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76–308CC 2001

CHALLENGES FACING THE FEDERAL TRADE

COMMISSION

HEARING

BEFORE THE

SUBCOMMITTEE ON

COMMERCE, TRADE, AND CONSUMER PROTECTION

OF THE

COMMITTEE ON ENERGY AND

COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

NOVEMBER 7, 2001

Serial No. 107–68

Printed for the use of the Committee on Energy and Commerce

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/house

2

COMMITTEE ON ENERGY AND COMMERCE

W.J. ‘‘BILLY’’ TAUZIN, Louisiana, Chairman

MICHAEL BILIRAKIS, Florida

JOE BARTON, Texas

FRED UPTON, Michigan

CLIFF STEARNS, Florida

PAUL E. GILLMOR, Ohio

JAMES C. GREENWOOD, Pennsylvania

CHRISTOPHER COX, California

NATHAN DEAL, Georgia

STEVE LARGENT, Oklahoma

RICHARD BURR, North Carolina

ED WHITFIELD, Kentucky

GREG GANSKE, Iowa

CHARLIE NORWOOD, Georgia

BARBARA CUBIN, Wyoming

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

CHARLES ‘‘CHIP’’ PICKERING, Mississippi

VITO FOSSELLA, New York

ROY BLUNT, Missouri

TOM DAVIS, Virginia

ED BRYANT, Tennessee

ROBERT L. EHRLICH, Jr., Maryland

STEVE BUYER, Indiana

GEORGE RADANOVICH, California

CHARLES F. BASS, New Hampshire

JOSEPH R. PITTS, Pennsylvania

MARY BONO, California

GREG WALDEN, Oregon

LEE TERRY, Nebraska

JOHN D. DINGELL, Michigan

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

RALPH M. HALL, Texas

RICK BOUCHER, Virginia

EDOLPHUS TOWNS, New York

FRANK PALLONE, Jr., New Jersey

SHERROD BROWN, Ohio

BART GORDON, Tennessee

PETER DEUTSCH, Florida

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

TOM SAWYER, Ohio

ALBERT R. WYNN, Maryland

GENE GREEN, Texas

KAREN MCCARTHY, Missouri

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

THOMAS M. BARRETT, Wisconsin

BILL LUTHER, Minnesota

LOIS CAPPS, California

MICHAEL F. DOYLE, Pennsylvania

CHRISTOPHER JOHN, Louisiana

JANE HARMAN, California

DAVID V. MARVENTANO, Staff Director

JAMES D. BARNETTE, General Counsel

REID P.F. STUNTZ, Minority Staff Director and Chief Counsel

SUBCOMMITTEE ON COMMERCE, TRADE, AND CONSUMER PROTECTION

CLIFF STEARNS, Florida, Chairman

NATHAN DEAL, Georgia

Vice Chairman

ED WHITFIELD, Kentucky

BARBARA CUBIN, Wyoming

JOHN SHIMKUS, Illinois

JOHN B. SHADEGG, Arizona

ED BRYANT, Tennessee

STEVE BUYER, Indiana

GEORGE RADANOVICH, California

CHARLES F. BASS, New Hampshire

JOSEPH R. PITTS, Pennsylvania

GREG WALDEN, Oregon

LEE TERRY, Nebraska

W.J. ‘‘BILLY’’ TAUZIN, Louisiana

(Ex Officio)

EDOLPHUS TOWNS, New York

DIANA DEGETTE, Colorado

LOIS CAPPS, California

MICHAEL F. DOYLE, Pennsylvania

CHRISTOPHER JOHN, Louisiana

JANE HARMAN, California

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

BART GORDON, Tennessee

PETER DEUTSCH, Florida

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

JOHN D. DINGELL, Michigan,

(Ex Officio)

(II)

3

C O N T E N T S

Page

Testimony of:

Muris, Hon. Timothy J., Chairman, Federal Trade Commission ................. 10

Material submitted for the record by:

Business Roundtable, The, report entitled Information Privacy: The Current Legal Regime ......................................................................................... 40

Davis, Anna, Office of the Director, Congressional Relations, Federal

Trade Commission, letter dated December 5, 2001, to Hon. Clif Stearns,

enclosing response for the record ................................................................ 35

Simons, Joseph J., Director, Bureau of Competition, Federal Trade Commission, letter dated December 3, 2001, to Hon. Edward Markey, enclosing response for the record .................................................................... 38

(III)

(1)

CHALLENGES FACING THE FEDERAL TRADE

COMMISSION

WEDNESDAY, NOVEMBER 7, 2001

HOUSE OF REPRESENTATIVES, COMMITTEE ON ENERGY AND COMMERCE, SUBCOMMITTEE ON COMMERCE, TRADE, AND CONSUMER PROTECTION, Washington, DC.

The subcommittee met, pursuant to notice, at 10:08 a.m., in room

2123, Rayburn House Office Building, Hon. Cliff Stearns (chairman) presiding.

Members present: Representatives Stearns, Deal, Whitfield,

Shimkus, Bryant, Buyer, Terry, Bass, Tauzin (ex officio), Towns,

Markey, Eshoo, and Dingell (ex officio).

Staff present: Ramsen Betfarhad, majority counsel; Kelly Zerzan,

majority counsel; Brendan Williams, legislative clerk; Jonathan

Cordone, minority counsel; and Bruce Gwinn, minority professional

staff.

Mr. STEARNS. Good morning. The subcommittee will come to

order. I welcome all of you, especially our witness, the Chairman

of the Federal Trade Commission, Mr. Muris. I am pleased to have

you today and look forward to your testimony.

I hope that your testimony today would be one of many before

the subcommittee during your tenure as Chairman of the Commission. As a committee of jurisdiction with oversight responsibilities

over the Commission, I find it important that there be good lines

of communication between the committee and the Commission.

I consider both our oversight obligations and our mandate to protect consumers to be of utmost import, and therefore week a close

working relationship with the Commission.

I hope that all subcommittee members will take the time to visit

with the Chairman, and the other members of the Federal Trade

Commission.

I understand that your testimony today is on behalf of the Commission, and that it will outline the Commission’s agenda, and specifically it is enforcement and programmatic priorities.

I commend you and the Commission for focusing on the fundamentals which in the case of an enforcement agency, such as the

FTC, is a vigorous enforcement of the existing laws. I also share

with the Commission a keen interest in a number of other matters

identified in your testimony as being priority issues for the Commission.

One of these issues, of course, is privacy. As you are aware, and

as we have talked about, our committee has held six hearings on

2

this matter, and we have amassed a great deal of information on

this subject, and we think our hearings have been instrumental in

a better understanding of the issue.

I welcome your attempt at focusing the Commission’s resources

on enforcement, and as you have mentioned, specifically enforcing

existing laws that either directly or indirectly have privacy implications. That is after all precisely what an enforcement agency

should be doing, enforcing the law.

As was evident by the subcommittee’s May hearing on cyberfraud and crime, I and many other members of the subcommittee

find cyber-fraud and crime to be particularly important and worthy

of special attention by the Commission.

The potential for such fraudulent and criminal activities to impact thousands of consumers, and engender great financial losses

make them particularly troubling. The FTC’s consumer sentinel,

Depository of Cyber-Fraud Complaints Accessible to Law Enforcement Agencies, is an important step.

Nevertheless, effective law enforcement actions against cyberfraud crime I think requires greater participation by both human

and artificial intelligence. Moreover, the record from our hearing in

May suggested less than a stellar level of cooperation between the

various enforcement agencies when confronting cyber-fraud and

crime.

If such problems persist today, let us know. There is no excuse

for interagency turf issues impending or undermining effective

identification and prosecution of fraudulent and criminal activities

on-line or off-line. I also welcome the Commission’s commitment to

a more aggressive enforcement and education initiative targeting

health care fraud, and in particular, deceptive and misleading

health claims.

Health fraud is especially repugnant, as it impacts members of

our society that are among the more vulnerable, such as the elderly

and the young. And health fraud impacts the life and physical wellbeing of the American consumer, something much more important

than just his or her pocket book.

The Commission faces an arduous task combating health fraud,

one that was made more difficult with the advent and proliferation

of health websites. Also, taking a cue from your testimony, I also

want to highlight my interest in two other issues.

First, I think that increasingly the intersection between intellectual property rights and anti-trust law is being colored by flux or

tension, and as such it requires greater vigilance on the part of our

anti-trust enforcers.

Moreover, I think we have just begun to understand and grapple

with the significance of standards and standard setting organizations, as key sectors of our economy now are subject to network effects.

I commend the Commission for their focus and attention on these

two matters. Moreover, we are in agreement that consumer education is a critical mission of the Commission. I do believe that empowering the American consumer with knowledge is a most effective and potent consumer protection.

I would encourage you and the Commission to explore new and

creative ways of informing the American public of your work. I

3

know very few people that are aware of the good work that the

Commission undertakes on behalf of the American consumer.

Let’s make a concerted effort to change that. One thought that

I had was for the Commission to use banner ads to inform the

American public about its various activities, or alert them, just

simply alert them, to the various scams. Just a thought.

And finally I would be remiss if I didn’t raise an issue that I, and

I believe many Americans, find important today. First and foremost, I would appreciate your comments as to whether the FTC

has any evidence of fraud being perpetrated against the Americans

using charitable giving for the September 11 victims as a pretext.

Second, I would like to know whether the Commission has any

persuasive authority with legitimate charitable organizations convincing them—convincing them—to disperse all the money collected for September 11 victims to those victims’ families in a timely manner.

We had an oversight hearing on this yesterday, in which it was

evident that a lot of these charities were accumulating large sums

of money and were very slow in dispersing it. I thank you for your

testimony today. I am glad that we are able to do it in this room.

Unfortunately, we had to cancel the previous hearings, and I appreciate your patience, and I am glad that you are here today, and

I look forward to working with you, and my colleagues and I know

that we are going to have a great relationship with you during the

107th Congress.

And with that, I will close, and ask the ranking member, Mr.

Towns, the gentleman from New York, for his opening statement.

Mr. TOWNS. Thank you very much, Mr. Stearns. I would like to

welcome the Chairman to the committee, and look forward to his

testimony. The Federal Trade Commission has always played a pivotal role in America, standing with consumers and representing

them against commercial interests, and who do not always have

the customers’ best interests in mind.

And so I am pleased to have the new Chairman before us today,

and having met with the Chairman a few weeks ago, I have all the

confidence in the world that you, Mr. Chairman, will stand up for

the consumers on every possible opportunity.

Having said that, there are some issues of concern that I would

like to see addressed today at the hearing. I would hope that you

would address what seems to be a never-ending list of mergers

which sits before the Commission and the issue of consumer privacy in both on-line and off-line situations.

I know that you, Mr. Chairman, have every intention of being

open about the happenings at the Commission through your testimony, and of course through your answers to our questions as well.

I look forward to working very closely with you in the days and

months ahead, and on that note, Mr. Chairman, I yield back the

balance of my time.

Mr. STEARNS. I thank the gentleman, and recognize Mr. Shimkus

for an opening statement.

Mr. SHIMKUS. Thank you, Mr. Chairman. I do want to welcome

the Federal Trade Commission Commissioner here, Mr. Muris, and

I want to focus my short comments and listening to the debate on

a couple of issues. And one was from my colleague on the merger

4

issue, but the focus that I have had since I have been involved with

the NATO parliamentary assemble and the EU issue is the

usability to deny mergers that in essence we have approved here.

And in essence the competitive disadvantage placed upon the

United States and a lot of our fine companies because of the EU

application process, and then the barriers that they are able to

drop without—well, in essence, in negotiation, and we are at a competitive disadvantage.

The other issue that I will address in the question and answer

period is on the Internet and some patrolling of some of the business opportunities offered there, and the role in which you play.

And I still have not—we know in the Department of Ag the Packers and Stockyard Act is the vertical integration aspect of merging

concentration, and I am wondering where the line is drawn when

it goes into the corporate application of the boxings of food and material. I know that is a big concern in the agricultural sector, is the

concentration of that market in the hands of a few, leaving the producers at the whims of only a handful of purchasers.

It is probably not in our venue. It is of my concern, and those

are the things that I will be listening for and going into during

questions and answers. Thank you, Mr. Chairman, and I yield back

my time.

Mr. STEARNS. I thank the gentleman and recognize the gentleman from Massachusetts, Mr. Markey.

Mr. MARKEY. Thank you, Mr. Chairman, and welcome, Mr.

Chairman, to your first meeting here with the Commerce Committee. The FTC recently announced that it was no longer going to

recommend that Congress pass a law to protect the privacy and

freedom of Americans on the Internet.

Instead, the Agency announced that it would attempt yet again

to get more of the on-line industry to take voluntary actions to protect personal privacy comprehensively. The Commission also indicated that it would renew its commitment toward stepping up its

enforcement actions.

I salute the laudable efforts of certain segments of the industry

in trying to develop so-called self-regulatory solutions to some of

the privacy concerns that many have expressed.

These undertakings are critical to increasing consumer confidence and trust in the medium, and will be an important component in any comprehensive set of privacy protections for our consumers.

Relying solely upon voluntary industry efforts, however, will not

suffice. I believe that the progress that has been made in part voluntarily must be coupled with comprehensive protections for all

Americans. There is no reason to delay in developing standards for

such privacy protection.

I do not accept the notion that the Internet is too complex and

technology changing too rapidly to develop enforceable privacy protections for our consumers. As technologies change and business

plans for on-line commerce adjust, consumers’ privacy protections

remain a constant.

Again, consumers can negotiate in the marketplace for better privacy protection if they can get it, but no consumer should be withVerDate 11-MAY-2000 15:13 Apr 08, 2002 Jkt 010199 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 E:\HEARINGS\76308 pfrm09 PsN: 76308
5

out basic privacy protections, or without recourse to redress grievances for harm caused by privacy invasions.

With respect to enforcement, increasing agency activity on this

front is certainly welcome. Efforts can be made to protect Americans through enforcement, for example, of the law that we passed

to protect the privacy of children on the on-line environment, as

well as existing telemarketing laws.

I authored the law which was approved by this committee 10

years ago to establish do not call telemarketing rules to protect

consumers. That law also permitted regulators in Section 227 of

the Communications Act to establish a national do not call data

base, rather than company by company lists which drives people

crazy.

At the time the FCC chose not to endorse a data base technology,

although authority to implement it still exists on the books today.

I encourage the Federal Trade Commission to step up its enforcement of the current do not call regulations and explore how technology from the private sector can help protect consumers today.

In addition, Mr. Chairman, my hope is that the FTC will increase its investigation and analysis of products purported to be secure for consumer use, especially when such on-line use may include sensitive personal data.

In this regard, enhancing the FTC’s role in protecting consumers

from security risks and new software products, and on-line services

such as those alleged by consumer groups to be inherent in

Microsoft’s new Windows XP Operating System, and its Passport

Program, is also something that I believe the FTC must explore in

a timely fashion.

I would argue that the Federal Trade Commission should begin

its inquiry almost immediately since this product has the potential

of compromising consumers and I believe that we shouldn’t wait

until after the damage is done to millions of Americans before

there is an inquiry which is announced, and which may in and of

itself be enough to protect consumers.

Increased enforcement, however, will not help anybody if the

egregious conduct is not yet against the law, and that is why I continue to believe that we must pass on-line privacy legislation.

I thank the chairman for calling the hearing, and I look forward

to working with you, Mr. Chairman, and again we welcome you to

our greatest of all committees in Congress. It is great to have you

with us.

