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S. HRG. 110–1173 

FEDERAL TRADE COMMISSION REAUTHORIZATION 

HEARING 

BEFORE THE

SUBCOMMITTEE ON INTERSTATE COMMERCE, 

TRADE, AND TOURISM 

OF THE

COMMITTEE ON COMMERCE, 

SCIENCE, AND TRANSPORTATION 

UNITED STATES SENATE 

ONE HUNDRED TENTH CONGRESS 

FIRST SESSION 

SEPTEMBER 12, 2007 

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

( 

(II) 

SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION 

ONE HUNDRED TENTH CONGRESS 

FIRST 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 

TRENT LOTT, Mississippi 

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 

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 

SUBCOMMITTEE ON INTERSTATE COMMERCE, TRADE, AND TOURISM 

BYRON L. DORGAN, North Dakota, 

Chairman 

JOHN D. ROCKEFELLER IV, West Virginia 

JOHN F. KERRY, Massachusetts 

BARBARA BOXER, California 

MARIA CANTWELL, Washington 

MARK PRYOR, Arkansas 

CLAIRE MCCASKILL, Missouri 

JIM DEMINT, South Carolina, Ranking 

JOHN MCCAIN, Arizona 

OLYMPIA J. SNOWE, Maine 

GORDON H. SMITH, Oregon 

JOHN ENSIGN, Nevada 

JOHN E. SUNUNU, New Hampshire 

(III) 

C O N T E N T S 

Page 

Hearing held on September 12, 2007 ..................................................................... 1 

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

WITNESSES

Abrams, Martin E., Executive Director, Center for Information Policy Leadership, Hunton & Williams LLP ............................................................................ 74 

Prepared statement .......................................................................................... 75 

Calhoun, Michael D., President, Center for Responsible Lending ...................... 49 

Prepared statement .......................................................................................... 51 

Cooper, Dr. Mark N., Director of Research, Consumer Federation of America . 36 

Prepared statement .......................................................................................... 38 

Majoras, Hon. Deborah Platt, Chairman, Federal Trade Commission ............... 2 

Prepared statement .......................................................................................... 4 

Murray, Chris, Senior Counsel, Consumers Union ............................................... 59 

Prepared statement .......................................................................................... 61 

Schwartz, Ari, Deputy Director, Center for Democracy and Technology ............ 66 

Prepared statement .......................................................................................... 67 

APPENDIX

Response to written questions submitted to Michael D. Calhoun by Hon. 

Byron L. Dorgan ................................................................................................... 120 

Response to written questions submitted to Hon. Deborah Platt Majoras by: 

Hon. Byron L. Dorgan ...................................................................................... 103 

Hon. Daniel K. Inouye ...................................................................................... 101 

Hon. Olympia J. Snowe .................................................................................... 113 

Stevens, Hon. Ted, U.S. Senator from New Jersey, prepared statement ...........

101 .......................................................................................................

(1) 

FEDERAL TRADE COMMISSION 

REAUTHORIZATION 

WEDNESDAY, SEPTEMBER 12, 2007 

U.S. SENATE, 

SUBCOMMITTEE ON INTERSTATE COMMERCE, TRADE, AND

TOURISM, 

COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 9:35 a.m. in room 

SR–253, Russell Senate Office Building, Hon. Byron L. Dorgan, 

Chairman of the Subcommittee, presiding. 

OPENING STATEMENT OF HON. BYRON L. DORGAN, 

U.S. SENATOR FROM NORTH DAKOTA 

Senator DORGAN. The Committee will come to order. This is the 

Senate Committee on Commerce, Science, and Transportation, 

Interstate Commerce, Trade, and Tourism Subcommittee, hearing 

on the Federal Trade Commission reauthorization. 

I regret to tell you that last evening, about 8:30 in the evening, 

they scheduled three votes, starting at 9:30 this morning. Because 

of that, the first vote is now underway; it’ll be followed by two tenminute votes. My expectation is, the votes will be completed by 

10:15. And I deeply apologize for the inconvenience to all of you, 

but, because of that, we will have to recess until 10:15, at which 

time the hearing will begin. 

The Committee is in recess. 

[Recess.] 

Senator DORGAN. The Committee will come to order. 

First, again—I should say, again, let me apologize for the inconvenience. I know it is not convenient for any of you to wait for 

nearly an hour, but the schedule of the Senate sometimes isn’t established for our convenience, or yours, it’s an unusual body, and 

so, we are delayed today, but thank you very much for waiting, and 

thank you for being here. 

Chairman Majoras, thank you very much for being with us 

today. We will have testimony from you, and then we will have testimony from a second panel. 

The second panel will include Dr. Mark Cooper, from the Consumer Federation of America; Mr. Chris Murray, from the Consumers Union; Mr. Michael Calhoun, the President of the Center 

for Responsible Lending; Mr. Ari Schwartz, from the Center for Democracy and Technology; and Mr. Marty Abrams, from the Center 

for Information Policy Leadership. 

2 

The hearing today is a reauthorization hearing for the Federal 

Trade Commission, which is an independent Federal agency established in 1914. This is an agency that has a gray beard, it’s been 

around a long, long time, and serves a very useful purpose. Under 

the Federal Trade Commission Act of 1914, the Commission was 

established to protect consumers. The mandate has two different 

and distinct components—first, to protect consumers from unfair or 

deceptive acts or practices in or affecting commerce; and, second, 

to protect consumers from unfair methods of competition. As part 

of this authority, the agency enforces some 46 statutes and is the 

only Federal agency with both consumer protection and competition 

jurisdiction in very broad sectors of the economy. 

The Commission’s consumer protection authority is provided 

under the FTC Act; and, under that Act, the Commission is 

charged with preventing a broad range of consumer abuses, including deceptive or misleading advertising, telemarketing fraud, credit 

report errors, and false labeling. The Act also grants the FTC jurisdiction over unfair methods of competition, deceptive acts or practices that unreasonably impede a consumer’s ability to make an informed choice. 

I don’t need to remind everyone how important these particular 

functions are, given what we have read in the newspapers in the 

last several months. The issue of consumer safety is paramount in 

this galloping global economy and rules for that global economy are 

not nearly keeping pace. We have stories, these days in the newspapers, about danger and risk to American consumers. I want to 

talk a little about that today. It’s a very important function, the 

function of ensuring competition, as is the function of consumer 

protection. We need to reauthorize the Federal Trade Commission, 

and we will hope to do so with legislation that we move to the floor 

of the Senate very soon. 

The Commission itself is a five-member Commission appointed 

by the President, confirmed by the Senate, for 7-year terms. We 

have invited the Chairman of the Commission to be with us today. 

Let me, again, say thank you for your patience and ask you to 

proceed. Your entire statement will be made a part of the record 

today, and we will ask you to summarize. 

Madam Chair, go ahead. 

STATEMENT OF HON. DEBORAH PLATT MAJORAS, CHAIRMAN, 

FEDERAL TRADE COMMISSION 

Ms. MAJORAS. Thank you very much, Chairman Dorgan. It’s a 

great pleasure to appear before you today to describe the FTC’s 

broad program to protect consumers in today’s dynamic marketplace through vigorous law enforcement, consumer and business 

education, competition advocacy, and market research. 

During the past 3 fiscal years, our consumer protection work has 

produced more than 250 court orders requiring defendants to pay 

more than $1.2 billion in consumer redress, 47 court judgments for 

civil penalties, totaling over $38 million, and approximately 180 

new Federal court complaints aimed at stopping unfair and deceptive conduct. At the same time, we’ve developed 250 consumer and 

business education campaigns and publications, completed 54 

statutorily mandated rulemakings and reports, hosted 48 public 

3 

conferences and workshops, and issued 40 reports on issues of 

great significance to consumers. This active agenda continues. 

Protecting the privacy and identity of American consumers has 

become, and remains, a top priority in this information age. The 

FTC has brought 14 enforcement actions against companies for 

their failure to provide reasonable security for consumers’ data, actions that have helped set standards for industry, and more are in 

the pipeline. 

Last year, we launched a nationwide identity theft consumer 

education campaign, ‘‘Deter, Detect, Defend,’’ and developed a new 

business education guide on data security. Over the past 2 years, 

we’ve brought nearly a dozen enforcement actions against purveyors of spyware, and a steady stream of cases against spammers. 

We continue protecting Americans’ privacy through implementation 

and enforcement of the highly successful Do Not Call Registry, 

which now contains more than 147 million telephone numbers, and 

enforcement actions against telephone pretexters and those who 

violate the Children’s Online Privacy Protection Act. 

To protect consumers in the financial services marketplace, we’re 

focusing on enforcement efforts in the marketing of mortgage products, particularly in the subprime market, deception in the credit 

area, and illegal methods used in debt collection. We’ve attacked 

false or inadequate disclosures relating to gift cards and rebate 

programs. Other areas of attack in our fraud program include business-opportunity and work-at-home scams, various forms of telemarketing fraud, and bogus health and weight-loss claims, and the 

latter rank very high on the agenda, because they have such potential to harm consumers who forego legitimate treatment options. 

We’ve been a driving force in the recent renewal of self-regulation in the advertising of food to children, and we continue our 

work in monitoring self-regulation among marketers of video 

games, music, and movies with violent content, as well as alcohol. 

Indeed, as to the latter, this week we’ve been sponsoring ‘‘We Don’t 

Serve Teens Week,’’ blanketing the Nation through PSAs and a lot 

of help from states and others, with the admonition not to provide 

alcohol to minors. Thanks to Congress, which worked with us to 

pass the U.S. SAFE WEB Act of 2006, we now have better tools 

with which we are fighting cross-border fraud. 

We’re equally active in protecting competition, focusing on areas 

that have the most significant impact on consumers; namely, 

healthcare, energy, real estate, and high-technology industries. So 

far, in this fiscal year, we’ve issued 31 second requests in mergers, 

we’ve had 20 merger cases that have resulted in enforcement action or withdrawal of the merger, and we’ve brought 11 nonmerger 

cases. In healthcare, for example, we’ve achieved substantial relief 

over the last year before allowing mergers in the areas of generic 

drugs, over-the-counter medications, injectable analgesics, and 

other medical devices and diagnostic services. We’ve challenged 

price-fixing agreements among competing physicians, and agreements between drug companies that delay generic entry. We are 

continuing to stand up against reverse-payment settlements, including by working with Congress on bipartisan efforts to advance 

a workable legislative remedy. And the Commission recently issued 

4 

an opinion ruling that Evanston Northwestern Healthcare Corporation’s acquisition of Highland Park Hospital was anticompetitive. 

So far in 2007, the Commission has challenged three mergers in 

the energy industry: Western Refining’s acquisition of Giant Industries—unfortunately, we were unsuccessful in District Court; Equitable Resources’ proposed acquisition of the People’s Natural Gas 

Company—that is still in litigation; and the proposed $22 billion 

deal whereby energy firm Kinder Morgan would be taken private 

by its management, and a group of investment firms, including 

Carlyle Group and Riverstone Holdings. 

We also charged the American Petroleum Company with illegally 

conspiring with competitors to restrict the importation and sale of 

motor oil lubricants in Puerto Rico. And other industries in which 

we’ve brought significant actions include real estate, grocery stores, 

and funeral homes, and related products and services. 

Complementing these antitrust enforcement efforts are our competition advocacy efforts, our market research, which has produced 

reports on IP issues, municipal provision of wireless Internet, 

broadband policy, and competition in real estate, and our new consumer education campaign. 

Mr. Chairman, the more than 1,000 employees of the FTC remain focused on our critical mission to protect consumers and competition. We always appreciate your support, and look forward to 

continuing to work together to further the interests of American 

consumers. 

Thank you for holding this hearing. I’d like to thank my fellow 

commissioners who are with me today, and some of our staff, and 

I also would like to thank those on the second panel, who obviously 

play a very important role in the work that we do. 

Thank you. 

[The prepared statement of Ms. Majoras follows:] 

PREPARED STATEMENT OF HON. DEBORAH PLATT MAJORAS, CHAIRMAN, 

FEDERAL TRADE COMMISSION

I. Introduction 

Chairman Dorgan, Ranking Member DeMint, and Members of the Subcommittee, 

I am Deborah Platt Majoras, Chairman of the Federal Trade Commission (‘‘Commission’’ or ‘‘FTC’’). I am pleased to come before you today at this reauthorization hearing.1

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 business practices that are harmful to consumers because they are anticompetitive, deceptive, or unfair, and 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. 

The agency’s consumer protection work has focused on data security and identity 

theft, technology risks to consumers such as spam and spyware, fraud in the marketing of health care products, deceptive financial practices in the subprime mortgage and credit repair industries, telemarketing fraud, and Do Not Call enforcement. During the past three fiscal years, the FTC has obtained more then 250 court 

orders requiring defendants to pay more than $1.2 billion in consumer redress, obtained 47 court judgments for civil penalties in an amount over $38 million, and 

filed approximately 180 new complaints in Federal district court to stop unfair and 

deceptive practices. It also completed 54 statutorily-mandated rulemakings and reVerDate Nov 24 2008 06:52 Sep 21, 2012 Jkt 075679 PO 00000 Frm 00008 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\75970.TXT JACKIE
5 

ports, hosted 48 conferences and workshops, issued 40 reports on topics significant 

to consumers, and developed 250 consumer and business education campaigns. 

The Commission’s competition mission has worked to strengthen free and open 

markets by removing the obstacles that impede competition and prevent its benefits 

from flowing to consumers. To accomplish this, the FTC has focused its enforcement 

efforts on sectors of the economy that have a significant impact on consumers, such 

as health care and pharmaceuticals, energy, technology, and real estate. So far in 

Fiscal Year 2007, there have been 20 merger cases that have resulted in enforcement action or withdrawal—including three litigated preliminary injunction actions—and 11 nonmerger enforcement actions.3

Our testimony today summarizes some of the major activities of the recent past 

and describes some of our planned future initiatives. It also identifies certain legislative recommendations that the Commission believes will allow us to better protect 

U.S. consumers. These are: 

1. to stop brand name drug companies from paying generic companies not to 

compete at the expense of consumers; 

2. to repeal the telecommunications common carrier exemption; and 

3.to ensure that the Commission has authority to impose civil penalties in cases 

in which the Commission’s traditional equitable remedies are inadequate, such 

as spyware and data security cases.4

II. Consumer Protection 

As the Nation’s consumer protection agency, the FTC has a broad mandate. This 

year, it devoted significant resources to the issues of data security and identity 

theft, technology risks to consumers, fraud in the marketing of the health care products, financial practices, telemarketing fraud, and Do Not Call enforcement.5 The 

Commission plans to continue our important work in these areas in 2008. This testimony highlights key issues and initiatives for the agency’s consumer protection mission, as well as the methods the FTC will use to address them. 

A. Data Security and Identity Theft 

In 1998, Congress passed the Identity Theft Assumption and Deterrence Act 

(‘‘Identity Theft Act’’), which assigned the FTC a unique role in combating identity 

theft and coordinating government efforts.6 This role includes collecting consumer 

complaints; implementing the Identity Theft Data Clearinghouse, a centralized 

database of victim complaints used by 1,600 law enforcement agencies; assisting victims and consumers by providing information and education; and educating businesses on sound security practices. The FTC continues to focus on combating identity theft primarily through law enforcement, implementation of the recommendations of the President’s Identity Theft Task Force, and education both to help consumers avoid identity theft and to assist the millions of Americans who are victimized each year. 

