity about the legal rules would benefit businesses in
    assessing the risk associated with a particular provision, as well as
    reduce judicial errors and litigation costs.
        The recent case involving Apple's e-book pricing model highlights
    the need for further guidance relating to CRRs.\120\ In the Apple e-
    books matter, the Division alleged that Apple facilitated an illegal
    horizontal price-fixing agreement among the publishers of e-books.
    Further guidance is needed to clarify how similar CRRs would be
    analyzed in a vertical context (absent evidence of horizontal
    collusion).
    ---------------------------------------------------------------------------
        \120\ United States v. Apple, Inc., 791 F.3d 290 (2d Cir. 2015).
    ---------------------------------------------------------------------------
    3. Tying and Bundling
        A tying arrangement is an agreement by a party to sell one product
    on the condition that the buyer also purchase a separate product. Tying
    can be challenged as an act of exclusion under Section 2 of the Sherman
    Act, as well as under Section 1 of the Sherman Act and Section 3 of the
    Clayton Act.
        Early decisions held tying arrangements to be per se illegal.\121\
    More recent decisions suggest that judicial disapproval of tying
    arrangements is dissipating.\122\ The Supreme Court in Illinois Tool
    Works v. Independent Ink Inc. clearly indicated that tying arrangements
    are not always or almost always anticompetitive.\123\ In addition, in
    United States v. Microsoft,\124\ the D.C. Circuit declined to apply the
    per se rule to the tying of an operating system and a web browser,
    reasoning that platform software tying arrangements may have
    procompetitive efficiencies.
    ---------------------------------------------------------------------------
        \121\ E.g., Int'l Salt Co. v. United States, 332 U.S. 392 (1947).
        \122\ Illinois Tool Works v. Independent Ink Inc., 547 U.S. 28
    (2006).
        \123\ Id. at 45 (``Many tying arrangements . . . are fully
    consistent with a free, competitive market.'').
        \124\ 253 F.3d 34 (D.C. Cir. 2001).
    ---------------------------------------------------------------------------
        Other courts and commentators have observed that tying frequently
    has procompetitive effects, including: (1) enhanced ability to assure
    product quality; (2) achieving economies through joint production,
    distribution, or marketing; (3) undermining collusion by enabling
    secret price-cutting; (4) precluding excessive markups by sellers of
    complementary products; and (5) avoiding double marginalization.\125\
    ---------------------------------------------------------------------------
        \125\  See, e.g., Brantley v. NBC Universal, Inc., 675 F.3d 1192,
    1200 (9th Cir. 2012) (``Like other vertical restraints, tying
    arrangements may promote rather than injure competition.''); David
    Evans & Michael Salinger, Why Do Firms Bundle and Tie? Evidence from
    Competitive Markets and Implications for Tying Law, 22 Yale J. on Reg.
    37 (2005).
    ---------------------------------------------------------------------------
        Although less numerous, some commentators and decisions have
    continued to find potential anticompetitive effects in tying
    arrangements, including: (1) raising prices to consumers; (2) limiting
    consumer choices; and (3) excluding or impairing rivals by raising
    their costs, thereby triggering higher prices and facilitating
    anticompetitive price discrimination.\126\
    ---------------------------------------------------------------------------
        \126\ See, e.g., Collins Inkjet Corp. v. Eastman Kodak Co., 781
    F.3d 264, 271-72 (6th Cir. 2015) (a tying arrangement may be
    anticompetitive if it ``tends to force more efficient competitors out
    of the tied product market''); Steven C. Salop, The Raising Rivals'
    Cost Foreclosure Paradigm, Conditional Pricing Practices and the Flawed
    Incremental Price-Cost Test, 81 Antitrust L.J. __, 31-32 (forthcoming
    2017), available at http://scholarship.law.georgetown.edu/cgi/
    viewcontent
    .cgi?article=2632&context=facpub.
    ---------------------------------------------------------------------------
        Bundling, like tying, is a practice that, in different market
    contexts, can be either procompetitive or anticompetitive. Bundled
    discounts are awarded to customers who make a designated number of
    purchases across multiple product lines. Bundled discounts offered by
    large firms with numerous product lines may impair competition in
    circumstances where the bundled discount cannot be matched by smaller
    firms lacking broad product lines, regardless of whether the smaller
    firm is the more efficient producer of a particular product.\127\ On
    the other hand, bundling can result in a real discount, reducing market
    prices and increasing competition, and can help generate economies of
    scope and scale.
    ---------------------------------------------------------------------------
        \127\  See Daniel A. Crane & Graciela Miralles, Toward a Unified
    Theory of Exclusionary Vertical Restraints, 84 S. Cal. L. Rev. 605, 646
    (2011) (``[A] contract or contractual provision should be deemed to
    foreclose some share of the market only when it prevents an equally
    efficient competitor from profitably offering its own set of
    contractual terms that the customer reasonably might chose in lieu of
    the defendant's terms for some increment of the market's output.'');
    Elyse Dorsey & Jonathan M. Jacobson, Exclusionary Conduct in Antitrust,
    89 St. John's L. Rev. 101, 134-36 (2015).
    ---------------------------------------------------------------------------
        The Third and Ninth Circuits disagree on the proper antitrust test
    for bundled discounts. The Ninth Circuit applies predatory pricing
    standards (though without the recoupment feature).\128\ The Third
    Circuit rejects predatory pricing tests and condemns bundled discounts
    that ``foreclose the opportunities of rivals'' in an ``unnecessarily
    restrictive way.'' \129\ When different rules apply to conduct
    depending on where it occurs, the potential for erroneous enforcement
    is unacceptably high. The Section suggests that bundling is another
    area ripe for an Agency enforcement policy statement to identify and
    distinguish the circumstances where the practice produces
    procompetitive or anticompetitive effects.
    ---------------------------------------------------------------------------
        \128\ Cascade Health Sol'ns v. PeaceHealth, 515 F.3d 883 (9th Cir.
    2008).
        \129\ LePage's Inc. v. 3M, 324 F.3d 141 (3d Cir. 2003).
    ---------------------------------------------------------------------------
        In light of the countervailing considerations that tying and
    bundling cases present, this is an area in which the Agencies should
    proceed carefully, concentrating on practices they believe to be truly
    anticompetitive, while considering the efficiency justification both as
    a matter of prosecutorial discretion and as presented in court. Such
    prudential enforcement activity would be very helpful in drawing the
    line between what is procompetitive and what is not.
    B. Antitrust and Intellectual Property
    1. Patent-Related Antitrust Issues
        The Section recommends that the Agencies study patent-related
    antitrust issues, in particular those related to phenomena sometimes
    called ``holdup'' and ``holdout.'' It is generally accepted that the
    ownership of a patent by itself is not presumed to create a presumption
    of market power, and that the proper assertion of a valid patent is not
    an antitrust violation. By the same token, improper assertions of
    patent rights, like those involving other assets, can raise questions
    of competitive significance. ``Patent holdup'' occurs, for example,
    when an SEP holder that has made a commitment to license its patents on
    FRAND terms instead uses the essential nature of its patent
    (``standard-lock-in'') to charge an unjustifiably higher royalty than
    would have been possible before its patent was included in the
    standard.'' \130\ Supracompetitive compensation can lead to deadweight
    loss from revenue raising, deter commercialization of patented
    technologies, reduce follow-on invention, exacerbate strategic uses of
    patents to raise rivals' costs, and induce costly overinvestment in
    patents to be used for those purposes or defensively. Subcompetitive
    compensation can reduce returns to investment in patentable inventions,
    and the prospect thereof could reduce such investment in innovation, or
    standard-setting, or both.
    ---------------------------------------------------------------------------
        \130\ Douglas H. Ginsburg et al., The Troubling Use of Antitrust to
    Regulate FRAND Licensing, 10 Competition Pol'y Int'l Antitrust Chron. 1
    (2015); see also, J. Gregory Sidak, The Antitrust Division's
    Devaluation of Standard-Essential Patents, 104 Geo. L.J. Online 48, 61
    & n.49 (2015).
    ---------------------------------------------------------------------------
        Holdout refers to the situations in which an implementer either
    delays or refuses to take a license or engages in bad-faith challenges
    to patent validity or in which a patent holder delays, or refuses to
    offer, or engages in bad-faith negotiation regarding, a license to the
    entire portfolio of patents, or any subset thereof, held by the patent
    holder or any commonly controlled entity for which the implementer
    seeks a license or conceals or fails to disclose the entire portfolio
    of patents held by the patent holder or any commonly controlled
    entity.\131\ Both holdup and holdout can arise with respect to
    technologies included in, or necessary as a practical matter to
    implement, public standards and patented technologies that are not
    included in standards.
    ---------------------------------------------------------------------------
        \131\ Sidak, supra note 131 at 61 & n.49; Anne Layne-Farrar, Patent
    Holdup and Royalty Stacking Theory and Evidence: Where Do We Stand
    After 15 Years of History? (2014), available at http://www.oecd.org/
    officialdocuments/publicdisplaydocumentpdf/?cote=DAF/COMP/
    WD%282014%2984&doclanguage=en.
    ---------------------------------------------------------------------------
        The holdup issue raises a number of questions. One is whether
    patent holders that assert SEP patents are able to obtain
    supracompetitive royalties from users in an individual case or whether
    implementers of patented technologies can force patent holders to
    accept less than competitive royalties.\132\ Another, very different
    question is whether the costs incurred by technology users for using
    patented standards technology have in the aggregate been excessive,
    e.g., would harm the product market or restrict output. Empirical
    studies on the subject require data, most of which is available only in
    aggregated form, which has obvious limitations. A finding that
    aggregate costs to technology users are not excessive could mean that
    patent holdup has not in the aggregate deterred the use of patented
    standards technologies or follow-on inventions, but such a finding
    would not itself demonstrate the absence of adverse effects from
    holdup. Aggregated data would not disclose problematic holdup if, for
    example, (1) relatively few patents were asserted in the period studied
    and the percentage of patents being asserted increases over time or (2)
    excessive royalties when patents are asserted have distorted the use
    of, or follow-on invention based on, the asserted patents or created
    perverse incentives for over-patenting. Careful analysis of the context
    is important, because neither holdup nor excessive pricing, without
    more, violates the antitrust laws.
    ---------------------------------------------------------------------------
        \132\ See, e.g., William F. Lee & A. Douglas Melamed, Breaking the
    Vicious Cycle of Patent Damages, 101 Cornell L. Rev. 384 (2016).
    ---------------------------------------------------------------------------
        There is no consensus about the factual significance and likelihood
    of the phenomena known as holdup and holdout, and the disagreements
    about these factual issues have important ramifications for patent
    policy and antitrust policy regarding patents. The Section concurs in
    the statements of ranking enforcement officials that high or low
    returns standing alone do not form the basis for a finding of an
    antitrust violation in the absence of evidence of unlawful exclusionary
    conduct.\133\ It is the exclusionary conduct that raises the unresolved
    questions. We therefore recommend that the Agencies gather reliable and
    credible information on--and propose a framework for evaluating--holdup
    and holdout, and the circumstances in which either may be
    anticompetitive. The Agencies are particularly well-suited to gather
    evidence and assess competitive implications of such practices, which
    could then inform policymaking, advocacy, and potential cases. The
    Agencies' perspectives could contribute valuable insights to the larger
    antitrust community.
    ---------------------------------------------------------------------------
        \133\ See, e.g., Bill Baer, Ass't Att'y Gen., U.S. Dep't of
    Justice, Reflections on the Role of Competition Agencies When Patents
    Become Essential, Remarks at the 19th Annual Int'l Bar Association
    Competition Conference (Sept. 11, 2015); Edith Ramirez, Chairwoman,
    U.S. Fed. Trade Comm'n, Standard-Essential Patents and Licensing: An
    Antitrust Enforcement Perspective, 8th Annual Global Antitrust
    Enforcement Symposium (Sept. 10, 2014).
    ---------------------------------------------------------------------------
    2. International Issues Related to Intellectual Property
        In addition to patent issues, international topics are significant,
    most notably in the context of the multinational implications of agency
    actions and the effect of decisions by agencies such as the
    International Trade Commission (ITC).
    a. Multinational Effects
        Worldwide portfolio licensing remedies pose significant comity
    concerns, especially when such remedies are not consistent with other
    jurisdictions' policies.\134\ The United States, for example, does not
    regulate price; instead, because of a concern about innovation
    incentives, the United States protects the right of IP holders to set
    the prices of their products.\135\ In contrast, several foreign
    countries have ``excessive pricing'' prohibitions and some foreign
    competition authorities have applied them to IP rights.
    ---------------------------------------------------------------------------
        \134\ See, e.g., Christine A. Varney, Ass't Att'y Gen., Antitrust
    Div. U.S. Dep't of Justice, Coordinated Remedies: Convergence,
    Cooperation, and the Role of Transparency, Remarks as Prepared for the
    Institute of Competition Law New Frontiers of Antitrust Conference
    (Feb. 15, 2010) (encouraging antitrust agencies to ``endeavor to make
    our remedial decisions with our eyes open to their consequences beyond
    our shores, taking steps to minimize their extraterritorial effects;
    let us keep our eyes open to what our sister agencies have already done
    in particular cases, so that we do not unnecessarily diverge from their
    decisions'').
        \135\ See supra note 134.
    ---------------------------------------------------------------------------
        While the FTC and some foreign agencies have threatened to impose
    extra-jurisdictional remedies in some instances, other foreign
    jurisdictions have appropriately refrained from imposing remedies with
    extraterritorial effects. For example, the antitrust agencies in Europe
    and China typically have limited their remedies to domestic conduct
    pertaining to domestic patents. In April 2014, for example, the
    European Commission's Directorate-General for Competition (DG
    Competition) entered into a settlement with Samsung \136\ and issued a
    decision against Motorola Mobility \137\ essentially prohibiting both
    companies from seeking injunctive relief against willing licensees of
    standard essential patents except under certain limited circumstances.
    DG Competition specifically limited its remedy to conduct occurring in
    the European Economic Area (EEA), and only to patents granted in the
    EEA. Likewise, in a 2015 penalty decision against Qualcomm for
    allegedly abusing a dominant position by charging unreasonably high
    royalties, bundling SEP and non-SEP licenses without justification, and
    imposing other unreasonable conditions on the sale of baseband chips
    (such as requiring a waiver of the licensee's right to challenge the
    agreement), China's National Development and Reform Commission (NDRC)
    limited remedies to conduct related to Chinese patents being licensed
    for use in China only.\138\ In contrast, in the Rambus matter,\139\ the
    FTC's cease and desist order applied to the company's enforcement of
    its patents everywhere in the world. In light of the significant comity
    concerns presented by extraterritorial remedies involving patents, the
    Section recommends that the Agencies refrain from seeking such
    remedies.
    ---------------------------------------------------------------------------
        \136\ Press Release, European Comm'n, Antitrust: Commission Accepts
    Legally Binding Commitments by Samsung Electronics on Standard
    Essential Patent Injunctions (April 29, 2014) (IP/14/1490).
        \137\ Case AT.39985-Motorola-Enforcement of GPRS standard essential
    patents, Comm'n Decision, 2014 O.J. (C 344) 06.
        \138\ NDRC Administrative Sanction Decision No. 1 [2015] (Mar. 2,
    2015), available at http://www.ndrc.gov.cn/gzdt/201503/
    t20150302_666209.html. Specifically, the NDRC approved the
    ``rectification plan'' submitted by Qualcomm, under which the company
    agreed: (1) not to bundle Chinese SEPs and non-SEPs and to provide
    patent lists during negotiations; (2) to charge royalties of not more
    than 5 percent for Chinese 3G SEPs and 3.5 percent for Chinese 4G SEPs
    using a royalty base of 65 percent of the net selling price of the
    device; (3) not to condition the sale of baseband chips on signing a
    licensing agreement with terms that NDRC found to be unreasonable
    (e.g., a no-challenge clause); and (4) to provide existing licensees
    with an opportunity to elect to take the new terms for sales of branded
    devices for use in China.
        \139\ Final Order in the Matter of Rambus Incorporated, File No.
    011-0017, Dkt. No. 9302 (F.T.C. 2007), available at https://
    www.ftc.gov/sites/default/files/documents/cases/2007/02/
    070205finalorder.pdf. The cease and desist order was ultimately
    overturned by the United States Court of Appeals for the District of
    Columbia Circuit on other grounds. Rambus v. FTC, 522 F.3d 456 (D.C.
    Cir. 2008), cert. denied, 129 S. Ct. 1318 (2009).
    ---------------------------------------------------------------------------
        Some foreign competition authorities have also considered imposing
    broad requirements that IP holders share their IP with others,
    including competitors. The United States strongly disfavors such
    requirements, while some Asian competition agencies have argued in
    favor of sanctioning refusals to license and making licensing
    compulsory.\140\ The Agencies also recognize that practices such as
    tying and bundling, discriminatory licensing, cross-licensing, and
    grantbacks can be procompetitive, and thus call for an effects-based
    analysis. In contrast, some Asian competition agencies appear to apply
    presumptions that such licensing conduct is anticompetitive. To protect
    the ability of U.S. businesses to innovate and compete, the Agencies
    may wish to consider whether the concerns warrant an adjustment in U.S.
    policy or an international dialogue that might reconcile these
    conflicting policies.
    ---------------------------------------------------------------------------
        \140\ See, e.g., Chinese Antimonopoly and Anti-unfair Competition
    Enforcement Bureau of State Administration for Industry & Commerce,
    Antitrust Guideline on Intellectual Property Rights Abuses 16,
    available at http://www.saic.gov.cn/fldyfbzdjz/gzdt/201601/
    W02016010858039947
    3419.pdf.
    ---------------------------------------------------------------------------
    b. International Trade Commission
        In addition to multinational implications, issues arise from the
    differences between the standards that Federal courts apply for
    injunctions and the United States International Trade Commission's
    (ITC) applies for exclusionary remedies. The U.S. Supreme Court's
    decision in eBay Inc. v. MercExchange,\141\ held that a district court
    must apply the same standards required in all other injunction cases.
    After eBay, a district court must consider and weigh whether: the
    plaintiff will suffer irreparable harm; money damages are inadequate to
    compensate the plaintiff; the balance of hardships weigh in the
    plaintiff's favor; and the public interest would not be disserved by
    the issuance of an injunction. Because the only relief available before
    the ITC is injunctive in nature, complainants' primary remedy is an
    exclusion order excluding the importation of infringing goods,\142\
    rather than money damages which are not available there. With its own
    statutory scheme that lays out a test for exclusion orders, the ITC
    does not follow the eBay test. For that reason, it is possible that
    patent holders who appear before the ITC could obtain exclusion orders
    when they would not be entitled to injunctions, or vice versa.\143\
    This divergence in standards could result in different outcomes for
    similar conduct depending on the tribunal addressing that conduct, and
    thus could have a significant impact on litigants' choice of tribunals.
    ---------------------------------------------------------------------------
        \141\ 547 U.S. 388 (2006).
        \142\ 19 U.S.C. Sec. 1337(d)-(f).
        \143\ E.g., Colleen V. Chien & Mark A. Lemley, Patent Holdup, The
    ITC, and the Public Interest, 98 Cornell L. Rev. 1, 16 (2012).
    ---------------------------------------------------------------------------
        The possibility that SEP owners might attempt to avoid district
    courts and obtain bargaining power in royalty negotiations by seeking
    exclusion orders at the ITC raises issues for the appropriate analysis
    of patent holdup disputes. If the ITC were to issue exclusion orders to
    SEP owners under circumstances in which injunctions would not be
    appropriate under the eBay standard, the inconsistency could induce SEP
    owners to strategically use the ITC in an effort to achieve settlements
    of patent disputes on terms that might require payment of
    supracompetitive royalties. Though it is not clear how likely this is
    or whether the risk has led to supracompetitive prices in the past,
    this dynamic could lead to holdup by SEP owners and unconscionably
    higher royalties.\144\ We recognize that Congress has already
    established by statute standards and factors that the ITC should weigh
    for determining when the ITC should grant an exclusion order, but
    suggest that the Agencies consider offering guidance to the ITC about
    potential SEP holdup and holdout.
    ---------------------------------------------------------------------------
        \144\ Whether the threat of an exclusion order is likely to lead to
    inflated royalties depends in part on the likelihood of an exclusion
    order being granted, and thus far the ITC has granted only one
    exclusion order on an SEP, which was disapproved by the USTR. See U.S.
    Trade Representative Exec. Office of the President, Disapproval of the
    U.S. International Trade Commission's Determination in the Matter of
    Certain Electronic Devices, Including Wireless Communication Devices,
    Portable Music and Data Processing Devices, and Tablet Computers,
    Investigation No. 337-TA-794 (2013), available at https://ustr.gov/
    sites/default/files/08032013%20
    Letter_1.PDF (hereinafter USTR 2013 Veto Letter to ITC).
    ---------------------------------------------------------------------------
        The Section believes that analysis of these issues could also yield
    valuable information for the Office of the United States Trade
    Representative (USTR) in exercising its review function to overturn
    what it considers to be inappropriate ITC orders. For example, can
    litigants be counted on to seek intervention in appropriate cases? If
    not, does the USTR have adequate mechanisms to ensure review when
    appropriate? We believe scrutiny on questions like these would be
    worthwhile.
    3. Patent Acquisitions and Dispositions
        The Agencies should look at purchases and sales of patents as they
    would other assets, to evaluate their impact on competition.
        It is generally accepted that the ownership of a patent by itself
    is not presumed to create a presumption of market power. By the same
    token, acquisitions and dispositions of intellectual property, like
    those involving other assets, can raise questions of competitive
    significance. Reflecting the complexity of the setting, the Agencies
    should recognize the potential harms and benefits from the creation and
    exploitation of large patent portfolios. In some circumstances, such
    collections ``can be used offensively, and can be valuable primarily
    because of their size rather than the validity of each patent in the
    portfolio.'' \145\ At the same time, the Agencies should take into
    account, as they do in other asset acquisitions, the potentially
    significant efficiencies from such acquisitions. In particular, they
    should recognize the potential benefits of aggregating complementary
    patents in solving the Cournot complements problem.\146\
    ---------------------------------------------------------------------------
        \145\ Michael A. Carrier, Patent Assertion Entities: Six Actions
    the Antitrust Agencies Can Take, at 2-3, CPI Antitrust Chron. (Jan.
    2013), available at https://www.justice.gov/sites/default/files/atr/
    legacy/2013/04/03/paew-0034.pdf.
        \146\ See Mark A. Lemley & A. Douglas Melamed, Missing the Forest
    for the Trolls, 113 Colum. L. Rev. 2117, 2157-58 (2013).
    ---------------------------------------------------------------------------
        Combining substitute patents (i.e., patents covering competing
    products or methods to accomplish the same objective) may raise Clayton
    Act issues applicable to horizontal mergers. Despite this, resolution
    of the competitive implications of a particular combination is often
    made difficult by uncertainty about the validity and scope of patents,
    and thus, about their competitive significance. The Agencies should use
    merger retrospectives to shed light on these issues.
        The Agencies should also consider harm to competition that could
    result from disaggregating complementary patents. Disaggregating such
    patents could lead to a double marginalization problem that results in
    increased costs for technology users, and could be a strategic device
    for raising costs for firms that compete with one or more of the patent
    holders.\147\ Enforcement actions based on the Sherman Act could be
    warranted depending on factors including contract terms (e.g.,
    requiring the targeting of product market rivals of the original owner)
    and the increased likelihood that the disposition of the patents will
    lead to higher aggregate prices for technology users without evident
    procompetitive justification.
    ---------------------------------------------------------------------------
        \147\ See id. at 2158-61, 2178-80.
    ---------------------------------------------------------------------------
    4. Standard Development Organizations
        Standard Development Organizations (SDOs) present multiple
    antitrust issues, including the role the Agencies should play and
    Sherman Act Section 1 considerations.
    d. General Agency Practice
        As a starting point, the Section recommends that the Agencies
    continue their scrutiny of SDOs. While such organizations promise