Mr. STEARNS. Thank you. The Chair recognizes Mr. Buyer for an

opening statement.

Mr. BUYER. Mr. Chairman and Mr. Towns, I want to thank you

for inviting the Chairman to come up and see us. Mr. Chairman,

I have—I may not be able to be here for the question phase, and

so I just want to let you know some areas of interest that I have.

I note that in your testimony that you touched on five areas, and

I join Mr. Shimkus with a concern about vertical integration in agriculture, and I noticed in your testimony that you had mentioned

that you had wanted to follow the guidelines with regard to—you

said that the Agency will continue to follow the merger guidelines

when assessing the impact of the proposed merger on competition.

6

And then you cite horizontal guidelines, and I don’t know about

how you handle vertical integration, but I do know that farmers

out there today have less choices, less choices where they buy their

equipment, and where they get their Ag inputs, and even limit on

their markets.

And it is very concerning what is happening out there in the Ag

world. I also have concerns with regard to—there is a bill here in

Congress called the Franchise E Act. It is a concern between the

franchise owners and the parent companies, and it is a very serious

issue, and it is one that we need to look at.

The issue on—and one that I have never been able to figure out

in the 9 years that I have been in Congress, is multi-level pricing

in drug companies. I think the day that I can figure out how they

do pricing in airline tickets, I will be able to figure out how they

do multi-level prices in with drug companies.

Another issue of concern that I have on consumer protection

deals with sports programming. What is occurring today is with

baseball as an example, and Congress gives baseball an anti-trust

exemption. The baseball owners then pay these outrageous salaries

to athletes.

And they pay $250 million to a shortstop, and people go how can

an owner do that. An owner can do that because he takes those

costs and passes them off to the programmers, and then people

don’t know why their cable rates are going up.

They think cable rates are going up, Mr. Chairman, because of

infrastructure upgrades. Cable rates are going up because sports

programmers are taking advantage of consumers all across the

country, and that is something that really concerns me.

And it is a conversation that I want to continue to have with you,

and as a matter of policy, and before I yield back my time, before

I was on the Judiciary Committee for 4 years, and would work with

the anti-trust division of the Department of Justice, I was really

concerned about the level of merger mania that occurred there in

the 1990’s.

And something bigger is better and can provide greater efficiencies, and therefore the consumer gets something at a lesser

cost. Wait a minute. Time out. Aren’t we about protecting the small

businesses and the entrepreneurs so that we have an open and fair

competitive marketplace?

I think that is what the job of government should be in a capitalistic economic system. So as a matter of policy, I look forward to

your comments on how a new administration views the world and

the marketplace. I yield back and thank you for my opening comments.

Mr. STEARNS. I thank the gentleman, and the Chair recognizes

the distinguished ranking member of the full committee, Mr. Dingell.

Mr. DINGELL. Mr. Chairman, I thank you. I thank you for holding the hearing, and I believe that it is an important one on a very

important subject. The issues facing the Federal Trade Commission

during these uncertain times are a matter of great concern, and I

look forward to hearing the views of the Commission’s new Chairman.

7

One issue that I am particularly concerned about is the growing

problem of identity theft, especially in the wake of the terrifying

events of September 11. Within the limitations of its current resources and authority, I believe the FTC has made some progress

in addressing fraud perpetrated through the use of stolen identities. I applaud these efforts.

But we will have to see whether they are sufficient and I believe

that there is evidence developing that they are not. We now live

in a new reality, a reality in which the production and use of false

identifications have very clear implications, and not just for ordinary citizens, but for the very security of the Nation itself.

It’s not just our personal financial security at stake. We once

were only concerned with stolen identities, aiding thieves and con

artists. Now we must be concerned with stolen identities aiding

terrorists, and allowing them to conduct activities anonymously,

and potentially granting them access to secure locations.

The Commission must conduct a thorough examination of who

has access to personally identifiable information in commerce, and

the processes by which such information is collected and disseminated.

The collection and transfer of non-public information has become

an industry in and of itself, and it is used now to enrich people,

and very frankly to hurt the people whose personal information is

being used.

For a fee today intimate and personal detailed information can

be obtained by and about virtually anybody or everybody. The

genie of privacy has been released from the bottle, and we are left

with an extremely difficult task of putting it back in.

Existing laws and government resources simply cannot restrict

broad access to personal information of consumers. Years after the

murder of Amy Boyer, Congress has still not prohibited the unauthorized sale or transfer of Social Security numbers that played

such an important role in that case.

Alone, neither industry self-regulation nor the government can

fully protect the public against identity theft, and indeed I would

note that industry has shown very little concern or interest in protecting the identities and the personal privacy of American citizens.

Indeed, the most effective weapon against identity theft is to empower consumers with control over their personal information, and

how that information is collected and disseminated.

If citizens are armed with effective, and enforceable, legal rights,

then the individual consumer should be able to manage access to

his or her personally identifiable information more responsibly

than industry or government.

In conclusion, I agree with Chairman Muris that Congress

should not limit new privacy legislation to on-line practices. Our

goal must continue to be consumer control over their personal information, whether on or off-line, or indeed wherever it might happen to be.

Under your leadership, Mr. Chairman, we expect the FTC to assist us in this endeavor. If we fail in this critically important task,

we should expect the States to address the problem in ways that

will pose far more problems for industry than any new Federal law.

8

Indeed, the States could give us 50 or more different solutions to

a problem, which might create significant problems for industry if

industry does not recognize that situation.

So industry, like individual Americans, then has a strong interest in seeing effective, enforceable, new authority and rights enacted. We must stop identity theft and we must do it now. We must

see to it that the privacy of the American people is protected for

new reasons above and beyond those which Mr. Markey and others

on this committee and I have traditionally pushed.

Mr. Chairman, I look forward to working with you on this important matter, and I welcome Mr. Muris for his appearance before

this committee. Thank you, Mr. Chairman.

Mr. STEARNS. I thank the gentleman. Mr. Terry is recognized for

an opening statement.

Mr. TERRY. Thank you. I just want to thank the Chairman for

being here today, and I am anxious to hear your vision and your

philosophy for the department under your leadership; and I also

want to express my appreciation for your attempts to see each of

us individually.

That impressed me, and what also impressed me is how you are

going to get your arms around so many important issues. Just listening to the opening statements today, each one of us have different concerns, of which have incredible significance and magnitude to them, and I am particularly going to listen in as Mr.

Boyer mentioned on vertical integration in foreign policy.

But I am going to look at it and attack the issues, and see when

an Internet company is allowed to just control all of the transactions, or how we allow more small tech businesses to be involved

in the process. So with that telegraph of where I will ask my questions, I will yield back the rest of my time.

Mr. STEARNS. I thank the gentleman, and the Chair recognizes

the gentleman from New Hampshire, Mr. Bass.

Mr. BASS. Thank you, Mr. Chairman, and I appreciate also you

holding this hearing. The Federal Trade Commission is more than

perhaps any regulatory agency the heart of the jurisdiction of this

committee besides Energy. I mean, Commerce is trade, and we

want to welcome the new Chairman.

There are many issues that we need to review and address over

the coming years, including issues such as identity theft, privacy,

anti-trust, and oversight, and other consumer protection issues. So

I think this is a great opportunity to get an introduction, and we

will be discussing many important issues today, and I thank the

chairman for holding the hearing.

Mr. STEARNS. I thank the gentleman.

[Additional statements submitted for the record follow:]

PREPARED STATEMENT OF HON. ED BRYANT, A REPRESENTATIVE IN CONGRESS FROM

THE STATE OF TENNESSEE

I would like to thank Chairman Muris for testifying before us today about the

challenges facing the Federal Trade Commission. I look forward to hearing from the

Chairman on the Commission’s work protecting the welfare of our nation’s consumers.

As the chairman discusses in his testimony, the FTC is the only federal agency

with jurisdiction across many sectors of the nations economy in the areas of both

consumer protection and competition. I am particularly interested in hearing from

9

the Chairman on the Commission’s work in regard to technology and intellectual

property, health care, privacy, energy, and mergers.

It is important that the FTC continues to fight Internet and health care fraud and

educate consumers about the characteristics of scams so that the nation has educated and aware consumers.

I understand that many on the Commission do not believe there is a need for Congressional action in regard to information privacy—I hope to hear from the chairman on the reasons why some commissioners have concerns about action in this

area.

I consistently hear from a number of my constituents regarding the deluge of unsolicited emails they receive, and I am glad to hear that the FTC has an electronic

mailbox where consumers can forward their spam.

I also look forward to hearing about the Commission’s work looking out for the

interests of the consumers in its evaluation of mergers.

I thank the Chairman for holding this hearing today and again, thank Chairman

Muris for testifying before us today on the agency’s work to protect the welfare of

consumers.

PREPARED STATEMENT OF HON. W.J. ‘‘BILLY’’ TAUZIN, CHAIRMAN, COMMITTEE ON

ENERGY AND COMMERCE

Let me thank you, Mr. Chairman, for calling this morning’s hearing, which promises to provide us an excellent opportunity to discuss various challenges facing the

FTC.

This hearing will allow us to look forward a bit, to see what may be just over

the horizon and how the federal agency charged with consumer protection plans to

confront them. So I am pleased, as well, to welcome our distinguished guest, Federal

Trade Commission Chairman Tim Muris.

Given its general statutory authority to protect consumers from unfair or deceptive acts or practices, the FTC serves as consumers’ principal federal guardian in

the marketplace. From its policing of Internet fraud to generic drugs, to gas prices,

the FTC helps to ensure the competition and honest dealing that is necessary for

markets to thrive. And as the former head of the Bureau of Consumer Protection,

Chairman Muris—I am sure—fully understands the scope of the public trust he now

holds.

Over the past few years, the FTC has also made its mark on the Internet age,

as the body in charge of approving mega-mergers, such as the union of AOL and

Time Warner, of establishing online anti-fraud guidelines, and providing safeguards

to protect the Internet users’ personal information. The future, doubtless, will contain many of the same debates.

Privacy, for instance, is one issue that has been actively debated in this Subcommittee and I look forward to more discussion on that front this morning. I commend Chairman Muris for his thoughtful examination of this complex issue, as demonstrated by his recent speech in Cleveland, which focused on rededicating the

FTC’s attention and resources to enforcement issues, specifically actions related to

consumer privacy. Chairman Muris’ focus on enforcement is right on target.

Although it is unlikely the Committee will have time to tackle the issue this year,

given the shrinking session, I do see a need to explore additional legislative efforts

that will help address an apparent failure in the marketplace to protect consumers’

privacy. Perhaps there are some additional tools we can provide that will bring confidence to consumers and the industry without unnecessarily interfering with good

business practices.

Finally, Chairman Muris has long argued, and I agree with him, that the Commission should evaluate the economic impact of its actions closely and make sure

that any proposed action will benefit consumers. The Commission should take aggressive law enforcement actions against fraud and deception, but take care to steer

clear from cumbersome rule-makings designed to transform entire industries. Consumers benefit tremendously from free markets and competition, and I look forward

to continued acknowledgement of this fact at the FTC.

Mr. Chairman, I look forward to the discussion today, and to working with you

during your term.

Mr. STEARNS. At this point we welcome the testimony of Timothy

Muris, the Chairman of the Federal Trade Commission. I think you

have heard from a number of members who have brought up some

interesting topics that you probably had not intended to talk about,

10

such as baseball and the cable companies. But we welcome your

testimony this morning.

STATEMENT OF HON. TIMOTHY J. MURIS, CHAIRMAN,

FEDERAL TRADE COMMISSION

Mr. MURIS. Thank you very much, Mr. Chairman. Let me briefly

summarize my testimony and submit my statement for the record.

I am certainly pleased to be here today. It has been a while since

I testified before this committee, and this is my first testimony as

Chairman of the Federal Trade Commission.

I have been here at the FTC for 5 months. As your questions

imply, the FTC has a very broad mandate. It is the only Federal

Agency with both consumer protection and competition jurisdiction

in broad sectors of the economy.

This is the fourth job that I have had at the FTC, and I am honored to be Chairman. Our mission is important, as your questions

have indicated. The issues are crucial and fascinating, and the people with whom I work are outstanding public servants.

I am especially pleased to appear before this subcommittee for

my first Congressional testimony as chairman. The committee and

its chairman have been good friends to the FTC, and I especially

benefited from the chairman’s leadership on privacy. Privacy was

a new issue for me, and I learned much from this committee’s six

hearings on the issue. The facts from those hearings led to our new

privacy agenda, including increasing our resources devoted to protecting privacy by 50 percent.

The FTC’s record is impressive, and unlike the 1980’s when I

was last at the FTC, the FTC today is an example of bipartisan cooperation. We will continue the excellent work of our predecessors—my friend Bob Pitofsky and his colleagues.

Let me briefly discuss our two major missions, consumer protection and anti-trust. In consumer protection, 20 years ago the FTC

shifted from an attempt to be the second most powerful legislature

in Washington, to enforcing basic consumer protection laws: laws

against fraud, against deception, and against breach of contract. In

the 1990’s, this mission was perfected and performed extremely

well using a three-part strategy of law enforcement, of consumer

education, and of cooperation and working with the business community.

Today the FTC is the leader both in fighting fraud on the Internet and in using hi-tech tools to detect and deter fraud and educate

consumers about on-line scams. Last month, for example, we obtained an injunction against a cyber-scammer who allegedly used

more than 5,500 copycat web addresses to divert consumers from

their intended destinations to one of his sites, and then hold them

captive while pelting them with a barrage of advertisements, many

of them for products such as pornography, which many consumers

regard as inappropriate.

Another recent example is that we announced a settlement in a

negative option case with more than $8 million in redress for consumers. We also recently announced eight diet supplement cases,

which is an area in which we have seen an increasing number of

problems.

11

1The written statement presents the views of the Commission. My oral statement and responses to questions are my own and do not necessarily represent the views of the Commission

or any other individual Commissioner. 2The FTC has broad law enforcement responsibilities under the Federal Trade Commission

Act, 15 U.S.C. § 41 et seq. The statute provides the agency with jurisdiction over most of the

economy. Certain entities, such as depository institutions and common carriers, are wholly or

partially exempt from FTC jurisdiction, as is the business of insurance. In addition to the FTC

Act, the FTC has enforcement responsibilities under more than 40 statutes.

Following September 11, we have turned our attention to many

potential scams. We have recently worked with law enforcement officials all over the country to search the Internet for potentially

fraudulent and deceptive claims related to terrorism issues, and we

have numerous investigations underway. We have also launched an

aggressive consumer education campaign, warning consumers what

to look for in potential scams and also addressing the charitable solicitation issue. We finally have been screening, along with many

other agencies, for fraudulent charitable solicitations.

Turning to anti-trust, the watch word again is continuity. The

merger wave was extremely significant in the late 1990’s, and it

has receded somewhat, but we are still vigilant on the merger

front.

Last month, for example, we brought four merger cases. On nonmergers, we are increasing our efforts, particularly in health care.

Health care costs as you know compromise about 15 percent of our

GDP, up from 12 percent just 10 years ago. Not surprisingly,

health care cases are an important part of our focus. In particular,

we are increasing our efforts to prevent firms from engaging in

anti-competitive practices that raise drug prices.

We have investigated claims that manufacturers use the provisions of the Hatch-Waxman Act anti-competitively. One problem involves agreements between makers of brand-name drugs and makers of generics, under which the generic entrant is essentially paid

not to compete. A second issue under Hatch-Waxman involves efforts unilaterally by brand manufacturers to forestall competition,

and we are looking hard at that area as well.

