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75–166 PDF 2012

S. HRG. 110–1148 

FEDERAL TRADE COMMISSION REAUTHORIZATION 

HEARING 

BEFORE THE

COMMITTEE ON COMMERCE, 

SCIENCE, AND TRANSPORTATION 

UNITED STATES SENATE 

ONE HUNDRED TENTH CONGRESS 

SECOND SESSION 

APRIL 8, 2008 

Printed for the use of the Committee on Commerce, Science, and Transportation 

( 

(II) 

SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION 

ONE HUNDRED TENTH CONGRESS 

SECOND SESSION 

DANIEL K. INOUYE, Hawaii, Chairman 

JOHN D. ROCKEFELLER IV, West Virginia 

JOHN F. KERRY, Massachusetts 

BYRON L. DORGAN, North Dakota 

BARBARA BOXER, California 

BILL NELSON, Florida 

MARIA CANTWELL, Washington 

FRANK R. LAUTENBERG, New Jersey 

MARK PRYOR, Arkansas 

THOMAS R. CARPER, Delaware 

CLAIRE MCCASKILL, Missouri 

AMY KLOBUCHAR, Minnesota 

TED STEVENS, Alaska, Vice Chairman 

JOHN MCCAIN, Arizona 

KAY BAILEY HUTCHISON, Texas 

OLYMPIA J. SNOWE, Maine 

GORDON H. SMITH, Oregon 

JOHN ENSIGN, Nevada 

JOHN E. SUNUNU, New Hampshire 

JIM DEMINT, South Carolina 

DAVID VITTER, Louisiana 

JOHN THUNE, South Dakota 

ROGER F. WICKER, Mississippi 

MARGARET L. CUMMISKY, Democratic Staff Director and Chief Counsel 

LILA HARPER HELMS, Democratic Deputy Staff Director and Policy Director 

CHRISTINE D. KURTH, Republican Staff Director and General Counsel 

PAUL NAGLE, Republican Chief Counsel 

(III) 

C O N T E N T S 

Page 

Hearing held on April 8, 2008 ................................................................................ 1 

Statement of Senator Cantwell .............................................................................. 37 

Statement of Senator Dorgan ................................................................................. 1 

Statement of Senator Klobuchar ............................................................................ 9 

Statement of Senator McCaskill ............................................................................. 34 

Statement of Senator Snowe ................................................................................... 39 

WITNESSES

Harbour, Hon. Pamela Jones, Commissioner, Federal Trade Commission ........ 23 

Kovacic, Hon. William E., Chairman, Federal Trade Commission ...................... 11 

The Federal Trade Commission, prepared statement ................................... 13 

Leibowitz, Hon. Jonathan D., Commissioner, Federal Trade Commission ......... 25 

Rosch, Hon. J. Thomas, Commissioner, Federal Trade Commission .................. 26 

APPENDIX

Response to written questions submitted to the Federal Trade Commission 

by: 

Hon. John Ensign ............................................................................................. 62 

Hon. John D. Rockefeller IV ............................................................................ 55 

Hon. Olympia J. Snowe .................................................................................... 58 

(1) 

FEDERAL TRADE COMMISSION 

REAUTHORIZATION 

TUESDAY, APRIL 8, 2008 

U.S. SENATE, COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION, Washington, DC. 

The Committee met, pursuant to notice, at 10 a.m. in room SR– 

253, Russell Senate Office Building, Hon. Byron L. Dorgan, presiding. 

OPENING STATEMENT OF HON. BYRON L. DORGAN, 

U.S. SENATOR FROM NORTH DAKOTA 

Senator DORGAN. We will call the hearing to order. This is the 

hearing of the full Senate Commerce Committee. 

The subject today is the Federal Trade Commission Reauthorization bill. 

The Federal Trade Commission is a very important Federal 

agency, perhaps more important now than ever, and despite that, 

the Federal Trade Commission has been one of those agencies that 

has shrunk in size, despite the fact that it has a broader agenda 

in many ways. 

It has been reduced from a pre-1980 high of roughly 1,700 employees to now 1,100 employees. Its jurisdiction would have been 

or should be dealing with things like deceptive advertising and 

competition and subprime loans. All of us understand the nomenclature of subprime lending these days and what it has done to 

cause economic difficulties: oil pricing, consumer protection, mergers, trade. 

All of these are very, very important issues and they have become even more important at a time when the Federal Trade Commission has a third less people than it did 25 years ago to do its 

work. 

I want to put up a couple of posters, if I might, this morning. I 

especially want to talk about the importance of having a Federal 

Trade Commission that can establish a set of rules with respect to 

deceptive advertising, and I do this only because we have on the 

Floor of the Senate today the housing issue which relates to the 

subprime scandal and a lot of reasons and a lot of causes, but I 

want to describe some of them. 

This is an advertisement that most of us have been treated to 

here in this country. It’s from a company called Zoom Credit. I 

don’t know who Zoom Credit is, but here’s what they were telling 

us in advertising. ‘‘Credit approval is just seconds away. Get on the 

fast track at Zoom Credit . . . Even if your credit is in the tank, 

2 

Zoom Credit’s like money in the bank. We specialize in credit repair and debt consolidation. Bankruptcies, slow credit, no credit— 

who cares?’’ That’s an advertisement to the American people. 

Senator DORGAN. Next chart. Millennium Mortgage, ‘‘Twelve 

months No Mortgage payment. That’s right. We’ll give you the 

money to make your first 12 payments if you call in the next 7 

days. We pay it for you. Our loan program may reduce your current 

monthly payments by as much as 50 percent and allow you no payments for the first 12 months.’’ That’s an advertisement to the 

American people by Millennium Mortgage. Didn’t mention, of 

course, that the first 12 months goes in the back of the loan and 

actually increased the price of the house. 


408ZOOM1.eps 408MILLE1.eps
3 

Senator DORGAN. Countrywide, the largest lender in this country, said this in their ad. ‘‘Do you have less than perfect credit? Do 

you have late mortgage payments? Have you been denied by other 

lenders? Call us.’’ That’s from the largest mortgage bank in this 

country. 

Senator DORGAN. And by the way, these are still on the Internet. 

We got some yesterday: 2,500 of a percent fixed loan. One-quarter 

of 1 percent rate for a fixed loan; $500,000, half a million loan, 

your payment’s going to be a $104 a month. That’s what they’re advertising. They don’t, of course, tell the person that there’s much, 

much more here to this story than that. 

You want to get $200,000 to buy a house, your house payment 

will be $41 a month, according to this advertisement. Next one is 

credit.com. I’m just going to run through a couple of them just to 

describe for a moment the need I believe for expanded rulemaking 

authority by the Federal Trade Commission. 


408COUNTRY1.eps
4 

Senator DORGAN. This is credit.com. Low documentation loans 

and no documentation loans and this advertisement says that we 

are doing this to protect your privacy. You want to apply for a 

mortgage, you can do it either with no documentation of your income or low documentation of your income. 


408DORG1.eps 408DORG2.eps
5 

Senator DORGAN. This was on the Internet yesterday, still going. 

One year fixed payments as low as 1 percent. Five-year fixed payments as low as one and a quarter percent. You want a loan for 

your home and pay one and a quarter percent interest rate for five 

straight years. That’s what this company’s advertising. Pretty unbelievable when you think about it. 

Senator DORGAN. They say get a loan like this and control up to 

two to three times as much real estate versus conventional fixed 

rate mortgages. Here’s another one that is one of the more deceptive, it seems to me. Thirty-year fixed loan from 2.75 percent. 


408DORG5.eps
6 

Does anybody in this room think you can get a 30-year fixed 

mortgage at 2.75 percent interest rate? Anybody believe that? By 

the way, this is on the Internet advertising to American people yesterday. I pulled that off the Internet yesterday. 2.75 percent interest rate, fixed rate, for 30 years. 

Senator DORGAN. All right. The last one. This, too, was on the 

Internet yesterday, and it says these are perfect—this is a loan, 

perfect credit not required, no income verification loans. In fact, it 

says they are ideal for the self-employed. 


408DORG4.eps
7 

Senator DORGAN. Well, you get my point. My point is there has 

been unbelievably deceptive advertising out there and it exists 

today while we sit here in this room talking about consumer protection. 

Now I’ve introduced a piece of legislation with the Chairman of 

this Committee as a cosponsor and others to reauthorize the Federal Trade Commission. I welcome the Commissioners here today. 

I want to start by particularly paying notice that we have a new 

Chairman of the Commission, Mr. Bill Kovacic. The Chairman congratulates you for assuming the chairmanship. You’ve been with 


408DORG3.eps
8 

the FTC for many years but have just assumed these new responsibilities. 

The previous Chairman of the Commission, Chairman Majoras, 

was with us in September to testify as we considered drafting the 

FTC Reauthorization bill in 2008, and this morning I introduced 

that bill with Senator Inouye. We’re pleased to be introducing a bill 

that we believe gives the Federal Trade Commission the needed opportunities to protect consumers from unfair or deceptive practices 

and unfair methods of competition. 

I want to briefly outline what the FTC Reauthorization Act does. 

First, it provides for a 7-year reauthorization, starting in 2009. We 

set the funding level at $264 million, increase it 10 percent per 

year. We do that because, as I indicated earlier, we’re at a near 30- 

year low. We’re still almost 30 percent below where we were two 

and a half decades ago at a time when we need much more muscle 

and capability in our Federal agency to regulate and investigate. 

We give the FTC independent litigating authority so they won’t 

have to refer in every case, in the cases they now do to the Department of Justice. We give the FTC authority to give preference in 

the hiring process to administrative law judges who have some experience in the issues. 

We give the FTC the authority to commence a civil action to recover civil penalties in the district court for a violation of the FTC 

Act. We extend the jurisdiction to allow them to go after nonprofit 

entities as well, to investigate in cases where it is necessary, so 

that bad actors cannot hide behind a nonprofit status, and we allow 

them to go after those aiding and abetting an FTC violation. 

We give them the authority, by majority vote of the full Commission, to waive their current rulemaking requirements for any rule 

involving a consumer protection matter. We require the FTC conduct a rulemaking under the Administrative Procedures Act which 

is faster than their current Magnuson-Moss authority in the area 

of subprime loans. 

I know the Commission has sent 200 warning letters to mortgage 

advertisers and is conducting several investigations of mortgage 

advertisers and subprime lenders. In addition, they’ve brought 21 

cases in the last decade, but they have not had the opportunity to 

review bad practices and create a rule on bad practices that would 

prevent their recurrence and that is absolutely essential. 

We also repeal the common carrier exemption which the FTC has 

long been requesting and which I have been trying to accomplish. 

I want to thank the FTC for its work in these many areas. As 

you know, here in the Congress, we have just passed a Do Not Call 

Registry piece of legislation that makes that list permanent. I want 

to thank you for your support of that. We don’t want people having 

their mealtime interrupted by unwanted solicitation calls and we 

think we have accomplished that by permanently extending the 

list. 

You had six settlement cases in November 2007 against companies that violated that Do Not Call List. I congratulate you for 

that. 

Finally, I know you’ve hosted a workshop on behavioral advertising and you’ve released a set of proposed principles to guide the 

development of self-regulation in this area, and I believe you’ve 

9 

been seeking comments on those principles and those comments 

are due April 11, and I’ll be studying those comments and looking 

at legislation in this area as well. 

I just want to make one final point. I know that there are some 

who may look at these set of recommendations and say, well, this 

is once again giving a Federal agency some more authority and it’s 

once again suggesting there should be some additional regulation. 

You know, I think it’s very interesting that the Federal Reserve Board and the American taxpayers have ponied up $30 billion to 

assume the risk of JPMorgan buying BearStearns. Why? Because 

we’re told that BearStearns is too big to fail. If it is too big to fail, 

why is it not big enough to regulate? Why do we have—this is a 

different question, perhaps a different committee. 

But why, if we have institutions that are too big to fail, do we 

not have effective regulation of the kinds of things that can be very 

detrimental to this country? I believe that there are certain times 

and cases where someone ought to look over the shoulder of an organization that’s too big to fail and take a look at what they’re 

doing and make sure that we put them back on track. 

You, in the FTC, understand we’ve also asked a lot of questions 

about the price of gasoline and I would just say this to you as you 

take a new look at that. I believe that there’s a lot happening in 

that area that bears watching. There’s unbelievable speculation in 

the futures market for oil. We in the futures market buy and sell 

20 times more oil every day than exists. There is just an unbelievable amount of speculation. Some believe that the price of gasoline 

and oil is about $20 or $30 a barrel for the price of oil above where 

it ought to be because of the unbelievable speculation in the futures market where you can operate on margins of five and 7 percent as opposed to the stock market which requires a margin of 50 

percent. 

All of this doesn’t fall on your lap. My only point is that energy 

prices are a serious issue for the American people and I think 

there’s a lot to investigate with respect to that as well. 

I’m going to recognize the Commission in a moment, but I will 

call on my colleague from Minnesota for an opening statement. 

STATEMENT OF HON. AMY KLOBUCHAR, 

U.S. SENATOR FROM MINNESOTA 

Senator KLOBUCHAR. Thank you very much, Mr. Chairman. 

Thank you for holding this important hearing. Welcome to the 

Commissioners, and I know that this hearing is coming at a critical 

time for the FTC with the massive consumer protection challenges 

we are facing today. We certainly have seen it with the consumer 

issues with the toys in from China. 

We’ve seen it in Minnesota with the problems we’ve seen with 

cell phone service and advertisements about no dropped calls and 

then it turns out, when we actually had a hearing on this, there 

was a big billboard for one of the companies and we were able to 

take a picture of that billboard where they said one of the best networks with a picture of their phone where there were no bars, and 

certainly in the pharmaceutical area, and I’ll talk about that in a 

minute, we’ve been seeing problems with what I consider problematic trade practices. 

10 

Whether it be the subprime lending crisis, the record oil prices, 

the unsafe food and the products making their ways to our shelves, 

to the skyrocketing healthcare and pharmaceutical costs, American 

consumers are finding themselves under duress in an unprecedented way and at the same time, we are seeing a reduction from 

this Administration in the budgets for agencies. We certainly found 

that with the Consumer Product Safety Commission and it made 

what was already a problem worse. 

If we look at the major issues the Senate has addressed in recent 

weeks, we see that consumer protection is among the public’s 

greatest concerns. I was pleased with the work that the Senate did 

in the Consumer Product Safety Commission Reform Act and we 

are currently debating how to improve Federal regulation, as you 

know, in the mortgage area. 

More and more Americans are worried about their economic future, about their ability to make ends meet, and they’re outraged 

when they see companies engaging in deceptive or unreasonable 

pricing or sales schemes, and as we see a rockier picture for our 

economy, I can tell you, based on my experience as a prosecutor, 

whenever there are some difficult economic times, you see crime 

and fraudulent practices going up. People are used to a certain lifestyle. They want to keep it that way. So, they’ll go across the line 

to be able to keep their own wallets full and what I’m concerned 

about here, as we’ve already seen because of all the imports coming 

in, more need for regulation of deceptive practices, and I think 

we’re even going to see more going forward. 

Hardly a week goes by that we don’t get another report of a 

pharmaceutical company grossly inflating the price of a vital drug 

or a wireless company charging customers for invented fees hidden 

in their monthly bill or a mortgage lender offering deceptive home 

loans to low-income families. 

The FTC’s role in protecting against abuses of consumer trust 

and confidence has never been more important. Since the last reauthorization bill Congress passed in 1996, the Commission has done 

admirable work in responding to companies’ unfair or deceptive actions and unfair methods of competition, but given the current climate and conditions, it is clear that the FTC must be granted enhanced and expanded authority and resources to carry out its mission and I appreciate that some of the Commissioners have highlighted areas in which your current ability to protect consumers is 

unnecessarily restricted and for continuing to push for greater authority. 

I want to commend Senator Dorgan for his outstanding work in 

drafting the FTC Reauthorization legislation we’re discussing today 

and I believe that this bill makes several important improvements 

to strengthen the FTC’s oversight authority. I just want to tell you 

when you’re done with your opening remarks, one area that I’m 

very interested in is what’s going on with the pharmaceutical companies. 

This year, I’ve heard from Children’s Hospital in Minneapolis 

and consumers and other pediatric care providers regarding the 

drastic price increase of Indomethacin, which is a drug that’s used 

to treat children’s heart problems and it actually saves a lot of 

money because you don’t need surgery. 

11 

Two years ago, Ovation Pharmaceuticals acquired the rights to 

this drug from Merck and the company increased the price within 

a year by 18 times the amount without improving the drug in any 

way. We had a meeting with a number of doctors in Minnesota and 

the head of the hospital as well as patients, parents of little babies 

who were there who had been saved by this drug, and I know that 

the FTC has engaged in investigations of this type of activity in the 

past. One of my lines of questioning will be about how this could 

take place, if you need additional authority to go after practices 

like this, and what the history is for these kinds of investigations. 

Thank you very much, Mr. Chairman. 

Senator DORGAN. Senator Klobuchar, thank you very much. 

Mr. Chairman, we will hear from you first. 

STATEMENT OF HON. WILLIAM E. KOVACIC, CHAIRMAN, 

FEDERAL TRADE COMMISSION 

Mr. KOVACIC. Thank you very much, Chairman Dorgan, Senator 

Klobuchar. 

I’m enormously grateful for the opportunity to serve as Chair of 

my agency and to appear today to discuss with you the reauthorization proposals that you’ve just described. 

I want to emphasize that the growth and success of this agency, 

if we take it over a span certainly of its modern history, has been 

largely attributable to a very successful partnership between the 

Congress, this Committee, and the Commission in getting needed 

adjustments in its authority and resources over time. 

It would be impossible to discuss the accomplishments both of 

you have alluded to without touching upon a number of instances, 

certainly dating back to 1970, in which this committee and the 

Congress have provided needed enhancements to authority. 

So, it’s an enormous privilege for me today to continue that conversation and to continue that partnership that will put this agency in a position to be successful in the future. 

Let me take a moment to introduce my colleagues and to discuss 

the distribution of comments across us. I’ll be talking a bit about 

resources and the common carrier exemption. My colleague, Commissioner Harbour will be discussing our recent experience in enforcement and policymaking. My colleague, Commissioner 

Leibowitz will be discussing the aiding and abetting and civil penalties elements of the reauthorization proposal, and my colleague, 

Commissioner Rosch will talk about independent litigating authority and rulemaking. 

As a general observation, we welcome and encourage your efforts 

to continue to see that this agency is put on a footing that permits 

it to deliver effective competition and consumer protection programs in the future. I can only say that without the partnership 

that I referred to before, it would have been impossible for us to 

achieve the success that we have in many areas of our consumer 

protection and competition programs. 

The reauthorization proposal today provides a wonderful occasion 

to continue that discussion. 

I want to turn to the topic of resources which Chairman Dorgan 

mentioned just a moment ago. I think that the framework that the 

Committee has established is a very sensible one from several diVerDate Nov 24 2008 07:49 Jul 24, 2012 Jkt 052754 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 S:\GPO\DOCS\75166.TXT SCOM1 PsN: JACKIE
12 

rections. Whether or not the precise numbers come through the appropriations process over time, none of us can know. I think the 

basic framework is a sensible one, and in particular I like the fact 

that it takes a long-term focus. 

So rather than thinking about how the Commission and its resources might go from year to year, it puts us in the position of beginning to think, in a very intelligent way about what our needs 

ought to be over the horizon. 

Indeed, with my colleagues’ approval, I’ve suggested internally, 

largely inspired by this approach, that we undertake our own basic 

self-assessment of our capacity of the position that we want to 

achieve, not simply in the short term, but when we reach our centennial, which is only 6 years away. Essentially, we now need to 

ask ourselves in a very careful way with consultations with others 

where the Commission should be at 100. 

Another thing I want to underscore that, I think is particularly 

useful in this set of proposals, is the separate dedication of what 

might be called a capital budget for information technology. 

If you look at the numbers Senator Dorgan mentioned before, 

you’ll find that the trend from the late 1970s to the present basically has not affected the number of professionals we have. Those 

numbers have shrunk mainly because machines have replaced administrative support staff. That means, though, that the enhancement of our IT capability remains absolutely indispensable to what 

we do. We may not simply preserve its existing capacity; we must 

improve it over time. 

I think the focus in the reauthorization measure to look at information technology, equipment, and facilities as being key ingredients to improving productivity is a very sensible way to go ahead. 

Indeed, the only question I would have for you is that if the enhancements and authority that have been suggested take place, 

whether the numbers will be enough. I’m sure there will be occasions to revisit that in the future. I’d add again that with the encouragement of the Committee, if you look at the trend in our professionals, our lawyers and economists, going back basically over 

that 20-year period, your assistance has permitted us, going back 

to the early 1980s, to at least keep the number of lawyers and 

economists at the same level. Indeed, over the past decade we’ve 

seen modest increases to that capacity. 

I think that the proposals with respect to resources keep us on 

that path. 

I want to finish by saying that the common carrier adjustment 

is a necessary step. This was set in place when this agency was 

created in 1914. The exemption hasn’t changed, but I think we all 

know that the industry has changed just a little. 

Who could have imagined in 1914 the array of adjustments in 

what we now call the telecommunications sector? What the failure 

to revisit that exemption has done is that we almost every day of 

the week bump into limitations in our capacity to do exactly the 

kind of work that both of you have referred to. Senator Klobuchar, 

in particular, mentioned cellular telephony. That’s an area that in 

many respects we can’t touch. We’re like the old county policeman 

who has to drive up to the border and stop when we bump into the 

jurisdictional hurdle of the common carrier barrier, and I think 

13 

1The written statement represents the views of the Federal Trade Commission. Our oral presentations and responses to questions are our own and do not necessarily reflect the views of 

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

Act, 15 U.S.C. § 41 et seq. With certain exceptions, the statute provides the agency with jurisdiction over nearly every economic sector. Certain entities, such as depository institutions and common carriers, as well as the business of insurance, are wholly or partly exempt from FTC jurisdiction. In addition to the FTC Act, the agency has enforcement responsibilities under more 

than 50 other statutes and more than 30 rules governing specific industries and practices. 3This testimony does not address very recent changes to the bill, particularly new sections 

10 through 12, which were just made available to us. The Commission is examining these new 

provisions and how they intersect with other proposed provisions and indeed, the FTC Act as 

a whole. We look forward to working with you on these new provisions. 4See Prepared Statement of the Federal Trade Commission Before the Subcommittee on Interstate Commerce, Trade, and Tourism Committee on Commerce, Science, and Transportation, U.S. 

