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How Financial Overhaul Could Put the FTC on Steroids
& Transform Internet Regulation Overnight

Progress Snapshot
Release 6.7, March 2010

by Berin Szoka*

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This week marks a pivotal point in the history of the Internet. Monday was the 25th anniversary of the first .COM registration—and in some ways, the beginning of the commercial Internet. Yesterday, the Federal Communications Commission unveiled its long-awaited National Broadband Plan, which proposes ambitious subsidies to encourage broadband deployment. On the theory that unease about online privacy may discourage broadband adoption, the Plan also calls for increased regulation of how websites collect, and use, data from consumers.

The debate over how to regulate online data use has gone on for over a decade, leading to today's final "Roundtable" in the "Exploring Privacy" series held by the Federal Trade Commission over the last three months. The stakes in this debate are high: Data is the lifeblood of online content and services, and consumers will ultimately bear the cost of restrictions on data use in the form of reduced advertising funding for, and innovation in, online content and services.

That's why this week's most important technology policy event may ultimately prove to be today's Senate Commerce Committee hearing on Rep. Barney Frank's "Wall Street Reform and Consumer Protection Act of 2009" (H.R. 4173), which narrowly passed the House in December without a single hearing and no real debate. Although the sprawling (273,579 word) bill is mostly famous for creating a Consumer Financial Protection Agency, it would also, in just 613 words, "put the FTC on steroids," in the words of Jim Miller, FTC Chairman from 1981 to 1985. With vastly expanded powers, the FTC could impose sweeping new regulation touching virtually every sector of our economy.

The current FTC chairman, Jon Leibowitz, has made clear his determination to step up regulation of online data use, advertising, "blogola," and child protection, just to name a few of the hot topics in Internet policy. While the FTC will no doubt continue to push for increased statutory authority, such as the online privacy bill reportedly being drafted by House Commerce Internet Subcommittee Chairman Rick Boucher (mandating opt-in for data collection), Chairman Leibowitz may be able to implement most of his radical Internet regulatory agenda using the new powers conferred on his agency in a bill (H.R, 4173) few realize has anything to do with Internet policy.

Most importantly, Rep. Frank's bill would repeal procedural safeguards imposed on the FTC by a heavily Democratic Congress in 1980. The agency, in the 1970s, had so thoroughly abused its uniquely vast jurisdiction by, among other things, trying to ban advertising to children, that it was dubbed the "National Nanny" by the Washington Post—hardly a Thatcherite bastion. In fact, Congress 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." Besides requiring the agency to better define these vague concepts and focus on demonstrable harms, Congress strengthened safeguards it had put in place with the 1975 Magnuson-Moss Act to ensure that the agency did not rush into preemptive regulation without carefully weighing the costs and benefits of government intervention.

FTC Chairman Leibowitz complains that the Magnuson-Moss process takes too long, and Rep. Frank's bill would indeed accelerate the rulemaking process—by eliminating opportunities for public input and Congressional notification, while removing restrictions on Commissioners' ex parte meetings. So much for transparency!

These safeguards remain as necessary as they were when Congress passed Magnuson-Moss in 1975 to constrain the FTC's unique ombudsman authority over nearly all of the economy. But H.R. 4173 would go much further than simply removing these restraints. It would also significantly lower both the legal threshold for FTC regulation and the standard for judicial review of regulation: The FTC would no longer have to prove that an unfair or deceptive practice is "prevalent" to regulate it or justify regulation with "substantial evidence." Chairman Leibowitz has also complained that the FTC lacks the resources it needs to enforce its existing authority effectively. But instead of simply funding increased enforcement, Rep. Frank's bill would fundamentally transform the way FTC enforcement works. Today, the FTC relies on administrative orders and injunctions to stop bad actors, and imposes civil penalties only if a company violates a prior order. That's critical because the FTC's guiding legal standards—"unfairness" and "deception"—are so profoundly subjective. For example, in deciding whether Google's design of its new Buzz service was "unfair," the FTC must now weigh consumer benefits against consumer injury and ask whether that injury was one "consumers could not reasonably have avoided." Such trade-offs are particularly thorny when it comes to privacy, since many privacy "invasions" also offer great benefits to users.

But under Rep. Frank's bill, the FTC could impose civil penalties on a company before even putting them on notice that it might consider a particular practice "deceptive" or "unfair"—or giving the company a chance to clean up its act. And unlike today, the FTC could sue on its own without working through DOJ. With a maximum penalty of $16,000 per discrete violation or per day, the risk of huge penalties would hang like the "Sword of Damocles" over the head of industry, forcing them to err on the side of extreme caution. This kind of nightmarish "strict liability" legal regime would give the FTC unprecedented power to regulate by intimidation, by driving companies to rush to the FTC to ask, "Mother, May I?" whenever in doubt. That would be particularly devastating for online innovation, putting the FTC in the driver's seat when it comes to changing business models, technologies, and even user interface design.

Finally, the bill would extend the scope of this increased legal liability to companies that merely "substantially assisted" an unlawful act, even without direct responsibility for or actual knowledge of the violation. Importing this "aiding and abetting" concept from criminal law would have disastrous implications for anyone in, say, the chain of producing an advertisement or sharing consumer data. That new legal risk certainly won't help traditional ad-supported media struggling to stay afloat and evolve in the face of rapid technological change. But it remains unclear what this would mean online. The bill was amended prior to passage in the House (but without any public discussion) to recognize Congress's decision in enacting Section 230 of the Communications Decency Act of 1996 that, because of the unique nature of the Internet, online service providers should not be held liable for the content generated by third parties. But the amendment recognized only half of that vital immunity, and given recent court decisions sidestepping Section 230 immunity, many other questions remain about how the fear of stiff penalties could affect the complex ecosystem of the Internet.

In short, Congress is about to reinvent the FTC as the "National Nanny" it was well on its way to becoming back in the 1970s. Today, the FTC is not merely the general overseer of our economy, but the key regulator of the Internet. If the Senate passes Rep. Frank's bill with its so-called "improvements" to the FTC Act, future generations will look back and wonder why, without even taking the time to consider what it was doing, Congress radically transformed Internet governance as an afterthought to financial regulatory overhaul.

Related PFF Publications
    The Hidden Benefactor: How Advertising Informs, Educates & Benefits Consumers, Adam Thierer & Berin Szoka, Progress Snapshot 6.5, Feb. 2010, 2010. Chairman Leibowitz's Disconnect on Privacy Regulation & the Future of News, Adam Thierer & Berin Szoka, Progress Snapshot 6.1, Jan. 13, 2010. Privacy Trade-Offs: How Further Regulation Could Diminish Consumer Choice, Raise Prices, Quash Digital Innovation & Curtail Free Speech, Berin Szoka, Comments to the Federal Trade Commission at the Exploring Privacy Roundtable, Nov. 10, 2009. Privacy Polls v. Real-World Trade-Offs, Berin Szoka, Progress Snapshot 5.10, Oct. 8, 2009. Targeted Online Advertising: What's the Harm & Where Are We Heading?, Berin Szoka & Adam Thierer, Progress on Point 16.2, Feb. 13, 2009. Online Advertising & User Privacy: Principles to Guide the Debate, Berin Szoka & Adam Thierer, Progress Snapshot 4.19, Sept. 2008.

* Berin Szoka is a Senior Fellow and Director of the Center for Internet Freedom at The Progress & Freedom Foundation. The views expressed in this report are his own, and are not necessarily the views of the PFF board, fellows or staff.




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