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Monday, March 22, 2010

FTC Chairman Leibowitz: Just Trust Us, We Won't Abuse Vast New Powers!
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That's basically what FTC Chairman Jon Leibowitz told the Association of National Advertisers when he spoke to their "Advertising Law & Public Policy" conference last Thursday. As I noted last week, there's intense pressure in Congress to pass a financial regulatory overhaul and, unfortunately, the version passed by the House in December--Rep. Barney Frank's "Wall Street Reform and Consumer Protection Act of 2009" (H.R. 4173)--would also grant the Federal Trade Commission vast new powers for all its regulations, not just those relating to the non-bank financial institutions it currently regulates. In particular, HR 4173 would:

  • Make it far easier (and not just faster) for the FTC to issue all kinds of new regulations on its own, without a specific Congressional mandate to do so and instead of relying on case-by-case enforcement to punish "unfair" or "deceptive" acts and practices;

  • Reduce public input into those regulations;

  • Impose heavy civil penalties on companies before notifying them that a practice might be "unfair" or "deceptive";

  • Prosecute those who merely provided "substantial assistance" to someone engaged in "unfair" or "deceptive" acts or practices; and

  • Sue on its own authority, instead of through DOJ (as now).

I summarized my concerns about this bill in this short interview with PFF's new communications director, Mike Wendy, last week--listen here.

Leibowitz has lobbied hard to have his agency put on steroids (as former FTC Chairman Jim Miller put it), asking for all these things, as well as more funding, at the first Senate hearing on Hr 4173 back in February. (Conveniently, he was the only witness!) He repeated his calls for these powers on Thursday but tried to allay fears about how they'd be used.

As Communications Daily reports:

The FTC would use expanded authority only where consumers suffer "significant harm," bad behavior is common in the industry, standards would improve practices and the expected burdens are "reasonable," Leibowitz said. "We'd be really stupid if we try to solve every problem in American society with a rule," he said, so the commission will use any new authority "very judiciously...."  Where business practices and consumer expectations are "evolving," self-regulation is working and First Amendment issues are involved, the FTC would hold back, he said... [including] behavioral advertising and marketing to children. It would show "enormously bad judgment to pursue those matters, Leibowitz said. "We do believe in self-regulation."

I'm glad to hear Commission Leibowitz say all this but... well, I fear these soothing promises of regulatory restraint will ultimately prove hollow, if not under this FTC Chairman, then under his successors (just as I am not comforted by FCC Chairman Julius Genachowski's similar promises not to regulate the Internet, no matter how sincere he may be). Strangely, Leibowitz promises the FTC will regulate only when "bad behavior is common in the industry"--and yet HR 4173 would eliminate the requirement of the FTC's current Magnuson-Moss rulemaking procedures that a regulated practice must be "prevalent." (The Direct Marketing Association's Linda Wooley discussed this critical issue in detail in her testimony.) This illustrates a broader point: the whole point of restraining our regulatory agencies by statute is that we all know better than to trust a regulator when he says, "Oh, don't worry, we're not really going to use all that power--and if we do, we'll be sure to use it carefully!"

The FTC May Need New Focused Mandates, But Not More Broad Powers

Leibowitz singled out "negative-option marketing (where marketers presume consumers want a certain product and charge them for it unless they opt-out) as an example of the kinds of scams the FTC would use its new powers to punish. Perhaps he's right that the FTC may not be able to adequately address such unfair and deceptive practices today. But it does not follow that this requires increasing the FTC's powers across the board. Sen. Kay Bailey Hutchison hit the nail on the head in her remarks at last week's Senate Commerce Committee hearing on HR 4173:
In evaluating whether, and how, to change the scope and extent of FTC regulatory authority, I believe we must first ask whether there is a particular exigency, or area of consumer harm, that is so pervasive that the FTC's existing enforcement capabilities and rulemaking processes are not sufficient to address the issue.  Second, if there is such an exigency, is the proposed legislative change broadly applied, resulting in greater regulatory burdens across a wide range of industries, or is it appropriately narrow to provide the FTC greater ability to develop rules and carry out enforcement actions directly relevant to that exigency.  Third, we need to consider whether the FTC has sufficient personnel in key areas of its responsibility to carry out its enforcement and consumer protection mandates.