Senate (Sept. 12, 2007), available at http://www.ftc.gov/os/testimony/070912reauthorization 

testimony.pdf. 5Provigil is used to treat excessive sleepiness in patients with sleep apnea, narcolepsy, and 

shift-work sleep disorder. 6Federal Trade Commission v. Cephalon, Inc., No.: 1:08–cv–00244 (D.D.C. filed Feb. 13, 2008), 

available at http://www.ftc.gov/os/caselist/0610182/080213complaint.pdf. 

that this, along with the not-for-profit proposal, again puts us in 

a good position to begin to rethink what I believe to be anachronisms in our statute that were set in place long ago and severely 

need a rethink. 

I’ll now turn to my colleague, Commissioner Harbour. I thank 

you, both. 

[The prepared statement of Mr. Kovacic follows:] 

PREPARED STATEMENT OF THE FEDERAL TRADE COMMISSION

I. Introduction 

Chairman Dorgan, Vice Chairman Stevens, and Members of the Committee, the 

Federal Trade Commission (‘‘Commission’’ or ‘‘FTC’’) is pleased to appear before you 

today to testify about the FTC’s work to protect consumers and promote competition,1 and S. llll, a bill to reauthorize the Commission. We look forward to continuing to work with you to further the interests of American consumers. 

The FTC is the only Federal agency with both consumer protection and competition jurisdiction in broad sectors of the economy.2 The agency enforces laws that 

prohibit anticompetitive mergers and acquisitions and business practices that are 

harmful to consumers because they are anticompetitive, deceptive, or unfair. The 

FTC also promotes informed consumer choice and understanding of the competitive 

process. 

The FTC has pursued a vigorous and effective law enforcement program in a dynamic marketplace that is increasingly global and characterized by changing technologies. Through the efforts of a dedicated, professional staff, the FTC continues 

to handle a growing workload. This testimony highlights some of the FTC’s accomplishments since the last FTC reauthorization hearing and provides some comments 

on the proposed ‘‘Federal Trade Commission Reauthorization Act of 2008.’’ 3 We 

thank you for your proposed legislation, which is designed to ensure that the FTC 

can effectively confront the challenges of the 21st century. 

II. FTC Accomplishments 

The Commission testified on FTC reauthorization in September 2007.4 That testimony summarized recent FTC accomplishments in such areas as data security and 

identity theft, energy, real estate, technology, health, financial practices, telemarketing fraud and Do Not Call enforcement. 

Since September, the Commission has continued to be active on competition and 

consumer protection issues. In the competition area, we highlight a few recent enforcement developments. First, in the health care area, the Commission filed a case 

in February 2008, charging that Cephalon, a pharmaceutical manufacturer, engaged 

in illegal conduct to prevent competition for its branded drug, Provigil,5 by paying 

four competing firms to refrain from selling generic versions of the drug until 2012.6

The Commission’s complaint alleges that Cephalon’s conduct constituted an abuse 

of monopoly power that is unlawful under Section 5 of the FTC Act. We have several other exclusion payment (‘‘pay-for-delay settlement’’) investigations ongoing. 

14 

7See Federal Trade Commission v. Equitable Resources, Inc., No. 07–2499 (3rd Cir. 2008), 

available at http://www.ftc.gov/os/caselist/0610140/080204ftcmovacateequitabledecision.pdf. 8See id. (order granted Feb. 5, 2008), available at http://www.ftc.gov/os/caselist/0610140/ 

080303order.pdf. 9Federal Trade Commission v. Chicago Bridge & Iron Co., No. 05–60192 (5th Cir. 2008) available at http://www.ftc.gov/os/adjpro/d9300/080125opinion.pdf. 10The Commission continues to appeal its case against Whole Foods Market, Inc.’s acquisition 

of its chief rival, Wild Oats Markets, Inc., on the grounds that the district court failed to apply 

the proper legal standard that governs preliminary injunction applications by the Commission 

in Section 7 cases. The Court of Appeals for the District of Columbia Circuit will hear oral arguments on this case on April 23, 2008. 11See Press Release, ‘‘FTC Announces Law Enforcement Crackdown On Do Not Call Violators,’’ Nov. 7, 2007, available at http://www.ftc.gov/opa/2007/11/dncpress.shtm. 12 United States v. American United Mortgage Company, No: 07C 7064 (N.D. Ill. filed Dec. 17, 

2007), available at http://www.ftc.gov/opa/2007/12/aumort.shtm; In the Matter of Life is Good, 

Inc., File No. 072–3046, available at http://www.ftc.gov/os/caselist/0723046/index.shtm; In the 

Matter of Goal Financial, LLC., File No. 072–3013, available at http://www.ftc.gov/os/caselist/ 

0723013/080304agreement.pdf; In the Matter of TJX, File No. 072–3055, available at http:// 

www.ftc.gov/os/caselist/0723055/index.shtm; In the Matter of Reed Elsevier, Inc. and Seisint, 

Inc., File No. 052–3094, available at http://www.ftc.gov/os/caselist/0523094/index.shtm. 13See www.ftc.gov/infosecurity. 14See http://www.ftc.gov/bcp/workshops/ssn/index.shtml. 15See http://www.ftc.gov/bcp/workshops/ehavioral/index.shtml. 16See Press Release, ‘‘FTC Staff Proposes Online Behavioral Advertising Privacy Principles,’’ 

December 20, 2007, available at http://www.ftc.gov/opa/2007/12/principles.shtml. 

Second, in the energy area, in January 2008, the parties abandoned Equitable Resources’ proposed acquisition of the Peoples Natural Gas Company, a subsidiary of 

Dominion Resources, as an FTC challenge to the acquisition was on appeal.7 Although the Federal district court in Pittsburgh denied the FTC’s motion for a preliminary injunction and dismissed the complaint last year on state action grounds, 

in June 2007, the Third Circuit took the rare step of granting the Commission’s motion for an injunction pending appeal. In February 2008, the Third Circuit granted 

a motion by the Commission to vacate the district court’s ruling that had dismissed 

the complaint.8 The Commission is continuing to examine and address a wide range 

of issues in the energy markets, including its new authority regarding manipulation 

of wholesale crude oil, gasoline, or petroleum distillate markets. 

Finally, in January 2008, the U.S. Court of Appeals for the Fifth Circuit upheld 

a Commission order requiring Chicago Bridge & Iron Co., N.V. and its United 

States subsidiary (CB&I) to divest assets acquired from Pitt-Des Moines, Inc. used 

in the business of designing, engineering, and building field-erected cryogenic storage tanks.9 In its 2005 order, the Commission had ruled that CB&I’s acquisition of 

these assets in 2001, during a pending FTC investigation, would likely result in a 

substantial lessening of competition or tend to create a monopoly in four markets 

for industrial storage tanks in the United States, in violation of Section 7 of the 

Clayton Act and Section 5 of the FTC Act. The court endorsed the Commission’s 

findings, based on an extensive review of many years of bidding data, that the 

merged firms controlled over 70 percent of the market, and that new entry was unlikely given the high entry barriers based on the incumbents’ reputation and control 

of skilled crews.10

In the consumer protection area, we highlight five key FTC initiatives since the 

September reauthorization testimony. First, the Commission is grateful for Congress’ swift legislative action to make participation in the Do Not Call Registry permanent so that consumers will continue to enjoy its benefits without having to reregister. In November 2007, the Commission announced six new settlements and 

one new Federal court action against companies that violated the Do Not Call provisions of the Telemarketing Sales Rule. The six settlements resulted in $7.7 million 

dollars in civil penalties for Do Not Call violations.11

Second, in the privacy and data security area, the Commission announced five 

new data security cases; 12 released a new online, interactive tutorial to educate 

businesses on sound data security practices; 13 and hosted workshops on the private 

sector use of Social Security Numbers 14 and behavioral advertising.15 Following the 

workshop on behavioral advertising, the Commission staff released a set of proposed 

principles to guide the development of self-regulation in this area and is seeking 

comment on these principles.16

Third, in the area of financial practices, the Commission sent over 200 warning 

letters to mortgage advertisers and the media outlets that carried their advertisements for home mortgages. These letters stated that the mortgage advertisements 

identified may be deceptive, in violation of Section 5 of the FTC Act, or may violate 

the Truth-In-Lending Act. The Commission currently is conducting several investigations of mortgage advertisers and subprime lenders and will continue to monitor 

15 

17FTC v. Safe Harbour Foundation, No. 08 C 1185 (N.D. Ill., filed Feb. 25, 2008), available 

at http://www.ftc.gov/os/caselist/0823028/index.shtm; FTC v. Mortgage Foreclosure Solutions, 

Inc., (M.D. Fla., filed Feb. 26, 2008) available at http://www.ftc.gov/os/caselist/0823021/ 

index.shtm; FTC v. National Hometeam Solutions, Inc., (E.D. Tex., filed Feb. 26, 2008), available 

at http://www.ftc.gov/os/caselist/0823076/index.shtm. 

18 In the Matter of CashPro, No. 072–3203 (February 2008); In the Matter of American Cash 

Market, Inc., No. 072–3210 (Feb. 2008); In the Matter of Anderson Payday Loans, No. 072–3212 

(Feb. 2008), available at http://www.ftc.gov/opa/2008/02/amercash.shtm. 19See Press Release, ‘‘FTC Reviews Environmental Marketing Guides, Announces Public 

Meetings,’’ Nov. 26, 2007, available at http://www.ftc.gov/opa/2007/11/enviro.shtm. 20See Press Release, ‘‘Court Halts Bogus Check Scam Targeting ‘Lottery Winners;’ Money 

Transfers Used to Defraud Consumers,’’ Nov. 19, 2007, available at http://www.ftc.gov/opa/ 

2007/11/cashcorner.shtm. 21See Press Release, ‘‘FTC Stops International Spamming Enterprise that Sold Bogus Hoodia 

and Human Growth Hormone Pills,’’ Oct. 10, 2007, available at http://www.ftc.gov/opa/2007/ 

10/hoodia.shtm. 

claims made in mortgage advertising. The Commission also announced three cases 

targeting mortgage foreclosure rescue scams,17 and three settlements against ‘‘payday lenders’’ who failed to provide consumers with annual percentage rate information, as required by law.18 Fourth, as part of a review of its environmental marketing guidelines, also known as the Green Guides,19 the Commission is holding a 

series of public workshops on a number of emerging green marketing topics. The 

first such workshop took place on January 8, 2008, and addressed carbon offsets and 

renewable energy certificates. The second workshop, on green packaging, will take 

place on April 30, 2008. Finally, this fall, the Commission used its U.S. SAFE WEB 

Act authority to cooperate with foreign partners in two key matters; one involved 

a Canadian-based bogus lottery and prize-promotion scam,20 and the other involved 

an international spam enterprise.21 Since passage of the Act in 2006 and the promulgation of rules in May 2007, the SAFE WEB Act has enhanced the FTC’s ability 

to cooperate with foreign law enforcement authorities on consumer protection enforcement matters that cross international borders. 

III. Reauthorization Legislation 

The remainder of this testimony addresses S. llll, the proposed ‘‘Federal 

Trade Commission Reauthorization Act of 2008.’’ The Commission provides its views 

on the individual sections of the proposed bill below. 

A. Section 2: Authorization of Appropriations 

The Commission supports efforts to increase the agency’s resources to meet its anticipated needs. For the past several years, the Commission has sought an increase 

in funds. We are grateful to Congress for increasing our funding over time. 

The Commission’s staff has worked hard over the past several years to fulfill its 

mandate, address new and emerging problems in the marketplace, enforce newly enacted laws, and complete the tasks Congress has entrusted us to address. In the 

last few years, Congress has passed a variety of significant new laws that the FTC 

is charged, at least in part, with implementing and enforcing, such as the CAN– 

SPAM Act, the Fair and Accurate Credit Transactions Act, the Children’s Online 

Privacy Protection Act, the Gramm-Leach-Bliley Act, and the U.S. SAFE WEB Act. 

Yet it is uncertain whether agency resources have grown apace with our enforcement obligations. To meet its growing challenges, the Commission anticipates needing additional resources, which might include, among other things, more staff, 

money to hire experts and consultants, additional office space, and improved infrastructure. The Commission understands the draft bill would authorize an additional 

$20 million for technology funding for 2009 through 2015, over and above the reauthorization amount set forth in Section 2(a) of the bill. We thank the Committee 

for specifically recognizing the Commission’s needs for funding to improve its technology. We also appreciate the seven-year plan for resources which, if appropriated, 

would allow us to plan for the years ahead. 

B. Section 3 and Section 5. Independent Litigating Authority and Civil Penalties for 

Violation of the Federal Trade Commission Act 

Sections 3 and 5 of the proposed FTC reauthorization bill address two substantially intertwined aspects of the Commission’s litigation: the availability of civil penalties in court actions, and independent agency litigating authority. This section of 

the Commission’s testimony first provides an overview of the Commission’s current 

authority to obtain monetary remedies, including civil penalties. Second, it discusses 

the proposed extension of the Commission’s civil penalty authority. Third, it addresses the bill’s proposal regarding independent litigating authority to obtain civil 

penalties. Fourth, it discusses Commission litigation before the Supreme Court. 

16 

22Primarily, the FTC can seek civil penalties against any entity that knowingly violates a 

trade regulation rule promulgated by the FTC or that violates a pre-existing final FTC order 

to which it is subject. Moreover, recognizing the importance of civil penalties, Congress has specifically authorized the FTC to seek civil penalties for violations of certain statutes, e.g., the 

CAN–SPAM Act, 15 U.S.C. § 7701 et seq. 23 It is unclear whether the proposed reauthorization language in the earlier draft of the bill 

is intended to provide civil penalty authority for consumer protection cases only or for both competition and consumer protection cases. Although civil penalty authority in competition cases 

might provide a similar deterrent effect, the discussion in Sections 1 and 2 is limited to civil 

penalty authority in consumer protection cases. 24Generally, as discussed below, the Commission cannot bring civil penalty cases in its own 

right without first presenting them to the Department of Justice (‘‘DOJ’’) to bring on behalf of 

the Commission. Almost invariably, DOJ accepts the referral, but if it were to decline, in most 

instances, the Commission could bring the action in its own name. With one exception, the Commission cannot assess civil penalties in administrative proceedings. The exception is set forth 

in a provision of the Energy Policy and Conservation Act (‘‘EPCA’’), 42 U.S.C. § 6303(a). This 

provision (as adjusted pursuant to the Debt Collection Improvement Act of 1996, see FTC Rules 

of Practice, 16 C.F.R. §§ 1.97, 1.98) authorizes the Commission to assess administratively a civil penalty of not more than $110 for each violation of the Appliance Labeling Rule. 

In some cases, we could obtain civil penalties, but we do not because our paramount goal is 

to return money back to consumers, and defendants do not have enough money to pay consumer 

redress and civil penalties. In other cases, as described on page 13, we are trading civil penalties 

for quicker relief. 25See 15 U.S.C. § 53(b); see also 15 U.S.C. § 57b. 26When the Federal Trade Commission was established in 1914, it did not have the authority 

to seek civil penalties. Federal Trade Commission Act of 1914, Pub. L. No. 63–203, 38 Stat. 717– 

24 (1914). In 1938, the Commission was given the authority to seek civil penalties in Federal 

district court through the Attorney General against a party for violations of a Commission order 

to which that party was subject. Wheeler-Lea Act, Pub. L. No. 75–447, 52 Stat. 114–15 (1938). 

When the Commission started promulgating rules in the 1960s, it did not have the authority 

to seek civil penalties for violations of such rules. 

On February 4, 1970, the Commission testified before Congress in favor of allowing the FTC 

to assess civil penalties administratively against respondents who knowingly committed consumer protection violations. See Hearings on H.R. 14931 and Related Bills before the Subcomm. 

on Commerce and Finance of the H. Comm. on Interstate and Foreign Commerce, 91st Cong. 53, 

54 (1970) (statement of FTC Chairman Caspar Weinberger). The Senate passed legislation to 

permit the FTC to seek civil penalties for such violations in Federal court proceedings, but it 

was dropped in conference. Ultimately, in 1975, Congress adopted legislation that authorized 

civil penalties for acts or practices previously determined by the Commission to be unfair or deceptive, through either a rulemaking proceeding or an administrative proceeding, and committed 

with actual or (for rule violations) constructive knowledge of the determination. See 15 U.S.C. 

§ 45(m)(1). 

1. Overview of Commission’s Authority to Obtain Monetary Remedies 

Although the Commission has authority to seek civil penalties in some instances,22 for many violations—including violations of Section 5 of the FTC Act that 

involve fraudulent conduct—the Commission currently lacks general authority to 

seek civil penalties.23 In the past year, the Commission has sought civil penalties 

in approximately 22 percent of the consumer protection cases it has brought; it has 

had the option of seeking civil penalties in approximately 21 percent of additional 

consumer protection cases.24

The Commission can seek other types of monetary relief, including consumer redress and other equitable remedies such as disgorgement of ill-gotten gains, from 

defendants, under Section 13(b) or under Section 19(b) of the FTC Act in certain 

circumstances, by filing Federal district court actions in its own name, without referral to DOJ.25 The Commission has often used Section 13(b) of the FTC Act, particularly, to obtain restitution for consumers in consumer protection cases. In the 

past decade, the Commission has brought over 600 consumer protection law enforcement actions using Section 13(b) under the FTC Act, through which courts have ordered approximately $3 billion in redress for injured consumers. 

2. Additional Civil Penalty Authority 

Section 5 of S. XXXX would give the Commission authority to seek civil penalties 

for knowing violations of Section 5 of the FTC Act. As explained above, currently 

the FTC has authority to seek restitution on behalf of consumers and disgorgement 

of ill-gotten gains, but can obtain civil penalties only for certain categories of violations.26

In bringing consumer protection law enforcement actions, the Commission’s paramount goal is to stop unlawful practices and obtain restitution for injured consumers. It achieves this goal primarily by filing actions directly in Federal district 

court under Section 13(b) of the FTC Act. In many consumer protection cases, and 

most cases involving fraud, the Commission finds that the current equitable remedies of restitution and disgorgement give it the power to reach all of a defendant’s 

17 

27See, e.g., Prepared Statement of the Federal Trade Commission, ‘‘Federal Trade Commission 

Reauthorization,’’ Before the Subcommittee on Interstate Commerce, Trade, and Tourism of the 

Senate Commerce, Science, and Transportation Committee, 110th Cong., September 12, 2007, 

available at http://www.ftc.gov/os/testimony/070912reauthorizationtestimony.pdf (‘‘To enhance 

consumer protection in cases involving spyware, as well as those involving data security, the 

Commission continues to support provisions in pending bills that give the FTC civil penalty authority.’’); Prepared Statement of the Federal Trade Commission, ‘‘Federal Trade Commission 

Reauthorization,’’ Before the Senate Commerce, Science, and Transportation Committee, 110th 

Cong., April 10, 2007, available at http://www.ftc.gov/os/testimony/P040101FY2008Budgetand 

OngoingConsumerProtectionandCompetitionProgramsTestimonySenate04102007.pdf (‘‘We believe 

the Commission’s ability to protect consumers from unfair or deceptive acts or practices would 

be substantially improved by legislation, all of which is currently under consideration by Congress, to provide the Commission with civil penalty authority in the areas of data security, telephone pretexting and spyware.’’). 28Defendants likely do save some money from not complying with legal mandates. However, 

the cost savings of not instituting reasonable data security measures are, in many cases, small 

and not commensurate with the injury that resulted from the failure. 29Most state statutes provide for civil penalties for certain violations of state consumer protection laws. See, e.g., Ala. Code § 8–19–11; Ark. Code § 4–88–13. 30See supra note 24. DOJ acts in a timely manner, filing cases on behalf of the Commission 

and working cooperatively with the Commission and its staff. 31See supra note 24. 

available assets. In fact, in many of these cases, defendants do not have enough assets to cover consumer losses, and in such cases, the Commission usually takes the 

available assets and enters a suspended judgment for the remaining amount of consumer injury. 

As the Commission has previously testified, however, in certain categories of cases 

restitution or disgorgement may not be appropriate or sufficient remedies. These 

categories of cases, where civil penalties could enable the Commission to better 

achieve the law enforcement goal of deterrence, include malware (spyware), data security, and telephone records pretexting.27 In these cases, consumers have not simply bought a product or service from the defendants following defendant’s misrepresentations, and it is often difficult to calculate consumer losses or connect those 

losses to the violation for the purpose of determining a restitution amount. 

Disgorgement may also be problematic. In data security cases, defendants may not 

have actually profited from their unlawful acts. For example, in a case arising from 

a data security breach enabled by lax storage methods, the entity responsible for 

the weak security may not have profited from its failure to protect the information; 

rather, the identity thief who stole the information likely profited.28 In pretexting 

and spyware cases, the Commission has found that defendants’ profits are often 

slim; thus, disgorgement may be an inadequate deterrent. Also in pretexting and 

spyware cases, lawful acts and unlawful acts may be intermixed; thus, it may be 

difficult to determine an appropriate disgorgement amount.29 And in a whole host 

of cases brought under Section 5, when we are challenging hard-core fraud that 

could otherwise be prosecuted criminally, we should be able to seek fines against 

these wrongdoers. 

3. Independent Litigating Authority for Civil Penalty Actions 

As noted above, before bringing a civil penalty action, the Commission generally 

must notify the DOJ of the proposed action.30 If the Department declines to participate in the name of the United States or otherwise fails to act within 45 days on 

such a referral, the Commission may file the case in its own name.31 Section 3(1) 

of the proposed legislation would expand the agency’s independent litigating authority to allow the FTC to bring actions for civil penalties in Federal court ‘‘in its own 

name by any of its attorneys,’’ without mandating that DOJ have the option to litigate on the FTC’s behalf, as is currently required in most cases. Section 3(1) would 

require the Commission to ‘‘notify the Attorney General of any such action’’ and 

would permit the Commission to ‘‘request the Attorney General on behalf of the 

Commission to commence, defend, or intervene in any such action.’’ The Commission 

supports this provision. 

Giving the FTC independent litigating authority when it seeks civil penalties 

would allow the agency with the greatest expertise in the FTC Act to litigate some 

of its own civil penalty cases, while retaining the option of referring appropriate 

matters to DOJ. Under current law, agency staff—who have both general expertise 

in FTC law and specific knowledge of cases they investigate and recommend for litigation—turn over such cases to the DOJ’s Office of Consumer Litigation (OCL). 