1. Law Enforcement 

Although the FTC, a civil enforcement agency, cannot enforce criminal identity 

theft laws, it can take law enforcement action against businesses that fail to implement reasonable safeguards to protect sensitive consumer information from identity 

thieves. Over the past few years, the FTC has brought 14 enforcement actions 

against businesses, including BJ’s Wholesale Club, ChoicePoint, CardSystems Solutions, and DSW Shoe Warehouse, for their alleged failures to provide reasonable 

data security. In these and other cases, the FTC has alleged, for example, that companies discarded files containing consumer home loan applications in an unsecured 

dumpster; stored sensitive information in multiple files when there was no longer 

a business need to keep the information, or in unencrypted files that could be easily 

accessed using commonly-known used IDs and passwords; failed to implement simple, low-cost, and readily available defenses to well-known web-based hacker attacks; failed to use readily available security measures to prevent unauthorized 

wireless connections to their networks; and sold sensitive consumer information to 

identity thieves posing as the company’s clients. The Commission continues to monitor the marketplace to encourage companies to implement and maintain reasonable 

safeguards to protect sensitive consumer information. In appropriate cases, the 

Commission will bring enforcement actions. 

2. Identity Theft Task Force 

On May 10, 2006, the President established an Identity Theft Task Force, which 

I co-chair, and which comprises 17 Federal agencies with the mission of developing 

6 

a comprehensive national strategy to combat identity theft.7 In April 2007, the Task 

Force published its strategic plan for combating identity theft.8

In the Strategic Plan, the Task Force recommends dozens of initiatives directed 

at reducing the incidence and impact of identity theft. To prevent identity theft, the 

Plan recommends that governments, businesses, and consumers improve data security. It recommends that Federal agencies and departments improve their internal 

data security processes; develop breach notification systems; and reduce unnecessary uses of Social Security numbers, which are often the key item of information 

that identity thieves need. For the private sector, the Task Force proposes that Congress establish national standards for data security and breach notification that 

would preempt the numerous state laws on these issues. The Plan also recommends 

the dissemination of additional guidance to the private sector for safeguarding sensitive consumer data; continued law enforcement against entities that fail to implement appropriate security; a multi-year consumer awareness campaign to encourage 

consumers to take steps to safeguard their personal information and minimize their 

risk of identity theft; a comprehensive assessment of the private sector’s uses of Social Security numbers; and workshops on developing more reliable methods of authenticating the identities of individuals to prevent thieves who obtain consumer information from using it to open accounts in the consumer’s name. 

To assist victims in the recovery process, the Plan recommends development of 

easy-touse reference materials for law enforcement, often the first responders to 

identity theft; implementation of a standard police report, often a key document for 

victim recovery; nationwide training for victim assistance counselors; and development of an Identity Theft Victim Statement of Rights. And finally, the Plan includes 

a host of recommendations for strengthening law enforcement’s ability to detect and 

punish identity thieves. 

Many of the Task Force recommendations have already been implemented or are 

in the process of being implemented. For example, the Office of Management and 

Budget has issued data security and breach management guidance for government 

agencies.9 The FTC has developed and distributed detailed data security guidance 

for businesses,10 is planning regional data security conferences, has conducted a 

public workshop on consumer authentication,11 has published an identity theft victim statement of rights on its website and at www.idtheft.gov, and is leading the 

interagency study of the private sector usage of Social Security numbers.12 The Department of Justice has forwarded to Congress a set of legislative recommendations 

that seek to close existing loopholes for the prosecution of some types of identity 

theft,13 and is developing and presenting expanded training for their prosecutors 

and, in partnership with the FTC, for state and local law enforcement. 

3. Education 

The FTC continues to educate consumers on how to avoid becoming victims of 

identity theft, and last year launched a nationwide identity theft education program.14 This program—Deter, Detect, Defend—has been very popular. The FTC has 

distributed over 2.6 million brochures, has recorded more than 3.2 million visits to 

the program’s website, and has disseminated 55,000 kits, which can be used by employers, community groups, Members of Congress, and others to educate their constituencies. 

The FTC also sponsors an innovative multimedia website, OnGuard Online, designed to educate consumers about basic computer security.15 The website provides 

information on such as phishing, spyware, and spam. Since its launch in late 2005, 

OnGuard Online has attracted more than 3.5 million visits. 

The Commission directs its outreach to businesses as well. This April, the Commission released a new business education guide on data security.16 The Commission anticipates that the brochure will prove to be a useful tool in alerting businesses to the importance of data security issues and give them a solid foundation 

on how to address them. 

B. Technology 

Although technology can play a key role in combating identity theft and improving consumers’ lives, it also can create new consumer protection challenges. The 

Commission has worked aggressively to protect consumers from technological 

threats such as spam and spyware. In addition, the agency has focused on identifying new issues related to technology in order to better protect consumers in the 

future. 

To enhance consumer protections 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. Civil penalties are important in areas 

where the Commission’s traditional equitable remedies, including consumer restituVerDate Nov 24 2008 06:52 Sep 21, 2012 Jkt 075679 PO 00000 Frm 00010 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\75970.TXT JACKIE
7 

tion and disgorgement, may be impracticable or not optimally effective in deterring 

unlawful acts. Restitution is often impracticable in these cases because consumers 

suffer injury that is either non-economic in nature or difficult to quantify. Likewise, 

disgorgement may be unavailable because the defendant has not profited from its 

unlawful acts. As such, the Commission reiterates its support for civil penalty authority in these areas and looks forward to continuing to work with this Committee 

to improve the Commission’s ability to protect consumers. 

1. Spam 

Since 1997, when the FTC brought its first case involving spam, the Commission 

has aggressively pursued deceptive and unfair practices involving these e-mail messages through 90 law enforcement actions against 143 individuals and 100 companies, 26 of which were filed after Congress enacted the CAN–SPAM Act. These cases 

have focused on the core protections that the CAN–SPAM Act provides to consumers: opt-out mechanisms that function; message headers that are non-deceptive; 

and warnings, as appropriate, that sexually-explicit content is included. Through 

these 26 actions, the Commission has succeeded in obtaining strong injunctions and 

significant monetary relief. To date in the FTC’s CAN–SPAM cases, Federal courts 

have awarded the Commission more than $10 million in disgorgement or redress 

and in excess of $2.6 million in civil penalties. 

The FTC continues to devote significant resources to fight spam. In June 2007, 

the Commission hosted a ‘‘Spam Summit’’ to explore the next generation of threats 

and solutions in the spam arena. The Summit panelists, nearly 50 in number, all 

confirmed that spam is being used increasingly as a vehicle for more pernicious conduct, such as sending phishing e-mails, viruses, and spyware. This malicious spam 

goes beyond mere annoyance to consumers—it can be criminal, resulting in significant harm by shutting down consumers’ computers, enabling keystroke loggers to 

steal identities, and undermining the stability of the Internet. Due to strong spamfiltering, however, much of this spam is not reaching consumers’ inboxes. The panelists also confirmed that malicious spam is a technological problem, driven largely 

by ‘‘botnets’’ (networks of hijacked personal computers that spammers use to conceal 

their identities) and the exploitation of computer security vulnerabilities that allow 

spammers to operate anonymously. Industry is taking a leading role in developing 

technological tools, such as domain-level e-mail authentication, to ‘‘uncloak’’ these 

anonymous spammers, and the Commission is encouraged by reported increases in 

the adoption rates for e-mail authentication. Panelists also agreed that there is no 

single solution to the spam problem and encouraged key stakeholders to collaborate 

in the fight against spam. To that end, the Commission looks forward to continued 

collaboration with consumer groups, industry members, international bodies, Members of Congress, and criminal law enforcement authorities. 

2. Spyware 

The Commission has brought eleven spyware enforcement actions in the past 2 

years. These actions have reaffirmed three key principles: First, a consumer’s computer belongs to him or her, not the software distributor. Second, buried disclosures 

do not work, just as they have never worked in more traditional areas of commerce. 

And third, if a distributor puts a program on a consumer’s computer that the consumer does not want, the consumer must be able to uninstall or disable it. 

The Commission’s most recent settlement with Direct Revenue, a distributor of 

adware, illustrates these principles.17 According to the FTC’s complaint, Direct Revenue, directly and through its affiliates, offered consumers free content and software, such as screen savers, games, and utilities, without disclosing adequately that 

downloading these items would result in the installation of adware. The installed 

adware monitored the online behavior of consumers and then used the results of 

this monitoring to display a substantial number of pop-up ads on their computers. 

Moreover, it was almost impossible for consumers to identify, locate, and remove 

this unwanted adware. Among other things, the FTC’s complaint alleged that Direct 

Revenue used deception to induce the installation of the adware and that it was unfair for the company to make it unreasonably difficult to uninstall the adware. To 

resolve these allegations, Direct Revenue agreed to provide clear and prominent disclosures of what it is installing, obtain express consent prior to installation, clearly 

label its ads, provide a reasonable means of uninstalling software, and monitor its 

affiliates to assure that they (and any subaffiliates) comply with the FTC’s order. 

In addition, Direct Revenue agreed to disgorge $1.5 million to the U.S. Treasury. 

The Commission will continue to monitor this area and bring law enforcement actions when warranted. 

8 

3. The Tech-Ade Workshop 

The FTC is committed to understanding the implications of the development of 

technology on privacy and consumer protection—as, or even before, these developments happen. Last November, the FTC convened public hearings on the subject of 

Protecting Consumers in the Next Tech-Ade.18 The FTC heard from more than 100 

of the best and brightest people in the tech world about new technologies on the 

horizon and their potential effects on consumers. The staff has incorporated what 

it has learned at the hearings into its enforcement and policy planning, will issue 

a report shortly, and will follow-up the hearings with a series of ‘‘town hall’’ meetings. The first such ‘‘town hall’’ meeting will take place on November 1–2 in Washington, D.C. and will address the issue of online behavioral marketing. Behavioral 

marketing involves the collection of information about a consumer’s activities online—including the searches the consumer has conducted, the web pages visited, 

and the content the consumer has viewed. The information is then used to target 

advertising to the consumer that is intended to reflect the consumer’s interests, and 

thus increase the effectiveness of the advertising. The FTC will examine how behavioral marketing works, what types of data are collected, how such data are used, 

whether such data are sold or shared, and what information is conveyed to consumers about its use. 

4. Repeal of the Common Carrier Exemption 

To address the consumer protection challenges posed by technology convergence, 

the Commission continues to support the repeal of the telecommunications common 

carrier exemption. 

Currently, 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.19 This exemption dates from a period when telecommunications 

were provided by government-authorized, highly regulated monopolies. The exemption is now outdated. Congress and the Federal Communications Commission 

(‘‘FCC’’) have dismantled much of the economic regulatory apparatus formerly applicable to the industry, and in the current world, firms are expected to compete in 

providing telecommunications services. 

Technological advances have blurred the traditional boundaries between telecommunications, entertainment, and information. 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, and billing and collection, areas in which issues 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. 

C. Health 

Of course not all fraud is technology-related. Fraud in the marketing of health 

care products, for example, can still be found in the offline world as in the online 

world. Too often, consumers fall prey to fraudulent health marketing because they 

are desperate for help. Fifty million Americans suffer from a chronic pain condition 20 and have found no effective cure or treatment. Seventy million Americans are 

trying to lose weight.21 The FTC continues to take action against companies that 

take advantage of these consumers. 

From April 2006 through August 2007, the FTC initiated or resolved 19 law enforcement actions involving 31 products making allegedly deceptive health claims.22

For example, in September 2006, a Federal district court found that defendants’ 

claims for their purported pain relief ionized bracelets were false and unsubstantiated, and required the individual and corporate defendants to pay up to $87 million in refunds to consumers. 

In January 2007, the Commission announced separate cases against the marketers of four extensively advertised products—Xenadrine EFX, CortiSlim, TrimSpa, 

and One-A-Day WeightSmart. Marketers for these products settled charges that 

they had made false or unsubstantiated weight-loss or weight-control claims. In settling, the marketers surrendered cash and other assets collectively worth at least 

$25 million and agreed to limit their future advertising claims.23

Another important issue on the Commission’s health agenda is childhood obesity. 

In the Summer of 2005, the Commission and the Department of Health and Human 

Services held a joint workshop on the issue of childhood obesity.24 The Commission’s 

9 

April 2006 report on the workshop urged industry to consider a wide range of options as to how self-regulation could assist in combating childhood obesity.25

A number of companies took the FTC’s recommendations seriously. On October 

16, 2006, for example, the Walt Disney Company announced new food guidelines 

aimed at giving parents and children healthier eating options.26 And in November 

2006, the Children’s Advertising Review Unit, or ‘‘CARU,’’ which is administered by 

the Council of Better Business Bureaus, announced a new self-regulatory advertising initiative designed to use advertising to help promote healthy dietary choices 

and healthy lifestyles among American children.27 Eleven leading food manufacturers—including McDonalds, The Hershey Company, Kraft Foods, and General 

Mills—are participants in this initiative. On July 18, 2007, at a forum on childhood 

obesity hosted by the FTC and the Department of Health and Human Services 

(‘‘HHS’’), these companies released the details of their pledges to voluntarily restrict 

their advertising to children under 12 on television, radio, print, and Internet. Each 

of the companies committed either to limiting 100 percent of their advertising directed to children to food products that meet certain nutrition criteria or to refrain 

from advertising to children.28 Nutritional standards vary by company, but all are 

required to be consistent with established scientific and/or government standards. 

As part of the initiative, the companies also committed to restricting their use of 

third-party licensed characters to products that meet these nutritional criteria and 

to websites promoting healthy lifestyles. 

At the July 18 FTC–HHS forum, select food and media companies reported on the 

progress they have made to date in adopting nutritional standards for advertising 

to children and reformulating products to offer children products that comport with 

these nutritional standards. The FTC also reported on its own research. The FTC’s 

Bureau of Economics discussed the results of a study of children’s exposure to food 

advertising on TV, released in June 2007. The study compared children’s exposure 

to advertising on television in 1977 and 2004. The study concluded that today’s children see more promotional advertisements for other programming, but fewer paid 

ads and fewer minutes of advertising on television. The study also found that children are not exposed to more food ads on television than they were in the past, although their ad exposure is more concentrated on children’s programming. 

The FTC also updated the audience on its efforts to conduct a more comprehensive study of food industry marketing expenditures and activities targeted toward 

children and adolescents. Through this effort, the FTC is exploring not only traditional TV, print, and radio advertising, but all of the many other ways that the industry reaches children—through in-store promotions, events, packaging, the Internet, and product placement in video games, movies, and television programs. The 

Commission hopes to get a more complete picture of marketing techniques for which 

publicly available data have so far been lacking. The Commission will submit the 

aggregated data about children’s food marketing in a report to Congress, as directed 

in the conference report on its 2006 appropriations legislation. This endeavor will 

be an important tool for tracking the marketplace’s response to childhood obesity 

and identifying where more action is needed. 

D. Financial Practices 

As with health issues, financial issues impact all consumers—whether they are 

purchasing a home, trying to establish credit or improve their credit rating, or managing rising debt. Thus, protecting consumers in the financial services marketplace 

is a critical part of the FTC’s consumer protection mission. The FTC has focused 

recent efforts in this area on subprime mortgage lending, payment cards, debt collection practices, and credit and debt counseling services.29

1. Mortgage Lending and Servicing 

In the last decade, the agency has brought twenty-one actions against companies 

and principals in the mortgage lending industry, focusing in particular on the 

subprime market.30 Several of these cases have resulted in large monetary judgments, with courts ordering that more than $320 million be returned to consumers. 