In summary, and I did want to briefly summarize my statement

and allow you to turn to your questions, our mission is simply to

protect consumers. Today’s FTC has forged a widespread and bipartisan consensus on how to protect consumers, and how to work

with other Federal and State agencies to provide maximum benefits. We will continue to use the full panoply of our institutional

tools in fulfilling this important mission.

Thank you very much.

[The prepared statement of Hon. Timothy J. Muris follows:]

PREPARED STATEMENT OF HON. TIMOTHY J. MURIS, CHAIRMAN, FEDERAL TRADE

COMMISSION

Mr. Chairman and Members of the Subcommittee, I am Timothy J. Muris, Chairman of the Federal Trade Commission. I am pleased to appear before you today on

behalf of the Commission to discuss our law enforcement and programmatic priorities.1

The FTC is the only federal agency with both consumer protection and competition jurisdiction in broad sectors of the economy.2 We enforce laws that prohibit

business practices that are anticompetitive, deceptive, or unfair to consumers, as

well as promote informed consumer choice and public understanding of the competitive process. The work of the FTC is critical in protecting and strengthening free

and open markets in the United States.

12

3See FTC v. Zuccarini, No. 01-CV-4854 (E.D. Pa. filed Sept. 25, 2001). 4This scam involved registering Internet domain names that are misspellings or transpositions of legitimate popular domain names to lure surfers onto a Web site that they never intended to visit. Once taken to the defendant’s sites, consumers were ‘‘mousetrapped,’’ making

it difficult to exit. Mousetrapping involves the use of a special programming code at the site

The FTC’s record is impressive. The agency has fulfilled its mission of protecting

American consumers by pursuing an aggressive law enforcement program during

rapid changes in the marketplace—the past decade saw the largest merger wave in

history, the rapid growth of technology, and the increasing globalization of the economy. Through the efforts of a dedicated and professional staff, the FTC has shouldered an increasing workload despite only modest increases in resources. We also

have benefitted greatly from the leadership of my predecessor, Robert Pitofsky.

The guiding word at the FTC will be ‘‘continuity.’’ The agency aggressively will

pursue law enforcement initiatives, launch consumer and business education campaigns, and organize forums to study and understand the changing marketplace,

just as it has done for several years. We will continue to address competition and

consumer protection issues in the evolving economy with the same expertise and

commitment as before.

Our competition mission will continue to reflect the following widely shared consensus: (1) the purpose of antitrust is to protect consumers; (2) the mainstays of

antitrust enforcement are horizontal cases—cases involving the business relations

and activities of competitors; (3) in light of recent judicial decisions and economic

learning, appropriate monopolization and vertical cases are an important part of the

antitrust agenda; and (4) case selection should be determined by the impact on consumers, guided by sound economic and legal analysis, and made with careful attention to the facts. The FTC is primarily a law enforcement agency, and we will continue aggressive enforcement of the antitrust laws within the agency’s jurisdiction.

The FTC is also an independent expert agency and a deliberative body, and is thus

well suited to studying an evolving marketplace and developing antitrust policy—

we will continue to hold public hearings, conduct studies, and issue reports to Congress and the public.

Similarly, there is widespread agreement on how the FTC best carries out its consumer protection mission. Twenty years ago, the FTC shifted its emphasis toward

more aggressive enforcement of the basic laws of consumer protection. The staple

of our consumer protection mission is to identify and fight fraud and deception. The

Commission continually monitors trends and developing issues in the marketplace

to determine the most effective use of its resources. The FTC has become the national leader in consumer protection and partners with other law enforcement agencies at the federal, state, local, and even international levels to maximize benefits

for consumers.

The FTC will continue to address significant law enforcement and policy issues

throughout the economy, devoting the major portion of its resources to those areas

in which the agency can provide the greatest benefits to consumers. I will highlight

five areas today:

• Technology and Intellectual Property

• Health Care

• Privacy

• Energy

• Mergers

TECHNOLOGY AND INTELLECTUAL PROPERTY

Changes in technology and the growing importance of intellectual property to the

economy have caused a significant change in the FTC’s work in both missions. The

consumer protection mission focuses increasingly on high-tech frauds, while the

competition mission works to provide consumers with the full benefits of both innovation and competition.

High-tech fraud. The FTC is the leader both in fighting fraud on the Internet

and in using high-tech tools to detect and deter fraud and to educate consumers

about online scams. The Internet has spawned new deceptive practices, and also has

given renewed vigor to traditional scams. The FTC will continue to monitor rapidly

evolving technologies used by scam artists. The FTC has brought a number of cases

involving scams that depend on the special nature of technology. In a case filed September 25, for example, 3 we obtained an injunction against a cyber-scammer who

allegedly used more than 5,500 copycat Web addresses to divert consumers from

their intended destinations to one of his sites and hold them captive while pelting

their computer screens with a barrage of advertisements.4

13

that obstructs surfers’ ability to close their browser or return to the previous page. Clicks on ‘‘close’’ or ‘‘back’’ buttons only cause new unwanted windows to open. The defendant’s sites also

contained a ‘‘stealth’’ feature, hidden under the task bar, making it invisible to consumers. Its

sole function was to act as a timer, periodically launching additional pages of advertisements,

without any action by consumers. Thus, even as consumers struggled to escape the defendant’s multi-window mousetrapping scheme, they were barraged with even more windows of unwanted

images. 5The other countries participating in this project are Australia, Canada, Denmark, Finland,

Hungary, Japan, Mexico, New Zealand, Norway, South Korea, Sweden, Switzerland, and the

United Kingdom. 6Dell Computer Co., C-3658 (May 20, 1996) (consent order).

Traditional frauds have migrated to the Internet in large numbers. Many of the

200 cases challenging Internet fraud brought by the FTC since 1994 concerned old

frauds in the new medium—28 cases challenged credit repair schemes, 13 cases

challenged deceptive business opportunities, and 11 cases challenged pyramid

schemes. The Internet can give these old scams a sleek, new veneer, as well as provide access to a larger pool of potential victims at little cost.

We also use technology in our fight against fraud. Our high-tech undertakings include:

• Consumer Sentinel—A consumer complaint database and web-based law enforcement tool that is maintained by the FTC and shared with over 300 law enforcement agencies in the U.S. and abroad. This database is an integral part of our

overall consumer complaint system. Analysis of the complaints in the database

enables staff to spot trends and identify targets. The database already has been

expanded to cover identity theft complaints, and this year will be expanded further to cover additional types of privacy complaints. We are also working with

the Department of Defense on Soldier Sentinel, a database tailored to accept

consumer complaints from military personnel and to track trends in frauds specifically targeted at members of the armed forces. • E-consumer.gov—A joint effort with 13 other nations launched earlier this year

to gather and share cross-border e-commerce complaints.5

• Surf Days—Joint initiatives whereby the FTC staff identifies a deceptive practice

that is prevalent on the Internet and recruits law enforcement partners to fight

it. Together we search the Web for a specific period of time using a specially

tailored protocol. Surfs can be highly efficient tools that: (1) enable law enforcement officials to learn about online practices; (2) provide an opportunity for the

FTC to alert and educate Web site operators—some of whom are new entrepreneurs, unaware of existing laws—whose sites appear to violate the law; and

(3) enable law enforcement authorities to identify the more egregious violators

for possible law enforcement action. • Internet investigation training—FTC-conducted training for more than 2000 individual law enforcement staff, including representatives of 20 countries, 30

states, and 22 federal agencies. This training will continue. • Toll free number—The FTC’s toll-free hotline, 1-877-FTC-HELP. The hotline will

receive additional resources to accept more consumer complaints and help us to

identify trends in consumer fraud. Complaints received through the hotline are

entered into Consumer Sentinel and made available to law enforcement agencies across the country.

Intellectual property. In past decades, our economy has become more knowledge-based; for some companies, patent portfolios represent far more valuable assets

than manufacturing or other physical facilities. Thus, an increasing number of the

FTC’s competition matters require the application of antitrust law to conduct relating to intellectual property. Both antitrust and intellectual property law share the

common purposes of promoting innovation and enhancing consumer welfare. On occasion, however, there have been tensions in how to manage the intersection between the doctrines, as well as questions about how best to spur innovation through

competition and intellectual property law and policy. These issues may well merit

broader and more in-depth study. In addition, we continue to pursue investigations

involving intellectual property.

An example of our objectives in this area is to ensure that patent holders do not

improperly withhold critical information from industry standard-setting groups to

delay the creation of a standard or raise the price of admission to its use. In Dell

Computer,6 the FTC considered the issue of the capture of a standard-setting body

by a holder of intellectual property rights that were critical to the standard ultimately selected by that body. Dell, a member of a standard-setting association, allegedly had influenced the choice of an industry standard for computer graphics performance without disclosing that its own intellectual property rights would benefit

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7See Federal Food, Drug, and Cosmetics Act, 21 U.S.C. § 301 et seq. The Hatch-Waxman

amendments were contained in the Drug Price Competition and Patent Restoration Act of 1984,

Pub. L. No. 98-417, 98 Stat. 1585 (codified at 15 U.S.C. §§ 68b, 68c, 70b; 21 U.S.C. §§ 301 note,

355, 360cc; 28 U.S.C. § 2201; 35 U.S.C. §§ 156, 271, 282 (1984)). 8 Abbott Laboratories, No. C-3945 (May 22, 2000), and Geneva Pharmaceuticals, Inc., No. C3946 (May 22, 2000) (consent orders). 9See also Hoechst Marion Roussel, Inc., No. C-9293 (May 8, 2000) (consent order). The Commission has also issued a complaint against Schering-Plough and two producers of generic drugs

challenging their settlement agreements resolving patent litigation involving the drug K-Dur.

Schering-Plough, No. 9297 (complaint issued April 2, 2001). Because the case is currently in administrative litigation, we cannot comment further. 10 Combating health fraud has been a longstanding priority of the Commission. Since 1998,

the Commission has brought 80 cases involving health and safety claims in advertising.

mately, consumers. To settle the FTC’s charges of antitrust violations, Dell agreed

not to enforce its intellectual property rights. We currently are investigating matters

that raise similar issues.

HEALTH CARE

Health care costs comprise a large part of both the family budget and the national

economy. Currently, health-related products and services account for approximately

15 percent of gross domestic product, up from 12 percent in 1990. Not surprisingly,

health-related cases constitute an important part of the FTC’s focus.

Generic drugs. A major portion of the American health care dollar purchases

prescription drugs, and we will continue our efforts to prevent firms from engaging

in anticompetitive practices that raise drug prices. In particular, we will strive to

ensure that anticompetitive practices do not delay market entry of generic drugs,

which cost less than name-brand pharmaceuticals. We will seek to ensure that protections provided to drug innovators under the Hatch-Waxman Act 7 are not abused

to the detriment of consumers. As you know, Hatch-Waxman was designed to increase the flow of new pharmaceuticals into the marketplace by carefully balancing

two public policy objectives: encouraging vigorous competition from generic drugs,

while maintaining incentives to invest in the development of innovator drugs.

The FTC has investigated claims that manufacturers use the provisions of this

Act anticompetively in two different ways. The first involves agreements between

makers of brand-name drugs and makers of generics, under which the generic entrant is essentially paid not to compete. In Abbott/Geneva,8 for example, the parties

allegedly agreed that the generic manufacturer—in exchange for money paid by the

branded manufacturer—would not enter the market until their patent litigation concluded; would not enter the market with any other generic version of the product;

and would not relinquish the 180-day period of exclusivity given to it under HatchWaxman as the firm first to file an application to make a generic equivalent.9 Such

agreements may unreasonably delay the entry of generic drug competition, potentially costing consumers hundreds of millions of dollars annually.

The second issue involves unilateral conduct by branded manufacturers designed

to forestall competition. For example, some branded manufacturers list additional

patents in the FDA’s ‘‘Orange Book,’’ often shortly before their original patents expire, which sets the stage for launching patent infringement suits against generic

drug firms poised to enter the market. Under Hatch-Waxman, such litigation triggers an automatic 30-month stay on FDA approval of the generic drug. If the listings do not meet statutory and regulatory requirements, their inclusion in the Orange Book may constitute unlawful restraints on competition.

To uncover whether strategies such as these are isolated examples or represent

patterns of anticompetitive conduct, the Commission has undertaken a study, as requested by Representative Henry Waxman, to provide a more complete picture of

how generic competition has developed under the Hatch-Waxman Act. The Commission has issued nearly 100 orders to innovator and generic drug companies to obtain

documents related to the issues identified through investigations and to identify any

other anticompetitive strategies that may exploit certain Hatch-Waxman provisions.

The facts obtained through this study may provide a basis for policy recommendations in this area.

Health care fraud. Fraud in the health care sector poses a direct and immediate

threat of both economic and physical injury to consumers.10 To fight health care

fraud, the FTC launched ‘‘Operation Cure.All,’’ a comprehensive consumer and business education and law enforcement initiative targeting deceptive and misleading

Internet promotion of products and services as cures or treatments for serious diseases. Just this summer, the FTC filed eight cases as part of Operation Cure.All,

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11See Panda Herbal Int’l, Inc., No. C-4018 (Aug. 8, 2001) (consent order) (St. John’s Wort and

Herb Veil 8 marketed as treatment for HIV/AIDS and skin cancer, respectively); ForMor, Inc.,

No. C-4021 (Aug. 8, 2001) (consent order) (St. John’s Wort marketed as treatment for HIV/AIDS;

colloidal silver and shark cartilage marketed as treatments for cancer, arthritis, and other diseases); MaxCell Bioscience, Inc., No. C-4017 (Aug. 8, 2001) (consent order) (multi-ingredient

product containing DHEA marketed to reverse aging and prevent age-related diseases); Michael

Forrest d/b/a Jaguar Enterprises of Santa Ana, No. C-4020 (Aug. 8, 2001) (consent order) (miracle herbs and black box, magnetic pulser, and Beck-Rife units marketed as treatments for cancer and arthritis); Robert C. Spencer d/b/a Aaron Company, No. C-4019 (Aug. 8, 2001) (consent

order) (colloidal silver marketed as treatment for cancer and many other diseases); FTC v. Western Dietary Products Co. (Skookum), No. C01-0818R (W.D. Wash., filed June 6, 2001) (herbal

cure packages and ‘‘zappers’’ marketed as treatments for cancer); FTC v. Western Botanicals,

Inc., No. S-01-1332 DFL GGH (E.D. Cal., July 25, 2001) (Stipulated Permanent Injunction)

(comfrey products); FTC v. Christopher Enterprises, Inc., 2:01CV-0505 ST (C.D. Utah, stipulated

preliminary injunction entered July 6, 2001) (comfrey products). 12 In 2001, the Commission has brought 14 cases challenging advertising claims made for dietary supplements. During the period from 1998 through 2000, the Commission brought 46 such

cases. 13 Nutrition Business Journal, Volume IV, No.6 ‘‘Industry Overview 1999’’ at 3. 14 Commissioners Anthony and Thompson continue to support legislation as recommended by

the Commission last year. See Statement of Commissioner Sheila Anthony on the Commission’s

Privacy Agenda (Oct. 4, 2001); Privacy Online: Fair Information Practices in the Electronic Marketplace: A Federal Trade Commission Report to Congress (May 2000) (Commissioner Orson

Swindle, Dissenting, and Commissioner Thomas B. Leary, Concurring in Part and Dissenting

in Part).

etary supplements to treat or cure cancer, arthritis, Alzheimer’s, diabetes, and many

other diseases.11

Although aggressive law enforcement is crucial, education may be the best consumer protection by preventing deception in the first place. As part of a comprehensive consumer education program, we recently partnered with the FDA to announce

a new publication, Miracle Health Claims: Add a Dose of Skepticism, which provides

detailed information on spotting and avoiding health care fraud. Another brochure,

Who Cares: Sources of Information About Health Care Products and Services, published jointly with the National Association of Attorneys General, informs consumers about information for arthritis cures, alternative medicine, and other health

issues, and where to file complaints about health care fraud. To alert older audiences about health fraud issues, the FTC works with other federal agencies, such

as the Department of Health and Human Services’ Administration on Aging, and

with private groups, such as the AARP.