While the FTC has an excellent working relationship with OCL on these matters, 

OCL also has responsibility for enforcement matters relating to the Food and Drug 

Administration, the Consumer Product Safety Commission, and the Department of 

18 

32 15 U.S.C. § 77t. 33 15 U.S.C. § 78u–2. 34 7 U.S.C. § 9; 7 U.S.C. § 13a; 7 U.S.C. § 13a–1. 35The proposed legislation would not authorize the agency to assess administrative penalties, 

which would give an agency more discretion to set policies for obtaining penalties than does the 

ability to seek penalties from a Federal district court. 36 15 U.S.C. § 56(a)(3)(A). 37 15 U.S.C. § 56(a)(3)(B). 38 15 U.S.C. § 56(a)(3)(A). 39Supreme Court Rules of Practice, 28 U.S.C. App. Rule 37. 40 5 U.S.C. App. Reorganization Plan No. 4 of 1961; 16 C.F.R. § 3.54. 

Transportation’s National Highway Traffic Safety Administration. In contrast, other 

independent Federal agencies are able to maximize the benefits of their own expertise by independently prosecuting administrative or judicial actions for civil penalties. For example, the Securities and Exchange Commission has independent authority to seek judicial civil penalties for any violation of the securities laws 32 or 

even to assess administrative civil penalties against registered entities.33 Similarly, 

the Commodity Futures Trading Commission has independent authority to seek judicial civil penalties or assess administrative civil penalties.34 Bringing the FTC’s 

authority more in line with comparable agencies would ensure that civil penalty 

prosecutions fully benefit from the agency’s expertise.35

Moreover, currently, there are instances in which the Commission confronts ongoing and injurious conduct that violates a rule or statute that provides for civil penalties, such as the Telemarketing Sales Rule or the CAN–SPAM Act. In such cases, 

the Commission can bring an action under Section 13(b) to obtain preliminary injunctive relief that halts the ongoing injury to consumers, or it can refer an action 

seeking civil penalties and other injunctive relief to DOJ. The Commission cannot, 

however, do both. In those instances where there is a need to bring ongoing deception or other economically-injurious conduct to a swift halt, and where justice requires both full equitable relief and appropriate civil penalties, the Commission 

should have the option of directly filing an action seeking both equitable and civil 

penalty relief. The proposed provision would give the Commission this option. 

The proposed provision would also increase efficiency. Currently, once the FTC 

makes a referral, DOJ has 45 days to commence a civil penalty action. This process 

requires extra time and delay, even under the best of circumstances, and extra paperwork. Moreover, once DOJ accepts a referral, the FTC normally assigns one or 

more of its own staff attorneys, at DOJ’s request, to assist in litigating the case. 

Despite excellent relations and coordination between staff at DOJ and the FTC, the 

use of personnel at two agencies inevitably creates delay and inefficiencies. This is 

particularly true in cases where the FTC is simply referring to DOJ a settlement 

to be filed. 

4. Independent Litigating Authority Before the Supreme Court 

Section 3(2) of the proposed legislation would allow the FTC to represent itself 

before the Supreme Court in the appeal of any litigation to which the FTC was a 

party. The Commission supports this provision. Currently, in any matter in which 

the Commission represented itself in the lower courts, the Commission may request 

that the Solicitor General of the DOJ petition for certiorari and represent the Commission before the Supreme Court.36 If the Solicitor General agrees to represent the 

FTC, under the FTC Act, he may not compromise a Commission position or settle 

the case without Commission consent.37 If the Solicitor General declines to represent the FTC, the Commission may petition the Court and represent itself.38 Of 

course, in any matter the Court may request that the Solicitor General file a brief, 

or the Solicitor General may file an amicus brief without a Court request.39

C. Section 4. Specialized Administrative Law Judges 

Section 4 would assist in providing the FTC with ALJs experienced in handling 

complex antitrust, trade regulation, and economic issues in adjudications that primarily involve uncharted circumstances or otherwise particularly call upon the 

agency’s expertise. The FTC endorses the Committee’s efforts to ensure that the 

agency’s ALJs are equal to the highly complex task they face. 

The Commission was created to develop and apply specialized expertise to matters 

concerning unfair methods of competition, and later unfair or deceptive acts or practices. The Commission may delegate its powers to ALJs (previously hearing examiners) to handle administrative trials, but ALJ findings and conclusions both of fact 

and law are subject to full Commission review, either on appeal or pursuant to its 

own decision to review a matter.40

19 

41 15 U.S.C. § 45(a)(2). 42 15 U.S.C. § 44. 43See, e.g., FTC v. Gill, 183 F. Supp. 2d 1171 (C.D. Cal. 2001) (‘‘[W]hile certain nonprofit corporations are exempt from liability for violations of section 5(a)(1) of the FTC Act, the exemption 

does not apply to sham corporations that are the mere alter ego of the [defendant].’’) (citing 

Community Blood Bank of Kansas City Area, Inc. v. FTC, 405 F.2d 1011, 1022 (8th Cir. 1969)); 

FTC v. Ameridebt, Inc., 343 F.Supp. 2d 451, 460–62 (D. Md. 2004) (denying motion to dismiss 

where FTC complaint alleged that purported credit counseling organization incorporated as a 

non-profit entity was a ‘‘de facto for-profit organization’’). 44See, e.g., cases announced as part of ‘‘Operation Phoney Philanthropy,’’ (May 2003), available at http://www.ftc.gov/opa/2003/05/opp.shtm. 45See, e.g., California Dental Ass’n v. FTC, 526 U.S. 756, 759, 765–69 (1999) (holding that 

FTC Act applies to anticompetitive conduct by non-profit dental association whose activities provide substantial economic benefits to for-profit members); American Medical Ass’n v. FTC, 638 

F.2d 443, 447–448 (1980) (finding FTC jurisdiction over non-profit medical societies whose activities ‘‘serve both the business and non-business interests of their member physicians’’). 46 15 U.S.C. § 1607(c); 15 U.S.C. § 1691c(c). 47See United States v. Rockford Mem. Hosp., 898 F.2d 1278, 1280–81 (7th Cir. 1990). 48 15 U.S.C. § 18. 49The Commission would be pleased to work with Congressional staff on crafting appropriate 

language. The Commission notes that, as drafted, Section 6 would reach only those non-profit 

entities that have tax-exempt status under section 501(c)(3) of the Internal Revenue Code. The 

Commission would benefit from broadening this provision to cover certain other nonprofits, such 

as Section 501(c)(6) trade associations. The Commission has previously engaged in protracted 

litigation battles to determine whether such entities are currently covered under the FTC Act. 

See, e.g., California Dental Ass’n v. FTC, 526 U.S. 756, 765–69 (1999) (holding that FTC Act 

Continued 

The issues raised in antitrust matters in particular, the very substantial body of 

law in this area, and the nature of economic evidence, are often sufficiently complex 

to require a person familiar with the law and experienced in handling economic evidence offered in trials. Not every ALJ or aspirant to an ALJ appointment has such 

experience, and the current process for appointments excludes such experience as 

a factor in making applicants available to the agency. The ability to hire ALJs with 

that experience would help the FTC fulfill its role as a specialized, expert agency. 

D. Repeal of FTC Act Exemptions 

This section discusses proposed Section 6 and Section 13 of the proposed FTC reauthorization bill, both of which would repeal certain exemptions to the FTC Act. 

Section 6 would repeal the FTC Act’s exemption for certain non-profit entities, and 

Section 13 would repeal the common carrier exemption. The Commission generally 

supports repealing these exemptions. In addition, Congress should examine other 

exemptions to the FTC Act to more broadly protect consumers and competition and 

to ensure consistent application of laws across economic sectors. 

1. Section 6. Non-Profit Exemption 

Section 6 of the proposed reauthorization legislation would subject charitable, religious, educational and other ‘‘section 501(c)(3)’’ organizations to the FTC Act. Currently, the FTC’s jurisdiction over non-profits is limited. The FTC Act applies to 

‘‘persons, partnerships, or corporations,’’ 41 and the Act defines ‘‘corporation’’ as an 

entity that ‘‘is organized to carry on business for its own profit or that of its members.’’ 42 Under this framework, the agency can reach ‘‘sham’’ non-profits, such as 

shell non-profit corporations that actually operate for profit.43 It can also reach entities falsely claiming to be affiliated with charitable organizations and entities who 

affirmatively misrepresent that ‘‘donations’’ collected will go to charity.44 Further, 

the Commission has jurisdiction over organizations such as trade associations that 

engage in activities that ‘‘provide[] substantial economic benefit to its for-profit 

members,’’ for example, by providing advice and other arrangements on insurance 

and business matters, or engaging in lobbying activities.45 The Commission also has 

jurisdiction over most non-profits in several discrete areas, for example, under certain consumer financial statutes, such as the Truth in Lending Act and the Equal 

Credit Opportunity Act.46 In addition, the Commission has jurisdiction over nonprofit entities for purposes of the Clayton Act,47 most notably Section 7, which prohibits mergers or acquisitions where ‘‘the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.’’ 48 The current definition of ‘‘corporation’’ in the FTC Act places substantial limits on the Commission’s 

jurisdiction over non-profit entities. While such organizations pursue many worthy 

activities that advance important public purposes, on occasion they engage in business activities that harm consumers. 

The Commission supports extension of its jurisdiction to certain non-profit entities.49 In healthcare, an area in which the Commission takes the lead to maintain 

20 

applies to anticompetitive conduct by non-profit dental association whose activities provide substantial economic benefits to for-profit members); American Medical Ass’n v. FTC, 638 F.2d 443, 

447–448 (1980) (finding FTC jurisdiction over non-profit medical societies whose activities ‘‘serve 

both the business and non-business interests of their member physicians’’). 50 Community Blood Bank v. FTC, 405 F.2d 1011 (8th Cir. 1969). 51See Piedmont Health Alliance, 138 F.T.C. 675 (2004) (consent order), available at http:// 

www.ftc.gov/os/adjpro/d9314/index.shtm; Tenet Healthcare Corp./Frye Regional Medical Center, Inc., 137 F.T.C. 219 (2004) (consent order), available at http://www.ftc.gov/os/caselist/ 

0210119/0210119tenet.shtm; Maine Health Alliance, 136 F.T.C. 616 (2003) (consent order), 

available at http://www.ftc.gov/os/caselist/0210017.shtm. 52The Commission notes that, just as the First Amendment limits the FTC’s ability to address 

certain practices of for-profit entities, it would also restrict certain FTC action concerning nonprofits. For example, in Riley v. National Federation of the Blind of North Carolina, Inc., 487 

U.S. 781 (1988), the Supreme Court struck down a North Carolina law that required fundraisers 

engaged in telemarketing on behalf of charities to disclose, during the call, the percentage of 

charitable contributions actually used for charitable purposes. The Supreme Court held that the 

for-profit fundraisers, like charities soliciting on their own behalf, were engaging in ‘‘fully protected expression’’ under the First Amendment, and the Court rejected the argument that these 

activities were less-protected ‘‘commercial speech.’’ Id. at 796. The Supreme Court found the law 

to be an ‘‘unduly burdensome’’ prophylactic rule that violated the First Amendment. Id. at 800. 

In 2003, the Court held that the First Amendment does allow a state to assert a fraud claim 

against a charity fundraiser for affirmatively misrepresenting to consumers where their money 

will go. See Madigan v. Telemarketing Associates, Inc., 538 U.S. 600 (2003). The Court noted, 

though, that a fraud claim would be dismissed on First Amendment grounds if it were based 

simply on a fundraiser’s failure to disclose fee arrangements or the percentage of donated funds 

that were retained by the telefunder. Id. at 617. 53See Prepared Statement of the Federal Trade Commission, Before the Subcommittee on 

Interstate Commerce, Trade, and Tourism Committee on Commerce, Science, and Transportation U.S. Senate (Sept. 12, 2007), available at http://www.ftc.gov/os/testimony/070912 

reauthorizationtestimony.pdf; Prepared Statement of the Federal Trade Commission On FTC Jurisdiction Over Broadband Internet Access Services, Before the Committee on the Judiciary, U.S. 

Senate (Jun. 14, 2006), available at http://www.ftc.gov/opa/2006/06/broadband.shtm; The Reauthorization of the Federal Trade Commission: Positioning the Commission for the Twenty-First 

Century: Hearing Before the Subcomm. on Commerce, Trade and Consumer Protection of the H. 

Comm. on Energy and Commerce, 108th Cong. (2003) (‘‘FTC 2003 Reauthorization Hearing’’) 

(statement of the FTC), available at http://www.ftc.gov/os/2003/06/030611reauthhr.htm; see also FTC 2003 Reauthorization Hearing (statement of Thomas B. Leary, FTC Commissioner), 

available at http://www.ftc.gov/os/2003/06/030611learyhr.htm; FTC Reauthorization Hearing: 

Before the Subcomm. on Consumer Affairs, Foreign Commerce and Tourism of the S. Comm. on 

Commerce, Science, and Transportation, 107th Cong. (2002) (statement of Sheila F. Anthony, 

FTC Commissioner), available at http://www.ftc.gov/os/2002/07/sfareauthtest.htm. 54 15 U.S.C. § 45(a)(2) exempts from the FTC Act ‘‘common carriers subject to the Acts to Regulate Commerce.’’ 15 U.S.C. § 44 defines the ‘‘Acts to regulate commerce’’ as ‘‘Subtitle IV of Title 

competition, the agency’s inability to reach conduct by various non-profit entities 

has prevented the Commission from taking action against potentially anticompetitive conduct of non-profits engaged in business. For example, the Commission generally cannot challenge price-fixing, boycotts, and other anticompetitive conduct by 

non-profit hospitals. Nearly forty years ago, a Commission order against an association of non-profit hospitals and a non-profit blood bank found to have unlawfully 

hindered the development of two commercial blood banks was vacated on the ground 

that the non-profit entities were beyond the FTC’s jurisdiction.50 In three recent enforcement actions, the Commission alleged that groups of physicians and hospitals 

had participated in unlawful price-fixing arrangements, but sued only the physicians and a for-profit hospital.51 The healthcare sector includes a variety of other 

types of nonprofit entities, such as nonprofit health maintenance organizations 

(HMOs), health plans, and standard-setting organizations, whose activities can also 

raise significant competitive concerns. 

The proposed legislation would also help increase certainty and reduce litigation 

costs in this area. Although the FTC has been successful in asserting jurisdiction 

against ‘‘sham’’ nonprofits and against non-profit trade associations, the proposed 

legislation would help avoid protracted factual inquiries and litigation battles to establish jurisdiction over such entities.52

2. Section 13. Common Carrier Exception 

Section 13 would strike the telecommunications common carrier exemption from 

the FTC Act. This exemption bars the agency from reaching certain conduct by telecommunications companies. The Commission has testified in favor of the repeal of 

the common carrier exemption on several occasions,53 continues to endorse its repeal, and thanks the Chairman for his continued support in this area. 

The FTC Act exempts common carriers subject to the Communications Act from 

its prohibitions on unfair and deceptive acts or practices and unfair methods of competition.54 This exemption dates from a period when telecommunications were proVerDate Nov 24 2008 07:49 Jul 24, 2012 Jkt 052754 PO 00000 Frm 00024 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\75166.TXT SCOM1 PsN: JACKIE
21 

49 (interstate transportation) and the Communications Act of 1934’’ and all amendments thereto. 55See Letter from the Federal Trade Commission to John Villafranco and Lewis Rose re Sprint 

Corporation, http://www.ftc.gov/os/closings/staff/070808sprintnextelclosingltr.pdf. (FTC letter 

closing investigation into non-common carrier activities of Sprint, a traditional provider of common carrier services, related to claims of unlimited web usage via mobile device). 56For example, the FTC has used the well-established doctrine that providing the means and 

instrumentalities by which unfair or deceptive practices occur is itself an unfair or deceptive 

practice in violation of the FTC Act. See, e.g., FTC v. Winstead Hosiery Co., 258 U.S. 483, 494 

(1922). 57One statute specifically gives the FTC express authority to pursue aiders and abetters. The 

Telemarketing and Consumer Fraud and Abuse Prevention Act allowed the Commission to promulgate rules to include within the definition of deceptive telemarketing those who ‘‘assist or 

facilitate’’ such telemarketing. 15 U.S.C. § 6102(a)(2). The Commission’s Telemarketing Sales 

Rule (‘‘TSR’’) in turn prohibits providing ‘‘substantial assistance or support to any seller or telemarketer when that person knows or consciously avoids knowing that the seller or telemarketer’’ is engaged in certain practices that violate the Rule. The Commission has included 

an ‘‘assisting and facilitating’’ allegation in at least 2 dozen cases since the TSR was adopted. 

See, e.g., Federal Trade Commission v. Assail, Inc., No. W03CA007 (W.D. Tex. final orders entered Jan. 2005); U.S. v. DirectV, Inc., No. SACV05 1211 (C.D. Cal. final order entered Dec. 

2005); U.S. v. Entrepreneurial Strategies, Ltd., No. 2:06–CV–15 (WCO) (N.D. Ga. final order entered Jan. 2006). 

vided by highly-regulated monopolies. The exemption is now outdated. In the current world, firms are expected to compete in providing telecommunications services. 

Congress and the Federal Communications Commission (‘‘FCC’’) have dismantled 

much of the economic regulatory apparatus formerly applicable to the industry. Removing the exemption from the FTC Act would not alter the jurisdiction of the FCC, 

but would give the FTC the authority to protect against unfair and deceptive practices by common carriers in the same way that it can protect against unfair and 

deceptive practices by non-common carriers engaged in the provision of the same 

services. 

Technological advances have blurred the traditional boundaries between telecommunications, entertainment, and high technology.55 As the telecommunications 

and Internet industries continue to converge, the common carrier exemption is likely to frustrate the FTC’s ability to stop deceptive and unfair acts and practices and 

unfair methods of competition with respect to interconnected communications, information, entertainment, and payment services. 

The FTC has extensive expertise with advertising, marketing, billing, and collection, areas in which significant problems have emerged in the telecommunications 

industry. In addition, the FTC has powerful procedural and remedial tools that 

could be used effectively to address developing problems in the telecommunications 

industry if the FTC were authorized to reach them. 

E. Section 7. Aiding and Abetting a Violation 

The Commission believes that proposed Section 7, which would give the FTC the 

ability to challenge practices that aid or abet violations of the FTC Act, could be 

beneficial to the Commission’s consumer protection law enforcement program. Implicit in this proposed provision is an understanding that effective law enforcement 

often requires reaching not only the direct participants in unfair or deceptive practices, but also those who support and enable the direct participants to violate the 

law. Since the Supreme Court’s ruling in Central Bank of Denver v. First Interstate 

Bank of Denver, 511 U.S. 164 (1994), however, the Commission’s ability to pursue 

those who assist and facilitate unfair or deceptive acts and practices has been compromised. The Supreme Court’s broad reasoning in that case cast doubt on the argument that Section 5 of the FTC Act could reach ‘‘aiding and abetting’’ another person’s violation. Although the Commission has developed alternative theories to 

reach secondary actors, these theories may make liability more difficult to prove 

than if the FTC had specific statutory authority in this area.56 Indeed, in some 

cases, staff has decided not to name potential defendants because the conduct at 

issue did not fit neatly under one of the alternative ‘‘assistance’’ theories.57

The need for this authority has become particularly clear in the Internet era. Section 5 of the FTC Act’s broad prohibition on unfair or deceptive acts and practices 

generally has given the agency ample authority to bring law enforcement action 

against those who engage in online fraud. Many of the new business models that 

are emerging on the Internet, however, involve numerous actors with murky and 

varying roles in complicated channels of distribution. Spyware distributors, for example, often use a complex system of affiliates and sub-affiliates to distribute harmful software to consumers, with each of these entities receiving a financial benefit 

from their role in its distribution. In addition, some online businesses located abroad 

22 

58The Commission notes that Section 7 is drafted to include aiding and abetting ‘‘any provision of the Act or any other Act enforceable by the Commission,’’ which would include aiding 

and abetting unfair methods of competition. It is unclear how this is intended to apply to competition cases, or whether application to competition cases is necessary. 59See Prepared Statement of the Federal Trade Commission, ‘‘Enhancing FTC Consumer Protection in Financial Dealings, with Telemarketers, and on the Internet,’’ Before the House Committee on Energy and Commerce Subcommittee on Commerce, Trade, and Consumer Protection 

(Oct. 23, 2007), available at http://www.ftc.gov/os/testimony/071023ReDoNotCallRuleEnforce 

mentHouseP034412.pdf. 

who engage in unfair or deceptive acts and practices that harm American consumers 

rely on support from entities located in the United States. An FTC prosecution of 

the domestic entity supporting the foreign online business may be the most effective 

means of preventing harm to American consumers. Making it easier for the Commission to challenge those who provide assistance to others who are violating Section 5 of the FTC Act could help the agency attack the infrastructure that supports 

Internet fraud, such as in the circumstances described above.58

F. Sections 8 and 9. Rulemaking Procedure For Consumer Protection, Subprime 

Lending, and Nontraditional Mortgage Loans 

Section 8 of the proposed FTC reauthorization legislation would allow the FTC to 

conduct rulemaking on any consumer protection issue (other than subprime lending 

and nontraditional mortgage loans) under the streamlined rulemaking procedures of 

Section 553 of the Administrative Procedures Act (‘‘APA’’) that are generally available to Federal agencies. Congress has heretofore authorized the Commission to conduct general rulemaking only under the rigorous, complicated, and time-consuming 

procedures of Section 18 of the FTC Act. Section 18 includes requirements that the 

FTC must publish an advance notice of proposed rulemaking and seek public comment before publishing its notice of proposed rulemaking; it must provide an opportunity for a hearing before a presiding officer at which interested persons are accorded certain cross-examination rights; and where there are numerous interested 

persons, the FTC must determine which have similar interests, have each group of 

persons with similar interests choose a representative, and make further determinations about representation for those interests in the cross-examination process. 

These requirements are not ordinarily applicable to other Federal agencies for comparable rulemaking. 

In addition, over the past 15 years, there have been a number of occasions where 

Congress has identified specific consumer protection issues requiring legislative and 

regulatory action. In these specific instances, Congress has given the FTC authority 

to issue rules using APA rulemaking procedures, and the Commission has supported 

this approach. 

Section 9 would provide for the Commission to conduct rulemaking under the APA 

with respect to subprime mortgage lending and nontraditional mortgage loans. The 

Commission previously has supported proposals to permit all responsible agencies 

to promulgate consistent and comparable rules in the financial services area.59 Current differences in rulemaking procedures may result in different regulatory requirements for financial service providers selling the same goods. To avoid the application of inconsistent standards, to improve interagency coordination on 

rulemakings, and to ensure that any FTC rulemaking does not lag years behind 

other financial regulators, the FTC believes that it should have the authority to use 

APA procedures to promulgate rules whenever the banking agencies and National 

Credit Union Administration commence rulemaking under the FTC Act. 

Conclusion 

Thank you for giving the Commission the opportunity to provide its views on the 

proposed FTC Reauthorization bill. We are grateful for Congress’ confidence in the 

FTC’s ability to protect consumers, and, through our enforcement and education efforts, we will continue to make sure that your confidence is well-placed. We look 

forward to working with the Committee as the bill moves forward. 