Most recently, in 2006, the Commission filed suit against a mortgage broker for 

deceiving Hispanic consumers who sought to refinance their homes. The FTC’s complaint alleged that the broker misrepresented numerous key loan terms.31 The alleged conduct was egregious because the FTC claimed that the lender conducted 

business with its clients almost entirely in Spanish, and then provided loan documents in English at closing containing the less favorable terms. To settle the suit, 

the broker paid consumer redress and agreed to a permanent injunction prohibiting 

it from misrepresenting loan terms.32

The Commission also has challenged deceptive and unfair practices in the servicing of mortgage loans.33 For example, in November 2003, the Commission, along 

10 

with the Department of Housing and Urban Development (‘‘HUD’’), announced a 

settlement with Fairbanks Capital Corp. and its parent company. Fairbanks (now 

called Select Portfolio Servicing, Inc.) had been one of the country’s largest thirdparty subprime loan servicers—it did not originate any loans, but collected and processed payments on behalf of the holders of the mortgage notes. The Commission alleged that Fairbanks failed to post consumers’ payments upon receipt, charged for 

unnecessary insurance, and imposed other unauthorized fees. The complaint also 

charged Fairbanks with violating Federal laws by using dishonest or abusive tactics 

to collect debts, and by reporting to credit bureaus consumer payment information 

that it knew to be inaccurate. To resolve these charges, Fairbanks and its former 

chief executive officer paid over $40 million in consumer redress, agreed to halt the 

alleged illegal practices, and implemented significant changes to company business 

practices to prevent future violations.34 Just last month, the FTC announced a 

modified settlement with the company, which provided substantial benefits to consumers beyond those in the original settlement, including account adjustments and 

reimbursements or refunds of fees paid in certain circumstances.35

To leverage resources in the Commission’s work on subprime mortgage lending, 

this summer it announced that it will cooperate in an innovative pilot project with 

Federal banking agencies and state regulators to conduct targeted consumer-protection compliance reviews of selected non-depository lenders with significant subprime 

mortgage operations. The agencies will share information about the reviews and investigations, take action as appropriate, collaborate on the lessons learned, and seek 

ways to better cooperate in ensuring effective and consistent reviews of these institutions. 

Finally, the Commission’s Bureau of Economics recently announced results of a 

study that confirms the need to improve mortgage disclosures.36 The research found: 

(1) the current federally required disclosures fail to convey key mortgage costs to 

many consumers; (2) better disclosures can significantly improve consumer recognition of mortgage costs; (3) both prime and subprime borrowers failed to understand 

key loan terms when viewing the current disclosures, and both benefited from improved disclosures; and (4) improved disclosures provided the greatest benefit for 

more complex loans, for which both prime and subprime borrowers had the most 

difficulty understanding loan terms. The Commission is working with Federal regulators on next steps. 

2. Payment Cards 

The Commission continues to bring law enforcement actions against marketers 

and distributors of payment cards within its jurisdiction. On July 30, the Commission obtained a temporary restraining order prohibiting EDebitPay and related companies from marketing reloadable prepaid debit cards 37 without adequately disclosing a processing and application fee of over $150. Moreover, the FTC alleges that 

some consumers who did not apply for defendants’ prepaid card nevertheless suffered unauthorized debits from their bank accounts. When consumers complained 

about the unauthorized withdrawals, defendants allegedly erected formidable barriers to obtaining refunds, including misrepresenting that consumers could not contest the debits as unauthorized. 

The Commission has also been examining hidden expiration dates and dormancy 

fees on gift cards. This year, the Commission has announced two settlements in this 

area, one with Kmart Corporation and another with the national restaurant company, Darden Restaurants.38 According to the FTC’s complaints, both Kmart and 

Darden promoted their gift cards as equivalent to cash but failed to disclose that 

fees are assessed after 2 years (initially 15 months, in Darden’s case) of non-use. 

In addition, the FTC alleged that Kmart affirmatively misrepresented that its card 

would never expire. Kmart and Darden have agreed to disclose the existence of any 

fees prominently in future advertising and on the front of the gift card. Both companies have also agreed to provide refunds of dormancy fees assessed on their cards. 

Kmart will reimburse the dormancy fees for consumers who provide an affected gift 

card’s number, a mailing address, and a telephone number. Darden will automatically restore to each card any dormancy fees that were assessed. In 2006, both companies voluntarily stopped charging dormancy fees on their gift cards. 

3. Debt Collection 

The FTC is tackling the problem of unlawful debt collection practices in two ways. 

First, the Commission engages in aggressive law enforcement. In nineteen lawsuits 

filed since 1998, the FTC has alleged that the defendants—including collection agencies, collection law firms, companies that purchase and collect delinquent credit accounts, and credit issuers—used illegal debt collection practices.39 In one such case, 

announced in February of this year, the Commission charged a collection agency, 

11 

Rawlins & Rivera, Inc., and its principals with violating Federal law by falsely 

threatening consumers with lawsuits, seizure of property, and arrest.40 The court 

has granted the FTC’s request for a preliminary injunction,41 and the litigation is 

continuing. In another case, in June 2007, the FTC obtained an injunction against 

defendants who victimized Spanish-speaking consumers by posing as debt collectors 

seeking payments consumers did not owe. 

Second, given the rise in consumer debt levels, as well as consumer complaints, 

it is time to take another look at the debt collection industry. This fall the FTC will 

hold a workshop to examine debt collection practices thirty years after enactment 

of the Fair Debt Collection Practices Act. The Commission will examine changes in 

the industry and the related consumer protection issues, including whether the law 

has kept pace with developments. 

E. Telemarketing and Do Not Call 

Since the mid-1980s, the Commission has had a strong commitment to rooting out 

telemarketing fraud. From 1991 to the present, the FTC has brought more than 350 

telemarketing cases; 240 of these cases were brought after 1995, when the FTC promulgated the Telemarketing Sales Rule (‘‘TSR’’).42 As one illustration of the Commission’s robust enforcement program, in July, the FTC halted the allegedly unlawful telemarketing operations of Suntasia Marketing 43 which, according to the FTC’s 

complaint, took millions of dollars directly out of consumers’ bank accounts without 

their knowledge or authorization. Suntasia allegedly tricked consumers into divulging their bank account numbers by pretending to be affiliated with the consumer’s 

bank and offering a purportedly ‘‘free gift’’ to consumers who accepted a ‘‘free trial’’ 

of Suntasia’s products. The complaint alleges that, once consumers divulged their 

bank account number, Suntasia debited many of their accounts. At the FTC’s request, a court halted the scheme and froze the defendants’ assets to preserve the 

Commission’s ability to distribute redress to injured consumers, should the Commission prevail in this litigation. 

The FTC also works closely with its Canadian counterparts to combat cross-border 

telemarketing fraud. One recent case resulted in a judgment of more than $8 million 

against Canadian telemarketers of advance fee credit cards.44 In this case, the FTC 

closely coordinated its action with other members of the Toronto Strategic Partnerships, a group of Canadian, U.S., and U.K. law enforcers whose mission is to cooperate in bringing telemarketing fraud cases. 

As a complement to its anti-fraud work in the telemarketing arena, the Commission has an active program to enforce the Do Not Call provisions of the TSR. Consumers have registered more than 147 million telephone numbers since the Do Not 

Call Registry became operational in June 2003. The Do Not Call provisions have 

been tremendously successful in protecting consumer’s privacy from unwanted telemarketing calls. Because currently consumers’ registrations expire after 5 years, the 

Commission plans a significant effort to educate consumers on the need to reregister 

their phone numbers. 

Most entities covered by the Do Not Call provisions comply, but for those who do 

not, tough enforcement is a high priority for the FTC. Twenty-seven of the Commission’s telemarketing cases have alleged Do Not Call violations, resulting in $8.8 million in civil penalties and $8.6 million in redress or disgorgement ordered.45

The Commission understands that this Committee has passed S. 781, the Do Not 

Call Implementation Act (‘‘DNCIA’’). The Commission supports this legislation and 

appreciates the Committee’s work on it. The Commission believes that the legislation, if enacted, will help ensure the continued success of the National Registry by 

providing the Commission with a stable funding source for its TSR enforcement activities. We also believe that the proposed legislation would benefit telemarketers, 

sellers, and service providers who access the Registry by providing them with a level 

fee structure. 

F. Media Violence 

The Commission has continued its efforts to monitor the marketing of violent entertainment to children and to encourage industry self-regulation. Since it began examining the issue in 1999, the Commission has issued six reports on the marketing 

of violent entertainment products to children. In April 2007, the Commission issued 

its latest report, which concluded that the movie, music, and video game industries 

generally comply with their own voluntary standards regarding the display of ratings and labels. Entertainment industries, however, continue to market some Rrated movies, M-rated video games, and explicit-content recordings on television 

shows and websites with substantial teen audiences. In addition, the FTC found 

that while video game retailers have made significant progress in limiting sales of 

M-rated games to children, movie and music retailers have made only modest 

12 

progress in limiting sales of R-rated and unrated DVDs and explicit content music 

recordings to children. The report also provides the results of a Commission survey 

of parents and children on their awareness and use of the video game rating system. 

G. ‘‘Green’’ Marketing 

The Commission continues to monitor marketplace developments to identify new 

consumer protection issues. In monitoring developments in the energy and environmental areas, the Commission has observed that new ‘‘green’’ claims, such as claims 

for carbon reduction, landfill reduction, and sustainable packaging are entering the 

market daily. These claims can be extremely useful for consumers; however, the 

complexity of the issues involved creates the potential for confusing, misleading, and 

fraudulent claims. Given this potential, in the coming months, FTC staff plans to 

conduct research, develop consumer and business outreach, and bring appropriate 

enforcement actions in this area. As part of the research process, the Commission 

plans to host a series of public workshops to seek input from consumers, industry 

representatives, environmental groups, academics, and other government agencies 

on how to prevent fraud and deception in this marketplace, while at the same time 

encouraging innovation and competition on the basis of truthful claims. 

H. Aiding Criminal Enforcement 

This testimony has highlighted various deceptive and unfair practices pursued by 

the Commission, from spam to spyware to health fraud to telemarketing fraud. 

These frauds that the FTC pursues civilly are also often criminal violations. The 

FTC’s Criminal Liaison Unit, or ‘‘CLU,’’ has stepped up cooperation with criminal 

authorities—an illustration of the FTC’s efforts to bring the collective powers of different government agencies to bear upon serious misconduct in many consumer protection areas. Since October 2006, based on CLU referrals to criminal agencies, 115 

FTC defendants or their associates have been charged, pled guilty, or were sentenced in criminal cases. The FTC’s criminal referral program continues to be a high 

priority. 

III. Maintaining Competition 

In addition to addressing unfair and deceptive conduct, the Commission is 

charged with protecting consumers by protecting competition. The goal of the FTC’s 

competition mission is to strengthen free and open markets by removing the obstacles that impede competition and prevent its benefits from flowing to consumers. To 

accomplish this, the FTC has focused its enforcement efforts on sectors of the economy that have a significant impact on consumers, such as health care, energy, technology, and real estate. 

A. Health Care 

The health care industry plays a crucial role in the U.S. economy in terms of consumer spending and welfare, and thus, the FTC has dedicated substantial resources 

to protecting consumers by vigorously reviewing proposed merger transactions, investigating potentially anticompetitive conduct that threatens consumer interests. 

1. Agreements that Delay Generic Entry 

The FTC continues to be vigilant in the detection and investigation of agreements 

between drug companies that delay generic entry, including investigating some patent settlement agreements between pharmaceutical companies that are required to 

be filed with the Commission under the Medicare Prescription Drug, Improvement, 

and Modernization Act of 2003. In these ‘‘exclusion payment settlements’’ (or, to 

some, ‘‘reverse payment settlements’’), the brand-name drug firm pays its potential 

generic competitor to abandon the patent challenge and delay entering the market. 

Such settlements restrict competition at the expense of consumers, whose access to 

lower-priced generic drugs is delayed, sometimes for many years. 

Recent court decisions, however, have made it more difficult to bring antitrust 

cases to stop exclusion payment settlements, and the impact of those court rulings 

is becoming evident in the marketplace. These developments threaten substantial 

harm to consumers and others who pay for prescription drugs. For that reason, the 

Commission supports a legislative solution to prohibit these anticompetitive settlements, while allowing exceptions for those agreements that do not harm competition. 

In addition, in November 2005, in the case of FTC v. Warner Chilcott Holdings 

Company III, Ltd., the Commission filed a complaint in Federal district court seeking to terminate an agreement between drug manufacturers Warner Chilcott and 

Barr Laboratories that prevented Barr from selling a lower-priced generic version 

of Warner Chilcott’s Ovcon 35, a branded oral contraceptive.46 Under threat of a 

13 

preliminary injunction, in September 2006, Warner Chilcott waived the exclusionary 

provision in its agreement with Barr that prevented Barr from entering with its generic version of Ovcon. The next day, Barr announced its intention to start selling 

a generic version of the product, and it now has done so, giving consumers the benefits of price competition.47

2. Pharmaceuticals, Medical Devices, and Diagnostic Systems 

The Commission is active in enforcing the antitrust laws in the pharmaceutical, 

medical devices, and diagnostic systems industries. For example, the Commission 

challenged the terms of Actavis Group hf.’s proposed acquisition of Abrika Pharmaceuticals, Inc., alleging that the transaction would create a monopoly in the U.S. 

market for generic isradipine capsules, a drug typically prescribed to patients to 

lower their blood pressure and to treat hypertension, ischemia, and depression. 

Under a consent order that allowed the deal to proceed, the companies divested all 

rights and assets needed to make and market generic isradipine capsules to Cobalt 

Laboratories, Inc., an independent competitor.48 The FTC also challenged Barr 

Pharmaceuticals’ proposed acquisition of Pliva.49 In settling the Commission’s 

charges that the transaction would have increased concentration and led to higher 

prices, Barr was required to sell its generic antidepressant, trazodone; its generic 

blood pressure medication, triamterene/HCTZ; either Pliva’s or Barr’s generic drug 

for use in treating ruptured blood vessels in the brain; and Pliva’s branded organ 

preservation solution. Last year, the FTC challenged several other pharmaceutical 

mergers, including: Watson Pharmaceuticals/Andrx Corporation; 50 Teva Pharmaceutical Industries/IVAX Corporation; 51 Johnson & Johnson’s acquisition of Pfizer’s 

consumer health division; 52 and Hospira, Inc./Mayne Pharma Limited.53 Recent 

FTC medical devices and diagnostic systems cases include: the FTC’s challenge of 

the proposed $27 billion acquisition of Guidant Corporation by Boston Scientific Corporation, in which the FTC required the divestiture of Guidant’s vascular business 

to an FTC-approved buyer; 54 and the FTC’s challenges of mergers affecting markets 

for biopsy systems and for centrifugal vacuum evaporators used in the health care 

industry.55

FTC staff also has initiated a study on authorized generic drugs.56 The study is 

intended to help the agency understand the circumstances under which innovator 

companies launch authorized generics; to provide data and analysis of how competition between generics and authorized generics during the Hatch-Waxman Act’s 180- 

day exclusivity period has affected short-run price competition and long-run prospects for generic entry; and to build on the economic literature about the effect of 

generic drug entry on prescription drug prices. 

3. Hospitals and Physicians 

The Commission has worked vigorously to preserve competition in local hospital 

markets. Last month, the Commission ruled that Evanston Northwestern 

Healthcare Corporation’s acquisition of Highland Park Hospital was anticompetitive,57 upholding an October 2005 Initial Decision by an FTC Administrative Law 

Judge that the consummated acquisition of its important competitor, Highland Park 

Hospital, resulted in substantially higher prices and a substantial lessening of competition for acute care inpatient hospital services in parts of Chicago’s northern suburbs.58 Several other hospital mergers have been announced within the past several 

months, and the FTC has active investigations pending.59

The FTC continues to investigate and challenge unlawful price fixing by physicians and other health care providers that may lead to higher costs for consumers. 