    significant procompetitive benefits in the form of interoperability,
    innovation, and enhanced consumer choice, they are also capable of
    having anticompetitive effects in the form of boycotts, the exercise of
    monopsony power, and holdup. Holdup concerns could arise from, for
    example, (1) the avoidance of FRAND or royalty-stacking obligations
    through transfer, tying, and bundling,\148\ (2) inadequate measures to
    prevent patent holders from exercising market power, and (3) enabling
    implementers to compel subcompetitive royalty rates as a condition of
    including the patented technologies in the standard. On the other hand,
    conduct such as tying and bundling may be procompetitive or benign.
    There are numerous procompetitive reasons for portfolio licensing,
    including reducing transaction costs and providing implementers with
    freedom to operate.
    ---------------------------------------------------------------------------
        \148\ For a critique of the royalty-stacking theory, see Alexander
    Galetovic & Kirti Gupta, Royalty Stacking and Standard Essential
    Patents: Theory and Evidence from the World Mobile Wireless Industry
    (June 2016), available at http://papers.ssrn.com/sol3/
    papers.cfm?abstract_id=
    2790347.
    ---------------------------------------------------------------------------
        While the guidance supplied by the Agencies as to whether certain
    SDO and other joint conduct may violate the antitrust laws has been
    instructive and should be continued, the Agencies should be careful
    when utilizing the business review letter process to emphasize that
    this form of guidance is highly fact-specific to the matter at hand. As
    the Division has recognized, it is unlikely that there is a ``one-size-
    fits-all'' template for analyzing SDO policies regarding IP rights.
    Because SDOs ``vary widely in size, formality, organization and
    scope,'' \149\ decisions regarding specific rules are ordinarily best
    left to individual SDOs and their members to decide.
    ---------------------------------------------------------------------------
        \149\ U.S. Dep't of Justice and Fed. Trade Comm'n, Antitrust
    Enforcement and Intellectual Property Rights: Promoting Innovation and
    Competition 33-34 n.5, 48 (2007), available at http://www.ftc.gov/
    reports/innovation/P040101PromotingInnovationandCompetition
    rpt0704.pdf.
    ---------------------------------------------------------------------------
    e. Sherman Act Section 1 Considerations
        Some contend that, under certain circumstances, SDO patent policies
    could violate the antitrust laws.\150\ The argument is that, first,
    such policies could enable even patent holders that agreed to comply
    with the patent policies to exercise market power ex post through, for
    example, inadequate measures to prevent the exercise of such market
    power. Second, they could enable technology users to exercise market
    power ex ante by, for example, requiring patent holders to agree to
    subcompetitive royalty rates as a condition of inclusion of their
    patented technologies in the standard. There is no case law that
    directly supports such contentions.
    ---------------------------------------------------------------------------
        \150\ See, e.g., Am. Soc'y of Mech. Eng'rs v. Hydrolevel Corp., 456
    U.S. 556 (1982). Seeking an injunction against a willing licensee also
    could potentially violate Sec. 2 of the Sherman Act or Sec. 5 of the
    Federal Trade Commission Act.
    ---------------------------------------------------------------------------
        Standard-setting may confer market power, and in these settings,
    the Agencies could study the extent to which a FRAND declaration limits
    the potential market power derived from a patent's inclusion in a
    standard. Some empirical research suggests that standardization does
    not confer market power, but rather serves to ``crown [existing]
    winners.'' \151\ Other research and cases show that standardization has
    conferred market power.\152\ In those instances in which an SDO creates
    market power in the technology market for an SEP holder, the Agencies
    should consider whether there may be circumstances in which the SDO
    might be in violation of Section 1 if it fails to take reasonable steps
    to prevent the exercise of that market power, such as a suitably
    defined and enforced FRAND policy or whatever effective alternative the
    SDO chooses.
    ---------------------------------------------------------------------------
        \151\ See, e.g., Anne Layne-Farrar & A. Jorge Padilla, Assessing
    the Link Between Standards and Patents, in Innovations in
    Organizational It Specification And Standards Development 19, 2426 (Kai
    Jacobs ed., 2012).
        \152\ See, e.g., Rudi Bekkers et al., Declared Essential Patents
    (Hoover Institution, IP2, Working Paper No. 16003, 2016); M. Rysman &
    T. Simcoe, Patents and the Performance of Voluntary Standard Setting
    Organizations, 54 Mgmt. Sci. 11, 1920-34 (2008); David Yoffie et al.,
    Qualcomm Incorporated 2009, Harvard Business School case study 9-710-
    433 (2011); see also, e.g., Rambus v. FTC, 522 F.3d 456 (D.C. Cir.
    2008).
    ---------------------------------------------------------------------------
        As the Agencies have recognized, SDOs generally have leeway to set
    their own policies. While the Section acknowledges that it is a
    contested issue and there are strongly held opposing viewpoints, some
    of us believe that in appropriate cases SDO policies (or the lack
    thereof) can form the basis for a Section 1 claim. One example is
    provided by FRAND and royalty-stacking obligations, which are generally
    a matter of contract law, but which could conceivably form the basis of
    a Section 1 claim if SDOs do not implement policies that would prevent
    such obligations from being evaded through transfer of FRAND-encumbered
    patents.\153\
    ---------------------------------------------------------------------------
        \153\ Note that any such liability must be consistent with the
    Standards Development Organization Advancement Act of 2004 (SDOAA),
    which extends the protections provided by the National Cooperative
    Research and Production Act of 1993 to SDOs. The SDOAA provides that
    the rule of reason applies to SDOs while they are engaged in standards
    development activities and limits liability to actual, as opposed to
    treble, damages so long as they properly notify the Agencies. 15 U.S.C.
    Sec. Sec. 4301-4306 (2016).
    ---------------------------------------------------------------------------
        There are a variety of possible alternatives to existing FRAND
    policies that SDOs might consider. These include requiring SDO members
    to use a certain type of arbitration when parties cannot agree on a
    FRAND rate and addressing the circumstances under which SDO members
    could seek injunctions or exclusion orders for infringement of FRAND-
    encumbered patents.
    5. Competition Advocacy
        The Agencies have done an effective job informing the PTO, USTR,
    Congress, ITC, and others of their competition concerns in the SEP
    area. In particular, the USTR disapproved an exclusion order from the
    ITC concerning an SEP, a decision that reflected arguments made by the
    Agencies.\154\ Those efforts should be continued but are likely
    insufficient on their own to achieve competitive outcomes. If informed
    parties benefit from the status quo, competition advocacy alone will
    not be able to change their behavior. The Agencies could analyze the
    incentives that drive the remaining anticompetitive behavior, and
    consider what they could do to change those incentives. For example,
    the Agencies could (1) litigate cases that raise significant antitrust
    concerns; or (2) file amicus briefs in private cases when the issues
    are important to obtaining procompetitive outcomes.
    ---------------------------------------------------------------------------
        \154\ See USTR 2013 Veto Letter to ITC, supra note 144.
    ---------------------------------------------------------------------------
        In the context of SDO patent policies, the Agencies have
    contributed to the public policy discussion and offered guidance to
    particular SDOs through the business review letter process. We
    encourage the agencies to continue reminding practitioners that general
    guidance does not define the limits of the law, and that the
    availability of guidance is not a signal that pre-approval is required
    or preferred before SDOs, or other entities in other areas, adopt new
    policies.
    V. Industry-Specific Issues
    A. Financial Sector
    1. Interaction of Competition and Regulation
        Financial markets are heavily regulated by a variety of government
    agencies such as the Federal Reserve (including the CFPB), SEC, and
    CFTC. Though government agencies in charge of competition policy have
    to work within the existing regulations and are in some circumstances
    constrained by legal precedents from using the antitrust laws to
    constrain industry behavior in a regulated industry, they can sometimes
    influence the content of the regulations and their adjudication.\155\
    The principle that competition is desirable applies to many features of
    financial markets and it is a very valuable application of agency
    resources to explain the positive and negative competitive consequences
    of various regulations.\156\ As a general matter, regulations impose
    disproportionate burdens on small firms compared to large firms and
    therefore one can expect that regulations will favor large financial
    firms over small ones and will discourage entry of financial firms at a
    small scale.\157\ The Agencies should make sure that the cost to the
    competitive process of those consequences should be considered as
    various regulatory bodies contemplate any regulatory change and
    evaluate current regulations.
    ---------------------------------------------------------------------------
        \155\ See, e.g., Credit Suisse v. Billings, 551 U.S. 264 (2007).
        \156\ See, e.g., OECD, Competition and Financial Markets Key
    Findings (2009).
        \157\ See, e.g., Daniel K. Tarullo, Member, Board of Governors of
    the Fed. Reserve Sys., Statement before the U.S. Senate Committee on
    Banking, Housing, and Urban Affairs (Sept. 9, 2014) (noting the Federal
    Reserve was ``cognizant that regulatory compliance can impose a
    disproportionate burden on smaller financial institutions'' and tried
    to work with smaller institutions to try to minimize this burden when
    implementing the Dodd-Frank Act).
    ---------------------------------------------------------------------------
    2. Banking
        By conventional competition benchmarks, the commercial banking
    sector in the U.S. is not highly concentrated nationally, although
    concentration has increased recently.\158\ Given the generally modest
    national concentration in banking, despite the large size of some
    individual firms, calls for breaking up large national banks to promote
    competition \159\ do not appear to be justified by the current state of
    knowledge about competition and efficiency in banking. However, some
    studies have found that when measured at a local level, banking is
    concentrated in certain areas.\160\ Local concentration in banking can
    affect the availability of credit to borrowers (especially small firms)
    as well as the rates paid to depositors.\161\ Usual merger analysis
    would identify such harms and those must be considered in evaluating
    any merger. The Section is aware of no support for the proposition that
    competition policy as applied to banking should give any special
    consideration to stockholders or debt holders of banks (excluding
    depositors).\162\ Mergers that would enrich stockholders or debt
    holders but harm consumers deserve no special treatment or exception
    when applied to banking. Similarly, the prohibition of entry of new
    banking entities that could take advantage of certain scale or scope
    efficiencies in order to protect the profitability of existing banks is
    not justified from the viewpoint of competition policy. Claims that
    competition policy should yield to other objectives--for example, the
    difficulty of regulating new entities--should be evaluated relative to
    less costly alternatives--for example, a requirement that the new
    entity post sufficient financial capital to satisfy legitimate
    regulatory concerns. In that way, legitimate regulatory concerns can be
    separated from protectionist efforts to restrain competition to the
    detriment of consumers. An evaluation of whether current or proposed
    regulations needlessly distort competition would be appropriate.
    ---------------------------------------------------------------------------
        \158\ For example, based on assets held, the four-firm
    concentration ratio of commercial banks in the United States was below
    45 percent in 2014. See, e.g., Steven Schaeffer, Five Biggest U.S.
    Banks Control Nearly Half Industry's $15 Trillion in Assets, Forbes
    (Dec. 3, 2014) (reporting data from SNL Financial).
        \159\ See, e.g., Sen. Elizabeth Warren, Reigniting Competition in
    the American Economy, Keynote Remarks at New America's Open Markets
    Program (June 29, 2016).
        \160\ Brian Akins et al., Bank Competition and Financial Stability:
    Evidence from the Financial Crisis, 51 J. of Fin. and Quantitative
    Analysis 1 (2016).
        \161\Board of Governors of the Fed. Reserve Sys., Report to
    Congress on the Availability of Credit to Small Business (2012); Ben R.
    Craig & Valeriya Dinger, Bank Mergers and the Dynamics of Deposit
    Interest Rates, 36 J. of Fin. Servs. Research 111-33 (2009); Charles
    Kahn et al., Bank Consolidation and the Dynamics of Consumer Loan
    Interest Rates, 78 J. of Bus. 99-133 (2005).
        \162\ See, e.g., Washington Mut. Sav. Bank v. Federal Deposit Ins.
    Corp., 482 F.2d 459 (9th Cir. 1973) (holding that all bank merger
    applications are subjected to traditional antitrust analysis and if
    violation is discerned, balancing of banking factors and
    anticompetitive effects is made, but FDIC, in weighing these interests,
    may not apply competitive standard more stringent than antitrust
    laws.); Robert E. Litan, Deputy Asst. Att'y Gen., Dept. of Justice,
    Antitrust Div., Antitrust Assessment of Bank Mergers, (Apr. 6, 1994)
    (``The Division uses the same standards to assess the competitive
    impacts of all mergers, whether or not they involve banks.'').
    ---------------------------------------------------------------------------
    3. Setting Benchmark Prices
        Several recent cases have focused on the collective activity of
    firms that claim to set a rate or pricing benchmark for such things as
    interest rates, gold prices, aluminum prices, foreign exchange, and the
    like.\163\ If the process turns out to be flawed either because of poor
    design or because the participants do something other than what they
    claim, the benchmark's value is affected. Although the courts in recent
    cases have provided some guidance, the Agencies should provide further
    guidance as to whether and under what circumstances such conduct is
    actionable and, if it is, whether it is appropriate to treat those
    cases as fraud, breach of contract, or antitrust cases.
    ---------------------------------------------------------------------------
        \163\ See, e.g., Gelboim v. Bank of Am. Corp., 823 F.3d 759 (2d
    Cir. 2016) (U.S. dollar London Interbank Offered Rate); In re Aluminum
    Warehousing Antitrust Litig., 833 F.3d 151 (2d Cir. 2016) (the
    ``Midwest Premium'' for aluminum); In re London Silver Fixing, Ltd.,
    Antitrust Litigation, No. 14-MD-2573 (VEC), 2016 WL 5794777 (S.D.N.Y.
    Oct. 3, 2016) (the silver ``Fix Price''); In re Commodity Exchange,
    Inc. Gold Futures and Options Trading Litigation, No. 14-MD-2548 (VEC),
    2016 WL 5794776 (S.D.N.Y. Oct. 3, 2016) (the gold ``Fix Price'');
    Alaska Electrical Pension Fund v. Bank of America Corp., No. 14-CV-
    7126, 2016 WL 1241533 (JMF) (S.D.N.Y. Mar. 28, 2016) (U.S. dollar
    ISDAfix); In re Foreign Exchange Benchmark Rates Antitrust Litigation,
    74 F. Supp. 3d 581 (S.D.N.Y. 2015) (benchmark rates in the Foreign
    Exchange market).
    ---------------------------------------------------------------------------
    4. Creation of Markets
        Exchanges create organized markets and are often regulated by
    sector-specific agencies like the SEC or CFTC. In many unregulated
    sectors, entities also may collaborate to create de facto markets,
    though not organized. The creation of markets, whether organized
    formally or not, requires collective action among participants.
    Information is often exchanged and certain rules on participation might
    be specified. A joint venture that collects information can misuse that
    information to exclude others from getting it. At the same time, rules
    limiting participation or conduct of participants can be desirable in
    order to prevent free riding, thereby enabling the markets to
    exist.\164\ Liquidity is a key attribute of many markets and rules that
    enhance liquidity at the expense of broad participation can be
    desirable. Forcing access to certain clearing functions of exchanges
    can be a form of free riding. The Division should remain vigilant that
    the creation and operation of financial services markets remain open,
    transparent, and accessible for all market participants. Experience has
    shown that transparent market exchanges drive procompetitive benefits
    and efficiencies, often leading to reduced prices and expanded output
    of market-made transactions.\165\
    ---------------------------------------------------------------------------
        \164\ See, e.g., Board of Trade of City of Chicago v. United
    States, 246 U.S. 231 (1918) (members of Board of Trade were restricted
    from trading off the exchange; the restriction forced more trading on
    the exchange, thereby promoting its success).
        \165\See, e.g., id.
    ---------------------------------------------------------------------------
    B. Healthcare Industry
    1. Antitrust Enforcement by the FTC and Division Following Healthcare
            Reform
        The healthcare industry is one of the largest sectors in the U.S.
    economy, accounting for approximately one-fifth of GDP.\166\ Parts of
    the public as well as the private U.S. healthcare system are based on
    principles of competition, and therefore the system only functions as
    well as the markets that support it.\167\ This point also applies to
    the operation of the Affordable Care Act (ACA), which requires
    competition in healthcare markets to be cost effective. However, as
    suggested by the ACA and recognized by the FTC and the Division, some
    forms of cooperation between providers and others may be beneficial and
    not necessarily in violation of the antitrust laws.\168\
    ---------------------------------------------------------------------------
        \166\ Organisation for Economic Co-Operation and Development,
    ``Briefing Note, OECD Health Statistics 2014: How Does the United
    States Compare? 3 (2014), available at www.oecd.org/unitedstates/
    Briefing-Note-UNITED-STATES-2014.pdf.
        \167\ Martin Gaynor, Efficiencies Analysis: False Dichotomies,
    Modeling and Applications to Health Care (Aug. 3, 2014).
        \168\ Edith Ramirez, Chairwoman, Fed. Trade Comm'n, Keynote Address
    at Antitrust in Healthcare Conference (hereinafter ``Keynote Address'')
    (May 12, 2016), available at https://www.ftc.gov/system/files/
    documents/public_statements/950143/160519antitrusthealthcarekey
    note.pdf (``[P]rocompetitive collaborations are already permissible
    under the antitrust laws.'').
    ---------------------------------------------------------------------------
        In response to the ACA and the perceived tension between the ACA's
    encouragement of cooperation and the antitrust laws, the FTC and
    Division developed a Policy Statement \169\ that provides a framework
    for analyzing networks, which at its core recognizes the continued
    relevance and importance of competition in healthcare reform. The
    Statement applies to accountable care organizations (ACOs) that serve
    both Medicare beneficiaries and commercially insured patients. It does
    not apply to mergers, which are evaluated under the Horizontal Merger
    Guidelines.\170\ However, as recently acknowledged, the FTC has not
    filed a single enforcement action against an ACO.\171\ Its principal
    focus has been on mergers.
    ---------------------------------------------------------------------------
        \169\ Fed. Trade Comm'n & Dep't of Justice, Statement of Antitrust
    Enforcement Policy Regarding Accountable Care Organizations
    Participating in the Medicare Shared Savings Program (2011).
        \170\ The Statement provides a rule of reason analysis for ACOs
    that are financially or clinically integrated, id. at 4, and a ``safety
    zone'' for networks that enjoy 30 percent or less for each service
    provided by two or more of the ACO providers, id. at 7. It also sets
    forth the conduct that may be suspect for ACOs with high PSA shares.
    See id. at 10-11.
        \171\ Julie Brill, Comm'r, Fed. Trade Comm'n, A Common Goal: The
    U.S. Federal Trade Commission's Health Care Enforcement Program and Its
    Implications for ACOs, Sixth Annual Accountable Care Organization
    Summit Preconference (June 2015), available at https://www.ftc.gov/
    system/files/documents/public_statements/673881/150617aco-summit.pdf.
    ---------------------------------------------------------------------------
        The Section recommends that the Agencies continue to challenge
    mergers, acquisitions and other transactions in the healthcare industry
    where such challenges are based on sound economic principles and
    focused on transactions that raise antitrust concerns. While some have
    argued that the goals of healthcare reform and antitrust are in
    conflict,\172\ for the reasons noted above, they are not. Effective
    competition in healthcare remains critical to the performance of this
    important sector. The Section urges the Agencies to continue to
    reiterate that reform does not displace competition in the healthcare
    industry, that antitrust enforcement is fully compatible with
    healthcare reform, and that mergers or conduct that reduce competition
    cannot be justified by measures to improve quality and lower costs that
    can be achieved by other means.\173\
    ---------------------------------------------------------------------------
        \172\ See, e.g., FTC v. Penn State Hershey Med. Ctr., No. 1:15-cv-
    2362, 2016 WL 2622372 (M.D. Pa. May 9, 2016) (denying FTC's motion for
    preliminary injunction), rev'd, 838 F.3d 327 (3d Cir. 2016).
        \173\ St. Alphonsus Med. Ctr. Nampa v. St. Luke's Health Sys., 778
    F.3d 775 (9th Cir. 2015); FTC v. OSF Healthcare Sys., 852 F. Supp. 2d
    1069 (N.D. Ill. 2012).
    ---------------------------------------------------------------------------
    2. Agency Challenges to Healthcare Mergers
        The FTC has had some notable recent success in challenging a
    physician merger in St. Luke's and healthcare provider mergers that
    raise competitive issues. The Section recommends that the FTC continue
    to challenge mergers that it believes substantially harm competition,
    despite the litigation risk, because of the important role competition
    plays in restraining the rise of national healthcare costs. As noted
    above, some challenges will fail, but an occasional failure does not
    diminish the value of litigation. Even cases that the Agencies lose
    help to clarify the law and demonstrate the Agencies' willingness to
    bring difficult cases in an effort to further develop the law. And
    losses in lower courts should be assessed and appealed if the decisions
    appear unsound. The Section encourages the FTC to appeal hospital
    merger decisions as it did in Penn State Hershey Medical Center \174\
    and Advocate NorthShore,\175\ when the agency feels the court did not
    follow sound precedent for analyzing the competitive effects of a
    merger.
    ---------------------------------------------------------------------------
        \174\ Penn State Hershey, 2016 WL 2622372.
        \175\ FTC v. Advocate Health Care, No. 15 C 11473, 2016 WL 4063481
    (N.D. Ill. June 14, 2016) (denying FTC's motion for preliminary
    injunction), rev'd, 842 F.3d 460 (7th Cir. 2016).
    ---------------------------------------------------------------------------
        The Division's recent challenges to two health insurance mergers
    highlight the importance of careful competitive analysis of these
    markets.\176\ The Section notes with interest the relevant markets
    pleaded in these complaints and the alleged monopsony effect of the
    mergers that would lower prices paid to providers. While previously
    relied upon,\177\ this theory could be further expanded and explained
    by the Division to observers and practitioners in speeches, economic
    models and the like.
    ---------------------------------------------------------------------------
        \176\ United States v. Aetna, Inc., No. 1:16-cv-01494 (D.D.C. filed
    July 21, 2016); United States v. Anthem, Inc., No. 1:16-CV-01493
    (D.D.C. filed July 21, 2016).
        \177\ See United States v. Aetna, Inc. (N.D. Tex. 1999) (``Aetna's
    acquisition of Prudential will also consolidate its purchasing power
    over physicians' services in Houston and Dallas, enabling the merged
    entity to unduly reduce the rates paid for those services.''). See also
    Marius Schwartz, Econ. Dir. of Enf't, Antitrust Div., U.S. Dep't of
    Justice, Buyer Power Concerns and the Aetna-Prudential Merger, 5th
    Annual Health Care Antitrust Forum, Northwestern University School of
    Law (Oct. 20, 1999).
    ---------------------------------------------------------------------------
    3. Work Product from Healthcare Workshops and Areas of Study
        In an effort to keep abreast of developments in this rapidly
    changing industry, the FTC in conjunction with the Division and the
    Centers for Medicare & Medicaid Services (CMS), has held extensive
    workshops with industry leaders in 2014 and 2015.\178\ The Section
    commends the Agencies for this joint endeavor and encourages them to
    continue to hold more joint workshops in the future on issues where
    clarity is needed, or new evidence is available that can guide policy.
    Medicare policies, including its payment rules, can influence provider
    consolidation and other aspects of market competition,\179\ and the
    Section encourages FTC and Division lawyers and economists to play a
    more active role in influencing Medicare policies and rules so as to
    take into account the effect on competition and antitrust issues beyond
    ACOs.\180\
    ---------------------------------------------------------------------------
        \178\ Fed. Trade Comm'n, Examining Health Care Competition
    Workshops (Feb. 2014 and Mar. 2015). The materials and presentations
    are available at https://www.ftc.gov/news-events/events-calendar/2015/
    02/examining-health-care-competition.
        \179\ See, e.g., Fed. Trade Comm'n, Comments on Centers for
    Medicare & Medicaid Services' Proposed Changes in Contracting for
    Medicare Part D (March 11, 2014).
        \180\ James Landman, Director at Inst. for Population Health
    Improvement, & Joe Miller, General Counsel for America's Health Ins.
    Plans, Remarks on Trends in Provider Consolidation, at Antitrust
    Division of the Department of Justice's Public Workshop: Examining
    Health Care Competition (Feb. 25, 2015) (citing Medicare payment
    rules).
    ---------------------------------------------------------------------------
        Although these workshops have provided material suitable for policy
    development and analysis, there have been no revisions to the Policy
    Statements issued in 1996; few, if any, speeches by government
    officials outlining some of the enforcement policies coming forth from
    these workshops; and few enforcement actions based on the theories of
    harm discussed during the workshop. At a minimum the Section encourages
    the Agencies to consider providing more detailed, focused guidance on:

      (1)  The anticompetitive use of contracting devices by dominant
            hospital providers as evidenced in the Division's suit against
            United Regional Health Care System \181\ challenging exclusive
            contracts, and the recent case brought by the Division against
            Carolinas HealthCare System challenging steering
            restrictions.\182\ What are the principles that cause the
            Division to choose these cases for enforcement?
    ---------------------------------------------------------------------------
        \181\ United States v. United Reg'l Health Care Sys., No. 7:11-cv-
    00030 (N.D. Tex. 2011).
        \182\ United States v. Charlotte-Mecklenburg Hosp. Auth., No. 3:16-
    cv-00311-RJC-DCK (W.D.N.C. 2016). See also Fiona Scott Morton, Theodore
    Nierenberg Prof. of Econ. At Yale U. Sch. of Management, Healthcare
    Contracting, at Antitrust Division of the Department of Justice's
    Public Workshop: Examining Health Care Competition (Feb. 24, 2015).

      (2)  The various theories of harm and potential benefits that can
            result from the vertical integration of hospitals and
            physicians,\183\ insurers and physicians, and cross market
            consolidation of providers;\184\ and
    ---------------------------------------------------------------------------
        \183\ Lawton Robert Burns, Dir. of Wharton Ctr. for Health Mgmt. &
    Econ. at U. Penn., Physician-Hospital Consolidation, Payer-Provider
    Consolidation & Payer-Provider Consolidation, at Antitrust Division of
    the Department of Justice's Public Workshop: Examining Health Care
    Competition (Feb. 25, 2015).
        \184\ Leemore Dafny, Dir. of Health Enter. Mgmt. at Kellogg Sch. of
    Mgmt. at Nw. U., Effects of Cross-Market Combinations: Theory and
    Evidence from Hospital Markets, at Antitrust Division of the Department
    of Justice's Public Workshop: Examining Health Care Competition (Feb.
    25, 2015). See also Leemore Dafny, Kate Ho & Robin S. Lee, The Price
    Effects of Cross-Market Hospital Mergers (Nw. Inst. For Policy
    Research, Working Paper 16-05, 2016).