We will continue to use the Internet and other media to distribute our consumer

education messages. Our Web site, www.ftc.gov, provides links to reliable health information, including www.healthfinder.gov, developed by the Department of Health

and Human Services. In a little over one year, the FTC’s Web-based consumer education material dealing with health issues has received nearly 80,000 hits.

To educate the unwary, the FTC also maintains three ‘‘teaser’’ Web sites— ‘‘Arthriticure,’’ ‘‘Virility Plus,’’ and ‘‘Nordicalite’’—accessed using common search engines and designed to mimic fraudulent health care sites. When consumers attempt

to order the bogus products, however, they are warned that if the promotions had

been real, they would have been scammed. Most important, the site provides consumers with tips on how to identify Web sites that are most likely scams and directs

them to sources of reliable information. In the last two years, the three teaser sites

have received over 20,000 hits.

One specific type of health-related product—dietary supplements—will continue to

receive special attention.12 False or deceptive claims in the advertising for these

products are especially rampant. Because total sales from such products were $15

billion in 1999 and are increasing annually by about 10 percent, 13 targeting deceptive claims for dietary supplements is an important use of FTC resources.

PRIVACY

Many consumers are deeply concerned about the privacy of their personal information, both online and offline. Although privacy concerns have been heightened by

the rapid development of the Internet, they are by no means limited to the

cyberworld. Consumers can be harmed as much by the thief who steals credit card

information from a mailbox or dumpster as by the one who steals that information

from a Web site. Of course, the nature of Internet technology may raise its own special set of issues.

A majority of the Commission does not support online privacy legislation at this

time,14 but there is no doubt that consumer privacy is an issue that will continue

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15See, e.g., Federal Trade Commission Act, 15 U.S.C. § 41 et seq. (prohibiting deceptive or unfair acts or practices, including violations of stated privacy policies); Fair Credit Reporting Act,

15 U.S.C. § 1681 et seq. (addressing the accuracy, dissemination, and integrity of consumer reports); Telemarketing and Consumer Fraud and Abuse Prevention Act, 15 U.S.C. § 6101 et seq.

(including the Telemarketing Sales Rule, 16 C.F.R. Part 310) (prohibiting telemarketers from

calling at odd hours, engaging in harassing patterns of calls, and failing to disclose the identity

of the seller and purpose of the call); Children’s Online Privacy Protection Act, 15 U.S.C. § 6501

et seq. (prohibiting the collection of personally identifiable information from young children without their parents’ consent); Identify Theft and Assumption Deterrence Act of 1998, 18 U.S.C.

§ 1028 (directing the FTC to collect identity theft complaints, refer them to the appropriate credit bureaus and law enforcement agencies, and provide victim assistance); Gramm-Leach-Bliley

Act, 15 U.S.C. § 6081 et seq. (requiring financial institutions to provide notices to consumers and

allowing consumers (with some exceptions) to choose whether their financial institutions may

share their information with third parties). 16See Remarks of Chairman Timothy J. Muris, ‘‘Protecting Consumers’ Privacy: 2002 and Beyond,’’ The Privacy 2001 Conference, Cleveland, Ohio (Oct. 4, 2001). 17Some examples of recent ‘‘pretexting’’ cases brought by the Commission include: FTC v. Information Search, Inc. and David Kacala, No. AMD-01-1121 (D. Md. preliminary injunction entered May 4, 2001); FTC v. Victor L. Guzzetta d/b/a Smart Data Systems, No. CV-01-2335

(E.D.N.Y. preliminary injunction entered Apr.19, 2001); FTC v. Paula L. Garrett d/b/a Discreet

Data Systems, No. H 01-1255 (S.D. Tex. preliminary injunction entered May 1, 2001). 18The European Commission’s Directive on Data Protection became effective in October 1998,

and prohibits the transfer of personal data to non-European Union nations that do not meet

the European ‘‘adequacy’’ standard for privacy protection. To bridge different privacy approaches

between the U.S. and the EU, and to provide a streamlined means for U.S. organizations to

comply with the Directive, the U.S. Department of Commerce, in consultation with the European Commission, developed a ‘‘Safe Harbor’’ framework, which was approved by the EU in July

2000. Companies that self-certify to the Department of Commerce that they comply with the

Safe Harbor Principles may be deemed by the EU to provide ‘‘adequate’’ privacy protection

under the EU Directive. The FTC will give priority to referrals of non-compliance with safe harbor principles from EU Member States. See Department of Commerce’s Safe Harbor Website,

www.export.gov/safeharbor. 19See Children’s Online Privacy Protection Act of 1998, 15 U.S.C. § 6501 et seq. The Commission has brought several actions to enforce COPPA and its implementing Rule. See, e.g. United

States v. Lisa Frank, Inc., No. 01-1516-A (E.D. Va. filed Oct. 1, 2001) ($30,000 civil penalty). 20See Fair Credit Reporting Act, 15 U.S.C. § 1681 et seq. 21Deceptive spamming is a prime example of high-tech fraud, discussed earlier.

ergy and Commerce, and particularly the Subcommittee on Commerce, Trade, and

Consumer Protection, have made significant contributions to the discussion of these

issues. The Commission looks forward to continuing to work with the Committee

and Subcommittee on these issues.

The FTC currently enforces a number of laws that address consumers’ privacy.15

The Commission intends to increase substantially the resources dedicated to privacy

protection. Our initiatives in this area attempt to reduce the serious consequences

that can result from the misuse of personal information and fall into three major

categories: vigorous enforcement of existing laws, additional rulemaking, and continued consumer and business education.16

Law enforcement. The FTC intends to increase its law enforcement efforts in

the following areas:

• Challenging ‘‘pretexting,’’ the practice of fraudulently obtaining personal financial

information, often by calling banks under the pretense of being a customer.17

• Enforcing privacy promises, focusing on cases involving sensitive information,

transfers of information as part of a bankruptcy proceeding, and the failure of

companies to meet commitments made under the Safe Harbor Program to comply with the European Commission’s Directive on Data Protection.18

• Enforcing the Children’s Online Privacy Protection Act, which prohibits the collection of personally identifiable information from young children without their

parents’ consent.19

• Enforcing the privacy protections of the Fair Credit Reporting Act, which ensures

the integrity and accuracy of consumer credit reports and limits the disclosure

of such information to entities that have ‘‘permissible purposes’’ to use the information.20

• Bringing actions against fraudulent or deceptive spammers.21 Since 1998, the

FTC has maintained a special electronic mailbox, uce@ftc.gov, to which Internet

customers can forward spam. This database currently receives 10,000 new

pieces of spam every day. We will use this mailbox to identify targets for law

enforcement action.

Rulemaking. The Commission plans to engage in the following rulemaking activities:

17

22See Telemarketing Sales Rule, 16 C.F.R. Part 310. 23 Recently, the Commission approved a federal district court settlement against Ira Smolev,

Triad Discount Buying Services, Inc., and other defendants to resolve charges that they deceptively telemarketed buying clubs using negative option free trial offers and pre-acquired account

information. The proposed order prohibits the defendants from obtaining account information

from third parties, unless the third parties disclose to account-holders that they will transfer

the account information and the account-holders agree to the transfer. The order also prohibits

the defendants from transferring credit card information and personal identifiers to others, except as needed to process consumer-authorized transactions. See In re Premier Membership Services LLC, Case No. 00-35053-BKC-SHF (Bankr. S.D. Fla.). 24The Gramm-Leach-Bliley Act, 15 U.S.C. §§ 6801(b) and 6805(b), requires the FTC to issue

a rule establishing appropriate standards for safeguards to ensure the security, confidentiality

and integrity of customer records and information. 25See Identity Theft and Assumption Deterrence Act of 1998, 18 U.S.C. § 1028. This Act

makes the FTC a central clearinghouse for identity theft complaints. Under the Act, the FTC

is required to log and acknowledge such complaints, provide victims with relevant information,

and refer their complaints to appropriate entities (e.g., the major consumer reporting agencies

and other law enforcement agencies). 26The Gramm-Leach-Bliley Act, 15 U.S.C. § 6801 et seq., requires financial institutions to provide notices to consumers and (with certain exceptions) allows consumers to choose whether

their financial institutions may share their information with third parties. The FTC will undertake enforcement efforts to ensure that financial institutions comply with the law and will work

to increase consumer awareness of the notices. 27 Exxon Corp. and Mobil Corp., No. C-3907 (January 26, 2001) (consent order). 28 BP Amoco p.l.c. and Atlantic Richfield Co., No. C-3938 (Aug. 29, 2000) (consent order). 29 Chevron Corporation/Texaco, No. C-4023 (consent agreement accepted for public comment

Sept. 7, 2001).

• Considering whether to propose an amendment to the Telemarketing Sales Rule 22

to create a national do-not-call list to allow consumers to make one call to remove their names from telemarketing lists. • Considering whether to propose an amendment to the Telemarketing Sales Rule

to address the misuse of ‘‘pre-acquired account information,’’ lists of names and

credit card account numbers of potential customers. Misuses include billing consumers who believed they were simply accepting a free trial, or billing consumers for products or services that they did not purchase.23

• Completing the current rulemaking on safeguarding consumers’ financial information pursuant to the Gramm-Leach-Bliley Act.24

Consumer and business education and outreach. The agency will continue

to conduct workshops and other educational activities:

• Training law enforcement officials of a number of agencies to use the ID Theft

database assembled by the FTC to spot trends that will help them prosecute

those who engage in ID theft.25

• Promoting the FTC’s toll-free number, 1-877-FTC-HELP, so that consumers know

where to report privacy-related complaints. • Hosting an interagency workshop on privacy notices required under GrammLeach- Bliley 26 to assess the impact of the notices, identify successful privacy

notices, discuss strategies for communication of complex information, and encourage industry ‘‘best practices’’ and consumer and business education. • Continuing to explore and monitor the privacy implications of new and emerging

technologies through workshops, reports, and other public meetings. • Joining with several companies and privacy organizations to develop a universal

fraud complaint form that victims of identity theft can submit to each creditor

involved. This form will help victims recoup their losses and restore their legitimate credit records more quickly.

ENERGY

As are health care and privacy, energy is of critical concern to consumers. The

energy sector accounts for a significant portion of the nation’s total economic output,

and is a vital input to virtually all sectors of the economy. The FTC has long experience with energy issues. We have investigated a number of oil mergers in recent

years and have brought cases where appropriate. For example, in Exxon/Mobil,27

BP/ARCO,28 and Chevron/Texaco,29 the FTC required large divestitures of oil

fields, refineries, pipelines, and gas stations to ensure that the combined companies

would not gain market power at any level in the petroleum industry. We will continue to investigate thoroughly any activities that may raise competition issues.

The Commission recently announced a series of comprehensive conferences and

hearings on ‘‘Factors that Affect the Price of Refined Petroleum Products’’ to further

explore the practices of, and the changes occurring among, firms in the industry.

The first conference was held on August 2, 2001, and agency staff is planning a secVerDate 11-MAY-2000 15:13 Apr 08, 2002 Jkt 010199 PO 00000 Frm 00021 Fmt 6633 Sfmt 6621 E:\HEARINGS\76308 pfrm09 PsN: 76308
18

30Staff Report, Competition and Consumer Protection Perspectives on Electric Power Regulatory Reform: Focus on Retail Competition. This report was prepared in response to a request

from Chairman Tauzin of the House Committee on Energy and Commerce, and Chairman Barton of that Committee’s Subcommittee on Energy and Air Quality. 31See., e.g., FTC v. Oil-Chem Research Corp. & Speedway Motorsports, Inc., No. 1:01 CV

00126 (M.D.N.C. filed Jan. 31, 2001) (challenging representations that vehicles using the zMax

‘‘Power System’’ will experience at least a 10 percent gas mileage improvement and reduced engine wear); United States v. Intermatic Inc., No. 00C50178 (N.D. Ill. May 31, 2000) (consent de- cree) ($250,000 civil penalty in settlement of allegations that the company violated a 1979 FTC

order by making unsubstantiated energy savings claims about an electric water heater timer);

Dura Lube Corp., No. 9292 (May 3, 2000) (consent order) (resolving allegations that respondents

deceptively represented that their engine treatment product reduces emissions and improves gas

mileage by up to 35 percent; order prohibits future deceptive claims and requires payment of

$2 million in consumer redress). 32 In the last five fiscal years, the FTC has reviewed over 17,000 HSR filings, opened 1,078

merger investigations, issued 190 second requests, and required modification to, or otherwise

challenged, 147 mergers and acquisitions. 33See Remarks of Chairman Timothy J. Muris, ‘‘Antitrust Enforcement at the Federal Trade

Commission: In a Word—Continuity,’’ before the ABA Antitrust Section Annual Meeting, Chicago, Illinois (Aug. 7, 2001). 34 U.S. Department of Justice and Federal Trade Commission, Horizontal Merger Guidelines

(1992, revised 1997), reprinted in 4 Trade Reg. Rep. (CCH) ¶¶ 13,104 (1997), available at <http:/

/www.ftc.gov/bc/docs/horizmer.htm> 35 15 U.S.C. § 18a, as amended, Pub. L. No 106-553; 114 Stat. 2762 (Dec. 21, 2000), effective

February 1, 2001.

ond set of hearings. We expect that a significant number of experts in this field will

participate at these hearings, which will be held early next year.

The FTC will investigate pricing behavior, where appropriate, in energy markets.

In just the past year, we investigated various price spikes or pricing anomalies in

petroleum products. Thus far, we have found no evidence of collusive activity in violation of the antitrust laws. Staff also investigated the recent gasoline price spikes

in the aftermath of the September 11th terrorist attacks. Although these investigations did not find antitrust violations, Commission investigations nonetheless both

have a deterrent effect on wrongdoing and provide the basis for action when anticompetitive practices have occurred.

Drawing upon our experience with energy and environmental matters, we have

been advising states on emerging consumer issues as they deregulate and restructure their electricity and natural gas markets. A recent staff report prepared at the

request of this Committee examines state retail electric programs to determine

which reforms appear to have worked best in introducing competitive forces into the

retail sale of electricity. The report concludes that, although the transition to competition is incomplete, the properly designed restructuring of this industry on the

state level ultimately will result in benefits to consumers.30

The agency also focuses on energy issues that have a direct bearing on consumers’ wallets. We have brought law enforcement actions challenging deceptive energy savings claims for various products.31 We also educate consumers on energy issues by

issuing alerts and other materials on topics such as saving at the gas pump, purported gas-saving products, and seasonal home heating and cooling tips. For example, the June 2001 consumer alert with gas-saving tips, How to Be Penny Wise, Not

Pump Fuelish, has been well-received. We will update our Web site with a special ‘‘Energy and the Environment’’ page for easy reference of the relevant FTC rules,

reports, and consumer and business education materials.