In the past year, the FTC challenged the practices of four physician groups alleging 

that the competing providers jointly set their prices and collectively agreed to refuse 

to deal with health care payers that did not meet their fee demands. The FTC 

charges against these groups were resolved by consent orders.60 Further, in June, 

the Commission accepted a consent order in South Carolina State Board of Dentistry,61 resolving charges that the South Carolina State Board of Dentistry restrained competition in the provision of preventive care by dental hygienists, limiting access to care by children living in poverty. 

B. Energy 

Few issues are more important to American consumers and businesses than high 

energy prices. The FTC plays a key role in maintaining competition and protecting 

consumers in energy markets by challenging antitrust violations, conducting studies 

and analyses, and providing comments to other government agencies. 

So far in 2007, the Commission has challenged three mergers in the energy industry. This past spring, the Commission challenged Equitable Resources proposed acquisition of The Peoples Natural Gas Company, a subsidiary of Dominion Resources.62 Equitable and Dominion Peoples are each other’s sole competitors in the 

14 

distribution of natural gas to nonresidential customers in certain areas of Allegheny 

County, Pennsylvania, which includes Pittsburgh. In March, the FTC filed an administrative complaint against the acquisition, and in April the staff sought an injunction in Federal court. Both actions alleged that the proposed transaction would 

result in a monopoly for many customers who now benefit from competition between 

the two firms. The district court denied the FTC’s request for an injunction, asserting that because the Pennsylvania Utility Commission has the power to approve the 

merger, the FTC is banned from taking action under the state action doctrine. The 

Third Circuit has issued an injunction pending appeal, and the appeal will be argued in early October. In January 2007, the Commission challenged the terms of a proposed $22 billion 

deal whereby energy firm Kinder Morgan would be taken private by its management and a group of investment firms, including The Carlyle Group and Riverstone 

Holdings.63 The Commission alleged in its complaint that Carlyle and Riverstone 

held significant positions in Magellan Midstream, a major competitor of Kinder Morgan in the terminaling of gasoline and other light petroleum products in the southeastern United States, and that the proposed transaction would threaten competition in those markets. In settling the Commission’s charges, Carlyle and Riverstone 

agreed to turn their investment in Magellan passive and to restrict the flow of sensitive information between Kinder Morgan and Magellan. 

In the most recent petroleum merger challenge, the Commission challenged Western Refining’s acquisition of Giant Industries to preserve competition in the bulk 

supply of light petroleum products to northern New Mexico, an area of the country 

where the Commission alleged that the two companies are direct and significant 

competitors.64 The Commission’s complaint for a preliminary injunction filed in Federal court and its subsequently issued administrative complaint alleged that, if it 

were not acquired by Western, Giant would soon increase the supply of gasoline to 

northern New Mexico, and that the transaction as proposed would prevent this. The 

U.S. district judge in New Mexico denied the Commission’s request for a preliminary injunction.65

The Commission also actively monitors energy markets, and markets for related 

consumer products, for anticompetitive conduct. In June 2007, the Commission 

charged the American Petroleum Company, Inc. with illegally conspiring with its 

competitors to restrict the importation and sale of motor oil lubricants in Puerto 

Rico, in an attempt to force the legislature to repeal a law that charged importers 

and others within the distribution chain an environmental deposit of 50 cents for 

each quart of lubricants purchased.66 The Commission’s consent order bars American Petroleum from engaging in such conduct in the future. 

On April 25, 2006, President Bush directed the DOJ to join the FTC and the Department of Energy to inquire into ‘‘illegal manipulation or cheating related to the 

current gasoline prices.’’ 67 Accordingly, staff of the Commission and the DOJ Antitrust Division, with assistance from the Department of Energy’s Energy Information 

Administration, conducted an economic analysis and investigation of the likely factors that led to higher national average gasoline prices during the spring and summer of 2006, and to determine whether anticompetitive conduct may have occurred.68 This study identified six major factors that contributed to price rises during the spring and summer of 2006: (1) the market effects of the summer driving 

season; (2) an increase in the price of crude oil; (3) an increase in the price of ethanol; (4) capacity issues related to the transition to ethanol from MTBE; (5) refinery 

outages; and (6) increased demand. A report detailing the findings was sent to the 

President in August.69

In May 2006, the FTC released a report titled Investigation of Gasoline Price Manipulation and Post-Katrina Gasoline Price Increases.70 This report contained the 

findings of a Congressionally-mandated Commission investigation into whether gasoline prices were ‘‘artificially manipulated by reducing refinery capacity or by any 

other form of market manipulation or price gouging practices.’’ The report also discusses gasoline pricing by refiners, large wholesalers, and retailers in the aftermath 

of Hurricane Katrina. In its investigation, the FTC examined evidence relating to 

a broad range of possible forms of manipulation. It found no instances of illegal market manipulation that led to higher prices during the relevant time periods, but 

found fifteen examples of pricing at the refining, wholesale, or retail level that fit 

the legislation’s definition of evidence of ‘‘price gouging.’’ 71 Other factors such as regional or local market trends, however, appeared to explain these firms’ prices in 

nearly all cases.72

C. Real Estate 

Purchasing or selling a home is one of the most significant financial transactions 

most consumers will ever make, and anticompetitive industry practices can raise the 

15 

prices of real estate services. In the past year, the agency has brought eight enforcement actions against associations of competing realtors or brokers. The associations, 

which control multiple listing services, adopted rules that allegedly discouraged consumers from entering into non-traditional listing contracts with real estate brokers. 

In seven of these matters, the Commission accepted settlements prohibiting multiple listing services from discriminating against non-traditional listing arrangements. The eighth matter, RealComp, is currently in administrative litigation; a 

trial was held in June and closing arguments are scheduled for September.73 The 

result of these actions will allow consumers more choice and ensure that consumers 

who choose to use discount real estate brokers will not be handicapped by rules preventing other consumers from seeing their home listings on the Internet. 

D. Technology 

Technology is another area in which the Commission has acted to protect consumers by safeguarding competition. In February 2007, the Commission issued an 

opinion and final order on remedies in the legal proceeding against computer technology developer Rambus, Inc.74 Previously, in July 2006, the Commission had determined that Rambus unlawfully monopolized the markets for four computer memory technologies that have been incorporated into industry standards for dynamic 

random access memory (DRAM) chips. DRAM chips are widely used in personal 

computers, servers, printers, and cameras.75 In addition to barring Rambus from 

making misrepresentations or omissions to standard-setting organizations again in 

the future, the February 2007 order, among other things, requires Rambus to license its SDRAM and DDR SDRAM technology; with respect to uses of patented 

technologies after the effective date of the order, bars Rambus from collecting more 

than the specified maximum allowable royalty rates; and requires Rambus to employ a Commission-approved compliance officer to ensure that Rambus’s patents and 

patent applications are disclosed to industry standard-setting bodies in which it participates.76 Rambus has appealed the Commission’s rulings to the U.S. Court of Appeals for the District of Columbia Circuit. 

E. Retail and Other Industries 

The FTC also guards against anticompetitive conduct in the retail sector. In June 

2007, the Commission sought a preliminary injunction in Federal district court 

blocking Whole Foods’ acquisition of its chief rival, Wild Oats Markets, Inc.77 The 

FTC charged that the proposed transaction would violate Federal antitrust laws by 

eliminating the substantial competition between these two uniquely close competitors in numerous geographic markets across the country in the operation of premium natural and organic supermarkets. On August 16, 2007, a judge for the U.S. 

District Court of the District of Columbia denied the FTC’s motion for preliminary 

injunction, and on August 23, the Court of Appeals denied the FTC’s emergency motion for an injunction pending appeal.78 The matter remains in administrative litigation. Also, this year in June, the FTC challenged Rite Aid Corporation’s proposed 

$3.5 billion acquisition of the Brooks and Eckerd pharmacies from Canada’s Jean 

Coutu Group (PJC), Inc.79 To remedy the alleged anticompetitive impact of the proposed transaction, the Commission ordered Rite Aid and Jean Coutu to sell 23 pharmacies to Commission-approved buyers to preserve the competition that would otherwise be lost in the merger. 

In March 2007, the Commission announced a proposed order settling charges that 

the Missouri State Board of Embalmers and Funeral Directors illegally restrained 

competition by defining the practice of funeral directing to include selling funeral 

merchandise to consumers on an at-need basis.80 The Board’s regulation permitted 

only licensed funeral directors to sell caskets to consumers on an at-need basis, 

thereby restricting competition from other retailers. The Board ended the restriction 

last year and agreed that it will not prohibit or discourage the sale of caskets, services, or other funeral merchandise by unlicensed persons, thereby settling the Commission’s charges. 

The Commission also has sought to protect customers by imposing conditions on 

mergers involving diverse industries such as launch services; 81 the manufacture of 

ammunition for mortars and artillery; 82 the Nation’s two largest funeral home and 

cemetery chains; 83 and liquid oxygen and helium.84

F. Guidance, Transparency, and Merger Review Process Improvements 

The FTC works to facilitate cooperation and voluntary compliance with the law 

by promoting transparency in enforcement standards, policies, and decision-making 

processes. Last year, the FTC implemented two important reforms that streamlined 

the merger review process. In February 2006, the Commission announced the implementation of significant merger process reforms aimed at reducing the costs borne 

by both the FTC and merging parties.85 In June 2006, the FTC and the DOJ AntiVerDate Nov 24 2008 06:52 Sep 21, 2012 Jkt 075679 PO 00000 Frm 00019 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\75970.TXT JACKIE
16 

trust Division implemented an electronic filing system that allows merging parties 

to submit, via the Internet, premerger notification filings required by the HartScott-Rodino Act.86

G. Competition Advocacy 

The Commission frequently provides comments to Federal and state legislatures 

and government agencies, sharing its expertise on the competitive impact of proposed laws and regulations when they explicitly or implicitly impact the antitrust 

laws, and when they alter the competitive environment through restrictions on 

price, innovation, or entry conditions. Recent FTC advocacy efforts have contributed 

to several positive outcomes for consumers. In the past year, the FTC has sought 

to persuade regulators to adopt policies that do not unnecessarily restrict competition in the areas of gasoline sales,87 real estate brokerage,88 real estate legal services,89 attorney advertising,90 and pharmacy benefit managers.91

H. Hearings, Reports, Conferences, and Workshops 

The FTC’s hearings, conferences, and workshops represent a unique opportunity 

for the agency to develop policy and research tools and help foster a deeper understanding of the complex issues involved in the economic and legal analysis of antitrust law. 

Beginning in June 2006 and continuing through May 2007, the FTC and the DOJ 

Antitrust Division held hearings to discuss the boundaries of permissible and impermissible conduct under Section 2 of the Sherman Act.92 The primary goal of the 

hearings was to examine whether and when specific types of single-firm conduct are 

procompetitive or benign and when they may harm competition. The Commission 

expects to issue a report with DOJ on the hearings. 

In August 2006, the FTC convened the Internet Access Task Force to examine 

issues raised by converging technologies and regulatory developments, and to inform 

the enforcement, advocacy, and education initiatives of the Commission. Under the 

leadership of the Internet Access Task Force, the FTC recently addressed two issues 

of interest to policymakers. 

First, in October 2006, the FTC released a staff report, Municipal Provision of 

Wireless Internet. The report identifies the potential benefits and risks to competition and consumers associated with municipal provision of wireless Internet service.93 Second, in June 2007, the FTC released a staff report, Broadband Connectivity 

Competition Policy, which summarizes the Task Force’s findings in the area of 

broadband Internet access, including so-called ‘‘network neutrality.’’ 94 The report 

proposes guiding principles for assessing this complex issue, and makes clear that 

the FTC will continue to vigorously enforce the antitrust and consumer protection 

laws and expend considerable efforts on consumer education, industry guidance, and 

competition advocacy in the important area of broadband Internet access. 

In April 2007, the Commission held a three-day conference on Energy Markets in 

the 21st Century: Competition Policy in Perspective.95 The conference brought together leading experts from government, the energy industry, consumer groups, and 

the academic community to participate on panels to examine such topics as: (1) the 

relationship between market forces and government policy in energy markets; (2) 

the dependence of the U.S. transportation sector on petroleum; (3) the effects of electric power industry restructuring on competition and consumers; (4) what energy 

producers and consumers may expect in the way of technological developments in 

the industry; (5) the security of U.S. energy supplies; and (6) the government’s role 

in maintaining competition and protecting energy consumers. The Commission expects to issue a report detailing the findings of this conference. 

Also in April of this year, the FTC and the DOJ issued a joint report, titled Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition, to inform consumers, businesses, and intellectual property rights holders 

about the agencies’ competition views with respect to a wide range of activities involving intellectual property.96 The report discusses issues including: refusals to license patents, collaborative standard setting, patent pooling, intellectual property licensing, the tying and bundling of intellectual property rights, and methods of extending market power conferred by a patent beyond the patent’s expiration. This 

second report on antitrust and intellectual property joins a report issued in 2003 

following extensive hearings on this important topic. 

In May 2007, the Commission and the DOJ Antitrust Division released a joint report, Competition in the Real Estate Brokerage Industry. The purpose of the report 

is to inform consumers and other industry participants about important competition 

issues involving residential real estate, including the impact of the Internet, the 

competitive structure of the real estate brokerage industry, and obstacles to a more 

competitive environment.97

17 

I. Competition Education Initiatives 

The FTC is committed to enhancing consumer confidence in the marketplace 

through enforcement and education. This year, Commission staff launched a multidimensional outreach campaign, targeting new and bigger audiences, with the message that antitrust enforcement helps consumers reap the benefits of competitive 

markets by keeping prices low and services and innovation high, as well as by encouraging more choices in the marketplace.98 As a part of this effort, the Commission’s website, www.ftc.gov, continues to grow in size and scope with resources on 

competition policy in a variety of vital industries. This year, the FTC launched new 

industry-specific websites for Oil and Gas,99 Health Care,100 Real Estate,101 and 

Technology.102 These minisites serve as a one-stop shop for consumers and businesses who want to know what the FTC is doing to promote competition in these 

important business sectors. In the past year, the FTC also issued practical tips for 

consumers on buying and selling real estate, funeral services, and generic drugs, as 

well as ‘‘plain language’’ columns on oil and gas availability and pricing. 

III. International 

The FTC’s Office of International Affairs (OIA), created in January 2007, brings 

together the international functions formerly handled in the Bureaus of Competition 

and Consumer Protection and the Office of General Counsel. OIA brings increased 

prominence to the FTC’s international work, and enhances the FTC’s ability to coordinate its enforcement efforts effectively to promote sound enforcement and convergence toward best practices with the agency’s counterpart agencies around the 

world. 

The FTC has built a strong network of cooperative relationships with its counterparts abroad, and plays a leading role in key multilateral fora. The growth of communication media and electronic commerce presents new challenges to law enforcement—fraud and deception know no borders. The Commission works with other nations to protect American consumers who can be harmed by anticompetitive conduct 

and frauds perpetrated outside the United States. The FTC also actively assists new 

democracies moving toward market-based economies with developing and implementing competition and consumer protection laws and policies. 