Senator DORGAN. Thank you very much, Mr. Chairman. 

Commissioner Harbour, you may proceed. 

23 

STATEMENT OF HON. PAMELA JONES HARBOUR, 

COMMISSIONER, FEDERAL TRADE COMMISSION 

Ms. HARBOUR. Thank you, Chairman Dorgan and Senator Klobuchar. 

I’m pleased to appear before you today. In particular, I would 

like to highlight recent efforts and accomplishments of the Commission in both the competition and consumer protection areas. 

Merger investigations are always a high priority at the Commission. This past January, the Commission enjoyed a resounding win 

on the merger front when the U.S. Court of Appeals for the 5th 

Circuit upheld a Commission Order in the Chicago Bridge & Iron 

Matter. 

In 2005, the Commission had ruled that Chicago Bridge & Iron’s 

acquisition of assets from a competitor was likely to substantially 

lessen competition or tend to create a monopoly in markets for 

cryogenic storage tanks used in a variety of industrial applications. 

The Commission had ordered divestitures to undo the deal and 

restore competition. The 5th Circuit’s recent opinion fully endorsed 

the Commission’s findings. 

Pharmaceutical markets have long been a critical area of focus 

for the Commission and we continue to be vigilant in protecting 

pharmaceutical competition. For example, this past February, the 

Commission filed a case charging that Cephalon, a pharmaceutical 

manufacturer, unlawfully blocked competition for a branded drug 

by paying four generic firms to stay off the market until the year 

2012. 

We are investigating similar exclusion payments involving other 

pharmaceutical firms as well. 

Of course, we also pay close attention to a wide range of issues 

in energy markets. We are considering how best to use our new enforcement authority regarding the manipulation of wholesale crude 

oil, gasoline and petroleum distillate markets. 

It is also worth noting the Commission’s recent challenge of the 

proposed acquisition by Equitable Resources of the People’s Natural Gas Company, a subsidiary of Dominion Resources. This 

transaction was abandoned by the parties in January of 2008. 

In April of last year, we unsuccessfully attempted to keep gasoline prices from going up in Albuquerque, New Mexico. We sought 

a preliminary injunction in Federal court in New Mexico to stop 

Western Refining, Inc.’s, acquisition of Giant Industries, but unfortunately the district court did not believe the merger would cause 

gasoline prices to increase. 

On the competition front, the Commission just announced settlements with retailer TJX and data broker, Reed, Elsevier and 

Seisint, settling charges that the companies failed to provide reasonable and appropriate security for sensitive personal information. 

These cases bring the total number of data security enforcement 

actions to 20, but rather than celebrate this milestone, we will use 

it to remind ourselves and the larger business community how 

much more work awaits us in this important area. 

Our data security cases typically allege multiple and systemic security vulnerabilities that were easily and inexpensively avoidable. 

This suggests that companies must do more to protect sensitive 

consumer information. 

24 

The Commission will continue to educate consumers and businesses about protecting personal information and we will continue 

to hold companies accountable for their information security practices. 

We are tremendously gratified that Congress expanded the Commission’s ability to cooperate with our foreign counterparts through 

the U.S. SAFE WEB Act. The law added new enforcement-sharing 

tools into the Commission’s law enforcement arsenal and allows us 

to pursue a wider range of cross-border enforcement matters. Since 

the rules went into effect in May 2007, the Commission has shared 

information 17 times with foreign agencies in cross-border consumer protection matters involving fraudulent telemarketing 

scams, deceptive mail schemes and spam cases. 

The Commission has also used its new authority to provide investigative assistance to foreign agencies in multiple Internet-related investigations. In short, the increasing use of the FTC’s new 

authority is removing some of the key roadblocks to effective international enforcement cooperation and the Commission will continue to focus on U.S. SAFE WEB in 2008. 

Let me end with mortgage lending. It has long been a Commission priority. In the past decade, the agency, as you have correctly 

noted, Chairman Dorgan, brought 21 actions focused on the mortgage lending industry, alleging that mortgage brokers, lenders and 

servicers have engaged in unfair or deceptive acts and practices 

and these cases have collectively returned more than $320 million 

to consumers. 

In February, the Commission announced three actions against 

companies that allegedly made false guarantees to homeowners 

that they would save their homes from foreclosure. In one case, the 

Commission charged that the company enticed consumers into a 

second mortgage or home equity line of credit on unfavorable terms 

without fully disclosing the risks, the costs and consequences of 

doing so. 

In conjunction with these cases, the Commission launched a related consumer education effort which included a fact sheet on how 

to avoid foreclosure rescue scams, a series of radio PSAs in English 

and in Spanish, and warnings about foreclosure rescue schemes 

which we will place in the classified ad sections of English and 

Spanish language community newspapers. 

And finally, the Commission likewise has been active in its efforts to protect consumers of non-mortgage financial services. The 

agency announced in February consent agreements with three 

Internet pay day lenders who advertised the cost of their loans 

without disclosing the annual percentage rate in violation of the 

Truth in Lending Act. This violation makes it far more difficult for 

consumers to comparison shop between pay day loans and other 

short-term forms of credit. 

And the Commission has also, as you correctly mentioned, sent 

out warning letters to over 200 mortgage brokers and lenders and 

the media that carry their ads that their advertising claims may 

violate Federal law. As a follow up to the mortgage advertising 

sweep, the Commission is investigating a number of these mortgage advertisers and we will continue to monitor these claims and 

25 

if the Chairman desires, we can give you a private briefing at a 

later date. 

I thank you very much, and I look forward to your questions. 

Senator DORGAN. Commissioner Harbour, thank you very much. 

Commissioner Leibowitz? 

STATEMENT OF HON. JONATHAN D. LEIBOWITZ, 

COMMISSIONER, FEDERAL TRADE COMMISSION 

Mr. LEIBOWITZ. Thank you very much, Senator Dorgan, Senator 

Klobuchar. 

Let me begin by underscoring how much we appreciate your very 

ambitious legislation to reauthorize the Federal Trade Commission. 

My colleagues have asked me to focus on two provisions today: authority to bring civil enforcement actions against those who aid or 

abet illegal acts, and authority to seek civil penalties for violations 

of the FTC Act. Both provisions are designed to provide strong deterrence to would-be lawbreakers. 

First, aiding and abetting. The Commission unequivocally supports Section 7 of the bill to the extent it would prohibit aiding or 

abetting a violation of any consumer protection statute enforced by 

the Commission. 

For many years, our agency relied on Section 5 of the FTC Act 

to pursue not only direct violators but also those who assisted violations. The Supreme Court’s ruling in Central Bank of Denver in 

1994, however, compromised our ability to reach such aiders and 

abettors. 

Since then, we have developed alternative theories to prosecute 

secondary actors, but as both of you are aware, sometimes it can 

be very difficult to prove liability. Indeed, in some cases, we have 

been unable to bring actions against potential defendants who enabled illegal behavior. Clear enforcement authority would certainly 

help. 

In fact, we already have this authority for telemarketing fraud. 

Pursuant to a 1994 law, the FTC’s Telemarketing Sales Rule prohibits assisting and facilitating violations. It has enabled us to successfully prosecute, for example, brokers who knowingly provided 

lead lists to scammers so they could easily find victims, and payment processors who electronically debited consumers’ accounts on 

behalf of obviously fraudulent enterprises. But the rule is limited 

to telemarketing violations. 

Now, why give a pass to facilitators of unlawful schemes that use 

the Internet or the mail—but not to those that use the telephone? 

To ask the question is to answer it. Authority to prosecute aiders 

and abettors would be an effective law enforcement tool, as well as 

a strong deterrent for malefactors and their accomplices. 

Second, civil penalties. Section 5 of the FTC Act, which prohibits 

unfair or deceptive acts or practices, as well as unfair methods of 

competition, is the ‘‘bread and butter’’ of our law enforcement program. The FTC may seek equitable remedies for violations, including restitution for injured consumers and disgorgement of profits 

from violators. We use these remedial tools often and generally 

very successfully. But the Commission doesn’t have authority to obtain fines for Section 5 violations. 

26 

The FTC’s civil penalty authority is effectively restricted to three 

circumstances: violations of statutes that authorize civil penalties, 

like COPPA or CAN–SPAM; knowing violations of FTC rules; and 

violations of administrative cease and desist orders, that is, when 

we have you under order already. Thus, a wide range of deceptive 

or unfair conduct, including outright fraud, may not be subject to 

this sanction. 

Your bill, Senator Dorgan, would authorize the Commission to 

seek fines for knowing violations of Section 5 of the FTC Act. The 

Commissioners all agree that we need additional civil penalty authority in certain categories of cases where the usual FTC monetary remedies, restitution and disgorgement, are inadequate. In recent years, we’ve testified in support of authorizing fines for 

spyware, for data security breaches and for telephone record 

pretexting. These are all instances in which it can be difficult to 

quantify consumer harm or in which the defendant’s ill-gotten 

gains are often slim, non-existent or difficult to determine. 

Admittedly, there is some debate about how far our civil penalty 

authority should extend. Some believe that Congress should authorize civil penalties piecemeal, in discreet areas, as problems 

arise, or that the broad liability for unfair or deceptive practices 

under the FTC Act should only be coupled with narrow remedies. 

Others, however, support your bill’s approach of permitting civil 

fines for a wide range of deceptive and unfair acts, as well as for 

antitrust violations. The authority you would give us would be tempered by allowing only Federal judges to impose the penalties and 

only for knowing violations. 

In the early 1970s, the Commission, under former FTC Chairman Caspar Weinberger, recommended that Congress give the 

agency authority to assess civil penalties administratively for consumer protection violations. In testimony before this Committee, 

Chairman Weinberger called for, and I quote, ‘‘stronger and more 

comprehensive tools to make the threat of a Commission proceeding a real deterrent to a lawbreaker.’’ 

In response, this Committee and the Senate passed legislation 

authorizing the FTC to seek fines in Federal court, which is what 

your bill would do, but this provision was dropped in conference 

with the House. 

We are all pleased that you are revisiting this issue today and, 

speaking for myself, I strongly support the proposed reauthorization, including the additional civil penalty authority. Your bill, I believe, will help give us the critical tools we need to successfully confront the antitrust and consumer protection challenges of the 21st 

century. 

Thank you for letting me participate in this hearing, and I’d be 

happy to answer questions after my colleague speaks. 

Senator DORGAN. Mr. Leibowitz, thank you very much. 

Finally, we’ll hear from Commissioner Rosch. 

STATEMENT OF HON. J. THOMAS ROSCH, COMMISSIONER, 

FEDERAL TRADE COMMISSION 

Mr. ROSCH. Chairman Dorgan, Senator Klobuchar, thank you 

very much for the opportunity to be before you today and testify 

about the proposed bill that would reauthorize the FTC. 

27 

I’d like to focus on two aspects of the bill that are of special interest to me. The first is granting the Commission independent litigating authority for civil penalties in matters before the Supreme 

Court, and the second is the agency’s rulemaking procedures. 

Commissioner Leibowitz has just described the agency’s need for 

civil penalties. Speaking for myself, I favor the proposed legislation 

and along with my colleagues, I strongly favor granting the Commission’s civil penalty authority in specific areas we’ve identified 

today and in prior testimony, like data security and spyware and 

pretexting. 

But whatever the ultimate scope of civil penalty authority that 

Congress grants to the Commission, my fellow Commissioners and 

I believe that giving the agency the ability to independently litigate 

civil penalty actions is necessary for the agency to fully protect consumers. 

Now I don’t want to leave the impression that there’s been a conflict with DOJ in litigating these cases. In fact, we’ve collaborated 

successfully on many civil penalty cases over the years, but there 

are two primary reasons why the current process in our opinion 

doesn’t serve consumers well. 

First, the Commission invests significant resources investigating 

and sometimes settling civil penalty matters before filing an action, 

and even after referral to DOJ, Commission staff are assigned to 

the case to assist in litigating the matter. So the referral process 

doesn’t free up significant Commission resources, particularly in 

settlements, and in fact, sometimes leads to the duplication of efforts. 

Second, the Commission’s often faced with ongoing consumer 

harm in cases that violate both Section 5 of the FTC Act and one 

or more specific civil penalty statutes. 

When the Commission exercises its independent litigating authority under Section 13(b), we can file an action immediately and 

seek a temporary restraining order and other immediate remedies 

to stop the violative conduct. In these types of cases, though, we 

must forego civil penalties all together and file the case seeking 

only redress and injunctive relief under Section 13(b) in order to 

get to court quickly. 

I frankly have been appalled at the large sums of money that defendants take in from deceptive or unfair practices. So, I find it especially frustrating that at the end of a case, we may be unable to 

achieve the fullest possible measure of deterrence. 

A related provision in the reauthorization bill gives the Commission authority to independently litigate its actions before the Supreme Court. I fully support the proposed legislation in this regard. 

At the end of the day, I think the issue of litigation authority determines whether the Commission is truly an independent law enforcement agency. 

Both in my prior tenure at the Commission and in my current 

tenure, I’ve understood that is what you, the Congress, wanted us 

to be. Giving the Commission independent authority to litigate civil 

penalty actions and to pursue our own appeals before the Supreme 

Court would help solidify the Commission’s independent status. 

Finally, I turn to the proposal to give the Commission authority 

to conduct rulemaking on a notice and comment basis. I was at the 

28 

agency when Magnuson-Moss was passed. At that time, none of us 

fully appreciated what a burdensome process Mag-Moss rulemaking would turn out to be as compared to the rulemaking procedures under Section 553 of the Administrative Procedure Act which 

are applicable to a whole host of other agencies. 

We did understand that, given the breadth of Section 5 of the 

FTC Act, there may be a need to give some notice to industry of 

some of the practices that would trigger civil penalties, but we 

didn’t envisage that the process would in effect make it difficult or 

impossible to enact rules in a timely manner to respond to consumer protection challenges. 

I know there are differing opinions among the Commissioners on 

this point, but speaking for myself alone, I think that APA rulemaking authority for consumer protection matters would greatly 

increase the Commission’s effectiveness in dealing with certain 

types of practices. 

The subprime mortgage lending area, which is specifically mentioned in the reauthorization bill, is one prime example. Now to be 

clear, I’m not advocating wholesale and burdensome regulation of 

industries. I know the agency has learned from the past, particularly the Kid Vid controversy in the 1970s, but in this day and age, 

the ability to conduct streamlined APA rulemaking would be a valuable tool in our arsenal to respond more quickly to some difficult 

consumer protection problems. 

Thank you for all of your time and your support of this agency 

and its mission, and I’m happy to answer any questions you might 

have. 

Senator DORGAN. Commissioner Rosch, thank you very much. 

I don’t think we should worry too much about someone thinking 

we might want to impose some additional regulations. The fact is 

that we now see, as I said earlier, $30 billion of taxpayers’ money 

ponied up to bail out an investment bank that was unregulated because it was too big to fail. Well, if it’s too big to fail, it ought to 

be big enough to be regulated so that we could take a look at what 

they’re doing and try to bring some of their practices back into 

some sensibility. 

I want to ask a couple of questions about subprime and deceptive 

advertising especially. You have such a wide agenda, but I want to 

focus on this just for a moment. 

The three charts that I showed previously, let me show them 

again quickly, and I’m going to ask you a couple questions because 

I pulled this one off the Internet yesterday. This is advertising as 

of yesterday on the Internet. It’s April 7, 2008. You can get a 30- 

year fixed rate mortgage, two and three-quarters percent. 

Does anybody believe that you can get a 30-year fixed mortgage 

for two and three-quarters percent? That’s what was advertised on 

the Internet yesterday. It seems to me like that’s clearly deceptive 

advertising. 

Second one. Yes. Well, they also advertised that one of the wonderful things is you don’t have to document your income. No doc 

and low doc. This is 5-year fixed payments for one and a quarter 

percent interest rate. 

Now, why is this deceptive? Because anything you don’t pay in 

the front end is put on the back end of this mortgage and will inVerDate Nov 24 2008 07:49 Jul 24, 2012 Jkt 052754 PO 00000 Frm 00032 Fmt 6633 Sfmt 6601 S:\GPO\DOCS\75166.TXT SCOM1 PsN: JACKIE
29 

crease the cost of purchasing that home. But, that’s not there. That 

is nowhere in the advertisement. They say use these low rates to 

control up to two to three times as much real estate versus conventional fixed-rate mortgages. 

What they’re saying is come in and get a teaser rate and speculate. Deceptive advertising? Seems to me it probably is. Finally—— 

Mr. LEIBOWITZ. Well, let me just add, it may also be violative of 

the FTC Act because in fact they are telling you that you don’t 

need to provide financial documents, right? That’s also very troubling. 

Senator DORGAN. They’re not only telling you that, that’s the way 

many of these subprime mortgages were given. 

I mean, I was surprised to hear that—— 

Mr. LEIBOWITZ. That’s right. 

Senator DORGAN.—no doc and low doc means you can get a loan 

without having to document your income to the mortgage lender. 

I mean, obviously that sounds like a bunch of drunks out there 

playing a joke on somebody, but it’s the way this system was working. 

You pay a slightly higher interest rate for a no doc or a low doc, 

but let me just go with the last chart. This is one quarter of 1 percent interest only rate. That’s for 5 years. So, they’re saying a 

$200,000 loan for your house, you have a house payment of $41.66 

a month. Now that’s on the Internet today. 

Now, I’m asking the question because everybody talks about, 

well, who’s at fault here? These folks have got these mortgages. 

They’re not victims. They knew what they were doing. But in many 

cases, brokers were cold calling people that were already in a 

home, saying we’ll put you in a better mortgage. One-half of the 

new mortgages, subprime mortgages went to people who qualified 

for a prime mortgage, one-half went to people who qualified for a 

prime mortgage, and yet they were stuck in the subprime and 

stuck in a subprime in most cases with prepayment penalties and 

so on. 

The point is this. In my judgment, there was massive deception 

going on, massive deception with respect to this question of mortgage advertising and they’re all involved. I mean, I showed you 

Countrywide was the biggest. I showed you what they were advertising. They were saying to consumers, you have bad credit, you 

have credit problems, you’ve been bankrupt, come to us, let us loan 

you some money because this was very profitable and at the top, 

they were all grunting and shoving and, you know, like hogs in a 

trough and making lots and lots and lots of money. 

So, how did this happen that all of this occurs without the Federal Trade Commission being able to step in and write a rule that 

relates to what is required with respect to this advertising? Tell me 

what the deficiency is with respect to your ability to have stepped 

in several years ago and see what’s going on and say, wait a second, you’ve got to stop it or face substantial penalties if you don’t. 

Mr. Rosch? 

Mr. ROSCH. I guess I have rulemaking. I would say that I draw 

a distinction between deception on the one hand and unfairness on 

the other. Both are covered by the FTC Act. 

30 

When you’re talking about some of the ads that you’ve shown us 

today, you’re talking about outright deception. We don’t need a rule 

to go after that, and in fact we may be going after some of those 

companies already. 

Where we do need a rule is where we’re talking about unfairness. 

As you said before, some of these companies were actually delivering on what they said. They were loaning without any requirement whatever with respect to income, et. cetera. 

Now that is arguably unfair, but what a rule would do is to prohibit companies from making those kinds of promises and granting 

loans on those conditions. What that does is it puts them on notice 

that we will consider this to be an unfair practice. 

Now why is your bill so important? It’s important because our 

Mag-Moss authority right now, which is the only rulemaking authority we’ve got, takes us anywhere from three to 9 years to make 

a rule. It’s just impossible for us to be ahead of the curve on something like this. 

With APA rulemaking, we can get a rule in place very quickly. 

Senator DORGAN. I’m a little lost with respect to deceptive and 

unfair, and I suppose that those are terms of art, but it seems to 

me if you’re advertising in a deceptive way, it’s also unfair to the 

person that is receiving the message. 

But what you’re saying is as the subprime activity ramped up, 

and it happened in a big hurry over a period of three, five, six 

years, all of a sudden we saw this unbelievable mountain of 

subprime lending: no doc, low doc, interest only, partial interest 

only, defer some of the interest and the principal, all of these 

things. It seems to me almost all of the advertising I saw was deceptive. Nobody ever said and, oh, by the way, we’ll stick all of this 

extra cost on the end of your mortgage and your house is going to 

cost more. 

So, did you not have much authority? I know you’ve gone after 

some individually, but did you not have authority to write a rule 

in this process to say here’s the rule that you’ve got to follow, 

here’s the process you’ve got follow? 

Mr. ROSCH. We did, but here’s the beauty of your legislation, 

Senator. It is that the rulemaking authority that we had to make 

a rule required us to spend anywhere from three to 9 years making 

that rule. 

What your authority would do, by giving us the authority to proceed under APA rulemaking, like most other agencies, it would 

allow us to shorten that rulemaking time very substantially. 

Mr. LEIBOWITZ. So that we can help consumers and just following 

up on Commissioner Rosch’s point, we have had discussions internally about whether to do a rule and it always ended with us determining that Mag-Moss rulemaking procedures will take us so long, 

it won’t be worthwhile. For example, under Mag-Moss, which is an 

almost Medieval form of rulemaking—one that turns rulemaking 

on its head—opponents of the rule can ask for a referee. They have 

rights of cross examination. 

When you’re looking at a 9-year rule, an 11-year rule, with opposition from the entire industry, and you could be sure they’d be in 

opposition to what we wanted to accomplish. That’s why I like your 

general grant of APA rulemaking authority when we see a major 

31 

problem like this, and that’s why specifically with respect to the 

subprime mortgage crisis, that provision of your bill will be enormously helpful to us. 

Senator DORGAN. I should make the point that, you know, there 

are some mortgage lenders out there that are doing it the right 

way. They’ve got good brokers. They’re doing the right thing. Nobody can come up and say I’m going to buy a home and, by the 

way, here’s the cash. You need home loans. You need mortgages. 

It’s a very important industry to allow for homeownership. 

But it is the case that if you look very deep into this system, in 

the last few years, four or 5 years especially, this thing spun way 

out of control with deception, with unfairness, a whole series of 

things, and it seems to me that you all didn’t have the capability 

which is why we made a change in this law or proposed law. You 

didn’t have the capability to write a rule to prevent this. You can 

go after them after the fact perhaps, but it seems to me you’ve got 

to be ahead of this to prevent the activity. 

Ms. Harbour? 

Ms. HARBOUR. Chairman, yes, I agree with that, and just stepping back a bit and looking at this in the historical context, the 

housing sector at one point was booming. We used to call this sort 

of behavior predatory lending and then it was changed to subprime 

lending. 