      (3)  The broader implications of the recent FTC victories in St.
            Luke's, ProMedica Health System \185\ and Penn State Hershey
            Medical Center, including a better understanding of cognizable,
            merger specific efficiencies \186\ and how efficiencies can be
            achieved by contract rather than merger or consolidation.\187\
    ---------------------------------------------------------------------------
        \185\ ProMedica Health Sys. v. FTC, 749 F.3d 559 (6th Cir. 2014).
        \186\ James Landman, Dir. of Inst. for Population Health
    Improvement, & Joe Miller, Gen. Counsel for America's Health Ins.
    Plans, Remarks on Trends in Provider Consolidation, at Antitrust
    Division of the Department of Justice's Public Workshop: Examining
    Health Care Competition (Feb. 25, 2015).
        \187\ Kenneth Kizer, Dir. of Inst. For Population Health
    Improvement, U. Cal. Davis Health Sys., & Joe Miller, General Counsel
    for America's Health Ins. Plans, Remarks on Trends in Provider
    Consolidation, at Antitrust Division of the Department of Justice's
    Public Workshop: Examining Health Care Competition (Feb. 25, 2015).

        The Section also encourages the FTC to continue its research and
    ---------------------------------------------------------------------------
    analysis, particularly with respect to the:

      (4)  Competitive impact of electronic health records and whether they
            deter patients from switching to alternative providers.
    4. Reverse-Payment Settlements in the Pharmaceutical Industry
        In the past two decades, the FTC has paid particular attention to
    settlements by which brand-name drug companies pay generic firms to
    settle patent litigation and delay entering the market. In its 2013
    decision in FTC v. Actavis, the Supreme Court, though it rejected the
    FTC's proposal to apply a ``quick look'' analysis, held that these
    agreements could have ``significant anticompetitive effects'' and
    violate the antitrust laws under the rule of reason.\188\ In the three
    years since the decision, courts have begun to flesh out the Actavis
    framework.
    ---------------------------------------------------------------------------
        \188\ 133 S. Ct. 2223, 2237-38 (2013).
    ---------------------------------------------------------------------------
        The issue that has received the most attention is whether the term
    ``payment'' is limited to cash or whether it extends to other types of
    consideration. The overwhelming majority of courts--including two
    Federal courts of appeals--that has analyzed the issue has held that
    payment is broader than cash.\189\ These decisions are consistent with
    the emphasis of substance over form in antitrust. Other issues that the
    Agencies may confront in the years ahead include the antitrust analysis
    the courts should apply, the role of the patent merits, causation,
    pleading requirements, and the role of state law.
    ---------------------------------------------------------------------------
        \189\ In re Loestrin Antitrust Litig., 814 F.3d 538, 549 (1st Cir.
    2016); King Drug Company of Florence v. Smithkline Beecham Corp., 791
    F.3d 388, 403 (3d Cir. 2015); In re Opana ER Antitrust Litig., 162 F.
    Supp. 3d 704, 717 (N.D. Ill. 2016); In re Actos End Payor Antitrust
    Litig., 2015 WL 5610752, at *13 (S.D.N.Y. Sept. 22, 2015); In re
    Aggrenox Antitrust Litig., 94 F. Supp. 3d 224, 242 (D. Conn. 2015);
    United Food & Commercial Workers Local 1776 & Participating. Employers
    Health & Welfare Fund v. Teikoku Pharma USA, 74 F. Supp. 3d 1052 1069-
    70 (N.D. Cal. 2014); In re Effexor XR Antitrust Litig., 2014 WL
    4988410, at *20-22 (D. N.J. Oct. 6, 2014), appeal docketed and
    consolidated with In re Lipitor Antitrust Litig., 46 F. Supp. 3d 523,
    544 (D.N.J. 2014) Lipitor, No. 15-1184 (3d Cir. July 8, 2015); Time
    Ins. Co. v. AstraZeneca AB, 52 F. Supp. 3d 705, 709-10 (E.D. Pa. 2014);
    In re Lipitor Antitrust Litig., 46 F. Supp. 3d 523, 544 (D.N.J. 2014),
    appeal docketed and consolidated with In re Effexor XR Antitrust
    Litig., No. 14-4202 (3d Cir. July 8, 2015); In re Niaspan Antitrust
    Litig., 42 F. Supp. 3d 735, 751 (E.D. Pa. 2014); In re Wellbutrin XL
    Antitrust Litig., No. 08-cv-02431 (E.D. Pa. Jan. 17, 2014); In re
    Nexium (Esomeprazole) Antitrust Litig., 968 F. Supp. 2d 367, 392 (D.
    Mass. 2013).
    ---------------------------------------------------------------------------
        For the past two decades, the FTC has played a crucial role in
    litigating reverse-payment settlement cases, filing amicus briefs,
    collecting settlements filed under the 2003 Medicare Modernization Act,
    and raising awareness of these issues. With jurisprudence accumulating
    in the wake of Actavis, the Section encourages the FTC to provide much-
    needed guidance to businesses, consumers, and the courts.
    5. ``Product Hopping''
        Another issue that has arisen in the pharmaceutical industry is
    ``product hopping,'' which occurs when a brand-name drug company
    switches from one version of a drug to another. Most reformulations,
    especially those made when a generic is not about to enter the market,
    do not raise anticompetitive concerns. But some may. By reformulating a
    drug and switching the prescription base to the new product, a brand
    firm can avoid regulatory regimes designed to encourage generic entry,
    namely the Hatch-Waxman Act and state drug product selection laws.
        The courts have tended to distinguish between ``hard switches,''
    viewed as anticompetitive because the brand removes the original drug
    from the market, and ``soft switches,'' viewed as not concerning
    because the original remains on the market. Some recent scholarship has
    contended that this distinction should not be accorded dispositive
    significance, and has argued that both types of behavior could
    conceivably not make economic sense absent its impairment of generic
    competition.\190\ Other scholarship has argued that neither type of
    conduct should violate the antitrust laws given the risks involved with
    asking courts to second-guess the value of innovation.\191\
    ---------------------------------------------------------------------------
        \190\ Michael A. Carrier & Steve Shadowen, Product Hopping: A New
    Framework, 92 Notre Dame L. Rev. 167 (2016).
        \191\ Dennis Carlton, Frederick Flyer & Yoad Shefi, Does the FTC's
    Theory of Product-Hopping Promote Competition?, 12 J. of Comp. Law &
    Econ. 495-506 (2016).
    ---------------------------------------------------------------------------
        The Section recommends that the FTC continue to follow developments
    in this area and to share its analysis of the nuances and consequences
    of product hopping and any nuances and consequences of adjudicating
    these cases. The Section also recommends that the FTC share its views
    through amicus curiae briefs in these cases as appropriate.
    6. Pharmaceutical Samples
        One practice that has recently received attention and that could
    have an effect on the development of generic drugs is brand firms'
    refusal to provide samples to generic manufacturers that request them.
    Under the Food and Drug Administration Amendments Act of 2007 (FDAAA),
    the FDA may require the use of Risk Evaluation and Mitigation
    Strategies (REMS) if needed to ensure that a drug's benefits outweigh
    its risks.\192\ Nearly 40 percent of new drugs are subject to REMS
    restrictions, with many of these including distribution
    restrictions.\193\
    ---------------------------------------------------------------------------
        \192\ 21 U.S.C. Sec. 355-1(a)(1).
        \193\ Darren S. Tucker, Gregory F. Wells & Margaret E. Sheer, REMS:
    The Next Pharmaceutical Enforcement Priority?, 28 Antitrust 74, 74
    (2014).
    ---------------------------------------------------------------------------
        Although REMS programs serve important purposes, Congress was
    concerned that they could delay generic entry, and thus made clear that
    holders of REMS-covered products would not be able to use REMS to
    ``block or delay approval'' of an Abbreviated New Drug Application
    (ANDA).\194\ A central element of the Hatch-Waxman Act was a generic
    manufacturer's ability to rely on the brand's clinical studies if it
    could show that its drug was bioequivalent to the brand's drug.
    Bioequivalence can be established by testing samples of the brand drug,
    which (absent REMS) generics can acquire from distributors or
    wholesalers.\195\ The challenge is that when an REMS program prevents
    distributors and wholesalers from selling the drug, and the brand
    refuses to sell to the generic, the generic lacks access to the samples
    needed for testing and may not be able to demonstrate bioequivalence in
    order to obtain an ANDA.\196\
    ---------------------------------------------------------------------------
        \194\ 21 U.S.C. Sec. 355-1(f)(8).
        \195\ Lauren Battaglia, Risky Conduct with Risk Mitigation
    Strategies? The Potential Antitrust Issues Associated with REMS,
    Antitrust Health Care Chron., Mar. 2013, at 26, 28.
        \196\ See generally Hovenkamp et al., IP and Antitrust, Chap. 15
    (2015 Supp.).
    ---------------------------------------------------------------------------
        Generally, a firm does not have a duty to deal with its
    competitors. But the REMS restrictions imposed by the FDA can raise
    complex questions of market access. The interplay of competition and
    the regulatory regime calls for close scrutiny. The FTC has
    participated as amicus curiae in cases raising this issue,\197\ and the
    competitive effects of distribution systems in the industry remain the
    subject of studies outside REMS settings.\198\ The Section also
    recommends that the FTC monitor and comment on potential legislative
    and regulatory approaches to the issue that might be viable complements
    or alternatives to antitrust enforcement.
    ---------------------------------------------------------------------------
        \197\ See, e.g., Mylan Pharmaceuticals, Inc. v. Warner Chilcott
    Pub. Lim Co., No. 15-2236, 2016 WL 5403626 (3d Cir. Sept. 28, 2015).
        \198\ For discussion of antitrust concerns raised by restricted
    distribution systems outside the REMS setting, see Michael A. Carrier,
    Nicole Levidow, & Aaron S. Kesselheim, Using Antitrust Law to Challenge
    Turing's Daraprim Price Increase, 31 Berkeley Tech. L. J. (forthcoming
    2017), available at http://papers.ssrn.com/sol3/
    papers.cfm?abstract_id=2724604.
    ---------------------------------------------------------------------------
    VI. INTERNATIONAL
    A. Establishing U.S. Focus and Leadership in International Antitrust
            Policy
    1. Dramatic Recent Growth in Global Antitrust Enforcement
        A dramatic expansion in active competition law enforcement that
    began in the 1980s now encompasses more than 130 jurisdictions and
    virtually every significant transaction, business enterprise, and
    economic sector worldwide. This global expansion of antitrust rules
    undoubtedly did much to enhance competition, most obviously by
    increasing the scope of business activity subject to legal limitations
    on ``hard-core'' cartel conduct. Such hard-core cartel prohibitions are
    among the most analytically sound and widely-supported policies
    characteristic of free-market economies. Limitations on anticompetitive
    structural transactions as well as on unilateral conduct by monopolists
    or ``dominant'' firms also are based upon persuasive policy rationales
    and enjoy broad support, although design and implementation of the
    latter prohibitions involve a variety of significant challenges.
        On the broadest level, global acceptance of the idea of free
    markets and the appropriate role of legal proscriptions on
    anticompetitive business conduct has been revolutionary in scope--and
    may constitute a fundamental reorientation of microeconomic policy
    thinking with the long-run potential to provide significant economic
    benefits for all participants in the global economy. But the
    jurisdiction-by-jurisdiction process that produced this worldwide
    antitrust expansion also created numerous and conflicting variations in
    nearly every aspect of competition law--including substance, procedure,
    remedy, institutional framework, and many other key characteristics of
    antitrust enforcement and compliance.
        This huge antitrust expansion dramatically increased the cost and
    complexity of compliance. While industries, companies and business
    activities operate increasingly across borders, enforcement is still
    primarily national (with important supranational and subnational
    enforcement regimes as well--e.g., the EU and Mercosur, EU Member
    States, states of the U.S., autonomous regions of Spain, provinces and
    other subordinate jurisdictions in China, etc.). There are numerous and
    still-expanding opportunities for friction, complexity, and
    inefficiency capable of adversely affecting the economy, the business
    community, and consumers inside and outside the U.S. Costs can arise
    from inapt substantive standards (including intermixture and confusion
    within many competition laws of both economic and other policy goals),
    lack of transparency, inadequate procedural protections, inexperienced
    decision makers, and institutions struggling to deal with the
    complexities of antitrust law, economics and procedure essential to
    effective antitrust enforcement. Moreover, the near-universal practice
    of applying local antitrust rules to any conduct that results in
    adverse local competitive effects--regardless of the nationality or
    location of the parties or of the offending conduct--assures that
    businesses must deal constantly with the complex interactions of
    numerous and to some extent conflicting provisions of competition laws
    of a multitude of jurisdictions, regardless of where their operations
    are located.
        The potential that such costs and frictions would arise as
    antitrust expanded globally was anticipated early on by the antitrust
    enforcement community (agency officials, scholars, members of the
    antitrust bar, the business community, and others). Solutions were
    sought through a variety of institutions and processes. Existing
    frameworks for international coordination to identify and minimize
    these costs and complexities (primarily the ICN, created in 2001, and
    the Competition Committee of the OECD, whose institutional pedigree
    traces back to the Marshall Plan, as well as a broad web of both ad hoc
    and formalized bilateral interagency relationships) offer some scope
    for discussion and reform. These networks of bilateral and multilateral
    relationships have been active for decades. Over time, this interaction
    has consistently encouraged the broader adoption of enforcement
    modalities of, such as criminal procedures and remedies, leniency
    programs, surreptitious surveillance and other sophisticated
    investigation techniques, as well as systems of private redress,
    including possibilities for collective actions similar to class
    actions. But harmonization and/or amelioration of conflicting elements
    of international enforcement remains challenging, and many conflicts
    remain to be resolved.
        The Agencies have contributed enormously to the progress of
    competition law and procedure, and we believe they can improve the
    effectiveness of their efforts. From at least the early 1980s, the
    Division generally included international matters within the portfolio
    of a specific Deputy Assistant Attorney General (``DAAG''), eventually
    making this the sole responsibility of an ``international'' DAAG. But
    that dedicated position no longer exists. By contrast, the FTC has
    assembled and maintained a well-staffed, experienced and focused
    International Division. There has long been a Foreign Commerce Section
    at the Division, but it is much smaller and appears to be active at a
    more technical level in recent years, relative to the FTC International
    Division. In the meantime, the international antitrust enforcement
    landscape has rapidly grown more complex, suggesting that restoring the
    position of the International DAAG would give the Division a clearer
    voice and facilitate more coordination in the Agencies' approach to
    this critical area.
        There is no self-evident formula for strengthening current
    international antitrust assistance and reform efforts by the United
    States. One option that should be considered is to establish a
    transparent, formal, and consistent process for coordinating the two
    Federal enforcement agencies' efforts in the field of international
    antitrust policy. The agencies should be encouraged to:

      (5)  Develop a mechanism to coordinate their efforts to monitor
            global developments;

      (6)  Anticipate the adverse effects of flawed foreign legislation;

      (7)  Identify ill-advised and conflicting mandates embodied in
            underlying substantive law, inadequate procedural protections,
            institutional arrangements, and other troublesome features of
            international competition-law regimes that adversely affect
            U.S. consumers and businesses, the U.S. economy, and the world
            economy; and

      (4)  Identify or open appropriate channels to engage the Executive
            Branch when necessary to resolve elevated disputes.\199\
    ---------------------------------------------------------------------------
        \199\ There is some history of successful attempts to escalate
    pressing current international antitrust enforcement frictions up
    through the Executive Branch: leading examples include the merger of
    Boeing with McDonnell-Douglas and addressing recent and serious due
    process issues in Asian jurisdictions. These tend to be ad hoc
    interventions, where essential, to address enterprise-threatening
    problems that agency-to-agency contacts have failed to resolve. There
    appears to be no formal mechanism to invoke Executive Branch assistance
    outside of crisis-generating events.
    ---------------------------------------------------------------------------
    B. Clarify the Jurisdictional Character of the FTAIA
        Congress adopted the Foreign Trade and Antitrust Improvements Act
    (FTAIA) in response to concerns from U.S. businesses that strict
    application of U.S. antitrust law to their foreign conduct would
    disadvantage them in competition against non-U.S. companies. Although
    the law has been criticized for its lack of clarity, it was clear in
    the legislative history and to those involved in consideration of these
    proposals that the FTAIA was intended to create a jurisdictional limit,
    rather than an additional substantive element of a Sherman Act
    violation.\200\ Other potential bases for limiting the reach of U.S.
    antitrust law--substantive law and comity--were explicitly excluded
    from the FTAIA's intended scope. Although its precedential force is
    subject to debate, the Supreme Court accepted the jurisdictional
    character of the FTAIA in its first decision construing the law.\201\
    ---------------------------------------------------------------------------
        \200\ See, e.g., Abbott B. Lipsky, Jr. & Kory Wilmot, The Foreign
    Trade Antitrust Improvements Act: Did Arbaugh Erase Decades of
    Consensus Building?, Antitrust Source at 7-9 (2013), available at
    www.americanbar.org/content/dam/aba/publishing/antitrust_source/
    aug13_lip
    sky_7_30f.authcheckdam.pdf.
        \201\ See F. Hoffman-La Roche Ltd. v. Empagran S.A., 542 U.S. 155,
    162 (2004).
    ---------------------------------------------------------------------------
        More recently, however, several Federal appellate courts have
    opined that FTAIA is substantive, not jurisdictional.\202\ This
    evolution emerged adventitiously from a civil rights decision, Arbaugh
    v. Y & H Corp.\203\ In that context, the Court adopted the simple rule
    that limitations placed on statutory rights would be regarded as
    substantive unless specifically declared jurisdictional by the
    Congress. The Court did not, however, consider whether its opinion
    would or should have retroactive effect on the FTAIA's specific
    limitations on antitrust law.
    ---------------------------------------------------------------------------
        \202\ E.g., Minn-Chem, Inc. v. Agrium Inc., 683 F.3d 845 (7th Cir.
    2012); Animal Sci. Prods., Inc. v. China Minmetals Corp., 654 F.3d 462
    (3d Cir. 2011).
        \203\ 546 U.S. 500 (2006).
    ---------------------------------------------------------------------------
        Classifying the FTAIA as substantive shifts the question of
    extraterritorial reach from the early pleading stage to merits
    discovery, later pleading stages, and/or trial. Eliminating the
    possibility of early dismissal of antitrust claims against foreign
    parties and conduct subjects defendants to the well-recognized expense,
    burden, and delay characteristic of U.S. antitrust litigation, even
    with regard to claims falling outside U.S. jurisdiction.\204\
    ---------------------------------------------------------------------------
        \204\ See, e.g., Lipsky & Wilmot, supra note 203, at 1-2.
    ---------------------------------------------------------------------------
        In prior litigation, including as recently as 2011, the Agencies
    have taken the position that the FTAIA is a jurisdictional limit.\205\
    The Section urges the Administration and the Agencies to continue to
    help clarify that the FTAIA is a jurisdictional statute by means of
    advocacy, legal positions taken in agency cases and amicus briefs
    submitted to courts presiding in private and/or state antitrust cases,
    and/or through legislation if appropriate. Congress's intent is
    abundantly clear to those familiar with the history of the policy
    debate and the legislative record of the FTAIA. The foreign reach of
    U.S. antitrust is a critical policy question that is better settled by
    direct confrontation of the key issues, rather than by requiring a
    search for ``magic words'' in prior legislation.
    ---------------------------------------------------------------------------
        \205\ See, e.g., Br. for the United States of America at 6-7,
    United States v. AU Optronics Corp., et al., No. CR-09-0110 (N.D. Cal.
    Apr. 8, 2011).
    ---------------------------------------------------------------------------
        Parties should not be forced to engage in discovery and merits
    defense of claims where it can be determined at the outset that the
    impugned conduct lacks the defined material nexus with U.S. economic
    interests specified in the FTAIA. A substantive construction of FTAIA
    is contrary to these bedrock considerations, while a jurisdictional
    construction supports them.
    C. Encourage Direct Agency Intercession in Foreign Agency Proceedings
    3. Background
        U.S. agencies characteristically engage in a great deal of
    substantive analysis--concerning the law, theoretical and empirical
    economics, and antitrust policy--in connection with matters that they
    investigate. It is an increasingly frequent pattern in international
    antitrust enforcement that similar transactions and conduct arise in
    many jurisdictions--and fall to be considered by antitrust agencies in
    a variety of jurisdictions--at about the same time. Multinational
    merger enforcement is an obvious example, but the same should be said
    of matters involving cartels, joint ventures, intellectual property
    activity, and dominant-firm conduct.
        It is widely appreciated that the U.S. agencies are often in direct
    communication with foreign counterparts where investigations involve
    similar parties, industries, or competitive practices. It appears that
    such discussions can improve case outcomes--by clarifying the economic
    theory of a case, by improving the accuracy of the factual conclusions
    underlying a decision, or by harmonizing remedies adopted in different
    jurisdictions and thereby reducing their collective burden on parties
    involved in cases of cross-border conduct.
    6. The Agencies Should Enhance Efforts to Communicate with Foreign
            Counterparts on Issues Affecting U.S. Industries and Firms
        The Agencies should demonstrate an increased willingness to
    communicate directly with foreign antitrust agencies considering
    matters involving U.S. industries and firms. Where appropriate legal
    grounds exist, and where otherwise consistent with U.S. policy, the
    Agencies should actively seek to intercede in foreign enforcement
    proceedings involving U.S. firms. Where there are existing bilateral
    channels, they should be used for this purpose, but the agencies should
    not hesitate to explore new channels, as may be feasible and
    appropriate in particular circumstances. This is particularly important
    for cases where basic procedural standards are materially deficient, or
    where foreign agency actions (or proposed actions) are contrary to
    sound substantive law, to consensus notions of territoriality, or to
    other practices that enjoy broad consensus support among antitrust
    enforcement authorities in numerous jurisdictions.
    D. Engage in a Critical Self-Assessment of U.S. Antitrust Procedures
        The international antitrust community has engaged in extensive
    critical examination of a wide variety of topics in antitrust
    enforcement, including substantive law, institutional design, and many
    other aspects of competition law. Recently there has been a surge of
    interest in the question of antitrust procedure--which procedures best
    support accurate, impartial, and efficient antitrust decisions? On May
    22, 2015, the Section issued a Report on Best Practices for Antitrust
    Procedure, covering all main phases of government antitrust
    proceedings: investigation, alleging infringement, conducting
    proceedings to assess and render judgment upon such allegations and
    formulation of remedies for infringements, including the process of
    appeal and review.\206\ The ICN recently adopted Guidance regarding
    Investigative Procedure, covering issues of this character that arise
    in the pre-complaint investigation phase of government antitrust
    investigations.
    ---------------------------------------------------------------------------
        \206\ Am. Bar Assoc. Section of Antitrust Law, Best Practices for
    Antitrust Procedure (2015), available at http://www.americanbar.org/
    content/dam/aba/directories/antitrust/dec15
    _lipsky_tritell_12_11f.authcheckdam.pdf.
    ---------------------------------------------------------------------------
    VII. CONCLUSION
        The ABA Section of Antitrust Law is grateful for the opportunity to
    present this Report to the Administration. The Section looks forward to
    working closely with the Division and the FTC over the next four years,
    and stands ready to be of service to the Administration and the
    Agencies in the critical task of promoting and preserving free and open
    competition in the Nation's economy.
                                     ______

                 File Nos. 1623079, 1623080, 1623081, & 1623082
                    Comments of Washington Legal Foundation
                        to the Federal Trade Commission
              Concerning Proposed Consent Agreements and Request
               for Public Comments in Zero-VOC Paint Claims Cases
       In Response to the Public Notice Published at 82 Fed. Reg. 32,818
                                (July 18, 2017)
    Dear Commissioners:

        As set forth below, the Washington Legal Foundation (``WLF'')
    strongly objects to the Federal Trade Commission's (the ``FTC,'' the
    ``Commission'') proposed efforts to re-open and ``harmonize'' the
    consent orders issued in the PPG Architectural Finishes, Inc. (Docket
    No. C-4385) and The Sherwin-Williams Company (Docket No. C-4386) cases,
    with the consent orders the FTC recently entered into with Benjamin
    Moore & Co, Inc. (File No. 1623079), ICP Construction, Inc. (File No.
    1623081), Imperial Paints (File No. 1623080), and YOLO Colorhouse (File
    No. 1623082), which the FTC published on July 11, 2017 (``New
    Orders'').
        WLF believes that the proposed New Orders and related harmonization
    proposal run a grave risk of sacrificing many of the benefits derived
    from the previously consensus-based Green Guides, whereby the agency
    exhibited regulatory humility and filled gaps in its knowledge and
    expertise by working with industry and consumers. WLF believes that
    ``[t]hose regulated by an administrative agency are entitled to `know
    the rules by which the game will be played.' '' \1\ Accordingly,
    modifying the Green Guides with respect to emissions and VOC-free
    claims, in WLF's view, requires further notice-and-comment proceedings.
    The Green Guides create what are essentially substantive rules,
    requiring that they be amended directly only through a notice-and-
    comment process.\2\ Changing the Green Guides outside of the notice-
    and-comment process erodes the FTC's effectiveness and undermines its
    ability to successfully defend its use of agency discretion.\3\
    ---------------------------------------------------------------------------
        \1\ Alaska Prof'l Hunters Ass'n v. FAA, 177 F.3d 1030, 1035 (D.C.
    Cir. 1999) (citations omitted).
        \2\ See infra notes 43-46 and accompanying text.
        \3\ Perez v. Mortgage Bankers Assoc., 135 S. Ct. 1199, 1209 (2015)
    (citing FCC v. Fox Television Stations, Inc., 556 U.S. 502, 515 (2009))
    (``[T]he APA requires an agency to provide more substantial
    justification when `its new policy rests upon factual findings that
    contradict those which underlay its prior policy; or when its prior
    policy has engendered serious reliance interests that must be taken
    into account. It would be arbitrary and capricious to ignore such
    matters.' ''). See also Elizabeth McGill, Agency Self-Regulation, 77
    GEO. WASH. L. REV. 859, 875 (2009).
    ---------------------------------------------------------------------------
        Even if such notice-and-comment proceedings are not required, such
    proceedings would be a better way to avoid disrupting the settled
    expectations of the industry. Notice-and-comment proceedings would also
    serve to rein in critics' perceptions that the Commission has
    overstepped its bounds through the sweeping embrace of a new ``common
    law'' of negotiated settlements, especially in this particular case
    where the latest proceedings, if approved by the Commission, would have
    the effect of changing substantive law without explanation.
        WLF submits this comment to the FTC with respect to all of the
    above-referenced proposed New Orders published on July 11, 2017.
    I. Interests of WLF
        Founded in 1977, WLF is a nonprofit, public-interest law firm and
    policy center based in Washington, DC, with supporters throughout the
    United States. WLF devotes a substantial portion of its resources to
    defending free enterprise, individual rights, limited government, and
    the rule of law. To that end, WLF regularly appears before Federal
    administrative agencies, including the FTC, to ensure adherence to the
    rule of law.\4\ Likewise, WLF has participated as amicus curiae in
    litigation challenging the scope of the FTC's regulatory authority
    under the FTC Act.\5\ In addition, WLF's Legal Studies Division, the
    publishing arm of WLF, frequently produces articles and hosts
    discussions on a wide array of legal issues related to FTC
    activities.\6\
    ---------------------------------------------------------------------------
        \4\ See, e.g., In re: FTC's Proposed Information Requests to Patent
    Assertion Entities and Other Entities Asserting Patents in the Wireless
    Communications Sector, Project No. P131203 (Dec. 16, 2013) (responding
    to the FTC's decision to investigate Patent Assertion Entities and
    contending that the proposed information requests were consistent with
    the requirements of the Paperwork Reduction Act, 44 U.S.C. Sec. 3501 et
    seq.).
        \5\ See, e.g., Ross v. FTC, 135 S. Ct. 92 (2014) (challenging FTC's
    authority to obtain monetary restitution under Sec. 13(b) of the FTC
    Act); FTC v. Wyndham Worldwide Corp., 799 F.3d 236 (3d Cir. 2015)
    (challenging the FTC's authority to regulate cybersecurity breaches
    under the ``unfairness'' prong of Sec. 5 of the FTC Act).
        \6\ See, e.g., Kurt Wimmer, et al., Data Security Best Practices
    Derived from FTC Sec. 5 Enforcement Actions, WLF Working Paper (January
    2017); John G. Greiner & Zoraida M. Vale, FTC Intensifies Scrutiny of
    ``Native Advertising,'' WLF Legal Opinion Letter (April 15, 2016);
    Christopher Cole, Jerry Schwartz, & Natalia Medley, Sustainable ``Green
    Advertising'': Implications of FTC's Guidelines for Public, Private, &
    Self-Regulation, WLF Webinar (February 21, 2013).
    ---------------------------------------------------------------------------
        These proceedings raise issues that sweep much more broadly than
    the FTC's efforts to regulate paint manufacturers' VOC-free clams for
    architectural coatings. The central challenge of administrative law
    over the past several decades has been to ``narrow[w] the category of
    actions considered to be so discretionary as to be exempted from
    review.'' \7\ As the size of the administrative state continues to
    expand, it is more imperative than ever that agencies play by the
    rules--especially the rule of fair notice--and that affected
    stakeholders continue to have a meaningful opportunity to participate
    in the operation of their government. Courts have criticized the
    increasing use of agency-created legislative rules whereby ``[l]aw is
    made, without notice and comment, without public participation, and
    without publication in the Federal Register of the Code of Federal
    Regulations.'' \8\ The FTC's recent actions in the zero-VOC paint-
    claims cases implicate these core concerns.
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        \7\ Martin Shapiro, Administrative Discretion: The Next Stage, 92
    Yale L.J. 1487, 1489 n.11 (1983).
        \8\ Appalachian Power Co. v. EPA, 208 F.3d 1015, 1020 (D.C. Cir.
    2000).
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    II. Background
    A. The FTC's Statutory Authority
        Section 5 of the FTC Act authorizes the Commission to take steps to
    prevent businesses and individuals (with certain limited exceptions)
    from using ``unfair or deceptive acts or practices in or affecting
    commerce.'' \9\ The FTC may use formal rulemaking procedures to issue
    binding rules that regulate unfair or deceptive acts or practices.\10\
    The FTC may act less formally by publishing guidance, enforcement
    policies, and other public statements to further its statutory
    objectives. Alternatively, the FTC may investigate, commence civil
    actions against, and obtain agreement to consent orders with businesses
    and individuals that allegedly engage in unfair or deceptive acts or
    practices.\11\
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        \9\ 15 U.S.C. Sec. 45(a)(2).
        \10\ 15 U.S.C. Sec. 57a.
        \11\ 15 U.S.C. Sec. Sec. 45(b), 57b.
    ---------------------------------------------------------------------------
    B. The FTC's Efforts to Regulate VOC-Free Claims for Architectural
            Coatings
        The FTC Issues the Green Guides. In 1992, the FTC issued the
    ``Guides for the Use of Environmental Marketing Claims,'' \12\ which
    later became known as the ``Green Guides.'' The Green Guides
    represented the FTC's best understanding of how Sec. 5 of the FTC Act
    applied to environmental advertising and marketing practices. The FTC
    updated the Green Guides in 1996, 1998, and 2012. As a basis for
    originally issuing and later directly amending the Green Guides, the
    FTC held public hearings and workshops, completed a consumer perception
    study, and followed notice-and-comment procedures.
    ---------------------------------------------------------------------------
        \12\ 16 C.F.R. Part 260.
    ---------------------------------------------------------------------------
        The FTC Agrees to Consent Orders and Issues Green Guides
    Enforcement Policy. On March 6, 2013, the FTC approved consent orders
    with PPG Architectural Finishes, Inc. (``PPG'') and The Sherwin-
    Williams Company (``Sherwin-Williams'') to settle alleged violations of
    Sec. 5 for marketing ``zero VOC'' paints.\13\ At the same time, the FTC
    published the ``Enforcement Policy Statement Regarding VOC-Free Claims
    for Architectural Coatings'' (``Enforcement Policy'') without an
    opportunity for the public and industry to weigh in as it had with the
    guides themselves.\14\ The Enforcement Policy stated that the
    Commission was replacing the definition of ``trace amounts of a
    substance'' in the Green Guides with a new definition that applied
    specifically to VOC-free claims for architectural coatings. The
    Enforcement Policy also introduced the element of human safety as a
    factor in the advertising claim analysis. The announced Enforcement
    Policy signaled to the remainder of the architectural coatings industry
    the Commission's policy going forward.
    ---------------------------------------------------------------------------
        \13\ Fed. Trade Comm'n, Press Release, FTC Approves Final Orders
    Settling Charges Against The Sherwin-Williams Co. and PPG Architectural
    Finishes, Inc.; Issues Enforcement Policy Statement on ``Zero VOC''
    Paint Claims (Mar. 6, 2013), https://www.ftc.gov/news-events/press-
    releases/2013/03/ftc-approves-final-orders-settling-charges-against-
    sherwin.
        \14\ Fed. Trade Comm'n, Enforcement Policy Statement Regarding VOC-
    Free Claims for Architectural Coatings (Mar. 6, 2013), https://
    www.ftc.gov/sites/default/files/documents/cases/2013
    /03/130306ppgpolicystatement.pdf.
    ---------------------------------------------------------------------------
        The FTC Agrees to Additional Consent Orders and Proposes to
    ``Harmonize'' All Consent Orders. On July 11, 2017, the FTC issued
    complaints and the New Orders with four more companies in the
    architectural coatings industry.\15\ The New Orders added yet another
    definition of ``trace amounts'' (now three) for the purposes of
    assessing ``free-of'' claims for architectural coatings. The FTC also
    stated that it will ``propose harmonizing'' these four New Orders with
    the PPG and Sherwin-Williams consent orders: ``Specifically, the
    Commission plans to issue orders to show cause why those [PPG and
    Sherwin-Williams] matters should not be modified pursuant to Section
    3.72(b) of the Commission Rules of Practice, 16 CFR 3.72(b).'' \16\ WLF
    is aware of no consumer-perception studies (FTC-commissioned or
    otherwise) that justify the Commission's new positions in the consent
    orders or the Enforcement Policy.
    ---------------------------------------------------------------------------
        \15\ Fed. Trade Comm'n, Press Release, Paint Companies Settle FTC
    Charges That They Misled Consumers; Claimed Products Are Emission-and
    VOC-free and Safe for Babies and other Sensitive Populations, https://
    www.ftc.gov/news-events/press-releases/2017/07/paint-companies-settle-
    ftc-charges-they-misled-consumers-claimed.
        \16\ See, e.g., Benjamin Moore & Co., Inc.; Analysis to Aid Public
    Comment, 82 Fed. Reg. 32818, 32820 (July 18, 2017), https://
    www.ftc.gov/system/files/documents/cases/benjamin_moore
    _analysis.pdf.
    ---------------------------------------------------------------------------
    III. To Provide Clarity and Address Due Process and Equal Protection
            Concerns, the FTC Should Treat the Green Guides as Substantive
            Rules
        The FTC Published the Green Guides Using a Rulemaking Process. The
    FTC published the Green Guides using a process very similar to the
    substantive rulemaking procedure prescribed by the Administrative
    Procedure Act (``APA'').\17\ For example, the FTC's Green Guide-related
    activity included performing research on consumer understanding and
    perceptions, undertaking a notice-and-comment process, submitting the
    resulting guidance for approval by the full Commission, and--most
    significantly--publishing the final Green Guides in the Code of Federal
    Regulations.\18\ The FTC's decision to formally publish the Green
    Guides in the Code of Federal Regulations should not be overlooked or
    ignored, given that the Code of Federal Regulations is ``the
    codification of the general and permanent rules published in the
    Federal Register by the departments and agencies of the Federal
    Government.'' \19\ Although the Commission lacks traditional APA
    notice-and-comment rulemaking authority, by using a process that in
    many respects resembled typical APA rulemaking, the Commission
    exercised significant regulatory humility in issuing the Green Guides,
    a characteristic notably absent in other areas of recent FTC activity
    (e.g., privacy and data security enforcement).\20\
    ---------------------------------------------------------------------------
        \17\ 5 U.S.C Sec. 553.
        \18\ 16 C.F.R. Part 260.
        \19\ U.S. Gov't Publishing Office, Code of Federal Regulations
    (Annual Edition), https://www.gpo.gov/fdsys/browse/
    collectionCfr.action?collectionCode=CFR. 44 U.S.C. Sec. 1510 (a) limits
    publication in that code to rules ``having general applicability and
    legal effect.'' See Brock v. Cathedral Bluffs Shale Oil Co., 796 F.2d
    533, 539 (D.C. Cir.1986) (Scalia, J.).
        \20\ See Brief of Petitioner, LabMD, Inc., at 38-43, LabMD, Inc. v.
    FTC, No. 16-16270 (11th Cir. Dec. 27, 2016) (arguing ``as a matter of
    law consent decrees cannot provide parties with fair notice, for Due
    Process Clause purposes, of an agency's interpretation of its governing
    statute or one of its regulations.''); Amicus Curiae Brief of
    Washington Legal Foundation, at 7, FTC v. Wyndham Worldwide Corp., 799
    F.3d 236 (3d Cir. Oct. 6, 2014) (arguing that ``the FTC's `catch-as-
    catch-can' approach to regulatory enforcement under Sec. 5 is not only
    deeply unfair to the business community, but it also fails far short of
    satisfying the legal standard for fair notice''); Appellant's Opening
    Brief and Joint Appendix Vol. 1, pp JA1-55, at 41, FTC v. Wyndham
    Worldwide Corp., 799 F.3d 236 (3d Cir. Oct. 6, 2014) (arguing that
    because a complaint or a consent decree ``is not a decision on the
    merits and therefore does not adjudicate the legality of any action by
    any party thereto, it does not and cannot provide fair notice of what
    the law either requires or proscribes.''). The House of Representative
    Committee on Oversight and Government reform also held hearings to hear
    testimony on the FTC's use of consent decrees in the privacy and data
    security space. Access to video of the hearings is available at https:/
    /oversight.house.gov/hearing/federal-trade-commission-section-5-
    authority-prosecutor-judge-jury-2/.
    ---------------------------------------------------------------------------
        Industry Relies on the Green Guides as an Authoritative Rule.
    Although the Green Guides bear all of the hallmarks of an APA
    rulemaking, including publication in the Code of Federal Regulations,
    the FTC also suggests that the Green Guides have no substantive effect
    and attempts to disavow their legislative nature: ``[The Green Guides]
    do not confer any rights on any person and do not operate to bind the
    FTC or the public. The Commission, however, can take action under the
    FTC Act [only] if a marketer makes an environmental claim inconsistent
    with the guides.'' \21\ But surely the Commission cannot have it both
    ways. Interpretive guidance by an agency can and often does become
    binding.\22\ While the FTC's reserving prosecutorial discretion and
    exercising self-restraint through the Green Guides is admirable,
    stakeholders have come to rely upon the guides as authoritative and
    binding. The danger this incoherent approach presents was not lost on
    then-FTC Commissioner Azcuenaga, who dissented based on the
    Commission's efforts to mask these substantive provisions as
    ``guidance.'' \23\
    ---------------------------------------------------------------------------
        \21\ 16 C.F.R. Sec. 260.1.
        \22\ See infra note 43 and accompanying text.
        \23\ Commissioner Azcuenaga stated, ``As the guides expressly
    state, the majority of the Commission does not view its guides as
    having the force and effect of law but as explanations of existing
    statutory terms and obligations. . . . I cannot agree. By stating
    definitively, for example, that a particular act `is deceptive' or that
    particular conduct `would be deceptive,' or that under specified
    circumstances, firms `must' or `should' act in a particular way,
    language that appears throughout the document, I believe that the
    document has `defined with specificity' a deceptive act or practice as
    set forth in section 18(a)(1)(B) [requiring Magnuson-Moss
    rulemaking].'' Dissenting Statement of Commissioner Mary L. Azcuenaga
    Concerning Isuance of Commission Guides on Environmental Marketing
    Claims, 57 Fed. Reg. 36363, 36368 (Aug. 13, 1992).
    ---------------------------------------------------------------------------
        The FTC cannot maintain that the Green Guides, Enforcement Policy,
    and even its consent orders are not substantive, while simultaneously
    insisting that they provide constitutionally sufficient fair notice to
    those entities regulated by them how to comport with the law. While the
    Commission frequently seeks to provide guidance, it consistently
    equivocates on what are best practices and what are legal
    requirements.\24\ Here, in the event of a challenge, the Commission is
    almost certain to point to the Green Guides as authoritative sources of
    notice for due-process purposes.\25\ While the Green Guides do an
    admirable job at addressing due-process considerations related to
    notice, recent efforts to modify them through enforcement proceedings
    create serious jurisprudential and policy concerns. On the one hand,
    the guides are authoritative and serve important due-process functions.
    On the other hand, the FTC's effort to disavow the binding nature of
    the guidance, which would provide some protection to regulated
    entities, leaves industry and the public guessing as to what the law
    may require at any given moment in time. As the Supreme Court has
    emphasized, ``[i]t is one thing to expect regulated parties to conform
    their conduct to an agency's interpretations once the agency announces
    them; it is quite another to require regulated parties to divine the
    agency's interpretations in advance or else be held liable when the
    agency announces its interpretations for the first time in an
    enforcement proceeding and demands deference.'' \26\
    ---------------------------------------------------------------------------
        \24\ See, e.g., FED. TRADE COMM'N, Protecting Consumer Privacy in
    An Era of Rapid Change: Recommendations for Businesses and
    Policymakers, at vii (2012), http://ftc.gov/os/2012/03/
    120326privacyreport.pdf (``The final privacy framework is intended to
    articulate best practices for companies that collect and use consumer
    data. These best practices can be useful to companies as they develop
    and maintain processes and systems to operationalize privacy and data
    security practices within their businesses. The final privacy framework
    contained in this report is also intended to assist Congress as it
    considers privacy legislation. To the extent the framework goes beyond
    existing legal requirements, the framework is not intended to serve as
    a template for law enforcement actions or regulations under laws
    currently enforced by the FTC.''); FED. TRADE COMM'N, Facing Facts:
    Best Practices for Common Uses of Facial Recognition Technologies, at
    iii (2012), https://www.ftc.gov/sites/default/files/documents/reports/
    facing-facts-best-practices-common-uses-facial-recognition-
    technologies/121022facial tech
    rpt.pdf (``The recommended best practices contained in this report are
    intended to provide guidance to commercial entities that are using or
    plan to use facial recognition technologies in their products and
    services. However, to the extent the recommended best practices go
    beyond existing legal requirements, they are not intended to serve as a
    template for law enforcement actions or regulations under laws
    currently enforced by the FTC.'')
        \25\ Whether FTC guidance can provide authoritative notice that
    satisfies constitutional fair-notice requirements remains unanswered.
    In a case against LabMD, Inc., the FTC has asserted that its guidance
    ``Protecting Personal Information: A Guide for Business'' provided the
    defendant with notice of reasonable security standards. See Brief of
    the Federal Trade Commission at 50-52, LabMD, Inc. v. FTC, No. 16-16270
    (11th Cir. Feb. 9, 2017) (referencing the Guide for Business,
    complaints, and consent decrees related to data security, and published
    guides by other Federal agencies). In the FTC's case against Wyndham,
    the district court held that the FTC is not required to promulgate
    formal rules before enforcing Sec. 5, and noted that some of the other
    publications by the FTC (including complaints and consent orders)
    provide some guidance. FTC v. Wyndham Worldwide Corp., 10 F. Supp. 3d
    602, 617-21 (D.N.J. 2014). On appeal, the Third Circuit also did not
    reach the question of whether the FTC's guidance provides authoritative
    notice of the FTC's interpretation of ``reasonable security.'' FTC v.
    Wyndham Worldwide Corp., 799 F.3d 236 (3d Cir. 2015). The appellate
    opinion in the LabMD case may provide greater clarity.
        \26\ Christopher v. SmithKline Beecham Corp., 576 U.S. 142, 158-59
    (2012).
    ---------------------------------------------------------------------------
        The Green Guides Lose Authoritativeness When Amended by Consent
    Orders. Amending the Green Guides through means other than directly via
    the previously used notice-and-comment process diminishes their
    authoritativeness, which may negatively impact the deference courts
    give them and leaves them more susceptible to attack if the Commission
    attempts to use them as a basis for an enforcement action. Agency
    deference by courts is based, in part, on an agency's formality,
    thoroughness in its consideration, and consistency of its
    statements.\27\ These factors may not be met when settlement agreements
    with private parties repeatedly change the substantive legal
    requirements and interpretations without justifying departing from the
    formal notice-and-comment process, as is the case here. By reducing the
    formality used when changing substantive rules and failing to use a
    process that incorporates industry and consumer input, the FTC has
    undermined the likelihood that courts will accord the agency deference
    when evaluating environmental-marketing decisions under the arbitrary
    and capricious standard.\28\
    ---------------------------------------------------------------------------
        \27\ ``The fair measure of deference to an agency administering its
    own statute has been understood to vary with circumstances, and courts
    have looked to the degree of the agency's care, its consistency,
    formality, and relative expertness, and to the persuasiveness of the
    agency's position.'' United States v. Mead Corp., 533 U.S. 218, 228