A. Consumer Protection 

Globalization and rapid changes in technology have accelerated the pace of new 

consumer protection challenges, such as spam, spyware, telemarketing fraud, data 

security, and privacy, that cross national borders and raise both enforcement and 

policy issues. The Internet and modern communications devices, such as Voice-overInternet Protocol, have provided tremendous benefits to consumers but also have 

aided mass marketing fraud and raised fresh privacy concerns. The FTC has a comprehensive international consumer protection program of enforcement, networking, 

and policy initiatives to address these new challenges. 

In the coming year, the FTC will continue to implement the U.S. SAFE WEB Act 

of 2006, which was signed into law last December. Thanks to the actions of this 

Committee, the U.S. SAFE WEB Act provides the FTC with updated tools for the 

21st century. It allows the FTC to cooperate more fully with foreign law enforcement agencies in the area of cross-border fraud and other practices that are global 

and harm consumers, such as fraudulent spam, spyware, misleading health and 

safety advertising, privacy and security breaches, and telemarketing fraud. The FTC 

already has used the powers conferred by the Act to share information with foreign 

agencies in several investigations. The increasing use of these new tools will remove 

some of the key roadblocks to effective international enforcement cooperation. 

The FTC works directly with consumer protection and other law enforcement officials in foreign countries to achieve its goals. In particular, in response to the 

amount of fraud across the U.S.-Canadian border, the FTC continues to build its 

relationship with its Canadian counterparts. The Commission has worked hard to 

expand partnerships with Canadian law enforcement entities to fight cross-border 

mass marketing fraud targeting U.S. and Canadian consumers. 

Increased globalization also requires the FTC to participate actively in international policy efforts to develop flexible, market-oriented standards, backed by aggressive enforcement, to address emerging consumer protection issues. In 2006, for 

example, the FTC, working with its foreign partners through the Organization for 

Economic Cooperation and Development (‘‘OECD’’) and through the London Action 

Plan, the international spam enforcement network, called for increased cross-border 

law enforcement cooperation and increased public/private sector cooperation to combat spam. Already in 2007, the FTC, working with its foreign partners through the 

OECD, has developed a framework for privacy regulators and law enforcement auVerDate Nov 24 2008 06:52 Sep 21, 2012 Jkt 075679 PO 00000 Frm 00021 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\75970.TXT JACKIE
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thorities to facilitate cross-border privacy law enforcement cooperation and provide 

greater protection for consumers’ personal information. Most recently, in July 2007, 

the FTC, again working through the OECD, agreed with its partners on a set of 

principles to address the practical and legal obstacles that many consumers face 

when trying to resolve disputes with businesses, in their own country or abroad, 

particularly in cross-border e-commerce transactions. 

The FTC will continue to focus the international community on the importance 

of enforcement as a key component of privacy protection in the OECD, the Asia Pacific Economic Cooperation (‘‘APEC’’), and other multilateral organizations. The FTC 

also continues to participate actively in APEC’s Electronic Commerce Steering 

Group and several OECD committees, including the Committee on Consumer Policy, 

and in the International Consumer Protection Enforcement Network (‘‘ICPEN’’). The 

FTC supported ICPEN’s operations this year by hosting its Secretariat. 

B. Competition 

The FTC’s cooperation with competition agencies around the world is a vital component of our enforcement and policy programs, facilitating our ability to collaborate 

on cross-border cases, and promoting convergence toward sound, consumer welfarebased competition policies. 

FTC staff routinely coordinate with colleagues in foreign agencies on mergers and 

anticompetitive conduct cases of mutual concern. The FTC promotes policy convergence through formal and informal working arrangements with other agencies, 

many of which seek the FTC’s views when developing new policy initiatives. For example, during the past year, the FTC consulted with the European Commission regarding its review of policies on abuse of dominance, non-horizontal mergers, and 

merger remedies, with the Canadian Competition Bureau on merger remedies and 

health care issues, and with the Japan Fair Trade Commission on revisions to its 

Guidelines on Patent and Know-how Licensing Agreements under the Antimonopoly 

Act. We are closely following competition developments in China and have held 

high-level meetings with the drafters of the antimonopoly law and with officials in 

China’s Ministry of Commerce responsible for their pre-merger notification guidelines, and conducted a multi-day, hands-on seminar on merger process and analysis 

for Chinese officials. The FTC continues to play a lead role with respect to marketbased competition and innovation issues in the U.S.-China Strategic Economic Dialogue, including participation in the May 22–23 summit meeting in Washington. We 

have just held our annual bilateral meetings with the Japanese Fair Trade Commission, we participated in consultations in Washington and in foreign capitals with top 

officials of, among others, the Korean Fair Trade Commission and Mexican Federal 

Competition Commissions, and we will soon hold our annual consultations with the 

European Commission’s Directorate General for Competition. 

The FTC plays a lead role in key multilateral fora that provide important opportunities for competition agencies to promote cooperation and convergence. In the 

International Competition Network, the FTC serves on the Steering Group, and 

FTC officials hold leadership positions in working groups on unilateral conduct, 

mergers, and competition policy implementation. We are also active in the competition work of the OECD, UNCTAD, and APEC. The FTC participates in U.S. delegations that negotiate competition chapters of proposed free trade agreements, such 

as with Korea, Thailand, and Malaysia. 

As competition enforcement has proliferated worldwide, the FTC’s international 

competition program has promoted sound, coherent, and fair application of competition laws, to the benefit of American businesses and consumers. 

C. International Technical Assistance 

The FTC assists developing nations that are moving toward market-based economies to develop and implement sound competition and consumer protection laws 

and policies. Our program is funded mainly by the United States Agency for International Development (‘‘USAID’’) and conducted in cooperation with the DOJ Antitrust Division. In 2007, the FTC sent 20 staff experts on 20 technical assistance 

missions to 14 countries, including the ten-nation ASEAN Community, India, Russia, Azerbaijan, South Africa, Central America, Tanzania, and Egypt. 

Because USAID resources for these activities have been declining, the Commission may need to consider alternative funding sources. The Antitrust Modernization 

Commission recently recommended that Congress appropriate funds for use by the 

agencies directly for this important work. 

V. Conclusion 

The Commission wants to ensure that the quality of our work is maintained despite the breadth of our mission and the challenges that have been described involvVerDate Nov 24 2008 06:52 Sep 21, 2012 Jkt 075679 PO 00000 Frm 00022 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\75970.TXT JACKIE
19 

ing technological change and an evolving global economy. In the last several 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. In light of these 

new laws and challenges, the FTC appreciates the Committee’s continued support 

for providing the Commission with the authority, personnel, and resources needed 

to ensure that the FTC vigorously protects American consumers and promotes a vibrant marketplace. 

I would be happy to answer any questions that you and other Members may have 

about the FTC’s reauthorization. 

Endnotes 

1The written statement represents the views of the Federal Trade Commission. My oral presentation and responses to questions are my 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. 3The Commission wants to ensure that the quality of our work is maintained despite the 

quantity of demands placed upon us, the breadth of our mission, and the increasing challenges 

of a dynamic domestic and global marketplace. Today, the FTC has 1,074 full-time equivalent 

employees (‘‘FTEs’’). 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. We would like to work 

with the Committee to help ensure that our reauthorization includes appropriate increases in 

resources to meet these growing challenges. 4The Commission’s ability to seek civil penalties is limited, and we look forward to working 

with you to ensure that the FTC has the authority it needs to deter wrongful conduct and protect American consumers. For example, where civil penalties are authorized (such as for violations of specific statutes like CAN–SPAM, or regulations including the Telemarketing Sales 

Rule), the Commission cannot, unlike other agencies such as the Securities and Exchange Commission or the Commodity Futures Trading Commission, go directly to court, but must first refer 

the case to the Department of Justice, which has 45 days in which to decide whether to bring 

the action. Only if the DOJ declines may the FTC bring the civil penalties claim. The Commission has a good, long-standing working relationship with DOJ, which has greatly assisted us 

in our consumer protection efforts. But, for example, there are cases in which we must forgo 

seeking civil penalties in the interest of seeking expeditious injunctive relief. We look forward 

to working with the Committee to examine this issue. 5So far during FY 2007, the FTC’s Bureau of Consumer Protection has achieved many successes. It obtained 57 court orders requiring defendants to pay more than $236 million in consumer redress, obtained 8 court judgments for civil penalties in an amount over $4.9 million, 

and filed 35 new complaints in Federal district court to stop unfair and deceptive practices. It 

also completed 14 statutorily-mandated requirements such as rulemakings and reports, led 2 

law enforcement sweeps, hosted 11 conferences and workshops, issued 5 reports on topics significant to consumers, and developed 16 consumer and business education campaigns. 6Pub. L. 105–318, 112 Stat. 3007 (1998) (codified at 18 U.S.C. § 1028). 7 Exec. Order No. 13,402, 71 FR 27945 (May 10, 2006). 

8The President’s Identity Theft Task Force, Combating Identity Theft: A Strategic Plan (‘‘Strategic Plan’’), available at http.//www.idtheft.gov. 9OMB Memorandum 07–16, ‘‘Safeguarding Against and Responding to the Breach of Personally Identifiable Information’’ (May 22, 2007), available at http://www.whitehouse.gov/omb/ 

memoranda/fy2007/m07-16.pdf; OMB Memorandum, ‘‘Recommendations for Identity Theft Related Data Breach Notification’’ (Sept. 20, 2006), available at http://www.whitehouse.gov/omb/ 

memoranda/fy2006/tasklforceltheftlmemo.pdf. 10See http://www.ftc.gov/infosecurity/. 11See http://www.ftc.gov/bcp/workshops/proofpositive/index.shtml. 12On July 30, 2007, the FTC issued a request for public comment on the uses of Social Security numbers in the private sector, and announced that it was planning to host one or more 

public forums on the issue in the coming months. See http://www.ftc.gov/opa/2007/07/ssn/ 

shtm. 13See http://www.usdoj.gov/opa/pr/2007/July/07lcrtl522%20%20%20.html. 14FTC News Release, FTC Launches Nationwide Id Theft Education Campaign (May 10, 

2006), available at http://www.ftc.gov/opa/2006/05/ddd.htm. 15 Available at http://onguardonline.gov/index.html. 16 Available at http://www.ftc.gov/bcp/edu/microsites/idtheft/business/data-breach.html. 17 In the Matter of Direct Revenue, LLC, FTC Dkt. No. C–4194 (June 29, 2007), available at 

http://www.ftc.gov/os/caselist/0523131/index.shtm. 18See FTC News Release, Hearings Will Explore Emerging Technologies and Consumer Issues 

in the Next Decade (July 26, 2006), available at http://www.ftc.gov/opa/2006/07/techade.htm. 19 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 

20 

49 (interstate transportation) and the Communications Act of 1934’’ and all amendments thereto. 20Partners for Understanding Pain, Pain Advocacy Tool Kit (Sept. 2006) (including members 

from American Cancer Society, American Pharmacists Association, and Arthritis Foundation, 

among others), available at http://www.nmmra.org/resources/HomelHealth/NurseslTooll Kitl2006.pdf. 21 E.g., Approximately two-thirds of U.S. adults are overweight or obese. National Center for 

Health Statistics, Prevalence of Overweight and Obesity Among Adults: United States, 2003– 

2004. available at http://www.cdc.gov/nccdphp/dnpa/obesity/faq.htm#adults; and approximately 127 million adults in the U.S. are overweight, 60 million obese, and 9 million severely 

obese, American Obesity Association, AOA Fact Sheet, available at http://obesity1. 

tempdomainname.com/subs/fastfacts/obesitylUS.shtml. 22 E.g., FTC v. Window Rock Enters., Inc., No. CV04–8190 (JTLx) (C.D. Cal. filed Jan. 4, 2007) 

(stipulated final orders) (Cortislim), available at http://www.ftc.gov/os/caselist/windowrock/ 

windowrock.htm; In the Matter of Goen Techs. Corp., FTC File No. 042 3127 (Jan. 4, 2007) (consent order) (TrimSpa), available at http://www.ftc.gov/os/caselist/goen/0423127agreement.pdf; 

United States v. Bayer Corp., No. 07–01 (HAA) (D.N.J. filed Jan. 3, 2007) (consent decree) (OneA-Day), available at http://www.ftc.gov/os/caselist/bayercorp/070104consentdecree.pdf; FTC v. Chinery, No. 05–3460 (GEB) (D.N.J. filed Dec. 26 , 2006) (stipulated final order) (Xenadrine), 

available at http://www.ftc.gov/os/caselist/chinery/070104stipulatedfinalorder.pdf; FTC v. QT, 

Inc., No. 03 C 3578 (N.D. Ill. Sept. 8, 2006) (final judgment order), available at http:// 

www.ftc.gov/os/caselist/0323011/061113qrayfinaljdgmntorder.pdf. 23See FTC News Release, Federal Trade Commission Reaches ‘‘New Year’s’’ Resolutions with 

Four Major Weight-Control Pill Marketers (Jan. 4, 2007), available at http://www.ftc.gov/opa/ 

2007/01/weightloss.htm. 24See FTC News Release, Workshop Explores Marketing, Self-Regulation, and Childhood Obesity (July 15, 2005), available at http://www.ftc.gov/opa/2005/07/obesityworkshopma.htm. 25Perspectives on Marketing, Self-Regulation, & Childhood Obesity: A Report on a Joint Workshop of the Federal Trade Commission and the Department of Health and Human Services (Apr. 

2006), available at http://www.ftc.gov/os/2006/05/PerspectivesOnMarketingSelf-Regulation& 

ChildhoodObesityFTCandHHSReportonJointWorkshop.pdf. 26See Bruce Horovitz and Laura Petrecca, Disney to Make Food Healthier for Kids, USA 

Today (Oct. 17, 2006), available at http://www.usatoday.com/money/media/2006-10-16- 

disneylx.htm. 27See Annys Shin, Ads Aimed at Children Get Tighter Scrutiny; Firms to Promote More 

Healthful Diet Choices, Wash. Post, Nov. 15, 2006, at D1. 28The one exception is Cadbury Adams, LLC, which committed either to refrain from advertising to children under 12 or to devote at least 50 percent of such advertising to a product that 

offers a healthier dietary option. Bubblicious gum is currently the only product Cadbury Adams 

advertises to children under 12. 29The Commission also brings other law enforcement actions related to financial services, 

such as credit reporting, financial privacy, data security, and identity theft. For a description 

of some of these recent cases, see ‘‘The FTC in 2007: A Champion for Consumers and Competition,’’ Federal Trade Commission, April 2007, at 24–25, http://www.ftc.gov/os/2007/04/ 

ChairmansReport2007.pdf at 29–30, 37. 30FTC v. Mortgages Para Hispanos.Com Corp., No. 06–00019 (E.D. Tex. 2006); FTC v. Ranney, No. 04–1065 (D. Colo. 2004); FTC v. Chase Fin. Funding, No. 04–549 (C.D. Cal. 2004); 

United States v. Fairbanks Capital Corp., No. 03–12219 (D. Mass. 2003); FTC v. Diamond, No. 

02–5078 (N.D. Ill. 2003); United States v. Mercantile Mortgage Co., No. 02–5079 (N.D. Ill. 2002); 

FTC v. Associates First Capital Corp., No. 01–00606 (N.D. Ga. 2002); FTC v. First Alliance Mortgage Co., No. 00–964 (C.D. Cal. 2002); United States v. Action Loan Co., No. 00–511 (W.D. Ky. 