Many consumers who were not able to buy homes were able to 

purchase them. However, because we didn’t have the rulemaking 

capability under the APA, we were bringing these cases under our 

traditional Section 5 authority—we brought 21 cases over the past 

10 years and returned $320 million to consumers. 

But this new rulemaking ability will give us enforcement tools 

which we will be able to use to be more vigilant in this area. 

Senator DORGAN. The 21 cases doesn’t sound like much to me 

when I see what was out there. 

Ms. HARBOUR. But you know what, Senator? These cases are 

very, very resource-intensive. So, in addition to the APA rulemaking authority that hopefully will be granted, also the funding 

and the monies to bring on extra attorneys to investigate and bring 

cases would be very helpful to the Commission. 

Mr. KOVACIC. Senator, could I add that as these phenomena developed, I suspect it’s largely recognized now that if the bubble had 

not burst and if the boom had continued, many of the problems 

would not have manifest themselves. 

As a number of the practices came to our attention, in addition 

to bringing the cases that my colleague has just mentioned, we 

started programs to learn about what was taking place as this 

wave unfolded. 

This was the purpose of the many workshops that we’ve spoken 

about in previous appearances. It’s the reason that our Bureau of 

Economics turned their attention as dramatically as they did to 

doing empirical work and studies about mortgage lending. It’s why 

for the agency, by my rough count of the 300 attorneys we now 

have working in the consumer protection part of our agency, roughly 50 of them now are spending their time on financial practices, 

financial services. 

32 

So, I would just add that, in addition to the litigation program, 

we’re trying to learn as fast as we can about what was transpiring 

and to reposition the agency to deal with this. 

Senator DORGAN. I understand. I’m just saying the lack of regulations, however, are costing this country hundreds of billions of 

dollars and if we can get this legislation passed, we’re going to give 

you a new authority. 

It’s very important that the Federal agency like yours not be a 

potted plant. Giving you the authority is one thing, using it is quite 

another, and it’s very important that it be used in the right way 

and used aggressively. 

Mr. KOVACIC. And Senator, could I suggest that there’s a model 

that you mentioned before that might be followed here? 

The Do Not Call rule in many ways evolved in roughly the same 

way. The life cycle of our work was extensive litigation under the 

Telemarketing Sales Act, reflection, workshops, data-gathering, 

and then the time came where the Congress said go to it, here’s 

a rule, proceed; I think a similar pattern could well unfold here 

with the authority you mentioned. 

Senator DORGAN. All right. Senator Klobuchar? 

Senator KLOBUCHAR. Thank you very much, Senator Dorgan. 

Hopefully there will be a second round here. I want to ask about 

the drug enforcement, but I first want to talk about one of the 

areas that this legislation would expand your authority in and you 

mentioned it, Commissioner Kovacic, and that would be in the area 

of the common carrier exemption. 

This is something we’ve been talking about on this Committee. 

We held a hearing on the cell phone industry, about the fact that 

it started in its infancy with, you know, like the movie Wall Street 

with the big phone in a briefcase and now 200 million people have 

them, yet essentially there are not many rules that the cell phone 

companies have to follow. The two main things that we’ve identified as issues are the prorating of the early termination fees and 

how that works and some of the advertisements that are done to 

entice people to buy and then they find they’re locked into a contract. 

Then, the second thing is the, as I mentioned, advertisements of 

cell phone service working, fewest dropped calls, all those kinds of 

things, without really any back-up. 

Could you first talk about how many complaints—do you get 

complaints on this, even though you don’t have authority? Is this 

an area that you’re interested in expanding into? 

Mr. KOVACIC. It is, Senator. We do receive some complaints. I 

don’t have a rough count in my mind, but we’ll certainly supply 

that to you. 

We also see in a variety of other forms of work we do the concern 

about advertising in the telecommunications sector. I would say 

one of the most important applications of the adjustment that is 

contemplated in the Reauthorization Act with respect to common 

carriers is that we could bring the large body of experience and enforcement capability that we have to bear on advertising issues in 

this area and it’s not to slight other public agencies that have had 

a hand in this area. It’s simply that we feel in the area of national 

advertising, and regional advertising, we handle these issues well. 

33 

I think it’s fair to say when we observe the possibilities that might 

come about from the application of our authority in this area, we 

think there would be large benefits to be had in establishing broader national principles that we have applied in other sectors to overseeing this sector, too. 

Senator KLOBUCHAR. Well, and I suppose one of the arguments 

that’s made is the FTC has jurisdiction over this. 

Could you just give me some examples of other areas where you 

have joint jurisdiction with other agencies where you focus on the 

advertising and they focus on the substance of the regulation? 

Mr. KOVACIC. We share responsibility with the FCC in the area 

of pretexting; that is, we have overlapping responsibility. We cooperate very intensively on the Do Not Call List. 

I realize, and you probably see them more than I do, there are 

inherent tensions that arise at any time that two Federal institutions have overlapping responsibility. At the same time, we’ve 

worked very hard with the FCC and with other institutions in 

which that circumstance exists to develop liaison arrangements to 

minimize tensions and to assure that we’re not tripping over each 

other when we’re operating in the same policy domain. 

So, I would have a great deal of confidence that those types of 

cooperative relationships would continue, they’d be intensified, and 

we’d still be able to do the kind of work that we think we do particularly well. 

Senator KLOBUCHAR. Commissioner Harbour, are you concerned 

about some of the advertising going on in this area and what 

you’ve heard? 

I mean, everyone I know in my state has a cell phone story. So, 

go ahead. 

Ms. HARBOUR. I’m glad you asked that, Senator, because the 

Federal Trade Commission will be hosting a town hall meeting on 

May 6 and 7 of this year called Beyond Voice: Mapping the Mobile 

Marketplace, where we will explore the evolving mobile commerce 

marketplace—it’s called mCommerce these days, and see how that 

impacts consumer policy. 

So, we’ll have parties from all sides discussing this issue and we 

will likely issue a report thereafter. 

Senator KLOBUCHAR. Very good. 

Mr. LEIBOWITZ. Let me just add that we have some overlapping 

jurisdiction with the bank regulators. We have overlapping jurisdiction with the Antitrust Division, and we sometimes allocate industry areas with them. 

But getting back to the common carrier issue, one area, and it’s 

one we’re going to be addressing at our workshop, that we’re becoming concerned about is cell phone spam and we believe we have 

jurisdiction either under the CAN–SPAM Act or under the FTC Act 

to go after any malefactors there. But you can be sure that if we 

bring a case, the first defense they’re going to raise is the common 

carrier defense. 

They’ll say, ‘‘we’re a common carrier,’’ and it will take us 6 

months to get through the litigation and it will consume a lot of 

resources for us to prove that they aren’t. 

Senator KLOBUCHAR. Right now, we have a big blown-up picture 

of an ad saying we can connect you to the world and the cell phone 

34 

service doesn’t work there or people are told, hey, on this map 

you’re going to be—don’t worry, you’re going to get cell phone service there and then they don’t and then they can’t even terminate 

their contract without having to pay 200 bucks and so their frustration is that there’s really no one minding the store when it 

comes to this right now. 

Is this something where, if Senator Dorgan’s exemption passed 

and the lifting of the exemption and we were able to get this done, 

that the FTC could look at? 

Mr. LEIBOWITZ. Yes. 

Senator KLOBUCHAR. Thank you. 

Senator DORGAN. Senator McCaskill? 

STATEMENT OF HON. CLAIRE MCCASKILL, 

U.S. SENATOR FROM MISSOURI 

Senator MCCASKILL. Thank you, Mr. Chairman. I’d like to talk 

a little bit about credit cards. 

I firmly believe that credit cards are the next frontier of disaster 

as it relates to America’s economy and some of the abuses going on 

and I understand Section 5 and the authority, and I know that you 

have done a lengthy study on consumer protections in the mortgage 

industry and have made recommendations to other financial services regulators and HUD about better consumer protections. 

We have had a number of hearings on credit cards. We’ve had 

in the Permanent Subcommittee on Investigations, which I serve 

on, and we’ve some incredible factual information that’s come to 

light about the credit card industry, and I think all of us have personal experiences that just make you want to wring someone’s neck 

in terms of some of the practices. 

I mean, one of my favorites is, Mr. Chairman, that some of these 

credit cards want you to get at your credit limit so they can raise 

your interest rate and that’s one of the rationales they use for raising your interest rate, is that you’re using credit at or near the 

limit they have set for you. 

So, someone in my office had a personal experience with this and 

the irony is, is that the credit card company sent him a check made 

out for the amount it would take to get him to his credit limit. All 

he had to do was sign the check, bingo, he’s there and they can 

raise the interest rate. 

I am curious if you have considered doing a similar study to the 

study you have done for the credit card industry because I think 

the abuses that are in the credit card industry and the practices 

that are being used. I just came back from China where my jaw 

dropped when I learned the savings rate in China was 50 percent 

and the savings rate in our country is now net negative and a large 

amount of that is debt load. As we look at this subprime crisis and 

we look what the reality is of consumers and what they’re doing 

out there, that the vast majority of this debt is being held in very 

expensive credit card debt and these are holes that the American 

consumers are not going to dig out of if they are doing what the 

credit card industry encourages them to do, which is minimum payment only. 

Could you all speak to whether or not you’ve considered doing a 

long-term study about the effects of the credit card industry on the 

35 

American consumer and what could be done within your aegis in 

terms of looking at those abuses? 

Uh-oh. I’m worried. Everybody’s looking at somebody else. 

Mr. KOVACIC. We had a rough division of labor by topic before, 

Senator. So, we wanted to make sure that, much like the infielders 

racing for the fly ball, that we didn’t run over each other. 

I would say we don’t have a specific plan in place to do this at 

the moment. We’re doing quite a bit of research on financial services and lending, but I would be happy to speak with your staff and 

I’d be happy to meet with you to talk about what a research agenda in this area might look like. 

A second observation is that this is an area and maybe a topic 

for a fuller discussion another day where we do bump into some 

substantial jurisdictional limits. 

The credit card issuers, we can examine, and those whom we 

prosecute are very much a function of the financial services statutory framework that we have. The basic distinction is whether the 

issuer is a bank or is not a bank, I know that the Congress is paying keen attention now to deciding how to retool and reconfigure 

the remarkable legacy-based financial services regulatory scheme 

that was put in place 50–60–90 years ago and in many ways hasn’t 

been revisited. 

So that’s a potential limitation on what we do here as well, but 

I’d be delighted to meet with you—— 

Senator MCCASKILL. That would be terrific. 

Mr. KOVACIC.—to discuss this. 

Senator MCCASKILL. I think it’s all hands-on deck time when it 

comes to the credit card industry and what’s going on. 

Mr. LEIBOWITZ. Yes, and let me just add to what the Chairman 

said, too. 

We do have a major investigation going on of a subprime credit 

card issuer, it’s a company called CompuCredit. I’m allowed to 

make that public because the company made it public in its SEC 

filings. If the Committee would like a briefing on that, we’re happy 

to provide it for you. 

Senator MCCASKILL. Mr. Chairman, if you would allow me one 

more question because I have to run back to the Armed Services 

hearing and I can’t stay for the second round. Do you mind? Do my 

colleagues mind? OK. Thank you very much. 

For a number of years, we have encountered problems in terms 

of marketing to seniors. I have sent you all a letter about the 

Craftmatic organization. I’ve not received a response from that yet, 

but there is incredible video footage of training going on in the area 

of marketing these beds to seniors, the adjustable beds. There is 

footage of the trainers teaching the salesmen, for gosh sakes, try 

to get them to cry and for God’s sakes, don’t let them talk to their 

loved ones, close the sale. It is incredibly—you know, it’s just sickening this footage, and I’m anxious to get a response from you 

about the investigation. This company has now changed names and 

problems. 

There’s three areas I want to address and then I’ll get to my 

question. Then there’s reverse mortgages which hopefully we’re 

going to get an amendment on the bill we’re considering right now 

on the Floor as it relates to the marketing of reverse mortgages to 

36 

seniors. These are complicated and expensive financial tools and we 

have many instances—we had a hearing on this in the Aging Committee. Many instances where these companies are marketing deferred annuities in tandem with reverse mortgage. Now that, you 

know, takes chutzpah. That takes a lot of nerve. 

Then we’ve got the New York Times article that was published 

in May 2007 where they documented the selling of lists to companies, saying these guys are suckers, these are old people that are 

lonely, you know, these are people who are buying lottery tickets 

and marketing these sales lists. In other words, you know, we’ve 

got a good hot list of elderly people you can prey upon. 

What this all brings to mind is that I think we need a senior protection/senior advocate within the FTC that will corral the many 

different examples of where the elderly are particularly being victimized by unfair and fraudulent trade practices and I would want 

to work closely with your agency in working on legislation that 

might create this position because I do think that there is a body 

of work that needs to be focused. 

If we going to prioritize our resources and prioritize what the 

FTC is doing, I could make a strong argument that that 

prioritization should begin with the bilking of the elderly and practices that are used against a vulnerable population where people 

are aware that these sometimes are people that don’t have a lot of 

family around and want someone to talk to and if you can gain 

their confidence on one front, then you can do some things that are 

pretty outrageous. 

I would appreciate your comments on your willingness to work 

with us in trying to create a senior protection/senior advocate within the FTC as part of this FTC reauthorization. 

Mr. LEIBOWITZ. Well, I think we need to take a look at your proposal, but we’re absolutely willing to work with you, Members of 

this Committee, Senator Kohl, Members of the Aging Committee. 

Absolutely. We’re aware of the legislation that’s pending on the 

Floor. 

Just going back to Craftmatic, which was the first topic you 

raised, we are well aware of Craftmatic. Craftmatic is very well 

aware of us because we fined them over a million dollars for Do 

Not Call violations last year; $4.5 million, actually. It was a substantial fine and so we’re aware of your letter. We will get back to 

you on that. 

Senator MCCASKILL. Yes. Because this goes way farther than a 

phone call. I mean, this man couldn’t read. I mean, he can’t see 

and he signed—she guided his hand on the paper and this is all 

documented. They sent in a hidden camera into this training session. I mean, it is—as a former prosecutor, it looks like to me it’s 

a slam dunk. 

Mr. KOVACIC. Well, Senator, could I offer one additional possibility that I think matches some of your own concerns here? One 

thing that we’ve spent a great deal of time doing in our Fraud Program is to identify specific patterns and this often involves working 

with criminal prosecutors and with our state counterparts to identify the specific patterns of behavior that you mentioned, especially 

the development among the serious, in many instances, serious 

37 

criminals who use these techniques to develop lists and sell lists 

of individuals who might be particularly vulnerable. 

One thing I would like to do in cooperation with my colleagues 

is to take a number of the things that we do that deal with the 

economically disadvantaged and deal with specific vulnerabilities 

that often are the consequence either of language asymmetries, 

poverty, other conditions, where we have programs now and to provide perhaps a more specific focus on them. I would like to take 

what we’ve learned in selected areas and apply them perhaps here 

as well. 

This is another topic I would be glad to speak with you and your 

staff about. 

Senator MCCASKILL. Thank you, Mr. Chairman, very much. 

Senator DORGAN. Thank you. Senator Cantwell. 

STATEMENT OF HON. MARIA CANTWELL, 

U.S. SENATOR FROM WASHINGTON 

Senator CANTWELL. Thank you, Mr. Chairman. It’s great to see 

the Commissioners here to talk about what I think is a very important issue impacting our economy today and that’s the high price 

of fuel. 

In my state, both gasoline and diesel are in some parts already over $4 per gallon and I know that you made mention in your testimony to the new authority that has been given to the FTC, but I 

kind of sense it was passing focus, and what I really want to get 

at today in my questions is the point to which work will move 

much—I mean that the FTC will move much more quickly on an 

expedited rulemaking. 

The reason I say this is because this is authority to help basically protect consumers from market manipulation and it is new 

authority, but we have been very successful with the SEC having 

this kind of authority to help on markets and in the 2005 Energy 

bill, we gave FERC similar authority to what we are giving to the 

FTC. 

It took them 6 months to get the rulemaking for that rule and 

to date, FERC has used that expanded authority for 64 investigations, 14 of which have resulted in settlements. This is basically 

just on their technical and existing authority, and they basically 

were settlements for over $48 million in various civil penalties. 

In addition, within 18 months of their rulemaking, FERC 

brought two major enforcement cases for market manipulation 

under their new authority which may total over $458 million in 

civil penalties. 

So, my question is, is the FTC going to act as expeditiously as 

FERC did in taking this new authority to protect consumers in the 

area of market manipulation of gas prices and come up with a new 

rule? 

In fact, what I’m really asking is whether you are going to be 

able to complete that rulemaking by the end of this year? 

Mr. KOVACIC. Could I take a try at the question, Senator, and 

lay out for you what we see to be a way ahead on this issue? 

The first thing we’re doing, we do have an internal working 

group that’s working on precisely this issue. Among the things 

we’re trying to do and have been working on is to make sure that 

38 

we learn from precisely the experiences of the other authorities 

whom you’ve mentioned, CFTC, FERC, all of the others who’ve 

been dealing with manipulation-like authority in the energy area. 

That’s going to inform our discussions. 

We’re also contemplating a process of public consultation because 

there are a number of thoughtful experts on the outside who have 

some very useful views, I think, about how this authority could be 

applied to help us make sure that in developing our authority that 

we don’t simply take an off-the-rack solution from FERC or the 

CFTC that might not fit our own needs well. We want to consider 

making what adaptations they think are appropriate. 

We have people who spend a lot of time looking on the outside 

at exactly the experience you’ve mentioned, so we think we can do 

a bit of learning about how that’s gone, and my prediction would 

be that there will be an advanced notice of a rulemaking this year. 

I don’t have a specific time table for you, but we are developing 

this and we’re working on this quite quickly. This is a high priority 

for us. This is something that I would be quite willing, in addition 

to this hearing, to discuss with you. 

Senator CANTWELL. I don’t understand what you mean by if it’s 

a high priority. Can you commit to having a rule done by the end 

of the year? If it’s a high priority and consumers are obviously anxious—we just had a hearing, Mr. Chairman, that you attended in 

another Committee on looking at the lack of transparency in investments, particularly from the various financial institutions in 

these markets, and we came to the conclusion that nobody could 

predict anything about prices because there wasn’t enough information that’s readily available. 

So, the authority given to FERC—to FTC, sorry, FERC already 

has this authority, but to FTC is critically important to be the regulator in the market, and if your analogy—I’m a big baseball fan. 

You know, your analogy about running into each other, I don’t 

think you’ve fielded a team. We need you to field a team of investigators that are going to go after this issue of market manipulation and we can’t wait until $4.50, at least in my area. 

Ms. HARBOUR. I guess the tension here, Senator, is that a poorly 

drafted rule could have adverse effects on gas prices and consumers. So, if it’s done, it has to be done correctly and so—— 

Senator CANTWELL. That’s why I’m giving you what FERC has 

done. FERC did it in 6 months and their authority so far has 

stopped basically settlement cases in the millions and in some 

cases civil penalties might be in the hundreds of millions. 

So, this is about saying that you will have a policeman on the 

beat, that somebody in the Federal Government is taking the oil 

markets and making sure that consumers are protected against 

market manipulation. 

We’ve already done that in the natural gas markets and electricity markets post-Enron and guess what? The new authority 

that FERC is using seems to be producing good results. So, I’d be 

more than thrilled if you’d beat FERC with coming up with a new 

rule within 6 months. 

Mr. KOVACIC. Senator, let me—— 

Senator CANTWELL. But I’ll give you 6 months as well. I agree, 

you need to do it right, but the urgency, I think, would be to say 

39 

that that’s your intention, to try to get it completed by the end of 

the year, given the extreme nature of what’s happening in the markets today. 

Mr. KOVACIC. Senator, I’d say we have a good team, a great 

team, none better. I’d add that, in addition to the new authority, 

they’re on the field every day with respect to the existing authority 

we have to identify misconduct that would violate the antitrust 

laws and they’re very busy on that front, too. 

Senator CANTWELL. These are not antitrust issues. That’s the 

whole problem. The new authority was given to you because it 

doesn’t have anything to do with antitrust. It is not people coming 

together colluding about prices. It is about transparency in the 

market and moving supply. 

I’m just again bringing it up, Mr. Chairman, because our state 

has asked the FTC for a longer investigation. Spokane, Washington, had the highest gas prices in the Nation and no one could 

say why. In fact, your initial investigation showed an anomaly in 

the marketplace but still couldn’t understand what the anomaly 

was about and that’s why you’re doing a larger investigation. 

Mr. KOVACIC. Yes. 

Senator CANTWELL. So, my point is that this is new authority to 

get around what has been years and years of saying that this issue 

is about antitrust. It is not. It is about whether someone is manipulating supply, not shortage of supply for natural reasons but manipulation of supply, and we had a 101 case in this as it related 

to electricity in the West Coast and we certainly don’t want to have 

another one of these cases as it relates to oil. 

Mr. LEIBOWITZ. Senator Cantwell, if I can just add, as someone 

who supported your provision, including the price gouging provision 

that I think was removed in conference, we start many of our 

rulemakings with an ANPR, advance notice of proposed rulemaking, so I actually think this is a pretty meaningful commitment 

to start the ball rolling here and to look at the manipulation provision and move it toward a rule. 

Senator CANTWELL. I thank you for that statement. I’m bringing 

this up because you didn’t ask for this authority. This Committee 

initiated the legislation and passed it as part of the Energy bill. 

So, we want to make sure you are going to implement the rule 

and that you’re going to do it aggressively. 

Mr. KOVACIC. Senator, I’m delighted, in addition to this hearing, 

to consult with you and all you need do is ask me—— 

Senator CANTWELL. Great. 

Mr. KOVACIC.—about what we’re doing. 

Senator CANTWELL. Well, I will be sending a letter along with my 

colleague, Senator Dorgan, today asking you to expedite the rule 

and have it completed by the end of the year. 

Thank you, Mr. Chairman. 

Senator DORGAN. Thank you. Senator Snowe. 

STATEMENT OF HON. OLYMPIA J. SNOWE, 

U.S. SENATOR FROM MAINE 

Senator SNOWE. Thank you, Mr. Chairman. Thank you for holding this timely hearing on an array of issues that certainly affect 

consumers, from subprime lending and the deceptive practices by 

40 

non-bank lenders, of course, to energy speculation as well as to 

identity theft, and so the FTC certainly is on the frontline in so 

many issues that are crucial and central to the consumers in America. 

Mr. Chairman, Chairman Kovacic, I want to follow up on some 

of the questions regarding energy speculation and futures speculation within the energy market because certainly that has been a 

fundamental underpinning of some of the reasons as to why increases in energy prices have skyrocketed. 