MERGERS

The FTC’s careful evaluation of mergers will continue.32 Although there has been

much speculation about how the new Commission will regard merger cases, this

area is yet another in which continuity, not change, will be the norm.33 The agency

will continue to follow the Merger Guidelines when assessing the impact of a proposed merger on competition.34 Merger cases are fact intensive—the impact of a

merger on competition can be assessed only with a careful investigation of the market or markets involved. If our investigation convinces us that a proposed merger

will harm competition, the agency will assess proposed restructuring options presented by the parties to determine whether they will prevent that harm, or, when

necessary, we will go to court to stop it.

Recent amendments to the Hart-Scott-Rodino Act 35 have reduced the overall

number of HSR merger filings that the FTC and the Antitrust Division of the Department of Justice receive. Despite this reduction in HSR filings, the number of

mergers raising competitive concerns appears to remain significant, and many are

likely to present complex competitive issues that require thorough investigation. In

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36MSC.Software Corp., No. 9299 (complaint filed Oct. 10, 2001). The complaint filed this

month challenges two acquisitions made by a dominant supplier of a popular type of advanced

computer-aided engineering software. The complaint alleges that the defendant acquired its only

two competitors in transactions that fell below HSR notification thresholds.

addition, the FTC will not limit its attention only to those mergers that are the subject of an HSR filing. In a complaint filed this month, the FTC alleged that an acquisition harmed consumers, even though it was not reportable to the antitrust

agencies under the HSR Act.36 It suffices to say that the merger staff likely will

remain quite busy.

The FTC also continues to focus attention on reducing the burden of merger investigations. We are reviewing the burden caused—to both the government and the

parties—by document productions received in response to so-called ‘‘Second Requests.’’ We are also assessing whether merger investigations can be streamlined

and shortened. As with all matters involving merger standards and procedures, we

are working with the Department of Justice to address these issues. In particular,

we are working with our counterparts at the Antitrust Division to determine the

‘‘best practices’’ that will minimize burdens while maintaining or enhancing our enforcement capability.

CONCLUSION

The agency’s mission is to protect the welfare of consumers. Today’s Federal

Trade Commission has forged a widespread consensus on how to protect consumers

and how to work with other federal and state agencies to provide maximum benefits

for consumers from our limited resources. We will continue to use the full panoply

of our institutional tools in fulfilling this important mission.

Mr. STEARNS. I thank the Chairman. I think the first question

obviously is what would you say your top 3 to 5 goals that you will

accomplish so that when you come back at the end of the 107th

Congress, and hopefully the 1st of October, September of next year,

that we can say that the Chairman said that his top 3 to 5 goals

are X, and this is what he accomplished. And so maybe I will just

start off with that question.

Mr. MURIS. Thank you, Mr. Chairman. I would—— Mr. STEARNS. I would just point out that we do have a vote here,

and we have a series of a couple of votes. So I will try and get

through my opening questions, and then we will recess and come

back, and I know that the members will be asking questions thereafter.

Mr. MURIS. Thank you. I want to emphasize that we are standing on the shoulders of people who did an excellent job at the FTC,

and we are hoping to build on the work that they did to do it even

better.

On the consumer protection side, as I have mentioned, we are

substantially increasing our resources on privacy. One of our issues

that Mr. Markey raised is we are going to propose a National Do

Not Call List, which for the first time will give consumers a onestop place to call and have their names taken off of telemarketing

lists. The Telemarketing Rule gives us that authority, and we have

discussed it with the FCC, and I believe that will be a very important consumer initiative. Thus, implementation of our privacy

agenda would be one point.

A second point on the consumer protection side would be to increase our effort against fraud, particularly on-line, although obviously we will look at off-line fraud as well. The diet supplement

area is one of increasing importance, and we are looking there.

Also, we are trying to use more sophisticated tools to search our

data base, to look for patterns of illegal activity, and to try to detect and stop fraud even faster.

20

On the anti-trust side, with the slight receding of the merger

wave, we are turning more attention to non-merger cases. We hope

in the drug and other areas to have a very aggressive agenda to

protect and benefit consumers. In the merger area, I would last

point out that we are continuing aggressive enforcement. At the

same time, we believe there are steps that we can take to reduce

the compliance burdens of businesses that have grown quite large.

Thus, these four areas are ones in which I hope we can accomplish

a lot.

Mr. STEARNS. Let me just get to a question that a lot of people

have asked me. Some have suggested that different types of fraudulent schemes have been used to fund terrorist networks in the

United States. Do you have any evidence to support that contention?

Mr. MURIS. No. We are aggressively looking at scams that attempt to take advantage of the events of September 11, but we certainly have no evidence of the sort that you are suggesting.

Mr. STEARNS. Are you receiving any complaints?

Mr. MURIS. We are receiving many complaints about potentially

fraudulent scams, but we have no evidence that links any of them

to terrorist organizations. What we see are people trying to take

advantage of the situation. For example, there are diet supplements that claim to cure or prevent anthrax, and people selling

perhaps deceptive kits to test for various sorts of problems that are

related to September 11.

Mr. STEARNS. And in the area of charitable giving are there any

fraudulent schemes being perpetrated dealing with charitable contributions as of September 11?

Mr. MURIS. There are dozens of law enforcement agencies that

we are working with that are searching for such schemes. At the

moment, although there have been a few problems that would surface briefly and then the companies would desist, there do not appear to be problems. Again, there are dozens of law enforcement

agencies looking at this issue, including us.

Mr. STEARNS. Recently, we have begun to see reduced risk tobacco product ads claiming that those products pose a lower health

risk than regular tobacco products. Does the Commission have the

requisite authority to review the efficacy of these ads, and if so,

will it?

Mr. MURIS. Yes on both accounts. The Commission has a long

history in the tobacco area. Although many of the issues of tobacco

advertising were resolved in the agreement between the tobacco industry and the States, this is an active issue. I would certainly recommend that the Commission move appropriately against any deception or unfairness in such advertising.

Mr. STEARNS. Just briefly. Is there anything as a result of September 11 that you are facing that part of the emergency funding

and supplemental that you see an area where you need beefed up

support that we in Congress should give you?

Mr. MURIS. In terms of resources, the Commission in the budget

that is about to pass will receive a modest increase. I personally

think another modest increase would be beneficial. Because of September 11, we have diverted resources from some other areas that

21

are important, and I do think that modest increases in our budget

are appropriate.

Mr. STEARNS. Okay. Mr. Chairman, we are going to take a recess

for two votes, and it will probably be about 20 minutes, and we appreciate your indulgence. You have been up here many times and

so you understand this.

Mr. MURIS. Yes, thank you.

Mr. STEARNS. And the subcommittee will take a recess.

[Brief recess.]

Mr. STEARNS. The subcommittee will come to order, and I have

finished with my questions, and I will go now to the ranking member, Mr. Towns of New York.

Mr. TOWNS. Thank you very much, Mr. Chairman. Talking about

identity theft, is there any one document or one piece of personal

information that seems to be used more than others by those that

engage in identity theft?

Mr. MURIS. Well, certainly the Social Security number is. If you

want to steal someone’s identity that is an excellent way to do it.

There are people who just get credit card numbers, and that can

be a problem as well, in the sense that if you get the credit card

number, then you can certainly run up bills.

Mr. TOWNS. Since September 11, there have been numerous

press reports about how easy it is in certain States to get a drivers

license. One State has reportedly issued more than a hundredthousand licenses all with the number 99999 as a substitute for a

Social Security number that could not be provided.

Do license requirements for a drivers license at that level pose

a significant problem in controlling identity theft, and if so, what

should be done about it?

Mr. MURIS. That is certainly a good question. Congress had us

create an identity theft lab, and we have about 130,000 complaints

and inquiries. I have actually sat in that lab and listened to calls.

My experience, and I am new at this particular issue, is that the

driver’s license is less of a problem than the other problems that

I have mentioned, but I would be certainly glad to look into it.

Mr. TOWNS. All right. How many of these identity theft complaints received by the FTC would you say constitute actual violations of the law, and how many result from legal commercial practices?

Mr. MURIS. Certainly most of the complaints that we have received are identity theft. There are people who have charges on

their bills that they did not make. There are serious problems in

so-called pretexting which Congress gave us authority to act

against, and which we are acting against. Pretexting is when someone calls a financial institution and pretends to be you, and gets

information. The Commission brought some recent cases, and I

think that is an outrageous practice. We have complaints about it.

Mr. TOWNS. Thank you. Let me say that the means with which

web sites collect and distribute non-public personal information is

by-and-large governed only by the industry self-regulation. We support the FTC’s efforts to enforce industry promises.

However, what can be done to address web sites that choose not

to participate in self-regulation, having inadequate or no privacy

policies at all? What can we do?

22

Mr. MURIS. One of the things that is under-appreciated by some

is the extent to which there has been considerable progress in posting privacy policies. All of the top web sites have such policies.

If the operator of a website permits payment using a VISA card,

for example, VISA requires that the website post a privacy policy.

Obviously, most web sites that do transactions would accept a

VISA card.

Moeover, in the privacy area, in terms of security, when information is leaked or sold either intentionally or negligently, I think

that under certain circumstances that can be a violation of the FTC

Act, and we are moving in that area.

Mr. TOWNS. One final question, Mr. Chairman. In many communities across the country predatory lenders swindle unsuspecting

consumers out of millions of dollars every year. What can the FTC

do, if anything, about that?

Mr. MURIS. The FTC has been quite aggressive under our predecessors in attacking predatory lending. There are some particularly

bad practices out there, and the cases have been appropriate. We

are prosecuting them vigorously, and we are looking for others.

Mr. TOWNS. Thank you very much, Mr. Chairman. I yield back.

Mr. STEARNS. I thank the gentleman. The chairman of the full

committee is here, Mr. Tauzin, is recognized.

Chairman TAUZIN. Thank you, Mr. Chairman. Let me welcome

you, Chairman Muris, and I know that our written statements

have been made a part of the record, and in the written statement

that I prepared for today’s hearing I commended you.

And I wanted to commend you personally for the statements that

you made in Cleveland, I think it was, regarding the privacy issue,

and the fact that you intend to refocus the Commission’s attention

to enforcing law in these areas, and insisting that in fact that as

much as possible that the private sector respect the principles of

privacy that have been outlined by the Commission on previous occasions.

And also I wanted to thank you for attending the privacy conference that Chairman Stearns and the Chamber of Commerce held

just recently at Landsdown, where in fact we got a better sense of

what the outstanding legislative initiatives may look like next year

when we take the issue up.

And particularly the concern that the States are beginning to

move, and particularly California, toward adopting State privacy

policies that might conflict with other States and Federal policies

in interstate conference.

And I want to thank you again for participating in that session

and for giving us the benefit of your thoughts and advice in regards

to that. And in that regard, while you indicated initially in that

speech that you thought that legislation might not be as necessary

as good enforcement, you seem to have conceded the notion to us

at that hearing that we have sort of been wrestling with as well

that if we are going to have a privacy policy that works for the

country, that having States and/or different agencies adopting conflicting policies could cause us great harm.

And that perhaps that we need at least some sort of standard,

some basic principles of policy upon which all of us can function in

interstate commerce. Is that correct?

23

Mr. MURIS. Yes, Mr. Chairman. I appreciate your comments. I

have enjoyed working with you so far, and look forward to working

together in the future. The point that I made in that speech, and

also at Landsdowne, was that the particular issue of broad based,

Internet only legislation is still premature at this moment. I did

say and I do believe that the best argument for such legislation is

if we start getting inconsistent State laws. At the moment that has

not happened, but I understand that there is some danger that

that will occur.

Chairman TAUZIN. Well, California came within the half-foot line

in football analogy from getting it done, right?

Mr. MURIS. It was financial institutions. It was not the on-line

privacy issue, but in that financial institution area it would create

a serious problem.

Chairman TAUZIN. And we also talked about the concept of creating a safe harbor for private institutions that work within selfregulatory regimes, and sealed organizations, so that they might

not be affected by any kind of Federal statutes or rulemaking.

And at the same time, some sort of provision to catch those that

refuse or are unwilling to work within self-regulatory structures. Is

that a good frame upon which we should proceed?

Mr. MURIS. Certainly if you are going to do legislation, legislation that gives clear guidance with things like safe harbors would

be appropriate. Quite frankly there is a lot that we can do under

the FTC Act, and I thank you for you commending us for doing

more. One of the things that we are doing both in our cases and

in working with the self-regulatory agencies is trying to set out

some clear guidance. But again if you are to do legislation, that

would be appropriate.

Chairman TAUZIN. And I want to touch on a topic that is going

to get I think a lot of attention next year. We are going to begin

work on a reauthorization of the FDAUFA statutes. FDAUFA is a

statute that deals with the FDA, and has to do with the user fees

that are collected for studying and for approving new drugs.

When that statute opens, it is very likely that we are going to

get back into tobacco, and so I want to ask you a couple of tobacco

questions. We are beginning to see advertisements by tobacco companies regarding their efforts to reduce the carcinogenic compounds

that are found in tobacco, and their efforts to market products that

have less of those carcinogens in the tobacco.

We are also beginning to see new products, new smokeless tobacco products, and we will begin to see advertisements on those

products. What is the FTC’s role when it comes to advertisements

or claims about safer, or different, forms of tobacco products?

Mr. MURIS. The FTC has an important role involving advertising.

As I have stated, this is an area in which we should be aggressive

in policing advertising for deception and unfairness, and I believe

that the FTC will continue to do that.

Chairman TAUZIN. So that if a tobacco company were making a

claim that some tobacco product had a less serious deleterious

health effect, and that it was safer in some respect, or that it contained less carcinogens, is it without the FTC’s jurisdiction and authority to examine those claims and to enforce the law against

24

false, misleading, or deceptive health claims in regard to these tobacco products?

Mr. MURIS. Absolutely. We have that authority now, and I believe the FTC would exercise it appropriately.

Chairman TAUZIN. I thank you very much, and I yield back, Mr.

Chairman.

Mr. STEARNS. I thank the gentleman. The gentlelady from California, Ms. Eshoo.

Ms. ESHOO. Thank you, Mr. Chairman, and welcome, Mr. Chairman.

Mr. MURIS. Thank you.

Ms. ESHOO. It is good to see you, and have you here. I wrote to

you last month with some of my concerns, and so I am looking forward to hearing back from you on the specifics of that letter.

But let me ask some broader questions of you this morning. I

want to commend you for proposing that the FTC’s enforcement of

existing laws—that your budget be, and your staff be increased by

I think 50 percent.

I think that is what you were asking for, and to devote it to consumer privacy issues. Where is that right now? I mean, very quickly. Is it in an appropriation bill?

Mr. MURIS. No, what I was saying is that we would increase

within our total budget our resources——

Ms. ESHOO. And how much is that?

Mr. MURIS. In the fiscal year that just ended, we spent about 35

people full-time.

Ms. ESHOO. And how much is that? So you are going 50 percent

over that?

Mr. MURIS. Yes, 50 percent over that. Actually, it is a little more

than 50 percent, but we will spend somewhere in the range of 55

to 60 people working on privacy, which is a slightly more than 50

percent increase from the last year. I am talking fiscal years, and

the fiscal year that just began last month.

Ms. ESHOO. Yes. I am aware of that. Thank you. Now, in the 50

percent increase of that staff, what exactly will they be doing relative to consumer privacy issues? Can you give us a thumbnail

sketch?