2000); FTC v. Nu West, Inc., 00–1197 (W.D. Wash. 2000); United States v. Delta Funding Corp., 

No. 00–1872 (E.D.N.Y. 2000); FTC v. Barry Cooper Prop., No. 99–07782 (C.D. Cal. 1999); FTC v. Capitol Mortgage Corp., No. 99–580 (D. Utah 1999); FTC v. CLS Fin. Serv., Inc., No. 99– 

1215 (W.D. Wash. 1999); FTC v. Granite Mortgage, LLC, No. 99–289 (E.D. Ky. 1999); FTC v. Interstate Res. Corp., No. 99–5988 (S.D.N.Y. 1999); FTC v. LAP Fin. Serv., Inc., No. 99–496 

(W.D. Ky. 1999); FTC v. Wasatch Credit Corp., No. 99–579 (D. Utah 1999); In re First Plus Fin. 

Group, Inc., FTC Docket No. C–3984 (2000); In re Fleet Fin., Inc., 128 F.T.C. 479 (1999); FTC v. Capital City Mortgage Corp., No. 98–00237 (D.D.C. 1998). 31FTC v. Mortgages Para Hispanos. Com Corp, supra note 28. 32Stipulated Final Judgment and Order of Permanent Injunction, FTC v. Mortgages Para 

Hispanos. Com Corp., supra note 28, Sept. 25, 2006. 33 United States v. Fairbanks Capital Corp, supra note 28; FTC v. Capital City Mortgage 

Corp., supra note 28. 34Order Preliminarily Approving Stipulated Final Judgment and Order as to Fairbanks Capital Corp. and Fairbanks Capital Holding Corp., United States v. Fairbanks Capital Corp., supra 

n. 28, Nov. 21, 2003; Stipulated Final Judgment and Order as to Thomas D. Basmajian, United 

States v. Fairbanks Capital Corp., supra n. 28, Nov. 21, 2003. 35FTC News Release, FTC, Subprime Mortgage Servicer Agree to Modified Settlement (Aug. 

2, 2007), available at http://www.ftc.gov/opa/2007/08/sps.shtm. 36FTC, Bureau of Economics Staff Report, James M. Lacko and Janis K. Pappalardo, Improving Consumer Mortgage Disclosures: An Empirical Assessment of Current and Prototype Disclosure Forms, June 2007. An earlier BE study addressed mortgage broker compensation disclosures. FTC, Bureau of Economics Staff Report, James M. Lacko and Janis K. Pappalardo, The 

Effect of Mortgage Broker Compensation Disclosures on Consumers and Competition: A Controlled Experiment, Feb. 2004, http://www.ftc.gov/os/2004/01/030123mortgagefullrpt.pdf. 37 A prepaid debit card, also called a prepaid card, is typically a plastic stored valued card 

that uses magnetic stripe technology to store information about funds that consumers ‘‘prepay’’ 

21 

or ‘‘load’’ onto the card. Consumers can use prepaid cards to make purchases or withdraw money 

from merchants and ATMs that accept the network brand on the card. 38See FTC News Release, National Restaurant Company Settles FTC Charges for Deceptive 

Gift Card Sales (Apr. 3, 2007), available at http://www.ftc.gov/opa/2007/04/darden.htm. 39FTC v. Rawlins & Rivera, Inc., No. 07–146 (M.D. Fla. 2007); United States v. Whitewing 

Financial Group, No. 06–2102 (S.D. Tex. 2006); FTC v. Check Investors, Inc., No. 03–2115 

(D.N.J. 2003), appeal docketed, Nos. 05–3558, 05–3957 (3rd Cir. Aug. 2, 2005); United States 

v. Capital Acquisitions and Management Corp., No. 04–50147 (N.D. Ill. 2004); FTC v. Capital 

Acquisitions and Management Corp., No. 04–7781 (N.D. Ill. 2004); In re Applied Card Systems, 

Inc., FTC Docket No. C–4125 (Oct. 8, 2004); United States v. Fairbanks Capital Corp., supra 

n. 14; FTC v. Associates, supra n.14; United States v. DC Credit Services, Inc., No. 02–5115 (C.D. 

Cal. 2002); United States v. United Recovery Systems, Inc., No. 02–1410 (S.D. Tex. 2002); United 

States v. North American Capital Corp., No. 00–0600 (W.D.N.Y. 2000); United States v. National 

Financial Systems, Inc., No. 99–7874 (E.D.N.Y. 1999); Perimeter Credit, L.L.C., No. 99–0454 

(N.D. Ga. 1999); In re Federated Department Stores, Inc., FTC Docket No. C–3893 (Aug. 27, 

1999); FTC v. Capital City Mortgage Co., supra n. 14; United States v. Nationwide Credit, Inc., 

No. 98–2920 (N.D. Ga. 1998); United States v. Lundgren & Associates, P.C., No. 98–1274 (E.D. 

Cal. 1998); In re May Dep’t Stores Co., FTC Docket No. C–3848 (Nov. 2, 1998); In re General 

Electric Capital Corp., FTC Docket No. C–3839 (Dec. 23, 1998). 40FTC v. Rawlins & Rivera, supra n. 34. 41Order Granting Motion for Preliminary Injunction, FTC v. Rawlins & Rivera, supra n. 34, 

Apr. 6, 2007. 42 16 C.F.R. § 310. The Commission promulgated the TSR following Congressional enactment 

of the Telemarketing and Consumer Fraud and Abuse Prevention Act in 1994. 15 U.S.C. 

§§ 6101–6108. 

43 FTC v. FTN Promotions, Inc., No. 8:07–cv–1279–T–30TGW (M.D. Fla. July 23, 

2007). 44FTC v. 120199 Canada, Ltd., No. 1:04–CV–07204 (N.D. Ill.) (permanent injunction order entered Mar. 8, 2007). 45These Do Not Call cases are included in the 240 TSR cases noted above. 46FTC v. Warner Chilcott Holdings Co. III, No. 1:05–cv–02179–CKK (D.D.C. filed Nov. 7, 

2005), available at http://www.ftc.gov/os/caselist/0410034/051107comp0410034%20.pdf. 47FTC News Release, Consumers Win as FTC Action Results in Generic Ovcon Launch (Oct. 

23, 2006), available at http://www.ftc.gov/opa/2006/10/chilcott.htm. In October 2006, the district court entered a final order that settled the FTC’s charges against Warner Chilcott. As a 

result of the settlement, Warner Chilcott: (1) must refrain from entering into agreements with 

generic pharmaceutical companies in which the generic agrees not to compete with Warner 

Chilcott and there is either a supply agreement between the parties or Warner Chilcott provides 

the generic with anything of value and the agreement adversely affects competition; (2) must 

notify the FTC whenever it enters into supply or other agreements with generic pharmaceutical 

companies; and (3) for 3 months, had to take interim steps to preserve the market for the tablet 

form of Ovcon in order to provide Barr the opportunity to compete with its generic version. FTC 

v. Warner Chilcott Holdings Co. III, No. 1:05–cv–02179–CKK (D.D.C. filed Oct. 23, 2006) (stipulated permanent injunction and final order), available at http://www.ftc.gov/os/caselist/ 

0410034/finalorder.pdf. The FTC’s case against Barr is ongoing. 48 In the Matter of Actavis Group, FTC Docket No. C–4190 (May 18, 2007) (decision and order), 

available at http://www.ftc.gov/os/caselist/0710063/index.shtm. 49 In the Matter of Barr Pharms., Inc., FTC Docket No. C–4171 (Dec. 8, 2006) (decision and 

order), available at http://www.ftc.gov/os/caselist/0610217/0610217barrdolfinal.pdf. 50 In the Matter of Watson Pharms., Inc., and Andrx Corp., FTC Docket No. C–4172 (Dec. 12, 

2006) (decision and order), available at http://www.ftc.gov/os/caselist/0610139/061212do 

lpubliclver0610139.pdf. 51 In the Matter of Teva Pharm. Indus. Ltd. and IVAX Corp., FTC Docket No. C–4155 (Mar. 

2, 2006) (decision and order), available at http://www.ftc.gov/os/caselist/0510214/0510 

214.htm. 52 In the Matter of Johnson & Johnson and Pfizer Inc., FTC Docket No. C–4180 (Jan. 19, 2007) 

(decision and order), available at http://www.ftc.gov/os/caselist/0610220/0610220c4180 

decisionorderlpublicversion.pdf; see also In the Matter of Allergan, Inc. and Inamed Corp., FTC 

Docket No. C–4156 (Apr. 17, 2006) (decision and order), available at http://www.ftc.gov/os/ 

caselist/0610031/0610031.htm. 53FTC News Release, FTC Challenges Hospira/Mayne Pharma Deal (Jan. 18, 2007), available 

at http://www.ftc.gov/opa/2007/01/hospiramayne.htm; In the Matter of Hospira, Inc. and 

Mayne Pharma Ltd., FTC Docket No. C–4182 (Jan. 18, 2007) (decision and order), available at 

http://www.ftc.gov/os/caselist/0710002/070118do0710002.pdf. 54 In the Matter of Boston Scientific Corp. and Guidant Corp., FTC Docket No. C–4164 (July 

25, 2006) (decision and order), available at http://www.ftc.gov/os/caselist/0610046/ 

060725do0610046.pdf. 55 In the Matter of Hologic, Inc., FTC Docket No. C–4165 (Aug. 9, 2006) (decision and order), 

available at http://www.ftc.gov/os/caselist/0510263/0510263decisionandorderpubrecver.pdf; In 

the Matter of Thermo Electron Corp., FTC Docket No. C–4170 (Dec. 5, 2006) (decision and order), 

available at http://www.ftc.gov/os/caselist/0610187/061205do0610187.pdf. 56FTC News Release, FTC Proposes Study of Competitive Impacts of Authorized Generic Drugs 

(Mar. 29, 2006), available at http://www.ftc.gov/opa/2006/03/authgenerics.htm. 57 In the Matter of Evanston Northwestern Healthcare Corp., FTC Docket No. 9315 (Aug. 6, 

2007) (Opinion of the Commission), available at http://www.ftc.gov/os/adjpro/d9315/ 

070806opinion.pdf. 

22 

58 In the Matter of Evanston Northwestern Healthcare Corp., FTC Docket No. 9315 (Oct. 20, 

2005) (initial decision), available at http://www.ftc.gov/os/adjpro/d9315/051021idtext 

version.pdf. 59The Commission also challenged the merger of two of the top three operators of outpatient 

kidney dialysis clinics and required divestitures in 66 markets throughout the United States. 

In the Matter of Fresenius AG, FTC Docket No. C–4159 (June 30, 2006) (decision and order), 

available at http://www.ftc.gov/os/caselist/0510154/0510154.htm. 60 In the Matter of Puerto Rico Ass’n of Endodontists, Corp., FTC Docket No. C–4166 (Aug. 

24, 2006) (decision and order), available at http://www.ftc.gov/os/caselist/0510170/ 

0510170c4166praedecisionorder.pdf; In the Matter of New Century Health Quality Alliance, Inc., 

FTC Docket No. C–4169 (Sept. 29, 2006) (decision and order), available at http://www.ftc.gov/ 

os/caselist/0510137/0510137nchqaprimedecisionorder.pdf; In the Matter of Advocate Health 

Partners, et al., FTC Docket No. C–4184 (Feb. 7, 2007) (decision and order), available at 

http://www.ftc.gov/os/caselist/0310021/0310021.htm; and In the Matter of Health Care Alliance of Laredo, L.C., FTC Docket No. C–4158 (Mar. 23, 2006) (decision and order), available 

at http://www.ftc.gov/os/caselist/0410097/0410097.htm. 

61 In the Matter of South Carolina State Board of Dentistry, FTC Docket No. 9311 (June 20, 

2007) (decision and order), available at http://www.ftc.gov/os/adjpro/d9311/070 

620decision.pdf. 62FTC v. Equitable Resources, Inc., Dominion Resources, Inc., et al., No. 07–cv–490 (W.D. Pa. 

filed April 13, 2007) (complaint filed), available at http://www.ftc.gov/os/adjpro/d9322/ 

070413cmpltforpi-tro.pdf. 63FTC News Release, FTC Challenges Acquisition of Interests in Kinder Morgan, Inc. by The 

Carlyle Group and Riverstone Holdings (Jan. 25, 2007), available at http://www.ftc.gov/opa/ 

2007/01/kindermorgan.shtm. 64FTC News Release, FTC Files Complaint in Federal District Court Seeking to Block Western 

Refining’s Acquisition of Rival Energy Company Giant Industries, Inc. (April 12, 2007), available 

at http://www.ftc.gov/opa/2007/04/westerngiantltro.shtm. 65Other recent energy matters include: Chevron/USA Petroleum, an abandoned transaction 

in which Chevron would have acquired most of the retail gasoline stations owned by USA Petroleum, the largest remaining chain of service stations in California not controlled by a refiner 

(USA Petroleum’s president stated that the parties abandoned the transaction because of resistance from the FTC), see Elizabeth Douglass, Chevron Ends Bid to Buy Stations, LA Times, Nov. 

18, 2006, Part C at 2; EPCO/TEPPCO, in which EPCO’s $1.1 billion acquisition of TEPPCO’s 

natural gas liquid storage business was only allowed to proceed if TEPPCO first agreed to divest 

its interests in the world’s largest natural gas storage facility in Bellvieu, Texas, to an FTCapproved buyer, see In the Matter of EPCO, Inc., and TEPPCO Partners, L.P., FTC Docket No. 

C–4173 (Oct. 31, 2006) (decision and order), available at http://www.ftc.gov/os/caselist/ 

0510108/0510108c4173do061103.pdf; Chevron/Unocal, which resolved the Commission’s administrative monopolization complaint against Unocal and antitrust concerns arising from Chevron’s 

proposed $18 billion acquisition of Unocal, see In the Matter of Chevron Corp., FTC Docket No. 

C–4144 (July 27, 2005) (consent order), available at http://www.ftc.gov/os/caselist/0510125/ 

050802do0510125.pdf and Union Oil Co. of Calif., FTC Docket No. 9305 (July 27, 2005) (consent 

order), available at http://www.ftc.gov/os/adjpro/d9305/050802do.pdf; and Aloha Petroleum/ 

Trustreet Properties, in which the Commission alleged that Aloha’s proposed acquisition of 

Trustreet Properties’ half interest in import-capable terminal and retail gasoline assets in Hawaii would have reduced from five to four the overall number of island gasoline marketers that 

had guaranteed access to supply, and from three to two the number of suppliers selling to 

unintegrated retailers, see FTC v. Aloha Petroleum Ltd., No. CV05 00471 HG/KSC (Dist. Hi. 

complaint filed July 27, 2005), available at http://www.ftc.gov/os/caselist/1510131/ 

050728comp1510131.pdf. Ultimately, Aloha Petroleum was dismissed at the agency’s request 

after Aloha announced a long-term agreement with a third party, Mid Pac Petroleum, that 

would give Mid Pac substantial rights to use the terminal to import gasoline into Hawaii. 66 In the Matter of American Petroleum Company, Inc., FTC File No. 061–0229 (June 14, 2007) 

(decision and order), available at http://www.ftc.gov/os/caselist/0610229/0610229 

decisionorder.pdf. 67President George W. Bush, Remarks to the Renewable Fuels Summit 2006 (Apr. 25, 2006), 

available at http://www.whitehouse.gov/news/releases/2006/04/20060425.html. 68The Commission and DOJ also extended an open offer to assist state Attorneys General 

with gasoline pricing investigations upon request. As part of its continuing law enforcement 

interaction with the states, through the National Association of Attorneys General, the Commission sponsored a Federal/state enforcement conference in September 2006 to explore competition 

issues in petroleum markets. 69 ‘‘Federal Trade Commission Report on Spring Summer 2006 Nationwide Gasoline Price Increases’’ (August 30, 2006), available at http://www.ftc.gov/reports/gasprices06/P040101 

Gas06increase.pdf. Commissioner Leibowitz dissented from the Report. See http://www.ftc.gov/ 

speeches/leibowitz/P010401gas06dissent.pdf. 70FTC News Release, FTC Releases Report on its ‘‘Investigation of Gasoline Price Manipulation and Post-Katrina Gasoline Price Increases’’ (May 22, 2006), available at http:// 

www.ftc.gov/opa/2006/05/katrinagasprices.htm. 71Science, State, Justice, Commerce, and Related Agencies Appropriations Act, 2007, Pub. L. 