Why hasn’t the FTC issued regulations since you’ve had the requirement to do so since December when this legislation became 

law? Even in your FTC report of 2007, it doesn’t even acknowledge 

that futures speculation could be a contributing factor to the rising 

prices in energy, and frankly, you know, this is not just hearsay 

or hypothetical. 

There have been two different studies that have been issued by 

the Permanent Subcommittee on Investigations of the Homeland 

Security and Governmental Affairs Committee that underscored 

this last year, that it can add $20 to $25 per barrel of oil in terms 

of futures speculation. 

So, why hasn’t the FTC pursued an aggressive approach and 

strategy with respect to this issue that seemingly can have a profound impact? I mean, the prices have increased since December 

with respect to oil and gasoline more than 20 percent and as we 

know, trucking companies and independent truckers are at a 

standstill across America. I mean diesel has gone beyond $4 a gallon. 

In my State of Maine, $3.78 for a gallon of oil, I mean, is just 

absolutely prohibitive and so we’ve got to take every stance possible and pursue every measure possible as to what could be possibly contributing to these price increases and the fact is, many 

have indicated it’s just not supply and demand that’s been the instigator driving up these prices, but in fact it is futures speculation 

that has risen by more than 850 percent since 2001. 

So, can you tell me, you know, exactly what the FTC is doing because I’m not sure that I was clear in your response to Senator 

Cantwell’s question because you’re in a position to issue regulations on this question. You didn’t even acknowledge it in the 2007 

FTC report that it could be a responsible factor for driving up these 

energy prices. 

Mr. KOVACIC. The authority in question, of course, is relatively 

new and I think you might sense from my response and that of my 

colleagues that we’re going to work as actively as we can to undertake the process that could lead to a rule. 

I’d also say that in many instances, I don’t know of another institution within the Federal Government that has spent more time in 

the past 10 years looking at these types of questions. I would say 

that with respect to futures markets and with respect to the aspect 

of speculation, a consequence of the jurisdictional boundaries that 

we’ve had is that’s principally been an issue and a set of concerns 

devoted to other agencies. I think one thing that all of us are committed to do in this instance, in the process of developing perhaps 

a rule in this area is to make sure that the separate public institutions—I’m thinking about FERC: I’m thinking about the CFTC in 

41 

particular—that instead of having individual effort in these areas, 

have a deeper collaboration, so that as we undertake the process 

that’s now possible under the new authority, our focus will be more 

intensely directed at precisely this kind of behavior. 

Senator SNOWE. Well, to that point, Senator Feinstein and I have 

introduced legislation that passed the Senate unanimously as an 

amendment to the Farm bill that’s pending in conference to provide, you know, the CFTC with the appropriate oversight of futures 

speculation, I mean oil futures speculation. 

In fact, the CFTC reversed its position last Fall and unanimously 

requested that oversight authority because it is so crucial to this 

issue, but irrespective of that, and hopefully it will get done, I 

frankly would like to have it pulled out of the Farm bill and just, 

you know, advance on its own and go to the President for signature 

so we can address that question right now and the CFTC have the 

oversight for transparency and accountability where the various 

mechanisms now evade the oversight by the CFTC, whether it’s 

Internet transactions, over-the-counter transactions, or international transactions. 

But be that as it may, you have in the FTC within your purview 

to oversee both consumer prices and futures prices. So, while the 

CFTC does have responsibility, no question, in its oversight, you 

have the ability to look at the macro picture and the totality of the 

picture in terms of the impact on those prices and particularly on 

consumers. 

So, I would ask you to adopt a sense of urgency with regard to 

this issue because people are suffering mightily under the weight 

of these price increases and we need to know why. We need to 

know why, what is driving up these prices, if isn’t supply and demand. 

So, I would urge you to do so because I think it is extremely critical. 

Mr. KOVACIC. Yes, Senator, I understand that very clearly and 

I see part of our responsibility here. In addition to addressing specific issues that arise in this area, we need to draw attention and 

stimulate debate about all of the forces that affect the pricing and 

supply of energy as we see it today. I think that is an indispensable 

and critical ingredient of what we can do. As we identify the 

strengths and weaknesses of different policy tools at our disposal, 

we need to consider the effect of these price developments that 

you’ve mentioned. So, I see this as being a critical part of our responsibility. 

Senator SNOWE. I appreciate that. Thank you. 

Senator DORGAN. Senator Snowe, thank you very much. Mr. 

Chairman, let me ask you with respect to this issue of the futures 

market driving up the price of oil well beyond where supply and 

demand would have it, the top analysts from Oppenheimer & Company says this is like a 24/7 casino, open 24 hours a day. 

You know, we had testimony from a couple of experts in front of 

the Senate Energy Committee saying that what is happening is 

that the futures market has now included substantial speculation 

by hedge funds and investment banks. Investment banks for the 

first time are actually buying oil storage capacity in order to buy 

42 

oil, take it off the market and then sell it later when oil is more 

valuable. 

I mean, what kind of jurisdiction do you have, what kind of authority would the FTC have to be taking a look at that? 

Mr. KOVACIC. I would say up to this point, we do have a broad 

charter that Congress has given us to do economic studies and research, and energy is certainly an area in which we’ve exercised 

that. 

I would say as a matter of custom, questions related to commodities trading and the operation of the commodities market has received some attention from us, but because of, in effect, the rough 

distribution of authority that we have across the agencies that do 

this work, that is a responsibility that’s principally been in the 

portfolio of another institution, the CFTC, but I would certainly expect as a consequence of the authority that’s contained in the 

measure that Senator Cantwell was instrumental in having this 

body adopt, that that’s inevitably, immediately going to become a 

more intense area of concern for us. 

One of the things that the internal group we have, which has 

been working for some time on the measure in question in the 

roughly 3 months or so since the authority was given us, is to develop a much closer relationship with the other Federal regulators 

who do exactly this work. 

Part of what I would anticipate as part of that process is that 

we create a greater degree of what I suppose could be interoperability so that we have greater direct and continuing access to the 

research they’ve already done. 

Part of what we’re seeking to achieve here, that is, in learning 

more about this dimension of the issue, is that we take the fullest 

possible advantage of work that our counterpart agencies have 

done. 

So, I would say it has been a modest part of our responsibility 

to date but a major focus of the work we’re doing internally in the 

run-up to proceedings in this area is to make sure that we learn 

in a meaningful way what our counterpart agency has done in this 

area. 

Senator DORGAN. Yes, I would say, though, that your counterpart 

agency can’t see what doesn’t exist and what doesn’t exist is that 

which is unregulated, behind the curtain, on the intercontinental 

exchanges and so on. 

It’s why a 32-year-old was able to control, what was it, 70 percent of the—was it natural gas? So, my point is, I wouldn’t worry 

too much about your relationship with others and waiting for someone to do something. If somebody else is not doing it, not able to 

do it, I’d jump right in with both feet and start investigating and 

use all the authorities that you have. 

There’s something going on here that’s wrong. I started this 

morning by talking about the substantial bail-out to the tune of 

tens of billions of dollars of institutions that are now adjudged to 

be too big to fail. If they’re too big to fail, they are not too small 

to regulate, it seems to me, and whether it’s hedge funds, investment banks, or whoever is engaged in these markets in very substantial amounts of speculation, I hope you’ll use all the authority 

that you have and that this committee wants to give you in a way 

43 

that is not overly deferential to other agencies that may not be 

doing anything. 

Mr. KOVACIC. Senator, I don’t think you’ll find any hesitation on 

the part of myself and my colleagues to exert ourselves vigorously, 

in particular where we may share responsibility with another institution that is less vigorous in doing so. So, there’s no hesitation 

there. 

My observation, in exercising that responsibility, is that I would 

like to see us do two things. Where there has been good work done 

that can form our own proceedings, I’d like to have the benefit of 

that. In particular, to think of Senator Cantwell’s point again for 

a moment, where there has been experience, and we look forward 

to learning more about this experience, where there has been more 

experience with actual implementation, I expect that you would 

agree with me it would be foolish for us as we proceed again in a 

fast-paced way not to make sure that we have the benefit of that 

so that they can tell us—— 

Senator DORGAN. Mr. Chairman, I agree with that. 

Mr. KOVACIC. So, and the last piece of it is there are a number 

of very wise outsiders who have been following exactly these 

trends. Some of them have been witnesses before your Committees. 

We’d like to talk to them some more as well. 

Senator DORGAN. I don’t disagree with you. I would say, though, 

that I don’t know of a case where someone has effectively accused 

a Federal agency of speeding recently. Whether it’s the FTC or a 

dozen other regulatory agencies, our frustration is, I showed you 

what I put up on the chart, on the board today, that even today 

you can go to the Internet and see unbelievably deceptive advertising trying to reach out and victimize another homeowner. 

I just would say that we have written a piece of legislation that 

gives you in my judgment much needed new authority. Our purpose in doing that is to hope that you will be aggressive in using 

that authority at a time when we are surrounded by a whole series 

of practices that is now costing our country and our government a 

massive amount of dollars to try to clean up the mess. 

Mr. KOVACIC. I would say, all I could say is that I know of a few 

Federal judges who have given us tickets for speeding and have 

told us to turn over our license in specific cases, but I specifically 

and completely understand the urgency of the message you give us 

today. 

Senator DORGAN. Senator Klobuchar? 

Senator KLOBUCHAR. Thank you very much. I want to now explore this issue of regulation of some of the conduct of the pharmaceutical industry and part of me wants to know if the legislation 

that’s proposed will help at all in this area and then also just to 

explore, as someone who’s new to the Senate, what we can do to 

try to get at this problem because I just want to help some babies 

in my state and some doctors in my state that want to do their 

jobs. 

As I mentioned, there is a drug and I have it here called ‘‘intravenous indomethacin,’’ and it’s used to treat a disorder called Patent Ductus Arteriosus, which is known as PDA and it’s a rare disorder that prevents holes from healing in the hearts of premature 

infants and they used to use surgery to do this. Since the 1970s, 

44 

this drug has been proven as a commonly used method for treating 

this problem and it actually is cost effective and works. 

Well, Merck produced this drug and 2 years ago Ovation Pharmaceuticals acquired the rights. The company quickly increased 

the price more than 18 times. So, this used to sell for a $100 and 

then just in a matter of a few months it went up to $1,875 for three 

one milligram units of the drug. 

Now even though this is an American company, the price that 

this company charges in the United States is 44 times higher than 

what they sell it for in Canada. Nothing can justify this kind of 

price disparity as far as I’m concerned. 

I also want to point out that nothing was changed in this drug 

when they acquired it, yet they increased it 18 times. Now there’s 

no generic equivalent of this drug on the market and there’s only 

one other drug that’s approved by the FDA to treat this problem 

and as it happens, Ovation is also the source of that drug in the 

United States and not surprisingly, the price that it charges for 

this medicine is nearly identical to what it charges for this medicine. 

So you have a price that’s 44 times higher than Canada and that 

went up in just a few months 18 times what it was originally and 

is the price that they charge for the other drug, and to me this 

looks like price gouging and exploiting vulnerable babies and a 

healthcare system that’s already taxed to the maximum. 

So, what I want to know and we wrote a letter to this company 

May 7. We’ve been in some communication with them and we will 

continue to do that. My guess is that this will end up on your 

desks. What I want to know is has the FTC conducted investigations of problems that are similar to this? 

I know, Commissioner Harbour, you mentioned the current investigation that’s going on with payments made to keep generics off 

the market. This is obviously, as far as we know, a different situation, but are there investigations that are similar to these and 

what has the outcome been? 

Senator DORGAN. Senator Klobuchar, would you hold on that? I 

wanted to point out that I have to depart and Senator Cantwell 

will chair the remainder of this hearing. 

I want to thank the Commissioners. I’m sorry I interrupted your 

question, but—— 

Senator KLOBUCHAR. That’s all right. It was a dramatic moment. 

That’s fine. 

Senator DORGAN. I think perhaps the more dramatic moment 

will come in their answer. 

Senator KLOBUCHAR. Very good. 

Senator DORGAN. But I thank Senator Cantwell for being well to 

chair the meeting. 

Mr. KOVACIC. May I thank you, Chairman Dorgan, for the chance 

again to discuss your proposals today? Thank you. 

Senator DORGAN. Thank you. 

Ms. HARBOUR. Senator Klobuchar, we are very aware of your 

news release and your interest in this area and asking the FTC to 

investigate this price increase. 

In a public setting, we are not in a position to confirm, you know, 

or deny the existence of any such investigation—— 

45 

Senator KLOBUCHAR. I understand. 

Ms. HARBOUR.—but we do share the concerns of rapidly rising 

pharmaceutical prices and we will continue to be very, very vigilant 

in our enforcement. It is a common goal of ours to detect and stop 

these types of anticompetitive practices in this industry. 

My colleague, Commissioner Leibowitz, has been on the forefront 

of working with Congress on legislation and I’m going to let him 

talk about some of our current initiatives. 

Senator KLOBUCHAR. Excellent. If you could maybe, Commissioner Leibowitz, also if there’s examples of other cases from the 

past that you have. Being new at this, I’d just like to know the 

path that this could go. 

Mr. LEIBOWITZ. Well, we spend a lot of our time looking at pharmaceutical competition at our agency. We review many pharmaceutical mergers and one of our biggest initiatives on the ‘‘conduct 

side’’ is to try to stop these pay-for-delay settlements, where a 

brand pays the generic competitor to stay out of the market and 

consumers are left holding the bag or footing the bill, and there’s 

legislation introduced by Senators Kohl, Grassley, Leahy and Schumer on that. 

As for a legislative approach to this, why don’t we take a look 

at it in a little more detail and get back to you and see where we 

need to go and whether legislation is necessary? 

Senator KLOBUCHAR. Well, as far as legislation, I’m curious if— 

and we’re waiting to talk to the company about this, but I’m just 

wondering what you would do with this if this came your way. 

What’s the course? How long would it take? I’m trying to help these 

people in my state. 

Mr. LEIBOWITZ. So, look, obviously this is a real problem and it’s 

a drug that is only needed by a few people. They seem to have—— 

Senator KLOBUCHAR. Babies. 

Mr. LEIBOWITZ.—raised the price, some would say unconscionably, and the disparity between the United States and Canada is, 

it’s not a legal term but it seems appalling, and I understand why 

your constituents and probably people in other states are enormously concerned about this. 

When you’re dealing with unilateral conduct by a company, it’s 

more complicated than if they were to sit in a smoke-filled room 

and conspire to fix prices. Investigations are very labor intensive. 

There are many things that I happen to like about the reauthorization—but one of the areas where we are actually adding people 

is in our healthcare shop. We want to add more. The reauthorization would grow our agency considerably over a period of years. 

I know that doesn’t reach this particular circumstance, but it will 

help us when we have sufficient number of personnel and good attorneys—— 

Senator KLOBUCHAR. Just so—again—— 

Mr. LEIBOWITZ. It will help to stop these types of problems. 

Senator KLOBUCHAR. Right. I’m not on some crusade against you 

on this. 

Mr. LEIBOWITZ. I know, I know. 

Senator KLOBUCHAR. I’m on a crusade to fix this. 

Mr. LEIBOWITZ. You’ve always been very friendly. 

46 

Senator KLOBUCHAR. I want to know what would happen. We 

write a letter and we say this isn’t fair, it’s wrong, so then it goes 

into one of your rulemakings, and does the legislation change that? 

Is it going to take 9 years or, you know, what would happen? Not 

rulemaking. I apologize. But investigation. 

What would happen and how long could it take? 

Mr. LEIBOWITZ. Investigations could take, and usually do take a 

period of months. I think we would first—and we may be doing 

this—look at the issue generally and look specifically at this particular case, but again we can’t talk in much detail—— 

Senator KLOBUCHAR. I don’t want you to talk about this. I understand that as a lawyer. 

Mr. LEIBOWITZ. Sure. 

Senator KLOBUCHAR. I just need generally what’s happened. 

Mr. LEIBOWITZ. We’ll get back to you on this question. 

Senator KLOBUCHAR. So I can go tell the doctors back in Minnesota. 

Ms. HARBOUR. I’m not speaking about this particular case, but 

in general, if this type of drug was a biologic, one that’s made by 

a more natural process, perhaps a generic drug could emerge which 

would exert some sort of competitive pressure, but not specifically 

talking about this case, those are some of the things that we would 

look at as an agency. But this is an important issue and certainly 

this is something that is on our radar screen. 

Mr. ROSCH. Let me just say one thing about this, if I may, Senator, and that is, that this is very fact intensive. We have actually 

litigated in the 11th Circuit and lost a very important case where 

the 11th Circuit held that if and to the extent that a biologic or 

a medicine is covered by a patent, then the patentholder, by virtue 

of the patent laws, is able to do just about anything they want to 

do. 

So, frankly again, we’ve litigated this and we lost it. We tried to 

take it to the Supreme Court. We were unsuccessful in getting the 

Supreme Court to review it. So, the first issue that will arise in 

any of these cases is going to be whether or not it is patented and 

I don’t know at this point what the avenue is in the case you have 

mentioned, I have not a clue, but I don’t want to overpromise as 

to what we can do, consistent at least, with the 11th Circuit opinion. 

Now frankly, we don’t think they’re right, but at the present 

time, that’s the law. 

Senator KLOBUCHAR. All right. Well, that’s very helpful and we 

will continue. I’m sure you’ll hear from us on this case and it would 

be nice if there was a generic to have some competition going with 

this area, but what I’m most interested in is this action that happened where it went up 18 times and the fact that, you know, we 

can refer it, again I don’t want to get into the specifics of this. 

Usually you say OK, there’s a criminal violation, you refer it. It 

gets charged this way, it takes this long to go through the process, 

and these are the potential outcomes. So that’s what I’m trying to 

figure out with something that to me seems outrageous. 

What do I do with it, and how do I get some action, and if it’s 

not the FTC, then maybe we need legislation. 

OK. Thank you. 

47 

Senator CANTWELL. Thank you, Senator Klobuchar. Mr. Chairman Kovacic, I’m sorry, Kovacic, not to continue to talk about this 

issue, but I just want to explain one thing to make sure that we’re 

clear and then ask you all another question about DTV. 

On the market manipulation question, we’re not—it’s not confusing authority that we’re giving to the FTC that is as it relates 

to other agencies. The CFTC authority is very clear. It’s in the futures market. So, they look at futures commodities and—— 

Mr. KOVACIC. Yes. 

Senator CANTWELL.—and that’s why Senator Snowe’s good work 

with Senator Feinstein is trying to close a loophole in the futures 

market as it relates to online trading and particularly ICE which 

is—— 

Mr. KOVACIC. Yes. 

Senator CANTWELL.—a very big part of the trading futures market for oil that’s basically not regulated in the United States, you 

might have some insight into it, but it’s not an enforceable market 

mechanism by the CFTC. So that’s a good idea to close a loophole 

in the futures market. 

The FERC, the Federal Energy Regulatory Commission, has the 

ability in physical markets to investigate market manipulation of 

wholesale electricity and natural gas and as I said, that authority 

was given to them in 2005 and has worked very well in stopping 

the market from activities that they might have thought were OK 

to pursue. 

In the grand scheme of Enron, we saw where somebody got very 

elaborate about what they thought they could do in the physical 

market and certainly if you listen to the testimony of many of those 

individuals in court cases, they thought they had the authority to 

do so. They literally thought that their perpetration of schemes, of 

taking supply down or moving it out from one state to another 

state or moving it around, was legal to do and that’s why a very 

strong law on the books that says no, the physical manipulation for 

those purposes is wrong and so we are now giving and have given 

and passed, as I said, out of this committee to the FTC that new 

authority on the physical market for oil and distillates which 

doesn’t exist. 

It doesn’t exist with the CFTC. That doesn’t exist with FERC. It 

now exists with the CFTC and the exact language is, it is unlawful 

for any person to directly or indirectly, to use or employ in connection with the purchase or sale of crude oil or gasoline or petroleum 

distillates at wholesale any manipulative devices or contrivances. 

So, the point is that we are looking to you to look at what could 

be manipulative devices or contrivances, that’s language based on 

the SEC’s rule and court language that has been upheld, to focus 

on the notion, as my colleague Senator Dorgan was saying, somebody might move supply around. A hedge fund might hold supply 

off the coast of the United States for several days waiting for the 

price to go up even more and then put the product into the marketplace, thereby shorting the domestic U.S. supply, having the price 

rise and then benefiting from the sale of a higher price. That’s 

what we want you to do. 

We want you to do a rule and investigate that. It’s not an authority that any other agency has. It’s unique to the FTC. 

48 

Mr. KOVACIC. Thank you, Senator, and I would again like to invite you and your colleagues, where there are other scenarios of 

that type in mind to let us know. We would be happy to continue 

to discuss those with you so that we keep them clearly in mind for 

ourselves as we proceed. 

Senator CANTWELL. Well, I’ll look forward to that, and I hope 

that you are very aggressive about the physical market and making 

sure that there is someone looking at the physical market. 

I do have a question about—the Committee is also having a hearing this afternoon on DTV transition and I’m curious as to what 

role the FTC thinks that they have in respect to the digital television transition. 

I mean obviously the FCC and how they’re pursuing this, there’s 

a lot of consumer questions. For example, I recently met with the 

AARP representatives who told me that there is a 1–800 number, 

1–800–DTV–2009, that consumers may think that they are actually 

calling to get help or assistance or an information hotline, but it 

is really a sales pitch for satellite television services and so what 

kinds of issues will the FTC be taking a lead on as it relates to 

the DTV transition? 

Ms. HARBOUR. Senator Cantwell, staff has been in contact with 

the FCC, the agency overseeing this transition. The NITA, as you 

probably know, is implementing the program that is providing coupons to be used toward the purchase of these set-top converter 

boxes. 

But in mandating the DTV transition, Congress didn’t give a specific role to the FTC; but nevertheless, we are going to be working 

with these agencies to make sure that there is no unfair or deceptive conduct leading up to this transition. 

Senator CANTWELL. So, what do you think about a 1–800 number 

that lures consumers into calling only to find out it’s about a sales 

pitch for satellite purchase? 

Ms. HARBOUR. A 1–800 number based at the Commission? Is 

that what you’re asking? I didn’t quite—— 

Senator CANTWELL. No, I’m not saying it’s based at the Commission, but obviously there are a lot of people that are—we’re going 

to have a gap this afternoon, I am sure, in what many of us think 

needs to be aggressively done to make sure that the transition goes 

as smoothly as possible, but without a vacuum of—I mean with a 

vacuum of that happening. 

People are jumping in and filling this role and there are many 

seniors that are out there wondering exactly how they’re supposed 

to proceed here and when they see this 1–800 number DTV, obviously I think that they think that they’re really calling a 1–800 

number for information but I’m happy to have you look into it. 