And I think you know where I am going. Since it has been your

recommendation to kind of pull up the emergency brake so to

speak on legislative action, what I am pursuing is exactly how you

are going to make use of the staff at the FTC on this.

So how are you instructing them, and what exactly will they be

doing, and how do you pursue bad actors? What is a bad actor, and

how do you come down on them?

Mr. MURIS. We have five very recent privacy statutes that we enforce and we are increasing our enforcement. We have statutes

dealing with financial privacy, children’s privacy, health privacy,

and we have recent amendments to the Fair Credit Reporting Act.

We also have recent identity theft statutes. Plus, we have our own

statute that we use in privacy, and we are increasing our resources

by 50 percent to enforce those statutes. We will follow a tripartite

strategy of case enforcement, and that particularly deals with

the——

25

Ms. ESHOO. How aggressive has this been, or is it something that

is awakening and really being shaped by you?

Mr. MURIS. Privacy is a relatively new issue for the Federal

Trade Commission, but in the last few years the Commission has

become a leader in the privacy efforts. I thought particularly with

these new statutes that a further increase in our effort would be

appropriate. We are going to bring cases. We also have excellent

relations, and—— Ms. ESHOO. How do you determine bad actors? What is the process for the Commission and its staff to pursue this? Again, I think

it is obvious why I am asking these questions. What I am concerned about, and I know that obviously the letter that I sent to

you states this, that I think in some areas we need umbrellas, Federal umbrellas, because of the 50 States, and the patchwork quilt.

It is very difficult I think to give the answer to our constituents

of where we are on privacy, and how we have made progress as a

Nation, and what is acceptable, and what isn’t acceptable, and how

we pursue, and what the rules of the road are.

Right now if I were to describe it, I think it is like nailing jello

to a wall. I don’t really think we have anything. I think we have

some operating principles that people think are good things to go

by. I certainly have introduced legislation on this, and others have.

But what I am trying to nail down are some of the bright lines

of the FTC. So how do you determine bad actors? What are you

going to do about them? How does the staff bring this about? Are

they reported, or do you do this internally?

And I note that in your comments that you said that about a

hundred of the top companies have posted. Well, there may be a

hundred top companies, but I can think of at least 50 brand-named

companies in my Congressional District. And so a hundred is not

that many out of our country I don’t think. So, anyway, go at it.

Mr. MURIS. Sure. First of all, I apologize. I am unaware of your

letter. Unfortunately for 2 weeks we had no mail delivered to us,

and if you sent it in the regular mail, it probably—— Ms. ESHOO. We will fax it to you. How is that?

Mr. MURIS. I appreciate it. It probably was rerouted to Ohio, and

we are now starting to get mail delivered. We have a complaint

system, and it is one of the ways that we look for cases.

Ms. ESHOO. So, from the outside coming in?

Mr. MURIS. Yes, which we are improving. That complaint system

had never specifically addressed privacy concerns before. The privacy groups asked to change our complaint system to track privacy

complaints. I thought that was an excellent idea, and we are doing

that.

Under the specific statutes that we enforce, we look for people

who create problems. For example, the Fair Credit Reporting Act

was our first privacy statute. It is 30 years old, and it is an important privacy statute.

One of the things that it says is that if a consumer is denied

credit, insurance, or employment, because of something that is in

his or her credit report, the consumer has to be told that that was

why. And if the consumer is told, as credit reports aren’t always

perfect, then they know that there is a problem and to check on

the problem.

26

We are stepping up and increasing our enforcement of that provision. We are also quite frankly under the—— Ms. ESHOO. So if someone violates that and you find them, quote,

guilty, what happens to them?

Mr. MURIS. We have a variety of remedies that we can seek. In

some cases, depending on the violation, we can get monetary relief.

Under the Fair Credit Reporting Act, for the most part, we do what

is called a cease and desist order.

Ms. ESHOO. Let me ask you this, because I think the clock is

going to go off, or maybe the red light is already on.

Mr. MURIS. Okay.

Ms. ESHOO. In the areas that you listed out, and where you have

jurisdiction, in the last year how many violations that were either

detected or reported from the outside to the FTC have been adjudicated and fines levied, or whatever the process is?

Mr. MURIS. Well, we have brought numerous cases. Under the

Children’s Privacy Act, for example—— Ms. ESHOO. No, all of them combined.

Mr. MURIS. All of them combined? I am not sure what the answer is.

Ms. ESHOO. Do you think it is aggressive?

Mr. MURIS. One of the reasons that I proposed a 50 percent increase in resources is that I thought that we could do better. The

Commission has done a good job in the past in making privacy a

central issue, but I proposed an increase because I thought it was

an important issue that deserved more effort.

Mr. STEARNS. The gentlelady’s time has expired.

Ms. ESHOO. May I ask unanimous consent for one more question?

Mr. STEARNS. So ordered.

Ms. ESHOO. Thank you, Mr. Chairman. Why do you consider the

Internet and main street, and how they operate, one and the same?

Why do you treat them the same way?

Mr. MURIS. The point that I made about on-line and off-line,

which I know that Chairman Stearns’ proposal agreed with, is that

collecting information is increasingly becoming seamless. Companies that collect information off-line and on-line are integrating

those systems. To have one set of rules for the Internet is going to

punish the Internet relative to off-line. For the sensitive financial

and health information, which are the most important kinds of collections, we ought not to punish on-line.

Ms. ESHOO. I am not so sure I understand your answer. If you

draw a line between the two because they operate differently—Mr.

and Mrs. Smith’s store on main stream, versus an on-line privacy—

I don’t understand why you would treat them the same?

Mr. MURIS. The issue that we are talking about and that is relevant for us is the collection of sensitive personal information. If

you have tougher standards for the——

Ms. ESHOO. But it operates differently though.

Mr. MURIS. If you have tougher standards for the collection of information on-line than you have for the collection of information

off-line, then you are punishing the on-line companies.

Ms. ESHOO. And how would the FTC enforce that?

Mr. MURIS. How? Certainly the FTC will enforce whatever laws

Congress tells us to enforce. But my point is that we ought not to

27

penalize the development of the Internet by adopting tougher privacy standards for the collection of information on-line than for the

collection of information off-line.

Ms. ESHOO. And my final comment, and I thank the Chairman

for his patience, is that I think that if you don’t do more to build

the confidence of the American people in transactions on-line, then

we have lost the battle.

I think that there is enough out there that is cutting into this

confidence. We have many, many overlays today since September

11, but I think that confidence is the gold standard when it comes

to our markets, and I think confidence is the gold standard relative

to the Internet.

I think that confidence, confidence, confidence, being built in

each important sector just cannot be overlooked. So I think that we

are missing that opportunity, but I look forward to working with

you. Thank you, Mr. Chairman.

Mr. STEARNS. Thank you, gentlelady. Mr. Terry is recognized.

Mr. TERRY. Thank you, Mr. Chairman. We telephoned your office

to discuss an issue in my home town with one of my constituents,

and a couple of hundred of the employees that work for Paypal, in

a kind of interesting issue regarding vertical integration of E-Commerce on the Internet, and who can control the payment methods

when making purchases on the Internet.

So let me just ask you the general, and then if you can move to

the specific, but generally what is the philosophy of your department, of the FTC, regarding anti-trust on E-Commerce and vertical

integration.

And whether or not specifically then in electronic commerce if

the method of on-line payment fits into that philosophy, and again

whether or not the philosophy will change from past to now under

your leadership.

Mr. MURIS. To start at the most general level, we enforce the

anti-trust laws, and the anti-trust laws—mostly, but not exclusively—focus on agreements among competitors and on so-called

monopolistic practices. It is possible in certain circumstances to

bring a case based on vertical integration. The law is very tough

because it is premised on lots of empirical evidence that vertical integration often benefits consumers.

Many of these cases frequently involve contractual disputes, contractual issues more than they involve anti-trust law. If you have

a situation, however, when you have a company that really has

substantial market power, that company can misuse vertical integration in a way that harms consumers. It is a tough case to bring

and win.

Mr. TERRY. This issue is somewhere in the process at the FTC,

and where is it in—well, you mentioned about whether somebody

has sufficient market power to really cause damage. Has there

been any determination or early thoughts that E-Bay in this particular situation has that level of market power to really wreck

havoc on these small businesses that focus on electronic payment?

Mr. MURIS. We would take a look at situations involving abuses

of market power. I personally do not know enough about the specific matter that you have referenced. I just found out about it last

night, about the particular facts, and can not comment on those

28

facts. As I said, there can be appropriate cases, but they are relatively few and they are hard to win.

Mr. TERRY. Despite the difficulty in winning those, is this somewhere in the process of being reviewed at the FTC?

Mr. MURIS. Again, part of the problem is that we have had this

mail problem like everyone else has, and we will certainly look at

any recommendation we receive from you or any other members of

the committee.

Mr. TERRY. I appreciate that. Thank you. I yield back.

Mr. STEARNS. The gentleman yields back the balance of his time.

The gentleman from Massachusetts, Mr. Markey, is recognized.

Mr. MARKEY. Thank you, Mr. Chairman, very much. First, I

would like to compliment you, Mr. Chairman, on announcing that

the Commission is going—and I am reading from your testimony,

that the Commission plans to engage in the following rulemaking

activities to consider whether to propose an amendment to the telemarketing sales rule to create a national do not call list to allow

consumers to make one call to remove their names from telemarketing lists.

What greater gift could you give to the American people than to

just have one call where you say I don’t want anybody else to call

me again. You know, just keep them all away from my house.

So this has always been my dream when I authored the Act in

1991. That the day would arrive when out of the Federal Communications Commission, or the Federal Trade Commission, that they

would do this, and it was always my intention.

Because you just get worn down. You keep telling different companies, and then you can’t remember which company it was that

you told 3 weeks ago that you didn’t want to be called again, and

so you are not sure whether you should be mad at this one person

who is calling you, but you are just mad in general when you hang

up because you were waiting for a call from your Aunt Margie, and

these people are just interfering with it.

So I want to compliment you for doing it, but the hosannas will

rain down on you, Mr. Chairman, if more than just considering

whether to propose an amendment that you actually announce that

you are going to propose an amendment.

You name will ring in the heavens of this institution and all

across the country, because there never again will be a greater

achievement that will attach to your name than if you actually do

it. So I would just like you to know that on this issue that there

are no Democrats, and there are no Republicans. We are united at

water’s edge here in our battle against telemarketers.

So you will hear no dissenting views on this, I think, except from

companies that make money off of it. And the interesting thing

about privacy policy generally as you know is that we have this privacy paradox, which is that if in fact a company posts a privacy

policy, and then violates its own policy, then the Federal Trade

Commission can bring an action against them for engaging in unfair and deceptive practices.

However, if the company never posts a privacy policy, but engages in personal information hijacking, then there is nothing that

you can do about it, which is just totally backwards. The companies

that don’t protect privacy at all, you can’t do anything about, and

29

the companies that say that they are going to protect privacy and

then don’t, you have an action against them because they didn’t do

as much as they promised that they were going to do.

So the question that obviously constantly arises is why don’t we

just put a regulation on the books so that these bad people who

don’t protect any privacy at all have real protections which are

built in to the law so that there is a minimal level of electronic ethics that every company has to abide by, in terms of their relationship with the consumer.

Mr. MURIS. I certainly appreciate your comments on the telemarketing sales rule amendment, which we are about to propose.

Obviously, we have to look at the rulemaking record in making our

final determination.

The problem that I have at this time with on-line legislation, besides the fact that it would discriminate against on-line commerce,

is that it is notice based. This spring and summer everyone in

America received several notices from their financial institutions,

as required by Gramm/Leach/Bliley. We need to understand how to

do notice legislation better before we move to new notice-based legislation. We are holding a workshop on December 4, where we are

bringing in everybody, the agencies who enforce Gramm/Leach/Bliley and the people who send out the notices. We will try to see how

we can make it work better. Quite frankly that experience this

spring and summer was not a very salutary experience for noticebased legislation.

Mr. MARKEY. Can I tell you, Mr. Chairman, that I am the author

of that language as well, although it is included in the bill that you

keep mentioning, those three names. But it is the Markey language

that is in there.

And what we are trying to do with the financial services industry

is to deal with the fact that there is an underlying pathology in the

financial services industry which doesn’t want to provide any privacy protections whatsoever, which is why they fought us on this

committee, which is where it came out of, the privacy language.

They actually defeated it in the Senate and in the Banking Committee across the corridor from me. So they are kind of like—they

are in a recovering privacy violators program. There is a deep-seeded pathology that they have.

And then when you say to them, now, please give notice to people that their privacy may or may not be protected, and here is

your two-page document that you have to sign, and this or that,

and there is triple-negatives that are in it that would require a

$500 an hour lawyer in order to figure it out, of course it is not

successful.

However, if you allowed a bunch of sixth graders to sit around

and just draft it up, or just check it this way or that way, and it

is going to cover you for everything, then it would be all done.

And so it is not that complicated in fact. In just requires somebody in your staff to just kind of draft it up, and just say here is

what you are going to do from now on or else we are going to sue

you, and it would be all solved for the next round that we would

have to go through.

But it doesn’t require a lot to figure out that the people who were

charged with doing it at their company didn’t want to do it. I have

30

one final question, Mr. Chairman, if I may, and I apologize, and

ask for your indulgence.

In recent days there has been an announcement of media mergers that are going to receive a lot of attention. I think that one of

the ways in which we can gain some insights as to what needs to

be done would be looking just backwards a little bit toward the

AOL-Time Warner merger so that we can assess the conditions

that were imposed upon that merger, in terms of how successful

they have been.

So I would just like to just ask this quick question, and then ask

you to submit to the record, to the chairman, and to the full committee, or to the subcommittee, in writing your answer to this

question within 2 weeks, and I would appreciate it.

The consent AOL-Time Warner order, as summarized by your

agency’s website, stipulates, quote, that AOL would be required to

open its cable system to competitor ISPs, prohibited from interfering with content passed along the bandwidth, and contracted for

by non-affiliated ISPs, and from interfering with the ability of nonaffiliated providers of interactive t.v. services, to interact with

interactive signals, triggers, or content that AOL-Time Warner has

agreed to carry; and prevented from discriminating on the basis of

affiliation in the transmission of content, or from entering into exclusive arrangements with other cable companies with respect to

ISP services or interactive t.v. services.

And required to market and offer AOL’s digital subscriber line

services to subscribers in AOL’s cable areas where affiliated cable

broadband service is available in the same manner, and at the

same retail pricing, as they do in these areas where affiliated cable

broadband ISP service is not available.

So what I would like to ask, Mr. Chairman, is perhaps not 2

weeks, but perhaps by December 1, if the Agency could submit to

us in writing how much compliance in their opinion they believe

the AOL-Time Warner has given to this language.

Mr. STEARNS. I think that is a good question that we would like

to have.

Mr. MARKEY. And if I may, we would like a status report on each

condition so that we can have an idea in each area how well the

FTC is overseeing the implementation of the Act. Thank you, Mr.

Chairman.

Mr. STEARNS. Yes, I thank the gentleman.

Mr. MARKEY. Would the Chairman be willing to do that?

Mr. MURIS. Yes, sir.

Mr. STEARNS. Okay. The gentleman from New Hampshire, Mr.

Bass, is recognized.

Mr. BASS. Thank you, Mr. Chairman. Mr. Chairman, the Oversight and Investigation Subcommittee had a hearing yesterday on

the issue of charitable—the disposition of funds raised for charitable purposes in the aftermath of the September 11 tragedy.