No. 109–108 § 632, 119 Stat. 2290 (2005) (‘‘Section 632’’). 72Federal Trade Commission, Investigation of Gasoline Price Manipulation and Post-Katrina 

Gasoline Price Increases (Spring 2006), available at http://www.ftc.gov/reports/060518 

PublicGasolinePricesInvestigationReportFinal.pdf; but see concurring statement of Commissioner 

Jon Leibowitz (concluding that the behavior of many market participants leaves much to be desired and that price gouging statutes, which almost invariably require a declared state of emergency or other triggering event, may serve a salutary purpose of discouraging profiteering in 

23 

the aftermath of a disaster), available at http://www.ftc.gov/speeches/leibowitz/060518 

LeibowitzStatementReGasolineInvestigation.pdf. 73See, e.g., FTC News Release, FTC Charges Austin Board of Realtors With Illegally Restraining Competition (July 13, 2006), available at http://www.ftc.gov/opa/2006/07/ 

austinboard.htm; see also FTC News Release, FTC Charges Real Estate Groups with Anticompetitive Conduct in Limiting Consumers’ Choice in Real Estate Services (Oct. 12, 2006), available at http://www.ftc.gov/opa/2006/10/realestatesweep.htm; FTC News Release, Commission 

Receives Application for Proposed Divestiture from Linde AG and The BOC Group plc; FTC Approves Final Consent Orders in Real Estate Competition Matters (Dec. 1, 2006), available at 

http://www.ftc.gov/opa/2006/12/fyi0677.htm. 74FTC News Release, FTC Issues Final Opinion and Order in Rambus Matter (Feb. 5, 2007), 

available at http://www.ftc.gov/opa/2007/02/070502rambus.htm. 75 In the Matter of Rambus, Inc., Docket No. 9302 (July 31, 2006) (opinion of the Commission), 

available at http://www.ftc.gov/os/adjpro/d9302/060802commissionopinion.pdf. 76 In the Matter of Rambus Inc., Docket No. 9302 (Feb. 5, 2007) (opinion of the Commission 

on remedy) (Harbor, P., and Rosch, T., concurring in part, dissenting in part), available at 

http://www.ftc.gov/os/adjpro/d9302/070205opinion.pdf; In the Matter of Rambus Inc., Docket 

No. 9302 (Feb. 2, 2007) (final order), available at http://www.ftc.gov/os/adjpro/d9302/ 

070205finalorder.pdf. 77FTC v. Whole Foods Markets and Wild Oats Markets, No. 1:07–cv–01021 (D.D.C. filed June 

5, 2007), (complaint filed), available at http://www.ftc.gov/os/caselist/0710114/070605 

complaint.pdf. 78FTC v. Whole Foods Markets and Wild Oats Markets, No. 07–1021 (D.D.C. Aug. 16, 2007); 

FTC v. Whole Foods Markets and Wild Oats Markets, No. 07–5276 (D.C. Cir. Aug. 23, 2007). 79 In the Matter of Rite Aid Corporation and The Jean Coutu Group, FTC Docket No. C–4191 

(June 4, 2007) (complaint filed), available at http://www.ftc.gov/os/caselist/0610257/ 

070604complaint.pdf. 80 In the Matter of Missouri Board of Embalmers and Funeral Directors, FTC File No. 061 

0026 (Mar. 9, 2007) (proposed decision and order), available at http://www.ftc.gov/os/caselist/ 

0610026/0610026decisonorder.pdf. 81 In the Matter of Lockheed Martin Corp. and The Boeing Co., FTC File No. 051 0165 (Oct. 

3, 2006) (decision and order), available at http://www.ftc.gov/os/caselist/0510165/ 

0510165decisionorderpublicv.pdf; In the Matter of Lockheed Martin Corp. and The Boeing Co., 

FTC File No. 051 0165 (Oct. 3, 2006) (agreement containing consent order), available at 

http://www.ftc.gov/os/caselist/0510165/0510165agreement.pdf. 82 In the Matter of Gen. Dynamics Corp., FTC Docket No. C–4181 (Dec. 28, 2006) (decision 

and order), available at http://www.ftc.gov/os/caselist/0610150/0610150decisionorder.pdf; In 

the Matter of Gen. Dynamics Corp., FTC Docket No. C–4181 (Dec. 28, 2006) (agreement containing consent orders), available at http://www.ftc.gov/os/caselist/0610150/0610 

150agreement.pdf. 83 In the Matter of Serv. Corp. Int’l and Alderwoods Group Inc., FTC Docket No. C–4174 (Dec. 

29, 2006) (decision and order), available at http://www.ftc.gov/os/caselist/0610156/ 

070105do0610156.pdf. 84 In the Matter of Linde AG and The BOC Group PLC, FTC Docket No. C–4163 (Sept. 5, 

2006) (decision and order), available at http://www.ftc.gov/os/caselist/0610114/ 

0610114c4163LindeBOCDOPubRecV.pdf. 85FTC News Release, FTC Chairman Announces Merger Process Reforms (Feb. 16, 2006), 

available at http://www.ftc.gov/opa/2006/02/mergerlprocess.htm. 86FTC News Release, Federal Trade Commission and Department of Justice Allow Electronic 

Submission of Premerger Notification Filings (June 20, 2006), available at http://www.ftc.gov/ 

opa/2006/06/premerger.htm. 87FTC Staff Comments to Councilmember Mary M. Cheh, Chairperson, Committee on Public 

Services and Consumer Affairs, Council of the District of Columbia (June 8, 2007), available at 

http://www.ftc.gov/os/2007/06/V070011divorcement.pdf; FTC Staff Comments to Christopher 

R. Stone, State of Connecticut House of Representatives (May 2, 2007), available at http:// 

www.ftc.gov/be/V070008.pdf. 88Federal Trade Commission and United States Department of Justice Comments to Governor 

Jennifer M. Granholm of Michigan (May 30, 2007), available at http://www.ftc.gov/be/ 

v050021.pdf. 89Federal Trade Commission and United States Department of Justice Comments to 

Assemblywoman Helene E. Weinstein, Chair, Committee on Judiciary, New York State Assembly (Apr. 27, 2007), available at http://www.ftc.gov/be/V070004.pdf. 90FTC Staff Comments to Ms. Lilia G. Judson, Executive Director, Indiana Supreme Court 

(May 11, 2007), available at http://www.ftc.gov/be/V070010.pdf; Brief of the Federal Trade 

Commission As Amicus Curiae Supporting Arguments to Vacate Opinion 39 of the New Jersey 

Supreme Court Committee on Attorney Advertising (May 8, 2007), available at http:// 

www.ftc.gov/be/V070003opinion39.pdf; FTC Staff Comments to the Florida Bar (Mar. 23, 2007), 

available at http://www.ftc.gov/be/V070002.pdf; FTC Staff Comments to the Rules of Professional Conduct Committee, Louisiana State Bar Association (Mar. 14, 2007), available at 

http://www.ftc.gov/be/V070001.pdf; FTC Staff Comments to the Office of Court Administration 

of the New York Unified Court System (Sept. 14, 2006), available at http://www.ftc.gov/os/ 

2006/09/V060020-image.pdf. 91FTC Staff Comments to Assemblywoman Nellie Pou, Chair, Appropriations Committee, New 

Jersey General Assembly (Apr. 17, 2007), available at http://www.ftc.gov/be/V060019.pdf; FTC 

Staff Comments to Terry G. Kilgore, Member, Commonwealth of Virginia House of Delegates 

(Oct. 2, 2006), available at http://www.ftc.gov/be/V060018.pdf. 

24 

92FTC News Release, FTC and DOJ to Host Joint Public Hearings on Single-Firm Conduct 

as Related to Competition (Nov. 28, 2005), available at http://www.ftc.gov/opa/2005/11/unilateral.htm. 93FTC Staff Report, Municipal Provision of Wireless Internet (Sept. 2005), available at 

http://www.ftc.gov/os/2006/10/V060021municipalprovwirelessinternet.pdf. 94FTC Staff Report, Broadband Connectivity Competition Policy (June 2007), available at 

http://www.ftc.gov/reports/broadband/v070000report.pdf. 95FTC Conference, Energy Markets in the 21st Century: Competition Policy in Perspective 

(Apr. 10–12, 2007), available at http://www.ftc.gov/bcp/workshops/energymarkets/index.html. 96Federal Trade Commission and Department of Justice, Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition (April 17, 2007), available at 

http://www.ftc.gov/opa/2007/04/ipreport.shtm. 97Federal Trade Commission and United States Department of Justice, Competition in the 

Real Estate Brokerage Industry (Apr. 2007), available at http://www.ftc.gov/reports/realestate/ 

V050015.pdf. To complement the report, the Commission simultaneously released a consumer 

education publication, Buying a Home: It’s a Big Deal, which has tips for considering the services of a real estate professional and using the Internet as a source of real estate information. 

FTC Consumer Education, Buying a Home: It’s a Big Deal (May 2007), available at http:// 

www.ftc.gov/bc/edu/pubs/consumer/alerts/zalt001.shtm. 98 Available at http://www.ftc.gov/ftc/antitrust.htm. 99 Available at http://www.ftc.gov/ftc/oilgas/index.html. 100 Available at http://www.ftc.gov/bc/healthcare/index.htm. 101 Available at http://www.ftc.gov/bc/realestate/index.htm. 102 Available at http://www.ftc.gov/bc/tech/index.htm. 

Senator DORGAN. Madam Chair, thank you very much. We appreciate your testimony. 

Let me ask a number of questions of you. 

First, in your testimony, you indicate that you would like to work 

with the Committee to help ensure that the reauthorization includes appropriate resources—increases in resources to meet growing challenges. I note that, in 1979, the Federal Trade Commission 

had 1,750 full-time employees, it now has 1,074. So, from 1,700- 

plus to 1,000, that’s a very substantial reduction in the number of 

employees of the Federal Trade Commission. What do you think 

represents a level of employment and an increase in the investment in the FTC that would be appropriate, given the challenges? 

Ms. MAJORAS. I think part of it depends, Chairman Dorgan, on 

whether new—whether there are new enforcement priorities that 

are assigned to the FTC. I think where we are today is, if we can 

grow by 10 to 15, perhaps 20, FTEs a year over the next number 

of years, we probably will still be in a strong position to continue 

to protect consumers at the level at which we have been. 

It’s—there are—I think there are several reasons why the agency, particularly back in the 1980s, began to diminish in size. Over 

the last few years, it actually has been growing, and certainly in 

my tenure we’ve been growing steadily over the last few years as 

Congress—well, as markets have changed and required us to step 

in more—in new and different areas, and as Congress has given us 

new responsibilities. 

Senator DORGAN. Let me ask about the common carrier exemption. You have referred to that, and we’ve talked about that previously. The common carrier exemption is a gap that, in my understanding, prevents the Federal Trade Commission from moving in 

certain areas dealing with communications. Can you describe that 

gap? And how important is it that we deal with it? 

Ms. MAJORAS. I’m happy to do that. Thank you. 

Increasingly, as we are seeing the communications industry and 

players in that industry converging, technologies are converging, 

functions are changing, and, obviously, less of our communications 

function in this country falls under the rubric of common carrier. 

What we are bumping up against in trying to bring cases, say, in 

25 

area of calling cards or the area of advertising of bundles of services—so, a bundle that might include your cable, your Internet access, and telephone—we are being asked to look at whether there 

may be some deception in those areas, whether the advertising is 

not fully accurate. And the difficulty is that, if a company falls 

under the rubric of common carrier, what they argue to us is that 

we have no authority. Now, we’ve taken a view that common carrier status, from our perspective—we look at the activity and 

whether it’s common carriage, not the label that a company puts 

on itself, but, nonetheless, what we are finding in our enforcement 

work is that the telecom companies want to prohibit us from going 

in those areas, and we simply—this is what we, I think, are very 

good at. We have a lot of experience at rooting out deception in advertising and in other disclosures that are made to consumers in 

services that are extremely important to them. And so, we’re— 

what we’re worried about is that this problem is going to grow as 

the markets continue to evolve, and not be reduced. 

Senator DORGAN. Well, we agree. And my hope would be, in the 

reauthorization bill, that we will eliminate that exemption and give 

the FTC the authority that is necessary. 

Now, let me ask a question on a subject that you and I have disagreed on over the years, and that is the issue of oil pricing. There 

have been substantial mergers in the oil industry, mergers that 

have meant that virtually every oil company has two names— 

Exxon Mobil, ConocoPhillips—they marry up and have two names; 

they’re bigger, they’re stronger, they have more economic muscle in 

the marketplace. And many people feel that that has played a role 

in disadvantaging consumers and giving more market power to the 

companies. The reports I have seen recently suggest that refiners— 

I’m talking about the refinery capability in this country—are taking a larger share of the profits of oil. The Wall Street Journal 

noted, and I’ll quote, ‘‘Lately, American refiners have made a 

pretax profit of roughly $30 on each barrel of oil they use to 

produce gasoline, more than three times the margin in Singapore, 

a major Asian refining center.’’ If refiners are making twice as 

much on a gallon today, versus a few years ago, does that not suggest to someone in your position in the Federal Trade Commission, 

that there is market power being exercised in a way that disadvantages consumers, coming from, and stemming from, substantial 

mergers? 

Ms. MAJORAS. That’s not what we’ve concluded in the various investigations and studies that we’ve done into this industry, Senator. I mean, the fact of the matter is that, in refining in particular, if you actually look at it from concentration standpoint, it’s 

still a very unconcentrated marketplace. The problem we have is 

that demand continues to grow year after year, and refining capacity, while it has grown—some people say, ‘‘Well, all these refineries 

have closed, how could it have grown?’’ Well it’s grown through expansion, and we now have some bigger refineries, and a lot of the 

smaller and less efficient refineries have gone away. We also have 

better technologies and can refine more gasoline out of one barrel 

of oil. So, there has actually been an expansion in capacity, but, 

nonetheless, demand has continued to grow, and so, we’re now importing, actually, refined gasoline into this country, because we 

26 

have not—because the refiners and their capacity hasn’t kept up 

with the demand. 

Senator DORGAN. But if, in fact, it is the case that refiners are 

making twice as much now on a gallon of gasoline as they made 

previously, wouldn’t that suggest that the market power exists 

there because of mergers to impose that upon consumers? And 

wouldn’t that encourage the Federal Trade Commission to take a 

skeptical look at it? 

Ms. MAJORAS. Well, the—a couple of things—it doesn’t suggest 

that they have market power that comes from mergers. I mean, it 

could suggest that, but we’ve looked at it, and that’s not what we 

believe it suggests. The second thing is that, you know, we’ve 

brought three cases this year in the energy area; indeed, we 

brought one to challenge the merger between two refiners, because 

we felt that, in that part of the country, that would—that could, 

potentially, give the remaining refiner market power. And the District Court disagreed with us and said, ‘‘No, we’re not concerned 

about that, there’s plenty of competition here,’’ and denied our request for an injunction. So, surely we are being very vigilant and 

looking at mergers very, very closely, and identifying those that we 

think will inhibit competition, going forward. 