But what I was asking generally was what do you think the role 

is of the FTC in protecting consumers, even to the extent of getting 

more directly involved, because of deceptive practices that may be 

occurring in this transition period or maybe even helping to outline 

what are the best practices to some of the major players that are 

going to be involved? 

Ms. HARBOUR. I believe the Commission always has a role in 

looking out for the interests of consumers and if there’s any deception or unfairness going on leading up to the transition, that is 

49 

something that we would be very interested in and would certainly 

like to be taking a look at. 

Mr. LEIBOWITZ. We do have 800 numbers for consumer complaints and for identity theft victims, but I think it’s sort of as you 

envision it, Senator Cantwell. 

There are two agencies that are designated to be the lead agencies: the FCC and the NTIA. We stand ready to help and we will 

fill in any gaps as appropriate and we do consumer protection. 

That’s what we’re good at. 

I also would add that on the antitrust side, we just received a 

petition and we take our petitions very seriously about an allegation that the company that holds the licensing rights to some of the 

technology needed for digital television has raised royalty rates beyond its commitment. That might be in violation of the antitrust 

laws. It’s a petition we’re taking a look at. 

Mr. KOVACIC. And I would say, Senator, I think you’re absolutely 

right with your colleagues to focus on industries in a transition of 

this type. To add to my colleagues’ comments, I think there’s also 

a role here for us to play with consumer education; that is, we’ve 

done quite a bit of work, in addition to the measures my colleagues 

have mentioned in posting alerts, doing publicity, working with our 

colleagues at the state level, too, to make sure that consumers have 

rough simple guidelines to keep in mind as this unfolds. 

Senator CANTWELL. Thank you very much, Senator Snowe. 

Senator SNOWE. Thank you, Madam Chairwoman. I wanted to 

ask questions related to identity theft and I know you probably addressed it earlier in your testimony, but I’m certainly concerned. 

I mean, it’s the Number 1 consumer complaint in America. 

Mr. KOVACIC. Yes, Senator. 

Senator SNOWE. We’ve seen a major transition from the traditional sources of fraudulent practices to online practices, deceptive 

practices, and I just would like to know exactly what the FTC is 

doing and being in the forefront with effective methods of beginning to challenge this significant issue, even to the point that the 

IRS advocate, national taxpayer advocate in testifying before the 

Senate Finance Committee recently indicating it’s the most serious 

threat to the IRS and to taxpayers and is becoming more pronounced and that’s why I’ve introduced antiphishing legislation 

with my colleagues, Senator Stevens and Senator Nelson, on this 

question because that’s another dimension of identity theft that 

has escalated over this last year 57 percent from the previous year. 

So, it continues to go on and in Maine and throughout the Northeast and in Florida, we had a major security breach with Hannaford Brothers Company, a supermarket food chain where more 

than four million consumers’ debit and credit cards were breached 

recently from a period from December through early March. I 

mean, you know, it’s significant major breach. I mean, it represented 165 stores in the Northeast and another 106 stores in 

Florida and 51 of those stores were in the State of Maine alone. 

So, we need to have the FTC again on the forefront of this major 

question that is only going to increase in terms of practices, deceptive practices that, you know, we’re finding the perpetrators engaged in. 

Mr. KOVACIC. May I respond, Senator? 

50 

Senator SNOWE. Yes, you may. 

Mr. KOVACIC. And I invite my colleagues as always, not that I 

could hold them back from adding their own thoughts as well. 

I think several considerations come to mind. One strategy we’ve 

had has been an active litigation program which the Committee is 

aware of. Second, we have an intensive program of education for 

consumers so that they take basic precautions that, if taken, would 

serve to insulate them from some of the behavior. I think two other 

frontiers are worth mentioning as well. 

My colleague, Commissioner Harbour, mentioned that to an increasing degree, we’re working with our international counterparts 

to deal with this issue. As you know and in the work you’ve done 

on your legislative proposal, this is increasingly an international 

problem and the wrongdoers are technologically sophisticated. 

They’re geographically adroit, and they appreciate the gaps in individual national systems of enforcement. 

We have two countermeasures in mind there. One is to work 

with the authority that this body has given us, U.S. SAFE WEB, 

to work much more closely with our foreign counterparts and we’re 

applying that vigorously. The second frontier is that ultimately, I 

think, civil sanctions for the wrongdoers are not enough and while 

we would welcome additional capacity to impose civil penalties on 

the wrongdoers, my impression is, and you may well have a different view of this, but my impression is, Senator, that most of the 

wrongdoers in fact are engaged in criminal behavior. They are 

criminals, and the only way to deal with the serious wrongdoers is 

to take their freedom away. 

Our contribution to that as a body with civil enforcement authority has been to work much more closely with those with criminal 

prosecution power to exercise it. We prepare cases through our 

Criminal Liaison Unit which was created less than 5 years ago. We 

provide them to the Department of Justice and to state authorities. 

I see this as the only way for the most serious cases, such as 

phishing, where we’re going to get adequate deterrence with that 

is to engage the criminal enforcement powers of their jurisdiction 

and our foreign counterparts in taking away the freedom of the 

wrongdoers. 

Senator SNOWE. Does anybody else have a comment? 

Mr. ROSCH. Well, the only other comment I would make, Senator, 

is that, I’m sure you are aware of the fact that we’ve been very active in this area. We’ve brought more than 20 cases against—data 

security cases in the last 2 years since I’ve been at the Commission 

and we’ll continue to do so. 

However, one of the great things about the proposed legislation 

is that it gives us civil penalty authority. I quite agree with the 

Chairman that this is criminal conduct and it ought, for the most 

part, to be referred to criminal authorities, but we’d be greatly 

strengthened in our own battle against data security breaches if we 

had civil penalty authority and right now, the only time we can 

seek civil penalties for data security breaches is if it violates a specific statute that gives us civil penalty authority and in only one 

of those 20 cases, the ChoicePoint case, was there a specific statute 

that gave us that authority. That’s one of the great things about 

this statute. 

51 

Mr. LEIBOWITZ. The reauthorization would give us civil penalty 

authority for violations of Section 5. That would help us with getting a strong deterrent here and they need a strong deterrent for 

the data security breach cases. 

There’s also legislation out of your Committee, I think, or that’s 

been percolating in your Committee, that would give us specific 

data security civil penalty authority and that would be helpful, too. 

And as for phishing, I agree with my colleagues that it’s criminal. 

We refer those cases to Justice. We looked at your bill. I know it 

also has a very interesting domain name registration provision. 

That’s another issue. 

Ms. HARBOUR. I completely agree with the civil penalty authority 

that we really could use in this area. 

Just to back up for a moment and tell you some more about what 

we do in the area of identity theft, we train law enforcement authorities about how to handle ID theft. We have a victim assistance 

program. Ex-Chairman Majoras was a Co-Chair on the President’s 

National Task Force on Identity Theft, which came out with 31 recommendations this year. We have new videos on YouTube educating consumers about phishing. We have numerous education 

programs to help consumers deter, detect and defend and so we’ve 

been very vigilant in this area. 

Senator SNOWE. Well, I appreciate your comments, and I think 

it is important to know which tools are very effective and what we 

need to do in order to accomplish that and to move expeditiously 

and that’s why I’ve introduced my legislation and it does impose 

civil, you know, penalty authority because it is important. The 

United States hosts 32 percent of these phishing sites and so clearly we’re the top country in the world. 

So, I just think that we have to do everything that we can and 

I appreciate your comments and that will be helpful to us as we 

move forward. 

Thank you. 

Senator CANTWELL. Thank you, Senator Snowe. Senator Klobuchar. We promise we are not keeping the FTC here all afternoon, 

but we are going to have another round of questions, if anybody 

has them, and then we’ll conclude the hearing. 

Senator Klobuchar. 

Senator KLOBUCHAR. OK. Thank you. I have follow-up questions 

with some of the things that have already been raised. 

The first was the area that Senator Dorgan explored with you 

about the subprime mortgages and we all remember the pictures 

he had blown up of what was going on there. 

The proposed FTC Reauthorization bill would provide the authority to the state Attorneys General to in certain circumstances bring 

a suit for a violation of the subprime mortgage loan rules promulgated by the Commission or a violation of the Truth-in-Responsible 

Lending Act or the Homeownership-and-Equity Protection Act. 

Yesterday, I received a letter from the Attorney General for the 

State of Minnesota expressing concerns that the states might not 

have the funding and personnel necessary to prosecute. It’s not 

that they don’t want to prosecute and I also heard this yesterday 

in Minnesota, I did a forum on the mortgage crisis in a suburban 

area with a number of experts in this area, and one of the county 

52 

commissioners came up and said that the prosecutor for the area 

that had been prosecuting the cases and doing a very good job also 

was concerned about resources and as you know, local and state investigative agencies are facing tremendous resource issues and 

given the scope of the problem that we’re facing. Do you believe 

that state Attorneys General have the resources necessary to bring 

these suits against all violating parties and what role do you think 

the Commission could play in working with states to ensure that 

the appropriate legal actions are taken? 

Ms. HARBOUR. I think the Commission would be very happy to 

work with the state agencies. It’s always good for the American 

consumer to have another cop on the beat and if the states can 

work parallel investigations with the Federal Trade Commission, I 

think that benefits consumers. 

In the past, we have had very cordial working relationships with 

the state Attorneys General in some of our competition cases and 

some of our consumer protection cases, and I see no reason why the 

agencies could not work together in this area as well. 

Mr. KOVACIC. Senator, I don’t know that any of us have had the 

chance, given the continuing evolution of the reauthorization draft, 

to consult with our colleagues in the states and talk about their resource capacity at the moment. 

So, I don’t know that I have a view, maybe my colleagues do, 

about where they are. I suspect your colleague from Minnesota has 

given you a good glimpse of that, but as Commissioner Harbour 

said, whatever the resource capacity, I think our modern history 

has been to work as closely as possible to make the best possible 

use of the resources they would have. 

Mr. ROSCH. The only thing I would add, Senator, is that there 

is one aspect of that provision that I think is terrific and that is, 

that even if the states do bring actions, based upon this legislation, 

the Federal Trade Commission is supposed to be notified by the 

state that that action is pending and we have the right of intervention. 

I think that’s critical in terms of nationwide coordination of these 

actions. The worst thing that can happen is that we have a patchwork quilt. 

Mr. KOVACIC. Could I add, Senator, that as part of an initiative 

that we’ve undertaken in the past 2 years, we’ve been having an 

event every Fall now on a specific topic with our state counterparts 

that do competition and consumer protection. 

Our first year was gasoline. Last year it was pharmaceuticals 

and I would like to see us expand that framework so that again, 

as in the case of other matters we discussed before, we move away 

from a fragmentation of effort and responsibility to see that the individual public institutions that have shared interests work in a 

more collaborative way to make sure that we get the best possible 

results from the resources that all of us have. 

This would be another area where I would expect that frontier 

of cooperation could continue. 

Mr. LEIBOWITZ. Particularly because so much of this fraud, it’s 

Internet-based, it transcends state borders. So, we need to work 

with them, they want to work with us, and this bill gives us the 

ability to do that. 

53 

Senator KLOBUCHAR. Do you think that a Federal licensing 

standard would impact the ability to avoid our housing crisis? This 

is an amendment by Senator Feinstein that I’m also cosponsor of. 

It’s not yet been debated or voted on in the Senate. 

But just based on what you’ve seen as people who protect the 

consumers’ rights, do you think that would be helpful to have some 

kind of Federal licensing standard for mortgage brokers? 

Mr. KOVACIC. I don’t have an immediate reaction, Senator, but 

it’s something that, if you would permit us, I’m sure we would be 

glad to address specific questions and give you a fuller reply. I 

don’t have an immediate reaction, Senator. 

Senator KLOBUCHAR. OK. Thank you. Then last, I just was asking before about the past price gouging cases, not trying to get into 

this situation, as we may be bringing it to your attention, but if 

you could just in writing afterwards look and see what past price 

gouging investigations have gone on that have been made public 

and what were the results of those investigations. 

I know about in 1998, the 33-state Attorneys General. This was 

a generic drug investigation regarding Mylon and I think there was 

some kind of a $100 million settlement. I think the facts were different than the case I just talked about here, and I know that you 

mentioned another case, but if I could see the price gouging cases, 

the anticompetitive cases in the drug area just to gauge our 

chances, if we go this way or if we need to follow another route. 

Mr. KOVACIC. Yes, Senator. 

Senator KLOBUCHAR. Thank you. Appreciate it. 

Senator CANTWELL. Thank you, Senator Klobuchar, and thanks 

to the FTC Commissioners for being with us here today. We appreciate your attention to the issues and the issues that we have 

brought up. We do look forward to working with you not just on 

the FTC reauthorization legislation but on the various topics that 

were brought up by my colleagues today. 

So, thank you very much. 

Mr. KOVACIC. Thank you, indeed, Senator. Thank you. 

Senator CANTWELL. The hearing is adjourned. 

[Whereupon, at 12:03 p.m., the hearing was adjourned.] 

(55) 

1The FTC is not part of the joint task force you describe. 

A P P E N D I X 

RESPONSE TO WRITTEN QUESTIONS SUBMITTED BY HON. JOHN D. ROCKEFELLER IV 

TO THE FEDERAL TRADE COMMISSION

Question 1. We know that junk food advertisements have a negative effect on children’s health and are one of the reasons we are seeing such a huge rise in the incidence of childhood obesity in our country. Over the past year and a half, the Senate 

and FCC Joint Task Force on Media and Childhood Obesity has been working to 

find voluntary industry solutions to the overexposure of children to junk food advertisements on television. One objective of the health and advocacy groups participating on the Task Force was to reach a compromise whereby television stations 

and cable channels would agree to a balance of healthy and non-healthy food advertisements during their children’s programming. Rather than asking for a complete 

ban on junk food advertisements, the children’s health and media advocates were 

willing to allow a full half of food advertisements to be for unhealthy foods. Yet after 

a year and a half of negotiations, the media and advertising companies were unwilling to make this compromise. Since voluntary industry action seems unlikely, what 

is the FTC willing to do to ensure that our children’s health is not being compromised because they are being bombarded with advertisements for junk food? 

Answer. We share your concern about the rise in childhood obesity in our country. 

The FTC has undertaken a study, at the direction of Congress, to learn about companies’ expenditures and activities in marketing food and beverage products to children and adolescents. 

Recognizing the First Amendment issues raised by regulation of truthful and nonmisleading commercial speech, the Commission continues to be a strong advocate 

of addressing the issues of advertising and childhood obesity through industry self 

regulation. The FTC has undertaken its own significant efforts to encourage self 

regulation in this area.1 In 2005, the Commission and the Department of Health 

and Human Services convened a workshop on Marketing, Self-Regulation, and 

Childhood Obesity. That workshop—which brought together food manufacturers, entertainment companies, academic experts, consumer advocates, and government officials—produced a series of recommendations, including self-regulation to change the 

nutritional profile of products marketed to children. 

In July 2007, the FTC and HHS convened a follow-up forum to review progress 

in the intervening 2 years. We learned that our 2005 workshop had provided a stimulus for various industry initiatives, in particular the Children’s Food and Beverage 

Advertising Initiative announced in 2006 by the Council of Better Business Bureaus 

(CBBB). To date, 13 major food and beverage companies have joined the CBBB program with concrete pledges that when fully implemented—generally by the end of 

this year—will significantly alter the landscape of food marketing to kids. Most of 

these companies have committed either to not advertise directly to children under 

12 or to limit such advertising—including TV, radio, print, and Internet—to foods 

that qualify as ‘‘better for you’’ by meeting specified nutritional standards. In addition, the companies have pledged to limit use of licensed characters in advertising 

to promote healthier products and lifestyles, not to seek product placements in 

child-directed media, not to advertise food or beverages in elementary schools, and 

to use their ‘‘better-for-you’’ products in interactive games (‘‘advergames’’) directed 

to kids. 

At the same time, some media and entertainment companies, including Disney, 

Nickelodeon, and Cartoon Network, have adopted policies to limit the licensing of 

their characters to foods meeting nutritional guidelines. Moreover, Ion Media Networks, a producer of children’s weekend television shows, has committed not to air 

advertising for less healthy foods and beverages on children’s programs and to create story lines that encourage good eating habits and physical activity. The CommisVerDate Nov 24 2008 07:49 Jul 24, 2012 Jkt 052754 PO 00000 Frm 00059 Fmt 6601 Sfmt 6621 S:\GPO\DOCS\75166.TXT SCOM1 PsN: JACKIE
56 

2 16 C.F.R. § 312.2. 

sion expects that the CBBB Initiative, as well as the media and entertainment company efforts, will grow and expand coverage in the future. 

Question 2. A recent New York Times article examined how food marketers use 

‘‘casual games’’ or advergames on their websites to promote junk foods, and notes 

that all of the voluntary limits that food companies have placed on their food marketing to kids on television do not apply on the web. So it appears that while the 

industry is publicly showing restraint in their advertising of unhealthy food to kids 

on television, they are also working harder to push such advertising to kids online, 

where they spend an average of twenty minutes with such advertising instead of 

30 seconds. Therefore, if it is found that the industry’s voluntary solutions are not 

enough to protect children from being inundated by advertisements for unhealthy 

foods on the Internet, what are the FTC’s plans to hold the media and advertising 

industries accountable? 

Answer. As noted above, recognizing the First Amendment issues raised by regulation of truthful and non-misleading commercial speech, the Commission continues 

to be a strong advocate of addressing the issues of advertising and childhood obesity 

through industry self regulation. The Children’s Food and Beverage Advertising Initiative discussed above covers the Internet and online games. As the member company pledges become fully implemented, we expect to see changes in websites directed to children. If a company publicly states that it will change its advertising 

to children, and then does not do so, that failure to match its promise with actions 

could constitute a deceptive practice, which is prohibited under Section 5 of the FTC 

Act. 

Question 3. Back in the spring of 2006, the FTC, under the direction of Congress, 

initiated a comprehensive study of food marketing activities and expenditures directed at children and adolescents. Could you please state when the FTC is going 

to be prepared to release the food marketing study? 

Answer. On July 31, 2007, after obtaining the necessary approval from OMB, the 

Commission issued compulsory orders to 44 food and beverage companies, seeking 

information on the companies’ expenditures and activities in marketing food and 

beverage products to children and adolescents. The Commission’s orders sought data 

not only for traditional, measured advertising media—television, radio, and print— 

but also for newer and/or unmeasured forms of marketing, including the Internet 

and other new electronic media, packaging and in-store displays, event or athletic 

sponsorship, premiums, product placement, character licensing, and in-school marketing. FTC staff received responses at the end of 2007, and is now analyzing the 

data and preparing the report. The Commission expects to issue its report this summer. 

Question 4. Does the FTC consider an IP address to be personally identifiable information under COPPA? If not, does the FTC need greater authority to protect children from companies collecting information about children’s interests and preferences and using that information to target ads to children even if they don’t actually know the specific name of the child? What does the FTC think about the European Union’s move toward considering IP addresses as personally-identifiable information? 

Answer. Under the COPPA Rule, an IP address, by itself, is not personally identifiable information. The Rule defines ‘‘Personal Information,’’ as individually identifiable information about an individual collected online, including such information as 

first and last name, street address, e-mail address or other online contact information, telephone number, and Social Security Number, or ‘‘a persistent identifier, 

such as a customer number held in a cookie or a processor serial number, where 

such identifier is associated with individually identifiable information . . .’’ 2 In the 

Rule’s Statement of Basis and Purpose, the Commission specifically noted that: ‘‘The 

Commission believes that unless such identifiers [static IP addresses or process serial numbers] are associated with other individually identifiable personal information, they would not fall within the Rule’s definition of ‘personal information.’ ’’ 

The Commission has authority beyond COPPA, pursuant to Section 5 of the FTC 

Act, to protect children from unfair or deceptive practices, both online and offline. 

The Commission staff is actively examining the legal and policy issues raised by online behavioral advertising—the practice of tracking consumers’ activities online to 

target advertising to them. In November 2007, the Commission hosted a Town Hall, 

entitled ‘‘Ehavioral Advertising: Tracking, Targeting, and Technology,’’ which 

brought together a diverse group of interested parties to examine key issues raised 

by the practice. Following the event and review of the public comments received, 

the Commission staff issued for comment proposed principles to guide the developVerDate Nov 24 2008 07:49 Jul 24, 2012 Jkt 052754 PO 00000 Frm 00060 Fmt 6601 Sfmt 6621 S:\GPO\DOCS\75166.TXT SCOM1 PsN: JACKIE
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3See, e.g., In the Matter of The TJX Companies, FTC File No. 0723055 (proposed consent 

agreement announced March 27, 2008); In the Matter of Reed Elsevier Inc. and Seisint Inc., FTC 

File No. 0523094 (proposed consent agreement announced March 27, 2008), http://www.ftc.gov/ 

opa/2008/03/datasec.shtm. 4See, e.g, Gateway Learning Corp., Docket No. C–4120 (Sept. 10, 2004), http://www.ftc.gov/ 

opa/2004/07/gateway.shtm (company made material changes to its privacy policy and allegedly 

applied such changes to data collected under the old policy; opt-in required for future such 

changes). 

ment of meaningful self-regulation of online behavioral advertising. The Commission 

staff has specifically sought comment on whether information collected about children’s activities online should be treated as sensitive or otherwise given special consideration. The comment period closed on April 11, and staff is carefully reviewing 

the comments received. 

The Commission staff is also looking at the European Union’s position on IP addresses as a part of its examination of the privacy issues surrounding online behavioral advertising. The staff is actively conferring with technologists, industry, and 

privacy advocates on emerging technologies that may affect the discussion of this 

issue. 

Question 5. If the FTC finds that an Internet company violated the behavioral advertising self-regulatory principles (such as having an overly confusing, technical, or 

lengthy privacy policy), would the Commission consider that to be a ‘‘deceptive or 

unfair trade practice’’ and consider an enforcement action? 

Answer. In issuing the behavioral advertising principles for public comment, FTC 

staff intended to launch a public dialogue about the privacy issues raised by behavioral advertising, and to encourage meaningful self-regulatory efforts. The proposed 

principles, which are still being considered in light of the public comments received, 

should not be viewed as a regulation or as an interpretation of what constitutes a 

per se violation of the FTC Act. 

Of course, we note that regardless of the principles, the FTC retains the authority 

to challenge unfair or deceptive practices that arise in the behavioral advertising 

area. Further, some of the principles—for example, the principles regarding reasonable security for data and material changes to privacy promises—have a basis in 

FTC enforcement precedent. The FTC has brought and can continue to bring enforcement actions against companies that fail to provide reasonable protections for 

consumer data.3 The FTC can also bring enforcement actions against companies 

that use data in a manner materially different from promises made when the data 

was collected.4 However, whether or not a particular behavioral advertising practice 

constitutes a deceptive or unfair trade practice will depend on the facts of each case. 