    (2001) (internal citations omitted); Chevron U.S.A. Inc. v. Natural
    Res. Def. Council, Inc., 467 U.S. 837, 844 (1984). ``The weight
    [accorded to an administrative] judgment in a particular case will
    depend upon the thoroughness evident in its consideration, the validity
    of its reasoning, its consistency with earlier and later
    pronouncements, and all those factors which give it power to persuade,
    if lacking power to control.'' Skidmore v. Swift & Co., 323 U.S. 134,
    140 (1944).
        \28\ Perez v. Mortgage Bankers Assoc., 135 S. Ct. 1199, 1209 (2015)
    (citing FCC v. Fox Television Stations, Inc., 556 U.S. 502, 515 (2009))
    (``[T]he APA requires an agency to provide more substantial
    justification when `its new policy rests upon factual findings that
    contradict those which underlay its prior policy; or when its prior
    policy has engendered serious reliance interests that must be taken
    into account. It would be arbitrary and capricious to ignore such
    matters.' '').
    ---------------------------------------------------------------------------
        The Green Guides' Effectiveness Is Diminished When They Are Amended
    Outside of the Notice-and-Comment Process. Amending the Green Guides
    without justification or explication through negotiated consent decrees
    via enforcement investigations rather than using the previously
    established notice-and-comment process also reduces the guides'
    effectiveness as interpretive guidance for regulated businesses,
    thereby undercutting the Commission's goal in publishing them in the
    first place. Instead of looking solely to the Green Guides, businesses
    must now look to the Green Guides, the Enforcement Policy, and myriad
    settlement agreements negotiated without the participation of all
    relevant industry stakeholders to try to ascertain the FTC's
    expectations. Accordingly, businesses wishing to make environmental-
    marketing claims arguably do not have fair notice of the law. Moreover,
    they face the risk of arbitrary regulatory enforcement because the FTC
    could change its mind at any time. In contrast, treating the Green
    Guides like an agency rule would allow businesses and entities to know
    that changes will not be made without the opportunity to participate in
    an open and transparent process that provides a full opportunity to be
    heard.
        The Green Guides are imperfect, but at least they are relatively
    clear, authoritative statements developed with industry and consumer
    participation--and fundamentally they derive from efforts to understand
    precisely how consumers view and interpret certain types of
    environmental claims. Such participation is the foundation of both due
    process and regulatory humility. Assuming the FTC wants the Green
    Guides to be authoritative and followed by businesses and individuals,
    the Commission should treat them as authoritative statements, thereby
    reassuring the public that the Green Guides will be updated in a
    transparent, predictable, and participatory manner.
    IV. Case-By-Case Legislation by Consent Decree Is Inappropriate
        The FTC Can Choose Between Rulemaking and Adjudication to Execute
    Congressionally Delegated Powers. Generally, Federal agencies have
    discretion to choose between rulemaking and enforcement to execute
    their statutory responsibilities.\29\ The FTC's rulemaking authority is
    specifically circumscribed by Congress. To use its rulemaking
    authority, the FTC must follow additional requirements that are more
    cumbersome than the routine APA process.\30\ Congress has imposed
    additional requirements on the Commission because of its ``grossly
    overreaching proposal'' to regulate advertising to children in the
    1970s.\31\ Unfortunately, history may be repeating itself with the
    Commission's increasing commitment to legislation-by-negotiated-
    consent-decree. The FTC's use of its adjudicatory authority generally
    is understandable. But here, where the Commission has seemingly
    abandoned--without explanation--use of an interpretive process that was
    working well, it leaves much to be desired.
    ---------------------------------------------------------------------------
        \29\ See SEC v. Chenery Corp., 332 U.S. 194, 203 (1947). Congress
    may limit or provide rulemaking and/or enforcement authority. Id. at
    196, 207.
        \30\ See Lydia B. Parnes & Carol J. Jennings, Through the Looking
    Glass: A Perspective on Regulatory Reform at the Federal Trade
    Commission, 49 Admin. L. Rev. 989, 995 (1997).
        \31\ Fed. Trade Comm'n, Advertising to Kids and the FTC: A
    Regulatory Retrospective That Advises the Present, 8 (Mar 2, 2004),
    https://www.ftc.gov/sites/default/files/documents/public_
    statements/advertising-kids-and-ftc-regulatory-retrospective-advises-
    present/040802adstokids
    .pdf.
    ---------------------------------------------------------------------------
        The FTC Has Abandoned Its Rulemaking Procedures in Favor of
    Guidance and Adjudication. The inefficient and time-consuming process
    Congress imposed through the Magnuson-Moss Act has led the FTC to all
    but abandon even its statutorily prescribed rulemaking authority.\32\
    Instead, the Commission appears in recent years to have begun
    legislating through consent decree (e.g., in the area of data privacy
    and security) \33\ or using a quasi-rulemaking process such as the one
    previously used to issue and directly amend the Green Guides. After the
    FTC's rulemaking authority was so substantially restricted by Congress,
    the Commission undermines whatever authority it retains by overreaching
    in its use of enforcement-action settlements as a substitute for
    substantive and binding lawmaking processes like those used to publish
    the Green Guides.
    ---------------------------------------------------------------------------
        \32\ Prepared Statement of the Federal Trade Commission on Data
    Security: Hearing Before the Subcomm. on Commerce, Mfg., and Trade of
    the H. Comm. on Energy and Commerce, 112th Cong. 11 (2011) (statement
    of Edith Ramirez, Comm'r, Federal Trade Commission) (``[E]ffective
    consumer protection requires that the Commission be able to promulgate
    these rules in a more timely and efficient manner.'').
        \33\ Solove & Hartzog, The FTC and the New Common Law of Privacy,
    114 Columbia L. Rev. 583 (2014).
    ---------------------------------------------------------------------------
        The FTC's Guidance and Adjudication Process Has Taken the Place of
    Rulemaking. The FTC's recent Green Guides enforcement activity against
    the architectural coatings industry appears to be an end-around the
    rigorous rulemaking procedures that Congress assigned to the FTC. Until
    these latest order-related changes to the rules, the FTC utilized a
    ``guide-making'' process that closely resembles the APA's notice-and-
    consent rulemaking process to issue and directly amend the Green
    Guides. This process provides clear due process, equal protection, and
    related policy benefits, including the kind of broad-based
    participation and transparency that bolsters the Commission's stature
    as the premier consumer-protection law enforcement agency. But the
    FTC's subsequent Enforcement Policy and two sets of consent orders
    dramatically change the Green Guides without those same procedural
    safeguards and policy benefits. Inexplicably, the FTC now seeks to
    ``harmonize'' all of the consent orders to require six members of the
    architectural coatings industry to comply with consistent ``rules'' on
    emissions and VOC-free claims. This is de facto legislation through
    consent orders and, under FTC's proposed process, no effective
    negotiation is available among and by the public, non-parties, and
    arguably even parties to the prior orders whose settled expectations
    will now be upended.
        The FTC's Regulatory Approach to the Architectural Coatings
    Industry Raises Practical Challenges. The FTC has not indicated what it
    will do with the seemingly obsolete Enforcement Policy. Under the FTC's
    recently proposed order-related changes, anticipating precisely what
    the law is for architectural coatings emissions and VOC-free claims
    seems virtually impossible. The PPG and Sherwin-Williams orders and
    Enforcement Policy differ markedly from the Green Guides, in that they
    introduce the concept of protecting human health to change how the VOC-
    level would be measured. And because the New Orders drastically expand
    the scope of coverage from only VOCs to any emissions, they are
    inconsistent with the PPG and Sherwin-Williams orders and Enforcement
    Policy--hence the FTC's stated desire to obtain ``harmonization.''
        The FTC's approach also creates competition-policy concerns
    triggered by the FTC's having closed-door meetings with some industry
    participants during consent-order negotiations and providing them with
    informal guidance not provided to other industry participants. As a
    result, architectural coatings businesses have a confusing array of FTC
    regulatory guidance, enforcement policies, consent orders, and other
    informal guidance to decipher. Moreover, the Environmental Protection
    Agency (``EPA'') also regulates the architectural coatings industry,
    potentially creating conflicting obligations.\34\ Thus, the
    Commission's proposed labeling requirements regarding the VOC content
    and emissions of architectural coatings have the potential to create
    the very problems that it sought to avoid by treading carefully when it
    released the Green Guides. WLF urges the Commission to reconsider the
    wisdom of regulating so specifically in an area already squarely
    addressed by EPA regulations. In sum, the situation strongly suggests
    that regulators, businesses, and consumers would all be better off
    using a notice-and-comment process that involves all affected
    stakeholders.
    ---------------------------------------------------------------------------
        \34\ The EPA has addressed VOC emissions from architectural
    coatings in a final published rule, 40 C.F.R. Part 59 Subpart D
    (``National Volatile Organic Compound Emission Standards for
    Architectural Coatings'').
    ---------------------------------------------------------------------------
        The FTC's Guidance and Adjudication Process in the Architectural
    Coatings Industry Raises Constitutional Questions. FTC's preference for
    using individually negotiated settlement agreements to amend and
    clarify broad and often very precise and specific formal guidance
    raises serious due process and equal protection questions.\35\
    Constitutional due process and equal protection requirements and basic
    administrative-law principles require adequate and fair notice of laws
    and regulations before agency enforcement occurs. As the D.C. Circuit
    has said, ``Those regulated by an administrative agency are entitled to
    `know the rules by which the game will be played.' '' \36\ An agency's
    reliance upon negotiated FTC settlements to provide such notice and
    signal agency interpretations has been seriously questioned and is
    currently being actively litigated.\37\ How should businesses not under
    an FTC order decipher the inconsistencies of the Green Guides,
    Enforcement Policy, and consent orders not directly applicable to them?
    ---------------------------------------------------------------------------
        \35\ The Green Guides state that certain terminology related to
    ``free-of'' claims may be tailored on a case-by-case basis. 16 C.F.R.
    Sec. 260.9 (``'Trace contaminant' and `background level' are imprecise
    terms, although allowable manufacturing `trace contaminants' may be
    defined according to the product area concerned. What constitutes a
    trace amount or background level depends on the substance at issue, and
    requires a case-by-case analysis.''). But mere notice that a change may
    occur is not fair notice of what that change will be.
        \36\ Alaska Prof'l Hunters Ass'n v. FAA, 177 F.3d 1030, 1035 (D.C.
    Cir. 1999) (citations omitted).
        \37\ LabMD, Inc. v. Federal Trade Commission, No. 16-16270 (11th
    Cir.), is currently pending decision before the Eleventh Circuit
    following oral argument. The appellant argues that the FTC did not
    provide fair notice of the data security standards that were allegedly
    violated. See, e.g., Stegmaier & Bartnick, Physics, Russian Roulette,
    and Data Security: The FTC's Hidden Data-Security Requirements, 20 Geo.
    Mason L. Rev. 673, 719 (2013) (``Entities have not been given proper
    notice of what data-security practices are `reasonable' and `adequate'
    '' through the FTC's use of enforcement actions rather than
    rulemaking).
    ---------------------------------------------------------------------------
        Such an inscrutable approach to regulatory enforcement is not only
    deeply unfair to affected industry stakeholders, but it falls far short
    of satisfying the legal standard for fair notice. To begin with, it is
    widely understood that a consent decree binds only the parties to the
    agreement.\38\ Such private settlements in no way constrain the FTC's
    future enforcement decisions; unlike formal rulemaking, they do not
    even purport to lay out general enforcement principles. ``Nor is a
    consent decree a controlling precedent for later Commission action.''
    \39\ Rather, the ``function of filling in the interstices of [a
    statute] should be performed, as much as possible, through quasi-
    legislative promulgation of rules to be applied in the future.'' \40\
    ---------------------------------------------------------------------------
        \38\ See, e.g., Altria Group, inc. v. Good, 555 U.S. 70, 89 n.13
    (2008) (acknowledging that a ``FTC consent order is. . .only binding on
    the parties to the agreement'').
        \39\ Beatrice Foods, Co. v. FTC, 540 F.2d 303, 312 (7th Cir. 1976).
        \40\ SEC v. Chenery Corp., 332 U.S. 194, 202 (1947).
    ---------------------------------------------------------------------------
        Only one of the Commission's actions--issuing and directly updating
    the Green Guides--involved a multi-year effort with numerous revisions
    that directly and specifically addressed consumer and industry input in
    commentary accompanying the guides when they were published in the
    Federal Register. To meet due process and fair notice obligations, the
    proposed changes to the Green Guides through the harmonization of the
    New Orders seem at least as deserving of public participation and
    commentary.\41\ Otherwise, there can be little faith that the FTC's
    action is anything other than arbitrary.
    ---------------------------------------------------------------------------
        \41\ Inviting comment on this consent order is not the same as
    undertaking the notice-and-comment process previously used to amend the
    Green Guides, because the consent decree itself is non-binding
    precedent to everyone but the party agreeing to it, and this comment is
    only intended to highlight the procedural infirmity of seeking to
    change the law when an authoritative interpretation already exists.
    ---------------------------------------------------------------------------
        As a result, the FTC seriously risks losing any judicial deference
    when it alters or, more generously, ``discovers'' new specific
    requirements in formal guidance that no reasonable party could have
    reason to know existed.\42\
    ---------------------------------------------------------------------------
        \42\ See Kristine Cordier Karnezis, Annotation, Construction and
    Application of ``Chevron Deference'' to Administrative Action by United
    States Supreme Court, 3 A.L.R. FED. 2d 25, 39 (2005); 2 AM. JUR. 2D
    Administrative Law Sec. 77 (2002).
    ---------------------------------------------------------------------------
    V. The Commission Should Update the Green Guides Using the Notice-and-
            Comment Process
        Given the pragmatic and constitutional concerns with ad hoc
    legislation-by-consent-decree, the Commission should directly amend the
    Green Guides to incorporate its latest interpretations of Sec. 5 of the
    FTC Act as applied to environmental marketing claims.
        The FTC Should Treat the Green Guides as a Substantive Rule and Use
    the Notice-and-Comment Process to Update It. The FTC should enforce the
    Green Guides as written until it takes appropriate steps to directly
    amend and otherwise explain and justify the Commission's changes. Given
    the strong similarities between the issuance of the Green Guides and
    the issuance of substantive rules under the APA, the FTC should
    consider how courts have viewed agency changes to substantive rules
    implemented under the APA. An agency is bound by its regulations until
    it changes them via a process that is reasonable, non-arbitrary, and
    supported by the record.\43\ To change a substantive rule issued
    through notice-and-comment procedures, an agency must repeat those
    notice-and-comment process.\44\ Agencies cannot avoid the notice-and-
    comment process by simply couching a change as a new
    interpretation.\45\ Of course, post-hoc explanations for changes to
    substantive rules that did not go through a notice-and-comment process
    (such as through consent orders with private parties) are especially
    vulnerable to attack through the courts because there is no record by
    which to rationalize the changes.\46\
    ---------------------------------------------------------------------------
        \43\ Motor Vehicle Mfrs. Ass'n v. State Farm Mut. Ins. Co., 463
    U.S. 29, 41 (1983) (holding that the rescission or modification of a
    rule promulgated using the APA notice-and-comment process must not be
    ``arbitrary, capricious, an abuse of discretion, or otherwise not in
    accordance with law.''); United States v. Nixon, 418 U.S. 683, 696
    (1974) (``So long as this regulation remains in force the Executive
    Branch is bound by it.''); Vitarelli v. Seaton, 359 U.S. 535, 540
    (1959) (``[T]he Secretary of the Interior] here . . . was bound by the
    regulations which he himself had promulgated for dealing with such
    cases. . . .''); Service v. Dulles, 354 U.S. 363, 388 (1957) (``[The
    Secretary of State] could not, so long as the Regulations remained
    unchanged, proceed without regard to them.''); United States ex rel.
    Accardi v. Shaughnessy, 347 U.S. 260, 267 (1954) (``As long as the
    regulations remain operative, the Attorney General denies himself the
    right to sidestep the Board or dictate its decision in any manner.'').
        \44\ 5 U.S.C Sec. 551(5). See e.g., Perez v. Mortgage Bankers
    Assoc., 135 S.Ct. 1199, 1206 (2015) (citing FCC v. Fox Television
    Stations, Inc., 556 U.S. 502, 515 (2009) (The APA mandates ``that
    agencies use the same procedures when they amend or repeal a rule as
    they used to issue the rule in the first instance.''); Nat'l Family
    Planning and Reprod. Health Assoc. v. Sullivan, 979 F.2d 227, 231 (D.C.
    Cir. 1992) (requiring the use of notice-and-comment rulemaking to issue
    a ``directive'' significantly altering the meaning of a regulation
    originally issued through notice-and-comment rulemaking).
        \45\ E.g., Shell Offshore, Inc. v. Babbitt, 238 F.3d 622, 629 (5th
    Cir. 2001) (``Interior's new policy is a substantive rule for purposes
    of the APA, and Interior was required to submit their new rule for
    notice and comment.''); Appalachian Power Company v. EPA, 208 F.3d
    1015, 1024 (D.C. Cir. 2000) (``It is well-established that an agency
    may not escape the notice-and-comment requirements. . .by labeling a
    major substantive legal addition to a rule a mere interpretation.'').
        \46\ E.g., Christopher v. SmithKline Beecham Corp., 567 U.S. 142,
    (2012) (explaining that deference is ``unwarranted'' when ``the
    agency's interpretation conflicts with a prior interpretation or when
    it appears that the interpretation is nothing more than a convenient
    litigating position or a `post-hoc rationalization' advanced by an
    agency seeking to defend past agency action against attack''); Motor
    Vehicle Mfrs. Ass'n v. State Farm Mut. Ins. Co., 463 U.S. 29, 42 (1983)
    (``The courts may not accept appellate counsel's post hoc
    rationalizations for agency action.'').
    ---------------------------------------------------------------------------
        Because the Green Guides were created like a substantive rule,
    directly amended like a substantive rule, and enforced like a
    substantive rule, the FTC should continue to directly amend the Green
    Guides as an agency would any substantive rule under the APA--through
    the notice-and-comment process. The FTC describes the Green Guides as
    interpretive guidance, but they constitute a substantive rule because
    they provide a specific and definite interpretation of the FTC's broad
    scope of authority under Sec. 5 of the FTC Act, they were issued
    through the notice-and-comment process, and they were published in the
    Code of Federal Regulations. Once the FTC determined to use these
    processes to promulgate the Green Guides, its choice was not without
    consequence. Here, because the Commission has undertaken such rigorous
    procedures to promulgate the Green Guides, its decision to change them
    without resort to those same procedural safeguards seems arbitrary and
    capricious. Addressing these concerns would help permit the FTC to
    retain the clear authoritativeness of the Green Guides and likely
    receive the deference from courts it desires. Such a process would also
    afford businesses with a crucial opportunity to provide expert input
    into the regulatory process and receive fair notice of obligations
    under the law.\47\
    ---------------------------------------------------------------------------
        \47\ The FTC may consider working with the EPA on studies relevant
    to VOC-related claims and labels. Recently, the FTC and U.S. Department
    of Agriculture completed a joint consumer perception study of
    ``recycled content'' and ``organic'' claims. FED. TRADE COMM'N,
    Consumer Perception of ``Recycled Content'' and ``Organic'' Claims
    (Aug. 10, 2016), https://www.ftc.gov/system/files/documents/reports/
    consumer-perception-recycled-content-organic-claims-joint-staff-report-
    federal-trade-commission/
    consumer_perception_of_recycled_content_and_organic_2016-08-10.pdf.
    ---------------------------------------------------------------------------
    VI. Conclusion
        The Commission should conform the New Orders to the previously
    established requirements and not otherwise amend the Green Guides
    without using a notice-and-comment process that takes into account the
    specific considerations present in the architectural coatings industry.
    Pending the completion of such a process, the FTC should, at least with
    respect to non-parties to the consent orders or other parties, hold its
    enforcement authority in abeyance. Rather than seeking to bootstrap the
    updated requirements from the New Orders immediately onto certain other
    businesses in the industry, the FTC should consider using regulatory
    self-restraint to seek to provide the public, including consumers and
    other agencies whose regulations may overlap or even conflict, with an
    opportunity to comment upon and participate in an open and public
    discussion. This process will permit affected constituencies to have
    appropriate time and opportunity to seek clarification on the
    requirements without the threat of immediate fines (for those already
    under order) and investigation (for the remainder of the industry).
    This approach addresses practical considerations, constitutional due-
    process concerns, and competition policy concerns with some parties
    having more information than others about the FTC's compliance
    expectations for the Green Guides.
                Respectfully submitted,
                                               Cory L. Andrews,
                                               Richard A. Samp,
                                               Washington Legal Foundation.
                                     ______