And I asked Mr. Beamis yesterday about the issue of whether he

thought the FTC needed additional authority to oversee the practices of charities, and I am just wondering what your thoughts are

on that subject.

Mr. MURIS. One of the issues in the national do not call list is

that it would cover 80 percent of the calls, but it would not cover

31

political fundraising calls, or most charitable calls. If Congress proposed to extend our ability to cover charities in that sense, that certainly would be something that we would consider. You recently

amended the Telemarketing Sales Rule to give us more authority

over charities, and we are trying to understand the new law.

Mr. BASS. In the Patriot Act you mean; is that right?

Mr. MURIS. Yes. When there is outright fraud, we already have

sufficient jurisdiction. There are serious constitutional problems in

dealing with charities, however. A final issue with non-profits in

general, and not just charities, is that their exemption causes us

a problem under the anti-trust laws. There can be anti-competitive

conduct by non-profits that we cannot reach, although the Justice

Department, which also enforces the anti-trust laws, can reach

those.

Mr. BASS. Okay. Another issue is what level of success have you

had with enforcing rules when the seller is overseas, and it is probably an Internet more than anything else issue.

Mr. MURIS. That is an excellent question and it is one to which

we need to pay increasing attention. Cross-border fraud is a growing issue. As we have moved in the United States, for example on

the telemarketing front to crack down on fraud, many telemarketers have gone to Canada. We have good cooperation with

the Canadians, and we are hoping to increase it.

I hope to emulate something that occurred on the anti-trust side.

Over the last 15 years, anti-trust authorities internationally have

achieved good cooperation in attacking price fixing. I hope that we

can emulate that cooperation on the cross-border front. We have

begun with Canada, and I hope that we increase our work in that

area.

Mr. BASS. Do you need Congressional help to achieve that, or can

you do it anyway?

Mr. MURIS. We might need Congressional help, and it is something that I am studying. I certainly would not hesitate to ask for

your help, and this committee would obviously be the place to start.

Mr. BASS. One last question. Mr. Tauzin talked about the issue

of privacy and preemption of State regulatory efforts. Are there any

other areas where you think the FTC may have some issues with

State regulation versus Federal?

Mr. MURIS. For the most part, we have an excellent cooperative

relationship with the States. In fraud in particular, we bring cases

together with the States. The same thing happens on the anti-trust

side. It is clear that State legislation can cause problems. In terms

of enforcement, it is mostly cooperation and not any sort of adverse

competition.

Mr. BASS. Thank you, Mr. Chairman.

Mr. STEARNS. Thank you. I thank the gentleman. Mr. Deal is recognized.

Mr. DEAL. Thank you, Mr. Chairman and thank you for being

here today as well. I have a couple of very diverse areas, and to

follow up on your last comment, I have just a matter of inquiry

with regard to the enforcement of fraud schemes in cross-country

relationships.

Is there anything in WTO that binds all of the WTO members

to a common agreement with regard to prosecuting those, and if

32

not, is that an area that perhaps should be looked at as one that

our country should push?

Mr. MURIS. No, there is not. We should push bilateral agreements. We are not at the stage yet when a multi-lateral WTO

agreement would be appropriate, but certainly bilateral agreements, which is what we first used in the anti-trust laws, are appropriate. I plan to make this a priority.

Mr. DEAL. I would urge you to do that, and as we go forward

with the bilateral agreements, certainly I think we ought to make

it a priority in those agreements. Let me go—we all have our favorite issues that we have complaints about, and as a member who

has three—my wife and my own family members, who are 86

through 95 years of age, and live with us in our home, I have become increasingly aware of the fraud that is attempted and continue to be perpetrated and aimed at senior citizens and the socalled sweepstakes type solicitations.

I assume that at least part of that issue is within your jurisdiction, and I would just ask you if you would bring us up to date as

to what has been done. I mean, if I could just add together all of

the winnings that these three senior members of our family have

been told they have won, they would all be multi-millionaires.

However, if I added up the amount of fees that have to be paid just to get their earnings, whether it be send us $11.65 so that we

can mail you your $25,000 check, and we will do so immediately,

I think we have sort of all lost focus of that problem, and to me

it is a huge problem.

There may be problems in the mail elsewhere, but there is no

problem with those letters getting through. What is being done and

what if anything else do we need to do legislatively?

Mr. MURIS. The situation that you described would probably be

illegal. The Commission has brought cases. The typical one involves consumers paying money for a promise to help them win.

The States were very active and have announced in the last few

years settlements with major sweepstakes companies. Congress in

the last year or 2 passed legislation requiring additional disclosures. Thus, there has been much that has happened on this front.

We in general work with the AARP and other groups on particular problems that the elderly have. Health care issues are probably a bigger issue, but sweepstakes is a significant issue as well.

We have been aggressive in those areas.

Mr. DEAL. Do you need any other legislative authority to assist

in that regard?

Mr. MURIS. This is an area where our legislative authority is

quite good.

Mr. DEAL. All right. Let me move to a totally different subject,

and that is the area of health care, and your written testimony I

think is very good in that regard, in your efforts to deal with fraudulent and scam operations in the health care area.

Let me bring the question as it relates to an issue that we get

complaints from in my office, and that is the question of the ordering of prescription drugs over the Internet. And the question that

is raised by many local pharmacists, for example, that the adequate safeguards that are required of a local pharmacist, in terms

of advising, and follow-up, and counseling, are not accompanying

33

those kinds of orders. Is that an area that you have been involved

with, and what is the status of that? If you would comment.

Mr. MURIS. In general we have been looking at several issues of

products migrating on-line—whether they are sold deceptively and

whether there are restrictions imposed upon them that are appropriate. We have looked at some issues involving the on-line sale of

pharmaceuticals. I would be glad to get back to you with the details, because I do not know specifically the status.

Mr. DEAL. All right. If you would, because I think as you recognized as more migrates to that medium for purchase, we can’t

tighten up on the local pharmacist, and at the same time relieve

the other sales venues from those kind of controls.

And one final very unrelated question, and that is the safe harbor provisions that the EU has put in place. I noticed in your testimony, and I believe it is Footnote 18 to the testimony, that your

organization is giving priority to complaints of non-compliance.

I think that all of us recognize that some people think that we

are going too far in enforcing European law on American companies. What is your general view of the safe harbor under the EU

and your role in enforcement?

Mr. MURIS. It is important to understand what my predecessor

promised to do, which promise I will abide by. We are not going

to enforce the European law. What we are going to enforce is

American companies promises to their consumers.

In this case, if they promised that they will enforce certain privacy provisions and if they break that promise, we will act.

Mr. DEAL. That is a good distinction. Thank you very much, and

thank you, Mr. Chairman.

Mr. STEARNS. I thank the gentleman. Before we close, Mr. Chairman, you touched in one of your answers to one of my colleagues

that as a result of September 11 and these charitable contribution

funds, there have been some complaints that they have not distributed the money.

You sort of indicated that perhaps you could be given more authority to help out in this area. The State of Minnesota has a proposal that if you have a charitable, not-for-profit fund, that you

have to notify the State.

And second that you have to provide information on your expenses and your overhead. You don’t have to provide the privacy

of the individuals contributed, but you have to show how much

money was expended in overhead, or administrative expense, and

how much was given out in a charitable way.

And I was wondering if you thought on a national basis that we

should have perhaps as a start just for national emergencies, like

Hurricane Andrews down in Florida, or September 11, and perhaps

we have, god forbid, additional terrorist acts, that these national

tragedies which we see people develop huge amounts of money, and

yet the money is not distributed, is it possible that we should have

some national legislation that would give you more power so that

you would develop, say, a data base on these people to make sure

that they are legitimate, and that there is no fraud.

And then second that they have a reporting system where they

would have to tell what their expenses are and how much money

they give out, because just the light of day, the sunlight, would perVerDate 11-MAY-2000 15:13 Apr 08, 2002 Jkt 010199 PO 00000 Frm 00037 Fmt 6633 Sfmt 6602 E:\HEARINGS\76308 pfrm09 PsN: 76308
34

haps give the American citizens knowledge, whether they are giving money to the United Fund, or the Red Cross, or the Julianne

Fund, what it is doing with the money and when. I would just be

curious to hear your comments.

Mr. MURIS. That is an excellent question, Mr. Chairman. This is

not an area in which we have current jurisdiction, and I would

have to look at it more closely to give you a definitive answer. I

do know that there are serious constitutional issues just in doing

what you are stating, particularly with religious institutions. The

Supreme Court struck down a State law that required some of the

information that you are discussing on First Amendment grounds.

I certainly think that sunshine is appropriate. I know that there

are some self-regulatory organizations that provide that information. Through our consumer education programs, we try to help

educate consumers. But on the issue of additional legislation, I

would have to study it more closely.

Mr. STEARNS. You might do that for me and just get back in writing.

Mr. MURIS. Yes.

Mr. STEARNS. And as I pointed out, as I understand it, some

States have been successful in this, and have met the Constitutional requirements. So that is the area that we would work at.

The ranking member, I will ask for his——

Mr. TOWNS. I have a unanimous consent request.

Mr. STEARNS. Yes.

Mr. TOWNS. I ask consent for all members to be able to submit

statements for the record.

Mr. STEARNS. Without objection, so ordered.

Mr. TOWNS. And on that note, I ask that Congresswoman

DeGette, I would like permission for her to submit for the record

a report of the Business Roundtable, dated July 2001, entitled, Information Privacy, the Current Legal Regime.

Finally, Mr. Chairman, I request permission for Mrs. DeGette to

submit questions to the Chairman, and that his responses be included in the record of this hearing.

Mr. STEARNS. By unanimous consent, so ordered.

Mr. TOWNS. Thank you.

Mr. STEARNS. Mr. Chairman, thank you very much for your patience while we went to vote and we are delighted that we had this

first opportunity to engage in a discussion, and we look forward to

seeing you again. With that, the committee is adjourned.

Mr. MURIS. Thank you.

[Whereupon, at 11:58 a.m., the subcommittee was adjourned.]

[Additional material submitted for the record follows:]

35

1 15 U.S.C. § 45(a). The Commission also has responsibilities under more than 45 additional

statutes, e.g., the Fair Credit Reporting Act, 15 U.S.C. §§ 1681 et seq., which governs the privacy, fairness, and accuracy of certain sensitive consumer information; the Truth in Lending

Act, 15 U.S.C. §§ 1601 et seq., which mandates disclosures of credit terms; and the Fair Credit

Billing Act, 15 U.S.C. §§ 1666 et seq., which provides for the correction of billing errors on credit

accounts. The Commission also enforces over 35 rules governing specific industries and practices, e.g., the Used Car Rule, 16 C.F.R. Part 455, which requires used car dealers to disclose

warranty terms via a window sticker; the Franchise Rule, 16 C.F.R. Part 436, which requires

the provision of information to prospective franchisees; and the Telemarketing Sales Rule, 16

C.F.R. Part 310, which defines and prohibits deceptive telemarketing practices and other abusive telemarketing practices. 2These include the authority to file civil actions in federal district court, as well as to bring

administrative cease and desist actions, against those who engage in deceptive practices. The

FTC Act also enables the Commission to obtain a full range of relief for injured consumers.

Typically these civil actions seek preliminary and permanent injunctions to halt the targeted

illegal activity, as well as redress for injured consumers. 3Section 5(a)(2) of the FTC Act states:

The commission is hereby empowered and directed to prevent persons, partnerships, or corporations...from using unfair or deceptive acts or practices in or affecting commerce. 15 U.S.C.

§ 45 (a) (2).

Section 4 defines ‘‘Corporation’’ to include:

any company, trust, so-called Massachusetts trust, or association, incorporated or unincorporated, which is organized to carry on business for its own profit or that of its members . . . 15

U.S.C. § 44. 4See Community Blood Bank of Kansas City, Inc. v. FTC, 405 F.2d 1011 (8th Cir. 1969). 5 Community Blood Bank, 405 F.2d at 1019; Ohio Christian College, 80 F.T.C. 815 (1972). 6See FTC v. Saja, 1997-2 Trade Cas. (CCH) ¶ 71,952 (D. Ariz. 1997). Cf. California Dental

Ass’n v. FTC, 526 U.S. 756 (1999). 7 USA PATRIOT Act, Pub. Law No. 107-56, §§ 6102(a)(2), (3)(D), 6106(4), l Stat. l (2001).

FEDERAL TRADE COMMISSION

OFFICE OF THE DIRECTOR, CONGRESSIONAL RELATIONS

December 5, 2001

The Honorable CLIFF STEARNS

Chairman

Subcommittee on Commerce, Trade and Consumer Protection

Energy and Commerce Committee

United States House of Representatives

Washington, D.C. 20515

DEAR CHAIRMAN STEARNS: Enclosed please find the written responses from Chairman Muris to questions raised during the November 7, 2001 hearing. Please let me

know if I can be of further assistance.

Sincerely,

ANNA DAVIS

Enclosure

Question 1 (from Representative Bass): Does the Federal Trade Commission need

additional authority to oversee the practices of charities?

Response. I believe the Commission currently has sufficient authority to combat

fraudulent charitable fundraising practices, particularly in light of the additional

authority that the new USA PATRIOT ACT of 2001 confers.

Under the Federal Trade Commission Act (‘‘FTC Act’’), the agency’s mandate is

to take action against ‘‘unfair or deceptive acts or practices’’ that are ‘‘in or affecting commerce.’’ 1 The FTC Act also equips the FTC with a wide array of tools to enforce

this mandate.2 Sections 4 and 5 of the FTC Act provide the Commission with jurisdiction over corporations only if organized to carry on business for their own profit

or that of their members.3 Over the years, federal courts have construed Section 4

to bar the Commission from suing any truly nonprofit organization under the FTC

Act, thereby removing many charitable organizations from the FTC’s scope of authority.4

Significantly, however, the Commission does have jurisdiction over a nonprofit organization that is merely an instrumentality or a shell used to seek direct monetary

gain, either for itself or for its members.5 The Commission also has jurisdiction

under the FTC Act over entities that are organized to carry on business for profit.

These entities include for-profit telemarketers, sometimes referred to as

‘‘telefunders,’’ that contract with nonprofit organizations to perform the nonprofits’

fundraising activities.6 The Commission has used this jurisdiction aggressively to attack instances of fraud.

The recently-enacted USA PATRIOT ACT of 2001 provides the FTC with an additional tool to address charitable fraud.7 The USA PATRIOT law amends the statute

authorizing the FTC’s Telemarketing Sales Rule (‘‘TSR’’) to apply to certain solicitaVerDate 11-MAY-2000 15:13 Apr 08, 2002 Jkt 010199 PO 00000 Frm 00039 Fmt 6633 Sfmt 6621 E:\HEARINGS\76308 pfrm09 PsN: 76308
36

8 Courts have expressly held that enforcing anti-fraud statutes does not violate the First

Amendment. Riley v. National Fed’n of the Blind of N. Carolina, 487 U.S. 781, 795 (1988). The

Commission has successfully argued that false speech, which is the type of speech that the Commission targets for enforcement under Section 5, is not protected by the First Amendment,

Beauhanis v. People, 343 U.S. 250, 266 (1952). 9 Riley, 487 U.S. at 800. 10 15 U.S.C. § 45(a).

tions of charitable contributions. The Commission is currently considering proposed

amendments to the TSR that will implement this new authority.

