Expanded FTC Power Could Harm Internet, Regardless of Intentions

The FTC “went on a binge of rulemaking” in the 1970s that it would be wise to avoid redoing, said Jack Calfee, who worked in the economics bureau in the Reagan Administration, now at the American Enterprise Institute. After congressional blowback from trying to heavily regulate children’s TV advertising, the commission moderated itself, to the point that Calfee “acquired a new appreciation” for the FTC relative to the powerful FCC and FDA, he said. “It’s probably about as good a model as you can get” for a federal agency, under the restrictions that Leibowitz and others now want scrapped.

The FTC’s authority is “immense in its scope,” said James Davidson, a former Senate Judiciary Committee counsel on administrative procedures, now at Polsinelli Shughart. Split between Administrative Procedure Act authority for legislative mandates and Magnuson-Moss authority for circumscribed rulemakings, the agency was actually empowered by the 1975 law that it now chafes against, he said. The commission would be a “second legislature” without the restrictions, given its unusually broad mandate to go after unfair and deceptive trade practices, said Wilkinson Barker partner Maureen Ohlhausen, who formerly led the FTC’s Office of Policy Planning.

The commission “for all practical purposes regulates the Internet” already but would go further under its 600-word section of HR-4173, said Berin Szoka, director of the foundation’s Center for Internet Freedom. It’s considering expanding COPPA rules to mobile platforms and interactive TV, and classifying as personal information IP addresses and behavioral targeting data, despite having left alone COPPA in its first five-year review in 2005, Ohlhausen said. “Factions” among FTC staff would like to raise the under-13 application of COPPA to under-18, said Venable’s Stu Ingis, who represents the Direct Marketing Association and Interactive Advertising Bureau among others. That’s a decision that should be made by Congress, “not by one or three commissioners” under HR-4173’s authority, he said. The FTC’s work in December with other agencies in developing nutrition standards for food advertising, authorized in an appropriations bill, provides “the first hint of what they were thinking about” under the financial bill’s authority. The standards applied a “finer screen” to advertising than the USDA and FDA had ever attempted, Ingis said.

Without having to build a “record of substantial evidence” to justify regulation against a “prevalent” activity -- Magnuson-Moss restrictions removed in HR-4173 -- it’s not hard to imagine the FTC devising “draconian” ad rules, Ingis said. Some in the commission wanted to regulate “Internet 1.0” business models in the late 1990s that would have required “bizarre notices and consent,” which lawmakers rejected: “Had they issued those rules, I submit we probably wouldn’t have half of the Facebook-type tools, the Twitters.” FTC staff openly acknowledge the commission’s endorsement guidelines, which enraged bloggers who review products, were “one of their biggest mistakes” -- imagine if they were binding rules, Ingis said. Many Internet company executives are starting to worry the bill could make them less attractive to venture capitalists and Wall Street, he said.

The civil penalties for direct violations under HR-4173 would put the FTC in the role of “judge, jury and executioner,” Davidson said. The commission now can seek civil penalties for violation of a court order but is otherwise limited to consumer redress and freezing assets. The FDA is a cautionary tale, said Calfee, a drug-advertising specialist: The agency never has to go to court because drug manufacturers will always accede to their demands, creating a “bizarre advertising regimen.” TV stations and advertisers could also find themselves retroactively liable as the commission goes “backwards looking up the chain” for who aided and abetted misleading ad claims, another provision of the financial bill, Davidson said.

Speakers said they personally trusted Chairman Leibowitz and took him at his word that the commission would act “judiciously” with new authority. But “the case should be made [for] what’s not working well,” a question Ingis said he’s never heard answered. Regulatory inclinations “evolve” across new commission leaders. The FTC shouldn’t confuse a “system of laws with personalities,” Davidson said. It simply needs to run a Magnuson-Moss rulemaking “with some discipline” to be successful, such as by consolidating witnesses among industries, he said. Some proceedings have dragged on for years because they weren’t focused, Ohlhausen said. And the “give and pull of the congressional debate” can vastly improve some proceedings, as was the case in the CAN-SPAM rulemaking, which started with the commission pressing for an opt-in regime but ended with an opt-out system, Ingis said. The FTC’s larger problems -- too little funding and staff -- can be addressed more narrowly, he said.

The last hope for reining in the FTC could be the Senate Banking Committee’s financial regulation bill, which transfers some FTC authority to a new consumer protection agency without otherwise expanding the commission’s scope, Davidson said. That pullback of FTC authority is puzzling, since the agency has done well in regulating non-bank financial products, Ingis said. “I remain optimistic” that the final product won’t needlessly empower the commission.