                          Electronic Privacy Information Center
                                     Washington, DC, September 26, 2017

    Hon. Jerry Moran, Chairman,
    Hon. Richard Blumenthal, Ranking Member,
    U.S. Senate Committee on Commerce, Science, and Transportation,
    Subcommittee on Consumer Protection, Product Safety, Insurance, and
                Data Security,
    Washington, DC.

    RE: Hearing on ``FTC Stakeholder Perspectives: Reform Proposals to
                Improve Fairness, Innovation, and Consumer Welfare''

    Dear Chairman Moran and Ranking Member Blumenthal:

        We write to you regarding the upcoming hearing on ``FTC Stakeholder
    Perspectives: Reform Proposals to Improve Fairness, Innovation, and
    Consumer Welfare.'' \1\ As evidenced by recent massive data breaches,
    data protection is perhaps the most important consumer welfare issue
    facing the FTC today. The FTC must do more do more to safeguard
    American consumers. The FTC's continued failure to act against the
    growing threats to consumer privacy and security could be catastrophic.
    ---------------------------------------------------------------------------
        \1\ FTC Stakeholder Perspectives: Reform Proposals to Improve
    Fairness, Innovation, and Consumer Welfare, 115th Cong. (2017), S.
    Comm. on Commerce, Science, and Trans., Subcomm. on Consumer
    Protection, Product Safety, Insurance, and Data Security, https://
    www.commerce
    .senate.gov/public/index.cfm/2017/9/ftc-stakeholder-perspectives-
    reform-proposals-to-improve-fairness-innovation-and-consumer-welfare
    (September 26, 2017).
    ---------------------------------------------------------------------------
        EPIC is a public interest research center established in 1994 to
    focus public attention on emerging privacy and civil liberties
    issues.\2\ EPIC is a leading advocate for consumer privacy and has
    appeared before this Committee on several occasions.\3\ EPIC has fought
    for privacy rights for Internet users at the Federal Trade Commission
    for more than two decades. We filed landmark complaints about privacy
    violations by Uber, Microsoft, Facebook, and Google.\4\
    ---------------------------------------------------------------------------
        \2\ See EPIC, About EPIC, https://epic.org/epic/about.html.
        \3\ See, e.g, Marc Rotenberg, EPIC Executive Director, Testimony
    before the U.S. Senate Committee on Commerce, Science, and
    Transportation, Internet Privacy and Profiling (June 13, 2000), https:/
    /epic.org/privacy/internet/senate-testimony.html; Letter from EPIC to
    the U.S. Senate Committee on Commerce, Science, and Transportation on
    Oversight of the FTC (Sept. 26, 2016), https://epic.org/privacy/
    consumer/EPIC-Letter-Sen-Comm-CST-FTC-Oversight.pdf.
        \4\ See Complaint, Request for Investigation, Injunction, and Other
    Relief, In the Matter of Uber Technologies, Inc. (Jun. 22, 2015),
    https://epic.org/privacy/internet/ftc/uber/Complaint.pdf; Complaint and
    Request for Injunction, Request for Investigation and for Other Relief,
    In the Matter of Microsoft Corporation, (July 26, 2001), https://
    www.epic.org/privacy/consumer/MS_complaint.pdf; see also Complaint,
    Request for Investigation, Injunction, and Other Relief, In the Matter
    of Facebook, Inc, (Dec. 17, 2009), https://epic.org/privacy/
    inrefacebook/EPIC-FacebookComplaint.pdf; Complaint, Request for
    Investigation, Injunction, and Other Relief, In the Matter of Google,
    Inc, (Feb. 16, 2010), https://epic.org/privacy/ftc/googlebuzz/Google
    Buzz_Complaint.pdf.
    ---------------------------------------------------------------------------
    The FTC's Current Approach is Insufficient to Protect Consumer Privacy
            and Security
        American consumers face unprecedented privacy and security
    challenges. The recent data breach by consumer credit reporting agency
    Equifax exposed the personal information--including names, addresses,
    phone numbers, dates of birth, social security numbers, and driver's
    license numbers--of 143 million people.\5\ This the latest in a growing
    number of high-profile hacks that threaten the privacy, security, and
    financial stability of American consumers. Far too many organizations
    collect, use, and disclose detailed personal information without
    following proper procedures for safeguarding that information. Our
    government must respond with comprehensive, baseline privacy
    protections that ensure Fair Information Practices--an internationally
    recognized set of informational privacy practices \6\--are applied
    across the Internet ecosystem.
    ---------------------------------------------------------------------------
        \5\ Equifax Inc., Equifax Releases Details on Cybersecurity
    Incident, Announces Personnel Changes, https://investor.equifax.com/
    news-and-events/news/2017/09-15-2017-224018832 (Sept. 15, 2017).
        \6\ See EPIC, Code of Fair Information Practices, https://
    www.epic.org/privacy/consumer/code_fair_info.html.
    ---------------------------------------------------------------------------
        At this time, the FTC is simply not doing enough to safeguard the
    personal data of American consumers. While we respect the efforts of
    the Commission to protect consumers, the reality is that the FTC lacks
    the statutory authority, the resources, and the political will to
    adequately protect the online privacy of American consumers.
        The FTC's privacy framework--based largely on ``notice and
    choice''--is simply not working. Research shows that consumers rarely
    read privacy policies; when they do, these complex legal documents are
    difficult to understand. Nor can industry self-regulatory programs
    provide realistic privacy protections when they are not supported by
    enforceable legal standards.
        Even when the FTC reaches a consent agreement with a privacy-
    violating company, the Commission rarely enforces the Consent Order
    terms.\7\ American consumers whose privacy has been violated by unfair
    or deceptive trade practices do not have a private right of action to
    obtain redress. Only enforceable privacy protections create meaningful
    safeguards, and the lack of FTC enforcement has left consumers with
    little recourse.
    ---------------------------------------------------------------------------
        \7\ See EPIC v. FTC, No. 12-206 (D.C. Cir. Feb. 8, 2012).
    ---------------------------------------------------------------------------
        Fundamentally, the FTC is not a data protection agency. Without
    regulatory authority, the FTC is limited to reactive, after-the-fact
    enforcement actions that largely focus on whether companies honored
    their own privacy promises. Because the United States currently lacks
    comprehensive privacy legislation or an agency dedicated to privacy
    protection, there are very few legal constraints on business practices
    that impact the privacy of American consumers.
    EPIC's Recommendations
        Maintaining the status quo imposes enormous costs on American
    consumers and businesses. Consumers face unprecedented threats of
    identity theft, financial fraud, and security breach.\8\ Privacy
    protections based on industry self-regulation and burdensome ``notice
    and choice'' policies do not provide meaningful safeguards for
    consumers. The FTC must issue effective guidance and use its Section 5
    enforcement authority to ensure adequate protection of consumer privacy
    in the digital age.
    ---------------------------------------------------------------------------
        \8\ See, e.g., Fed. Trade Comm'n, Consumer Sentinel Network Data
    Book (Feb. 2016), https://www.ftc.gov/system/files/documents/reports/
    consumer-sentinel-network-data-book-januarydece
    mber-2015/160229csn-2015databook.pdf.
    ---------------------------------------------------------------------------
        Moreover, the FTC must promptly investigate business practices,
    pursue complaints, enforce existing Consent Orders, and modify proposed
    settlements to reflect public comments. The Commission's ongoing
    failure to fulfill these obligations is (1) contrary to the explicit
    purpose of the statutory provision that allows the Commission to
    request comments from the public;\9\ (2) contrary to the broader
    purpose of the Commission to police unfair and deceptive trade
    practices;\10\ and (3) contrary to the interests of American consumers.
    ---------------------------------------------------------------------------
        \9\ Commission Rules of Practice, 16 C.F.R. Sec. 2.34 (C) (2014).
        \10\ Federal Trade Commission Act, 15 U.S.C. Sec. 46 (2006).
    ---------------------------------------------------------------------------
        We urge Congress to consider the Commission's use of Section 5
    authority in the context of the greater American legal landscape.
    Because the U.S. lacks a comprehensive privacy law or an agency
    dedicated to privacy protection, there are very few legal constraints
    on business practices that impact the privacy of Americans. The FTC's
    already modest Section 5 authority helps to deter and penalize the
    abuse of data. Any effort to limit the Commission's authority--coupled
    with Congress' failure to update America's privacy laws--is a
    disservice to the vast majority of Americans who are increasingly
    concerned about their loss of privacy and want their government to do
    more to protect this important democratic value.
        We ask that this letter be submitted into the hearing record. We
    look forward to working with you to improve the FTC's authority in this
    field and to develop rules to provide meaningful and much-needed
    protections for consumer privacy.
                Sincerely,
                                                Marc Rotenberg,
                                                        EPIC President.
                                          Caitriona Fitzgerald,
                                                  EPIC Policy Director.
                                              Christine Bannan,
                                                    EPIC Policy Fellow.

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