[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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       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.
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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.
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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\
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    \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 
[email protected]. 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 [email protected].
---------------------------------------------------------------------------
                           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.
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    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.
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    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).
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    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.
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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.
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    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.
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    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 [email protected] 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 
[email protected] or @GeoffManne.
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           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\
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    \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.''
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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.
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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\
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    \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\
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    \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\
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    \207\ Manne & Sperry, supra note 52, at 13.
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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\
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    \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).
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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.
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    \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.
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    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.
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    \213\ Operating Manual at 9, Sec. 3.2.1.1.
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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.
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    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.
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    \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.
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    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.
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    \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
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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\
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    \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.
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    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\
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    \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.
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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\
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    \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
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    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\
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    \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.
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    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\
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    \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).
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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\
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    \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:
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    \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.
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                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.
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    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.
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    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).
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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.
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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.
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    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).
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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.
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    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).
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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.
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    \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.
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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\
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    \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.
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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\
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    \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.
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    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\
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    \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.
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    \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.
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    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.
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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.
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    \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.
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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.
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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\
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    \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.
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    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.
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    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.
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    \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.
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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.
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    \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.
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    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.
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    \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.
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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\
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    \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.
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    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.
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    \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.
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    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.
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    \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.
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    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.
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    \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.
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    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\
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    \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.
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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.
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    \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.
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    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.
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    \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.
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    \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\
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    \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.
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    \101\ An exception is for fraud cases in which the Commission may 
seek ex parte relief.
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    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.
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    \102\ 47 C.F.R. Sec. 0.311.
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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.
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    \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)).
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    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.
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    \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/.
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    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.
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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.
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    \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.
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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.
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    \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.
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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.
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    \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.
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    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).
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    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\
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    \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.
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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.
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    \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.
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    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\
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    \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).
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    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).
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    \120\ United States v. Apple, Inc., 791 F.3d 290 (2d Cir. 2015).
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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\
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    \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.
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    \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).
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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.
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    \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.'').
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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.
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    \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).
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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\
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    \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.
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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\
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    \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.'').
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    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.
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    \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.
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    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\
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    \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).
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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.
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    \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).
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    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.
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    \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).
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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\
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    \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).
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    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?
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    \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
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    \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\
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    \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 
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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.
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    \188\ 133 S. Ct. 2223, 2237-38 (2013).
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    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.
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    \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).
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    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\
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    \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).
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    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\
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    \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).
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    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\
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    \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.).
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    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.
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    \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.
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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.
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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.
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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.
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
    \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).
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    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\
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    \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.' '').
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    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).
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    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.
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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.
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    \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.
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    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.
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    \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).
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    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.

                                  [all]