Acting within the parameters of its authority, the Commission has asserted a

strong enforcement presence in the fraudulent fundraising arena. In the past decade, the Commission has filed over 25 cases in federal district courts challenging

deceptive fundraising practices by for-profit solicitors. Many of these cases involved

‘‘badge fraud,’’ where a telemarketer poses as a law enforcement officer or an affiliate and typically claims that he is raising money to support law enforcement efforts

in the donor’s local area. In fact, the telemarketer is not a law enforcement officer

or affiliate, and the money is not used to support local efforts, as promised. In these

cases, the Commission obtained injunctions stopping the deceptive fundraising and,

in many cases, recovered monetary redress for consumers.

Question 2 (from Chairman Stearns): Does the Federal Trade Commission wish

to be given the authority to develop a national database and corresponding reporting system to track charitable solicitation that occurs in response to national tragedies such as terrorist attacks and natural disasters, similar to the statute that exists in Minnesota?

Response. I am concerned that creating a new, nationwide registration and reporting system to track charities would impose significant costs, that a viable alternative to an FTC-run system might already exist, and that the costs of creating a

new system would not outweigh the incremental benefits.

Creating a new registration and reporting system would burden all charities, the

vast majority of which are legitimate. With increased administrative costs, charities

would have less funds to deliver program services; thus, less of a donor’s contribution would go for its intended purpose. Moreover, creating a new system would require significant government resources. For example, many states that have registration requirements have large staffs devoted exclusively to auditing and registration compliance issues.

Notably, an arguably analogous nationwide system is already in place. Currently,

in order to obtain tax-exempt status from the Internal Revenue Service, many charities must file with the IRS an application that contains financial statements. In addition, each year, many charities must file a Form 990 return, which requires charities to detail their costs and expenditures and to describe their specific program endeavors. In partnership with the IRS, a private non-profit company, Guidestar, publishes and makes available to the public many of the Form 990 filings that these

charities file each year. See www.guidestar.org. In light of the IRS-Guidestar system, it is not clear that the incremental benefits of creating a new FTC-run system

would justify the significant additional costs of creating a new system.

Another possible reason to pass new legislation is if it would meaningfully increase the distribution to potential donors of information about charities (whether

it be information already collected by the IRS or information that would be collected

under the new law). However, the government’s ability to require such dissemination is severely constrained by the First Amendment.8 The Supreme Court has held

that charitable fundraising is fully protected speech under the First Amendment.

Thus, for example, the government cannot require professional fundraisers to disclose to potential donors the percentage of donations the fundraisers keep,9 and presumably the government could not require charities that do their own fundraising

to disclose the percentage of donations that actually goes to charitable works.

Ultimately, I believe that resources might be better expended targeting law enforcement and regulatory efforts to combat deceptive activity.

Question 3. (from Representative Deal): The safeguards that apply to local pharmacists, in terms of advertising, followup, and counseling, do not appear to apply

when consumer purchase prescription drugs online. What is the role of the FTC in

the oversight of online pharmacies?

Response. The primary responsibility for the regulation of the dispensing of prescription drugs, both online and offline, is with the state medical and pharmacy licensing boards and the Food and Drug Administration.

The Federal Trade Commission’s authority derives from the agency’s mandate to

prevent deceptive or unfair acts or practices in commerce, pursuant to Section 5 of

the Federal Trade Commission Act (‘‘FTC Act’’).10 In addition, Section 12 of the FTC

37

11 15 U.S.C. § 52. 12FTC v. Rennert (CV-S-00-0861 JBR) (D. Nev.) (July 6, 2000). 13See, e.g., Kansas v. Focus Medical Group, Inc., No. 99C749 (D. Kan., Shawnee County, June

9, 1999). 14Testimony of Kansas Attorney General Carla J. Stovall before the Health, Education, Labor,

& Pensions Committee, Hearing on E-Drugs: Who Regulates Internet Pharmacies, March 21,

2000. 15Pittsburgh Post-Gazette, Internet Viagra, April 2, 2000, pg. A-12 16 21 U.S.C. § 353. In many instances, online pharmacies do not require that the patient have

a prior prescription from their treating physician. Patients without a prior prescription can often

obtain a prescription online through an ‘‘online consultation.’’ These practices raise difficult

issues involving physician practices that the Commission traditionally has refrained from regulating. 17 21 U.S.C. § 353(b). 18 21 U.S.C. § 331(a). 19 21 U.S.C. §§ 332, 333. 20 21 U.S.C. § 334.

Act prohibits the false advertisement of ‘‘food, drugs, devices, services, or cosmetics.’’ 11 The marketing of prescription drugs, either online or offline, would be deceptive in violation of the FTC Act if it involved a misrepresentation or omission

likely to mislead consumers acting reasonably under the circumstances to their determent. Thus, the Commission has authority to bring an enforcement action where

an online pharmacy makes false or misleading claims about the products or services

it provides and to obtain injunctive relief prohibiting the entity from making false

or misleading claims in the future.

Beginning in 1999, the FTC staff has conducted periodic monitoring of online

pharmacy sites, most recently looking at sites selling Cipro (ciprofloxacin) online, to

determine whether websites are engaged in deceptive or misleading advertising. The

Commission has filed one case against an online pharmacy.12 In this case, the Commission alleged that defendants falsely represented that their customers were

served by a clinic with physicians and an on-site pharmacy. According to the Commission’s complaint, defendants’ customers were not served by a medical clinic or

an on-site pharmacy. Defendants employed one physician in another state to review

customers’ medical questionnaires. For this service, customers were charged $75.00,

if the prescription was approved, and the doctor was paid $10.00 for each of the first

50 prescriptions he approved per week and $7.50 for each additional approved prescription request. The final stipulated order prohibits the defendants’ alleged misrepresentations and requires the defendants to clearly and conspicuously disclose

certain identifying information to help consumers and state regulatory authorities

identify the owners of the website and the pharmacy and physician involved in dispensing the drugs.

As noted above, traditionally, state licensing boards and the Food and Drug Administration have been responsible for regulating the dispensing of prescription

drugs. Accordingly, a number of states have actively challenged online companies

that dispense prescription drugs without a valid prescription. Kansas,13 Missouri,

and Illinois filed actions against so-called Internet pharmacies, and Michigan issued

intent-to-sue letters to 17 sites.14 The state actions are based on violations of state

consumer protection statutes as well as state medical and pharmacy laws. In addition, at least a dozen states have initiated professional disciplinary actions. In one

case, an Oregon physician was put on 10 years probation and fined $5,000 for prescribing drugs online without an examination.15

Under Federal law, the FDA has regulatory responsibility over prescription drugs.

The Federal Food, Drug and Cosmetics Act (‘‘FDC Act’’) provides that prescription

drugs may be dispensed only with a valid prescription under the professional supervision of a physician or other practitioner licensed to administer the drug.16 A prescription drug dispensed without a valid prescription is ‘‘misbranded.’’ 17 The introduction or distribution of misbranded drugs into interstate commerce is prohibited

under Section 301(a) of the FDA Act.18 The FDA may seek injunctive relief to restrain violations of the Act or in appropriate cases pursue criminal charges.19 FDA

can also institute a seizure action under Section 304 of the Act.20

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FEDERAL TRADE COMMISSION

BUREAU OF COMPETITION

December 3, 2001

The Honorable EDWARD MARKEY

United States House of Representatives

2108 Rayburn House Office Building

Washington, DC 20515

DEAR REPRESENTATIVE MARKEY: During the recent hearing on ‘‘Challenges Facing

the Federal Trade Commission’’ before the House Subcommittee on Commerce,

Trade, and Consumer Protection on November 7, 2001, you requested that FTC

Chairman Timothy Muris submit a written response detailing the status of compliance with each condition in the America Online/Time Warner (AOL Time Warner)

order. Because Chairman Muris is recused from participating in activities associated

with the AOL Time Warner matter, he has asked me to respond to your request.

As you know, the FTC entered into a consent order with America Online, Inc. and

Time Warner, Inc. (Docket No. C-3989), under Section 7 of the Clayton Act, as

amended, and Section 5 of the Federal Trade Commission Act, to remedy the likely

anticompetitive effects of the merger between the two companies. The consent order,

which was finalized on April 18, 2001, sets forth a number of requirements designed

to ensure access to the broadband Internet market. The following paragraphs provide an overview of the various requirements in the AOL Time Warner consent

order and a summary of the state of compliance by the merged company with each

relevant provision.

Paragraph II of the order sets out AOL Time Warner’s obligations to make nonaffiliated broadband ISP service available throughout Time Warner Cable’s system.

Subpart A of this paragraph sets out the requirements as to cable broadband ISP

service in each of Time Warner Cable’s twenty largest cable divisions. Paragraph

II.A.1 of the order requires AOL Time Warner to make Earthlink’s ISP service

available in each of Time Warner’s twenty largest cable divisions no later than AOL

Time Warner makes an affiliated ISP service (other than RoadRunner) available in

a particular cable division. As of November 30, 2001, AOL Time Warner will have

offered its affiliated ISP service in each of Time Warner Cable’s twenty largest cable

divisions no earlier than it offered Earthlink’s broadband service, consistent with its

obligations under the order. According to Earthlink’s web site, Earthlink is offering

its ISP service at a special introductory rate of $41.95 per month. See http://

www.earthlink.net/home/broadband/cable/tw/availability/ (As of 11/28, service in

New York is projected to be available, but not yet available.)

Paragraph II.A.2 of the order requires AOL Time Warner, within ninety days

after the affiliated ISP service is made available in each of Time Warner Cable’s

twenty largest cable divisions, to have entered into agreements approved by the

Commission with at least two nonaffiliated ISPs approved by the Commission to

make ISP service available in those cable divisions. As of November 30, 2001, AOL

Time Warner has entered into such agreements with the following ISPs for the indicated cable divisions (covering all of the twenty largest divisions) and has requested

Commission approval of each ISP and each agreement: (1) Juno Online Services Inc.

(now merged with NetZero and called United Online) for all cable divisions; (2) High

Speed Access Corp. for all cable divisions (application withdrawn); (3) New York

Connect for New York City Division; (4) Internet Junction for Tampa Bay and Central Florida Divisions; (5) Inter.net for all cable divisions; (6) STIK for all Texas divisions (San Antonio and Houston); (7) Local.net for upstate New York divisions

(Syracuse, Albany, and Rochester); (8) West Central Ohio Internet Link for all Ohio

divisions (Columbus, Cincinnati, Western Ohio, and Northeastern Ohio), and (9)

Digital Communications Networks (Los Angeles).

Commission staff is currently reviewing AOL Time Warner’s requests for approval

of the ISPs and the submitted agreements. As part of a review of this kind, staff

evaluates the financial and competitive viability of the ISP to determine whether

the ISP has the financial capability to implement the agreement and whether it has

the experience and expertise necessary to compete in the market. Commission staff

reviews financial information concerning the ISP and evaluates its current and proposed business and marketing plans. Commission staff also carefully examines the

terms of the proposed agreements to determine whether they are consistent with

AOL Time Warner’s obligations under the order and whether the agreement enables

the ISP to compete effectively in the market or whether any term in the agreement

would interfere with the ability of the ISP to compete effectively.

Paragraph II.A.3 of the order gives the Commission the right to appoint a trustee

to enter into the required agreements if AOL Time Warner fails to do so within the

time limits required. Paragraph III.B of the order sets out the requirements as to

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the remainder of Time Warner’s cable system (its smaller cable divisions). Paragraph II.B.1 of the order requires AOL Time Warner, within ninety days after affiliated broadband ISP service is made available in each of the remaining divisions of

Time Warner Cable’s system, to have entered into agreements approved by the

Commission with at least three non-affiliated ISPs approved by the Commission to

make cable broadband ISP service available in those cable divisions. It is our understanding that AOL Time Warner has not yet launched its cable broadband ISP service in any of these smaller cable divisions, so that the ninety day time period during

which it is obligated to make additional ISPs available in these cable divisions has

not yet begun. Several of the applications noted above include some of these smaller

cable divisions. For example, Inter.net covers all cable divisions; STIK covers Austin; and Local.net covers Binghamton.

Paragraphs II.A.3 and II.B.2 of the order give the Commission the right to appoint a trustee to enter into the required agreements if AOL Time Warner fails to

do so within the required time limits. AOL Time Warner is required to have executed agreements with two additional non-affiliated ISPs in the twenty largest cable

divisions (and three in the remaining cable divisions) within ninety days after making its own ISP available in a particular cable division. We understand that

Earthlink and AOL launched their first cable broadband ISP services in Columbus,

Ohio, on September 17, 2001, with launches following in the remaining 19 cable divisions throughout the fall of 2001. AOL Time Warner is thus required to have approved agreements with two additional non-affiliated ISPs in the first cable division

by December 16, 2001. If it does not satisfy that obligation, the Commission may

at that time determine to appoint a trustee to enter into an agreement, comparable

to the Earthlink agreement, with a non-affiliated ISP approved by the Commission.

Subpart C of this section describes specific provisions that must be included in

the agreements to be approved by the Commission. The agreements submitted to

the Commission for its approval include the specific provisions required by this

paragraph of the order. Subpart D of this paragraph describes AOL Time Warner’s

obligations in the event that an approved ISP ceases providing the service pursuant

to the agreement approved by the Commission. No ISP has ceased providing service

as of this date. Subpart E of this section requires AOL Time Warner to negotiate

and enter into agreements with ISPs to provide cable broadband service on Time

Warner’s cable system unless certain requirements are satisfied. AOL Time Warner

has hired an individual whose primary responsibility includes negotiating with ISPs

to provide cable broadband service on Time Warner’s cable system in compliance

with AOL Time Warner’s obligations under the order. Staff of the Compliance Division of the Commission’s Bureau of Competition is available to discuss any of the

concerns that ISPs might have in connection with this requirement, and members

of the staff have had some discussions with ISPs. There is no indication at this

point that AOL Time Warner is not complying with its obligation under this provision of the order.

Paragraph III of the order places specific prohibitions on AOL Time Warner in

connection with cable broadband service. Subpart A of paragraph HI prohibits AOL

Time Warner from interfering with the content of non-affiliated ISPs. Subpart B of

paragraph III requires AOL Time Warner to provide connections for the non-affiliated ISPs, at their request, wherever it is providing connections for its affiliated

ISP. Subpart C of paragraph III prohibits AOL Time Warner from interfering with

the provision of ITV services by non-affiliated ISPs. Subpart D of paragraph III prohibits AOL Time Warner from discriminating against nonaffiliated ISPs in the

transmission or modification of the content of the non-affiliated ISPs. Subpart E of

paragraph III prohibits AOL Time Warner from entering into exclusive agreements

for the provision of ISP services with any other cable company.

Paragraph IV prohibits AOL Time Warner from offering different prices and promotional activities for its cable broadband service based on whether AOL offers

broadband DSL service in a particular geographic area. Staff of the Bureau of Competition’s Compliance Division monitors AOL Time Warner’s compliance with its obligations under these provisions of the order. As part of its monitoring activities,

staff talks periodically with non-affiliated ISPs and with representatives of AOL

Time Warner, particularly of Time Warner Cable. In addition, staff has made it

clear to non-affiliated ISPs that it is available to discuss any concerns the nonaffiliated ISPs may have. Staff also consults regularly with Dale Hatfield, the Monitor Trustee in this matter, and he is also available to discuss with any ISPs concerns that they may have and has had on-going discussions with representatives of

Time Warner Cable. Staff will continue its normal monitoring procedures, particularly as additional non-affiliated ISP service is made available on Time Warner’s

cable system.

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