In written testimony, FTC Commissioner William Kovacic supported retaining Moss-Magnuson's additional procedural safeguards because:
While many other agencies do have the authority to issue rules following notice and comment procedures [under the Administrative Procedure Act (APA)], the Commission's rulemaking is unique due to the range of subject matter (unfair or deceptive acts or practices) and sectors (reaching broadly across the economy, except for specific carve-outs). Except where Congress has given the FTC a more focused mandate to address particular problems, beyond the FTC Act's broad prohibition of unfair or deceptive acts or practices, I believe that it is prudent to retain procedures beyond those encompassed in the APA.

Congress has already enacted several such statutes, such as COPPA, telemarketing, the CAN-SPAM Act and mortgages, and if the FTC could identify particular problems that require a new mandate to issue rules under the APA. Yet, as Linda Wooley noted in her testimony, when Commissioner Leibowitz was asked at last month's hearing to enumerate areas in which APA rulemaking authority would be helpful, he could only respond that, "...we'd really want to [...] think for a while if we got this authority about what we wanted to do and what we wouldn't want to do..."

[caption id="attachment_27348" align="alignright" width="300" caption="William Allen Rogers's 1904 cartoon recreates an episode in Gulliver's Travels, with T.R. as Gulliver"][/caption]

In other words, Leibowitz wants Congress to write his agency a blank check to do whatever it deems necessary in the future. Specifically, the FTC would get to decide which issues were appropriate for preemptive regulation, as well as achieving much the same effect of aggressive regulation through litigation designed to intimidate--imitating Teddy Roosevelt's approach to foreign policy: "Speak softly and carry a big stick!"

We've been down this road before. In the 1970s, the FTC so thoroughly abused its uniquely vast jurisdiction by issuing rules to, among other things, ban advertising to children, that it was dubbed the "National Nanny" by the Washington Post--hardly a Thatcherite bastion. This experience led Congress in 1980 to impose the procedural safeguards that would be repealed by HR 4173. Congress was so angry it actually briefly shut down the agency to make it clear that it had not dubbed the agency a regulatory knight errant, free to tilt its steely lance at imagined windmills of "unfairness" or "deception."

The Dodd Bill: A Welcome Alternative to HR 4173

HR 4173 was sent to the Senate in December, and in January, the bill was referred to the Senate Banking Committee, chaired by Sen. Chris Dodd. The Senate Commerce Committee, which held the two hearings discussed above, has jurisdiction only over the bill's implications for non-financial regulation. So the two committees will have to work out some kind of compromise before the Senate can pass a bill--which will probably have to be reconciled with what the House passed. That procedural posture is important because it means the Senate has the opportunity to do what the House did not: Pause and consider whether financial overhaul really requires reinventing the FTC as the "National Nanny" it was well on its way to becoming back in the 1970s--and, in particular, what such a radical change to the FTC's powers would mean for the Internet and other media regulated by the agency.

The good news is that Sen. Dodd's draft 1336-page legislation seems to do precisely what Sen. Hutchinson and others have suggested: Change the FTC's authority only with regards to a particular problem--in this case, financial regulation. (Dodd's bill differs in a number of other respects from HR 4173). In a nutshell, Dodd's bill would transfer the FTC's consumer financial protection functions to the newly created Bureau of Consumer Protection at the Federal Reserve, but the FTC could also punish violations of the bill's financial protections on its own under Section 5 of the FTC act.  Further, the Fed's BCP would have to consult with the Federal Trade Commission before imposing any regulations. The FTC could impose civil penalties, but only for "knowing violations" of the CFPA Act--i.e., only for financial offenses. In an important recognition of the dangers of unbridled agency discretion, the Dodd bill also imports the FTC's existing definition of "unfairness" as requiring that an act or practice be "likely to cause substantial injury to consumers, which is not reasonably avoidable by consumers" and which is "not outweighed by countervailing benefits to consumers or to competition."

The bad news is that Dodd's bill is unlikely to be the final word on the FTC's authority, as Sen. Rockefeller's Commerce Committee may insist on some or all of the provisions of HR 4173 that expand the FTC's powers across the board among a flurry of other amendments. Still, whatever its other shortcomings or advantages, Dodd's bill offers a path forward for financial overhaul that does not require remaking the FTC--and thus transforming regulation of the Internet, other media, advertising, cyber-security and privacy--among many other things. And for that, the Dodd bill deserves careful consideration as an alternative to just giving the FTC all the power it could ever want, and then just hoping the agency doesn't abuse it--which is essentially what Chairman Leibowitz, much like the FCC's Chairman Genachowski, is suggesting we do.

posted by Berin Szoka @ 9:19 AM | Advertising & Marketing , Privacy , The FTC

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