Question 6. What are the types of behavioral marketing that are being used with 

children? Does the FTC believe that voluntary self-regulatory guidelines will be sufficient to protect children from these forms of marketing? 

Answer. As indicated above, the Commission staff currently is examining the 

practices of online behavioral advertising targeted both to children and adults, 

through its request for public comment on proposed self-regulatory principles on behavioral advertising. We expect to learn more about the types of behavioral advertising associated with children through this process. In this regard, we note that one 

comment the staff received regarding the proposed principles raised the concern 

that children would be less likely to recognize behavioral advertising and less able 

to make informed choices about the practices. We also note, however, that we currently are not aware of any distinction between the behavioral advertising techniques used for children vs. adults and have no data on the products and services 

most promoted to children through behavioral advertising. 

Well-constructed self-regulatory efforts are important to protecting children’s interests, especially in dynamic marketplaces such as online advertising. The Commission staff’s publication of the proposed behavioral advertising principles may spark 

further self-regulatory innovations. For example, the Network Advertising Initiative 

recently proposed a prohibition on behavioral advertising to children under the age 

of 13. In addition to any self-regulatory changes sparked by the proposed behavioral 

advertising principles, existing self-regulatory programs, such as the Children’s Advertising Review Unit of the Council of Better Business Bureaus (CARU), apply to 

all forms of online marketing. CARU’s guidelines and enforcement actions provide 

strong direction and incentive to industry to conduct responsible online advertising 

to children. Finally, as noted above, the Commission also retains its authority under 

Section 5 of the FTC Act to pursue cases of unfair or deceptive online marketing 

to children. 

58 

1 In some cases, spam can be used for phishing or to disseminate spyware. In many of these 

cases, civil law enforcement is more difficult for the reasons described in the text. 

RESPONSE TO WRITTEN QUESTIONS SUBMITTED BY HON. OLYMPIA J. SNOWE

TO THE FEDERAL TRADE COMMISSION

Question 1. The FTC has stated that ‘‘phishing is a criminal endeavor that is best 

suited for criminal law enforcement.’’ However, the FTC actively pursues and enforces activities such as spam, identity theft, spyware, data security breaches, and 

even pretexting. Clearly, phishing is directly related to SPAM and identity theft, it 

[spear phishing] also attributes to security breaches of companies’ networks, and 

even phishing mirrors pretexting, which is obtaining telephone records using false 

pretenses. So why would phishing fall outside the purview and enforcement of the 

FTC when it is so closely tied to these other FTC related areas? 

Answer. Phishing continues to be one of the most vexing problems facing consumers, but it is difficult to address through FTC enforcement for several reasons. 

First, the architecture of the e-mail system creates significant investigative hurdles 

for the FTC to identify those responsible for sending phishing messages. The Internet protocol for e-mail, known as SMTP, does not require the transmission of accurate routing information. The only piece of information that must be accurate in an 

e-mail is the recipient’s address. Phishers exploit this flaw in SMTP, thereby making it virtually impossible to trace the source of a phishing e-mail using the e-mail 

message’s header information. And because phishers are not generally delivering a 

product to a consumer or using their own account information for financial transactions that we can trace, there are few civil investigative tools we can use to find 

the phishers. 

In addition, the nature of the illegal act also makes phishing better suited for 

criminal than civil enforcement. Indeed, in the phishing cases that the FTC has 

filed, the perpetrators of the schemes have been identified only with the considerable assistance of criminal investigative agencies and Federal prosecutors. Their efforts have included obtaining ISPs’ records, most of which the FTC is prohibited 

from seeking by the Electronic Communications Privacy Act, and conducting 

stakeouts of addresses where items purchased by the phishers are being delivered. 

Moreover, because phishing involves the brazen theft of consumers’ personal financial information, it is doubtful that a civil injunction will provide appropriate deterrence. 

More specifically, phishing often differs from four of the areas that you mention: 

Spam: Spammers making deceptive claims to sell products are generally more 

amenable to FTC enforcement tools than phishers. In cases involving deceptive 

spam, we often have civil investigative avenues that we do not have in phishing 

cases; there is often a product being delivered or a money trail that can be followed. These investigative avenues have enabled the FTC to bring a significant 

number of cases against deceptive spammers.1

Data Security: The FTC can also use its enforcement tools effectively in the data 

security area. The Commission’s investigative targets in these cases are the 

companies that failed to take reasonable precautions to prevent breaches, not 

the identity thieves who could take advantage of their failures. Targets in our 

data security cases are concerned about their reputation in the marketplace; 

they often cooperate in FTC investigations and comply with FTC injunctions. 

Pretexting: While phishers hide behind the SMTP protocol’s cloak of anonymity 

and are engaged in outright theft, pretexters often operate in the open. Although they may provide their services to those who intend to do harm to others, they also may provide services to legitimate entities such as investigative 

firms, media, or even attorneys, and they operate from a physical location. 

Moreover, in addition to engaging in pretexting, many pretexters may also offer 

legitimate legal investigative services. Thus, we have been able to locate the 

pretexters that have been the subject of our law enforcement. 

Spyware: Spyware can have characteristics of phishing as well as spam. The 

most egregious forms of spyware, such as keyloggers, share the same attributes 

as phishing: the perpetrators are extremely difficult to track down and are, at 

their core, nothing more than thieves. FTC enforcement against such spyware 

purveyors would likewise be futile. Other types of spyware, however, are more 

akin to the fraudulent and deceptive business practices that the FTC has traditionally tackled. For example, the FTC has successfully prosecuted a number of 

software developers and distributors who installed spyware on consumers’ computers for the purpose of displaying advertising, or collecting data on conVerDate Nov 24 2008 07:49 Jul 24, 2012 Jkt 052754 PO 00000 Frm 00062 Fmt 6601 Sfmt 6621 S:\GPO\DOCS\75166.TXT SCOM1 PsN: JACKIE
59 

2See, e.g., In the Matter of DirectRevenue, LLC, FTC File No. 052 3131 (Jun. 26, 2007); In 

the Matter of Zango, Inc., FTC File No. 052 3130 (Mar. 7, 2007). 3See, e.g., FTC v. Trustsoft, No. H 05–1905 (S.D. Tex. 2005); FTC v. MaxTheater, No. 05–CV– 

0069–LRS (E.D. Wash. 2005). 

sumers’ Internet habits.2 The FTC has also sued a number of software developers for using deceptive advertising designed to frighten or intimidate consumers into purchasing their products.3 In these types of cases, the defendants 

openly and directly interacted with consumers, and operated as a business (e.g., 

employing programmers, maintaining a corporate entity and corporate bank accounts, paying taxes on profits, etc.). Although these defendants caused massive 

consumer harm, they were not high-tech bank robbers (like phishers) but rather 

high-tech con men operating a fraudulent business. As a result, the FTC was 

able to leverage its investigative resources to locate and prosecute these defendants, and was able to deter future misconduct through injunctive relief and 

disgorgement. 

Identity Theft: Phishing is more like identity theft, a clearly criminal act that 

the FTC does not prosecute. Although the FTC plays a significant role in keeping data out of the hands of identity thieves by, among other things, enforcing 

data security laws and conducting aggressive outreach and education, strong 

criminal enforcement is the best approach to effectively punish and deter identity thieves. 

Although civil law enforcement may not be the most effective tool against 

phishers, the FTC has taken aggressive steps to curb the impact of phishing by encouraging industry to adopt anti-phishing technologies and by providing significant 

consumer education. Since 2004, the FTC has been urging ISPs and businesses that 

operate their own e-mail servers to adopt domain-level authentication technologies. 

With domain-level authentication, an ISP or other operator of an e-mail server will 

be able to verify that a message actually comes from the domain appearing in the 

‘‘from’’ address. The FTC is encouraged by the rapid adoption of domain-level authentication technologies that is now taking place. Combined with other anti-spam 

technologies, domain-level authentication should reduce the likelihood that phishing 

e-mails will enter consumers’ in boxes. And, as explained below, the FTC has an 

ambitious consumer and business education program aimed at combating phishing. 

Question 1a. So why wouldn’t the FTC want to ramp up its efforts and allocate 

more resources toward phishing since phishing scams are one of the top threats facing consumers? 

Answer. Although the FTC does not plan to ramp up enforcement efforts for the 

reasons described above, it continues to devote resources to phishing. Consumer 

education is a key tool for helping to reduce the number of consumers who fall victim to phishing scams. The FTC has long engaged in phishing education through 

consumer alerts and its OnGuardOnline.gov computer education website, which includes information on phishing. 

On April 1, the Commission held a workshop with approximately 60 experts from 

business, government, the technology sector, the consumer advocacy community, 

and academia to discuss strategies to reach and teach consumers about phishing. 

Several new initiatives for phishing education emerged from the workshop. First, 

the FTC launched new 30-second phishing education videos, and several participants agreed to place the videos on their websites and other channels. Second, the 

National Cyber Security Alliance announced that it is forming a Task Force on 

phishing education, and FTC staff plans to participate. Third, several participants 

supported the idea of using a landing page to educate consumers about phishing. 

Landing pages are web pages that ISPs and other entities would use to redirect consumers from sites identified as phishing sites to educational sites. Specifically, the 

Anti-Phishing Working Group will continue to develop informational phishing landing pages and will translate them into various languages for use by domestic—as 

well as foreign—ISPs. 

Question 2. At the FTC’s recent phishing education roundtable, one aspect that 

was addressed was the need for greater Internet safety and cyber security education 

in the K–12 school systems. Some research has shown that few school systems are 

teaching about these issues and as a result, teenagers and young adults are more 

susceptible to identity fraud because they’re less likely to take the necessary precautions to protect themselves from various types of identity theft. Can Congress 

do more to assist the states to incorporate more school-based education on computer 

and cyber security? Would you support effective legislative efforts on this issue? 

Answer. We agree that more school-based education on computer security, cyber 

safety, and cyberethics would be beneficial. Several participants at our phishing 

60 

4See, e.g., Am. Online, Inc. & CompuServe Interactive Servs., Inc., FTC Dkt. No. C–4105 (Jan. 

28, 2004) (consent order), available at http://www.ftc.gov/os/caselist/0023000/0023000 

aol.shtm; Juno Online Servs., Inc., FTC Dkt. No. C–4016 (June 25, 2001) (consent order), available at http://www.ftc.gov/os/caselist/c4016.shtm; Am. Online, Inc., FTC Dkt. No. C–3787 

(Mar. 16, 1998) (consent order), available at http://www.ftc.gov/os/1997/05/ameronli.pdf; 

CompuServe, Inc., 125 FTC 451 (1998) (consent order); Prodigy, Inc., 125 FTC 430 (1998) (consent order). 5See, e.g., Am. Online, Inc. & Time Warner, Inc., FTC Dkt. No. C–3989 (Apr. 17, 2001) (consent order), available at http://www.ftc.gov/os/2001/04/aoltwdo.pdf; Cablevision Sys. Corp., 

125 FTC 813 (1998) (consent order); Summit Commun. Group, 120 FTC 846 (1995) (consent 

order). 6The agenda for the workshop including presentations made at the workshop and the public 

comments filed in response to the workshop are available at http://www.ftc.gov/opp/workshops/broadband/index.shtml. 7See FTC, Broadband Connectivity Competition Policy (6/27/2007), available at http:// 

www.ftc.gov/opa/2007/06/broadband.shtm; see also Concurring Statement of Commissioner 

Jon Leibowitz Regarding the Staff Report: ‘‘Broadband Connectivity Competition Policy,’’ available at http://www.ftc.gov/speeches/leibowitz/V070000statement.pdf (noting the importance of 

transparency and disclosure for consumer rights on the Internet). 

workshop pointed to the Virginia school system’s legislatively-mandated Internet 

safety education program as a potential model program. See http://www.doe. 

virginia.gov/VDOE/Technology/OET/internet-safety-guidelines.shtm. The Commission has not taken a position on the respective roles of Congress and the states in 

directing education. 

Question 3. Last fall, evidence surfaced that a broadband provider was blocking 

or, at the very least, slowing down a very popular peer-to-peer application. The provider had stated prior to this practice coming to light that it ‘‘does not block access 

to any applications.’’ 

In addition, the operator seemed to employ questionable practices in its traffic 

management of this application such as ‘‘spoofing’’ IP packets—inserting reset packets that purported being from the downloading P2P computer instead of from the 

operator—and may have infringed upon consumer privacy by inspecting IP packet 

headers and payloads to determine what was P2P traffic. 

Has the FTC looked into this matter, since on the surface these actions (lack of 

disclosure and spoofing) may constitute a violation of Section 5—with respect to deceptive acts and practices to both commerce and competition? 

Answer. Although the FTC cannot comment on the existence of a specific investigation, if an Internet service provider (ISP) misrepresents, or fails to disclose, material aspects of its services in advertising or marketing to consumers, it may be 

liable for violating Section 5 of the FTC Act. 

For over a decade, the FTC has enforced the consumer protection and antitrust 

laws in numerous matters involving Internet access. In particular, the FTC has investigated and brought enforcement actions against ISPs for allegedly deceptive 

marketing, advertising, and billing of Internet access services.4 The FTC has addressed Internet access and related issues in a number of merger investigations as 

well.5 As increasing numbers of U.S. consumers have chosen to subscribe to 

broadband services, the FTC has been monitoring the claims made by broadband 

providers in marketing their services to consumers. In February 2007, the Commission held a workshop on broadband competition that focused on net neutrality questions, including questions of disclosure by Internet service providers.6 In June 2007, 

Commission staff released a report on broadband connectivity competition policy.7

The FTC has devoted and will continue to devote significant resources to protecting 

competition and consumers in the important area of Internet access. 

Question 3a. Has the FTC received any formal complaints on broadband carriers 

blocking Internet applications? 

The FTC receives complaints directly from consumers and from other agencies regarding a host of consumer protection issues. During the three calendar years 2005 

through 2007, we received over 2.8 million consumer complaints, and over 60,000 

of those complaints involved Internet access services. In an effort to locate consumer 

complaints that related specifically to broadband carriers blocking Internet applications, Commission staff searched the Internet access complaints for key words and 

combinations of words such as ‘‘application,’’ ‘‘bandwidth,’’ ‘‘block,’’ ‘‘broadband,’’ 

‘‘discriminate,’’ ‘‘Internet,’’ ‘‘net,’’ and ‘‘network’’ Staff found thousands of complaints 

containing these key words. Staff reviewed a small number of these complaints and 

found that they were unrelated to broadband carriers blocking Internet applications. 

It further refined the searches for complaints that included the word ‘‘neutrality,’’ 

and found less than ten complaints, and for complaints that included the key word 

‘‘block’’ with either the word ‘‘application’’ or the word ‘‘content.’’ This search reVerDate Nov 24 2008 07:49 Jul 24, 2012 Jkt 052754 PO 00000 Frm 00064 Fmt 6601 Sfmt 6621 S:\GPO\DOCS\75166.TXT SCOM1 PsN: JACKIE
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8The Commission staff replies orally or in writing to complaints it receives. In our responses, 

we explain that the Commission acts in the interests of all consumers, and therefore does not 

generally intervene in individual disputes. We also advise the consumers that the information 

they provide would be recorded in the FTC’s complaint retention system and made available to 

numerous law enforcement agencies. 9Prepared Statement of the Federal Trade Commission Before the Internet Corporation for 

Assigned Names and Numbers Meeting Concerning WHOIS Databases, Marrakech, Morocco, 

June 2006. 10FTC Press Release, FTC Permanently Halts Media Motor Spyware Scam; Trojan Program 

Downloaded Spyware, Adware, Porno Pop-Ups to Consumers’ Computers (Oct. 1, 2007), available 

at http://www.ftc.gov/opa/2007/10/motorspyware.shtm. 

11 Although the U.S. SAFE WEB Act gives the FTC tools to address problems of obtaining 

information from foreign sources, using these tools would still take additional time and resources. Particularly in the online world, any such delay could lead to frustration of an investigation. 12Some have expressed concern that public access to WHOIS databases compromises the privacy of domain name registrants. The Commission has recognized that non-commercial registrants may require some privacy protection from public access to their contact information, 

and that these registrants can be provided such protection without compromising real-time access by law enforcement agencies. See Prepared Statement of the Federal Trade Commission on 

Internet Governance: The Future of ICANN Before the Subcommittee on Trade, Tourism, and 

Economic Development of the Senate Committee on Commerce, Science, and Transportation, 

Washington, D.C., Sept. 20, 2006. 

sulted in approximately 100 complaints from the past three calendar years. Staff reviewed the comments in each of these complaints and found that approximately ten 

complaints may be related to the issue of blocked Internet applications.8

In addition to receiving consumer complaints, the FTC at times receives more formal petitions from parties requesting the FTC to investigate potential violations of 

the FTC Act. The FTC has not, however, received a formal petition alleging the 

blocking of an Internet application by a broadband ISP. The FTC nonetheless remains vigilant to any ISP conduct that may violate the antitrust or consumer protection laws. 

Question 4. Commissioner Leibowitz gave a speech to ICANN, back in June 2006, 

and stated that the WHOIS databases, which provide contact information of a domain name/website owner, are critical to the agency’s consumer protection mission. 

He further mentioned that the FTC is concerned that any attempt to limit WHOIS 

would put its ability to protect consumers and their privacy in peril. Can you elaborate on the concerns the Commission has about WHOIS? 

Answer. FTC staff has been using WHOIS databases for the past decade. As the 

Commission has noted, ‘‘WHOIS databases often are one of the first tools FTC investigators use to identify wrongdoers. Indeed, it is difficult to overstate the importance of quickly accessible WHOIS data to FTC investigations.’’ 9

When WHOIS information is available and accurate, it can provide us with a tremendous amount of information. For example, in our cases enforcing the CANSPAM Act and, in particular, the Adult Labeling Rule, accurate WHOIS information 

helped us identify the operators of pornographic websites that were promoted via 

illegal spam messages. In the recent Media Motor spyware case,10 FTC staff used 

domain name registration information from WHOIS databases to identify the 

website operators who infected more than 15 million computers with destructive, intrusive spyware. In that case, the FTC charged that the defendants tricked consumers into downloading malware that changed consumers’ home pages, tracked 

their Internet activity, altered browser settings, degraded computer performance, 

and disabled antispyware and anti-virus software. The WHOIS information was crucial to the FTC’s efforts to locate—and ultimately stop—this sophisticated and expansive spyware operation. 

Key to the utility of the WHOIS databases is our ability to access it in real time. 

The alternative to real-time access, compulsory process, is not always a viable option for three reasons. It is often too slow in the context of fast-moving Internet 

fraud; it risks disclosing the existence of an undercover investigation; and it may 

not be available or practical when the domain name registrar is located in a foreign 

jurisdiction.11

Although WHOIS databases continue to yield critical information in our investigations, their utility has been hampered by lack of real-time access to WHOIS records 

due to proxy registrations and due to inaccurate information.12

Question 4a. Has the FTC ever been hindered in its investigations due to the lack 

of accurate information or not having quick access to that information due to proxy 

services? 

Answer. Yes. Proxy registration services shield the identity of a website operator. 

This layer of anonymity has posed an obstacle in our investigations. 

62 

For example, in one FTC investigation, FTC staff encountered at least six 

websites that had proxy registrations, including one registered to a proxy service of 

a domestic domain name registrar and two others registered to proxies for foreign 

domain name registrars. Our inquiry into these websites was stalled by the need 

for compulsory process and, indeed, most of the websites closed down before we 

could pursue an alternative route. In the Media Motor case described above, the 

WHOIS results for a number of target websites identified a proxy service in place 

of the registrant’s name. To identify the registrant, the FTC had to contact the registrar that operates the proxy service. This extra step lengthened the time it took 

for FTC staff to identify the true registrant and initiate law enforcement action to 

stop the ongoing spyware operation. 

Even where access is not stymied by proxy registrations, much of the information 

in the WHOIS databases continues to be inaccurate or incomplete. FTC investigators can cite numerous instances where the WHOIS data has turned up domain 

names with facially false addresses and contact information, including websites registered to ‘‘God,’’ and ‘‘Mickey Mouse,’’ addresses listed as ‘‘XXXXXXX,’’ and obviously fake telephone numbers, such as 111–111–1111. FTC investigators have had 

to spend many hours tracking down perpetrators of Internet fraud because of inaccurate WHOIS data—hours that could have been spent pursuing other targets. 

Question 4b. Several law enforcement agencies have serious concerns about domain name registrars offering proxy or privacy services to domain name registrants, 

and NTIA even enforced the prohibition of proxy services for the .us TLD. What is 

the FTC’s position on proxy services that are utilized by commercial websites? 

Answer. The FTC has recognized that registrants of non-commercial websites 

might require some privacy protection from public access to their contact information, without compromising appropriate real-time access by law enforcement agencies. However, the FTC does not believe commercial websites have similar legitimate privacy concerns or a legitimate purpose to operate under a shroud of anonymity. As explained above, proxy registrations can either slow down or completely frustrate FTC investigations into the activities of commercial websites. 

RESPONSE TO WRITTEN QUESTION SUBMITTED BY HON. JOHN ENSIGN

TO THE FEDERAL TRADE COMMISSION

Question. Chairman Kovacic, in December 2006, ten of the country’s leading jewelry industry trade associations petitioned the FTC to address the practice of marketing laboratory-created diamonds as ‘‘cultured diamonds’’ to consumers. It is my 

understanding that the term ‘‘cultured’’ has traditionally been used in the jewelry 

industry only to refer to organically produced materials, like pearls. These industry 

associations strongly believe that the FTC’s Guidelines for the jewelry industry 

must be amended to protect consumers from deceptive or unfair business practices. 

It has been nearly one and a half years since that petition was filed and the petitioners have not yet received a response. Can you give us an update on the status 

of the FTC’s response to this petition? 

Answer. The FTC staff is currently reviewing the petition requesting that the 

Commission amend its Guides for the Jewelry, Precious Metals, or Pewter Industries to address the use of the term ‘‘cultured’’ to describe laboratory-created diamonds. The FTC staff’s review includes a thorough analysis of the petition and the 

consumer perception data submitted in support of the petition, to determine whether the use of the term ‘‘cultured’’ to market laboratory-created diamonds constitutes 

an unfair or deceptive trade practice in violation of Section 5 of the FTC Act. In 

addition, the staff is considering how its proposed recommendation might affect domestic and international commerce. Following this analysis, the staff will recommend to the Commission a proposed response. The FTC’s review will be completed as quickly as possible consistent with the serious attention the petition deserves. 

Æ