Senator DORGAN. But, in many ways, the mergers are already 

completed. I mean, we’ve had dramatic consolidation, and that consolidation, it seems to me, just intuitively, provides much greater 

muscle in the marketplace, and the consumers, at this point, are 

the victims at the end of the process. Is that not the case? 

Ms. MAJORAS. We actually don’t—we actually don’t believe it is, 

because—I mean, obviously, you’re referring to the mergers that occurred in the 1990s, the very large mergers. Interestingly, if—I 

mean, we look at the market in different pieces. If you look at upstream, for example, exploration and production of actual oil— 

there, consolidation has almost no effect; OPEC sets the price at 

that level. Exxon Mobil, indeed, has about a—just over, I think— 

last stats I saw were, maybe, a 3 percent market share—in the exploration and production of oil. So, you know, hard to see how a 

merger hurts consumers, when you have numbers that low. OPEC 

is clearly setting the price of oil, and the price of oil—is the greatest determinant of what we’re going to pay—of what we’re going 

to pay at the pump. Moving down the chain of distribution, obviously you get to the refining and wholesale levels. It’s true that, 

after years of very low profits, which probably contribute to having 

less investment in more refineries, over the last couple of years we 

have seen the profits for the refiners go up, as I said, as we’ve— 

as we’ve—it isn’t that the mergers have given us fewer—less refinery capacity, it’s—again, it’s—we have—we have more capacity 

now than we had 10 years ago. The problem is that we also have 

greater demand. And even as we hear consumers really feeling the 

pain at the pump; nonetheless, we look at the figures and the demand continues to go up. 

Senator DORGAN. But it seems to me, with all due respect, that 

that rationalizes a set of facts, to the best extent one can, with a 

conclusion one has already developed. It seems to me that here’s 

the case. As the large oil companies merge and our country waves 

a green light or a green flag or something, and says, ‘‘Go right 

27 

ahead’’—as they merge and become stronger and have more muscle 

in the marketplace, they, in many cases, have eliminated refineries. I would guess you would agree with that. We have more refining capacity, yes, but many of those mergers have resulted in refineries closing. And, in fact, it seems to me they have opportunities, through market power, to decide refining capacity in a way 

that maximizes their profits. And the refinery industry is not, as 

you suggest, widely dispersed in ownership; there is a substantial 

amount of ownership of the refining capacity by the major integrated companies. 

And I think you said that OPEC has a prominent influence in 

setting the price of oil. You’re right about that. There are three 

things that tell me there is no free market at all. The three things 

are: first, the OPEC ministers sitting in a closed room, making 

judgments; second, bigger, stronger, merged oil companies with 

more economic muscle in the marketplace; and third, a futures 

market that has become an orgy of speculation. Those three things 

tell me there’s not a free market. I mean, we talk about all this 

‘‘free market’’ stuff. There’s no free market here. And if, in fact, 

that’s the case, there is no free market, then it means it is much, 

much more important to have your agency be the watchdog to 

make certain that consumers are not gouged. 

Ms. MAJORAS. Well, thank you, Senator. I mean, I disagree with 

you that there’s not a free market in gasoline. We see the workings 

of the market, constantly. And—but where I absolutely agree with 

you is, regardless—I mean, you and I could agree to disagree on 

that point, but, nonetheless, where I absolutely agree with you is, 

we still have to be the watchdog in this area. And we are the 

watchdog. And, as I said, we’ve brought three energy cases this 

year; early last year, we were pushing on a merger that Chevron 

was trying to do. They abandoned the merger. They said it was because of concerns of the FTC. So, performing that watchdog function, we absolutely are doing. 

As far as closing refineries as a result of mergers, you know, I 

wasn’t—I have to say, of course, I wasn’t here in the 1990s, but, 

while there may have been some of that, there were a number of 

other things that happened. One is, the FTC did not allow these 

mergers to go through without significant divestitures. And some 

of those divestitures, as I understand it, occurred in the refining 

area. So, what we have today is, a lot of the largest refiners are 

not the Exxon Mobils in this country, they’re companies like Valero 

and others, who have—who bought refineries from the bigger companies and now are significant players in that. So, you actually 

have some relatively new players in the refining business, as well. 

We did do a study—we did do an investigation, in 2006 and the 

early part of 2007, to see whether, in fact, we could find evidence 

that refiners were using capacity in making decisions, particularly 

jointly, to keep the price—to keep the price high; and we just didn’t 

find any evidence of that. 

Senator DORGAN. North Dakota has the second highest price of 

gasoline in the country, next to Hawaii, today. We are the sixth 

largest energy-producing state in the country, with oil, natural gas, 

and coal. I mean, I would say that there are a whole lot of folks 

out there that have real questions about how these prices are set. 

28 

I don’t suggest this is the case with what is happening with oil or 

gas, but I would tell you that I chaired the hearing in this room— 

Ken Lay sat where you were sitting—the former CEO of Enron. 

And I also, on the Energy Committee, on another committee, sat 

at a dais when the Federal Energy Regulatory Commission sat at 

the table; and they weren’t watchdogs, they were lapdogs. The fact 

is, we were told—those of us that said, ‘‘What’s happening on the 

West Coast?’’—we were told, ‘‘You’re wrong.’’ The Vice President 

said we were wrong, ‘‘It’s a free market. The free market system 

is working.’’ Turns out, it wasn’t, there was grand theft going on. 

I’m not suggesting that that is the case here, but what I am suggesting is, the role of a watchdog and the role of a referee is a very 

important role in this country, especially if we have decided to 

allow substantial numbers of mergers, where you have increased 

concentration. That has been the case in this industry. And I want 

the industry to succeed. It’s certainly succeeding beyond most people’s dreams these days. But I also want the consumers to have a 

watchdog that gives them a voice, to determine whether there is 

market manipulation. 

Let me go to a couple of other things that I want to talk to you 

about. 

One is, as you might imagine, subprime loans. There’s an enormous consequence to this country’s economy with respect to what 

is happening with the consequences of subprime loans now. Tell me 

your impression of what kind of deceptive advertising, if any—or 

deceptive lending—existed that has caused this problem. Some will 

say, ‘‘Well, look, this is the fault of those that lent the money to 

people that shouldn’t have gotten it, and it’s the fault of the people 

that borrowed the money, who should have known better.’’ So, 

everybody’s at fault. But is there not a case to be made here that 

there has been substantial deceptive advertising? 

Ms. MAJORAS. Just yesterday, we announced that—earlier this 

summer, we did a—an Internet and other advertising sweep, and, 

just yesterday, sent letters to 200 advertisers of mortgage loans, to 

tell them that we believe that they may be violating Federal law 

by deceptively advertising loans on their—particularly on the first 

page; you go to the second page and get fine print—but teasing 

consumers into believing that they could get loans at 1 percent and 

the like. So, definitely, as, you know—the FTC has been active in 

this space, in terms of deception in mortgage loan advertising, for 

years, before this even became a big problem, and we’ve brought 

a number of cases, and we’ve gotten back $320 million for consumers. So, this is something that’s not a fad for us at all; we’ve 

been on—we’ve been on this. And I do think that deception played 

a role. 

I also, though, think that, even and, obviously, we wouldn’t be 

doing this work if we didn’t think it was extremely important, but 

there’s another thing, Senator, that we’re worried about, that I’d 

like to bring to your attention, and that is, even for those who 

weren’t deceived, and even for those who are getting loans—you 

know, both in the subprime arena, but also not—consumers just 

are not understanding what they’re getting in their mortgage. And 

we published a study earlier this summer that our economists did, 

which showed that, across the board, the mortgage disclosures, 

29 

even when the law is being followed, are just not explaining to people what their mortgage means. And so, I think we should look at 

both parts of this, the deception part, which we’re working on, but 

we’re also concerned about, even if honest disclosures are given, 

are our consumers understanding what their mortgage means and 

what they’re getting? 

Senator. DORGAN. So, first of all, I appreciate the work that you 

have done for some while in this area, but—Warren Buffet said, 

‘‘Every bubble will burst.’’ We forget that as the bubble builds. We 

always forget that. And it seems to me that we were in this period 

for some years, where we had all these advertisements for 

subprime loans and credit cards: ‘‘Have no income, have no job, 

have bad credit, come to us.’’ I mean, you see it and hear it on 

radio and—— 

Ms. MAJORAS. Yes. 

Senator DORGAN.—television and so on. And have you—during 

this period, have you put together initiatives that are more aggressive, that reach out? I mean, you describe what you’ve just done, 

and I appreciate that, but have we gone through a period where 

you weren’t very active? Or should the Commission have been more 

active during the period that the bubble was being created? And, 

if so, what can we learn from that, and how can we be more aggressive now to make sure this doesn’t happen again? 

Ms. MAJORAS. Well, I—no, you raise a good point. Obviously, it’s 

part of my job and my commissioners’ job and our other managers 

to always evaluate how we’re using our resources. We’ve—we certainly brought—have brought a number of cases in this area over 

the last few years. Should—could we, and should we, have been 

more active? That’s entirely possible. Our staff that works on this 

particular area was swamped, over this same period, with identity 

theft and data security issues. And we were sometimes, you know, 

the ones in the Federal Government who needed to deal with those 

issues. 

I was so concerned that we needed to be spending more time on 

some lending and other traditional financial issues that I split 

apart our financial services division last year, and said, ‘‘You focus 

on data security and identity theft, and these others—you need to 

redouble your efforts in the area of lending, other credit issues, and 

debt collection issues.’’ And we’ve now done that. 

Senator DORGAN. Let me read to you a couple of ads that I know 

you’re aware of. There’s an ad from probably the largest mortgage 

lender in the country, one that has had to go borrow $11 billion to 

meet a shortfall. Here’s the ad that they were running: ‘‘Homeowners, do you want to refinance, get cash? We have a great reason 

to do it now. No cost to refinance, no points, no application fee, no 

credit reporting, no third-party fees, no title, no escrow, no appraisal fees, no closing costs. You wind up with a lot more cash.’’ 

I’ve got a whole list of them here—‘‘Easy mortgage.’’ All of these 

are seductive advertisements to consumers, to say, ‘‘You know 

what, need money, fast bucks? Come here.’’ I mean, it reminds me 

of a different kind of industry that used to be operating in the 

shade someplace. While all of this was going on, did we intercept 

any of it, did we take action, at this point, to say, ‘‘Wait a second, 

this doesn’t sound right, doesn’t seem right’’? 

30 

Ms. MAJORAS. Well, we did. We certainly brought cases. We got 

consumer complaints in. We continue to monitor those complaints. 

We brought cases. 

Senator DORGAN. But you said you were swamped. And that gets 

back to the first question I asked you. If we’re going to increase by 

ten people a year, what’s that, 100 years before we get to 1,000 

people? And how long to add back what we used to have, some 

years ago at the FTC? 

Ms. MAJORAS. Well, I think the FTC was a very different place 

in 1980, and did a lot of things that most people would agree it 

shouldn’t have been doing. So, it’s—— 

Senator DORGAN. Like what? 

Ms. MAJORAS.—it’s not a perfect—— 

Senator DORGAN. Like what? 

Ms. MAJORAS.—comparison. Like industrywide rulemakings on 

things that were not very helpful to consumers, as opposed to some 

enforcement. And—no, look, I mean, the resource—the resource 

question is a fair one, but the thing to remember in this area is 

that we’re sharing—I mean, we have a piece—— 

Senator DORGAN. I understand. 

Ms. MAJORAS.—and we’re sharing with the banking agencies, 

and with all the states, who have, actually, greater powers than we 

have in this area. And so, we’re not the only players. Now, there’s 

just no—all I’m trying to admit to you, Senator, is that, of course, 

when there’s an economic crisis of some sort, or a bubble bursts, 

it’s part of my job to look back on it and say, ‘‘Yes, of course, if we 

had had more resources, we would have—we would have done it 

even more.’’ And, of course, that’s the case in almost everything we 

do. 

Senator DORGAN. I understand. But when you say, ‘‘We were 

swamped,’’ and we see an agency that went from 1,700 to 1,000 

people, and we now see not just this—in this particular area, which 

is going to have significant consequence to our whole economy and 

to a lot of the American people—but in addition to this, the toys 

coming in from China. I want to talk about that a little bit; I know 

that that relates to the Consumer Product Safety Commission, as 

well. But when you say, ‘‘We’re swamped’’—look, my interest is in 

having an enforcement agency that’s a referee and that represents 

us in going after deceptive advertising and issues of concentration 

and competition that you have the resources you need. That’s 

why—that’s the first question I asked you. I don’t want you to be 

too swamped to wake up in the morning and see an ad, or to have 

your people peruse all these ads, and say, ‘‘We’re going after it. 

This is wrong. Consumers are being bilked. This is unfair.’’ I mean, 

I want you to have the resources necessary. And as you know— 

there are people who believe that there ought to be a minimalist 

role here, ‘‘If someone gets stung by bad business practices, tough 

luck. They’ll just understand, they’ll learn, you don’t do business 

with that kind of situation any more, you don’t do business with 

that company.’’ There are people with that minimalist attitude. 

Ms. MAJORAS. And—— 

Senator DORGAN. I don’t want that. I want an FTC with teeth 

and with aggressiveness. 

31 

Ms. MAJORAS. That is absolutely not my attitude. It’s not that it’s 

minimalist. The difficulty for a small agency, though, is that I can’t 

absorb 50 people every year. I mean, it’s—the hiring cost that it 

takes just to get that done, the absorption of people into the agency, the training—I think we should grow, and—look, we’ll grow as 

fast as we can and I agree that we should grow. My only point is, 

having worked in this organization and others, it’s very difficult to 

suddenly—when you’re small, to begin with—grow by leaps and 

bounds—— 

Senator DORGAN. Right. 

Ms. MAJORAS.—all at once. 

Senator DORGAN. A fair point. I accept the point. And my only 

point is that whatever the level should be at the Federal Trade 

Commission to protect us in the manner that we want to be protected, to protect consumers, we want that level to exist with respect to resources. 

And I want to come, now, to this issue of the products that we 

read about on the pages of our newspapers. Someone buys a set of 

tires, to discover that the tires are faulty, bad products; and someone’s on the road, driving 70 miles an hour, and has a problem 

with a tire, and somebody dies. A young boy swallows a heartshaped charm—a small heart-shaped charm that comes with a pair 

of tennis shoes. Turns out it’s 99 percent lead, and the 4-year-old 

boy is dead. You know, the list is endless of trinkets and toys, Elmo 

and Big Bird, coming in from overseas now in this galloping global 

economy. And we discover—you know what?—we not only exported 

the jobs, we exported minimal requirements to attend to the production, and we don’t have the foggiest idea of the conditions under 

which these products are being produced. 

So, describe to me your role and the role of the Consumer Product Safety Commission, as well, with respect to product safety and 

what we’re now seeing with respect to the global economy and 

products coming in that are unsafe. 

Ms. MAJORAS. The Consumer Product Safety Commission, Senator Dorgan, has almost the entire responsibility for this current 

problem. We obviously have the ability to go after deceptive and 

unfair practice—and unfair practices. But as far as product safety 

has gone, that has been the province of the CPSC. Obviously, in 

food and pharma and so forth, that has been FDA. And we work 

with those agencies, as appropriate. But, in fact, we haven’t even 

worked much with CPSC, because we just don’t have much overlap 

with them. 

Senator DORGAN. The CPSC was originally an outgrowth of the 

Federal Trade Commission, is that—— 

Ms. MAJORAS. That’s my—— 

Senator DORGAN.—correct? 

Ms. MAJORAS.—understanding. And that—— 

Senator DORGAN. You have no relationship at this point, really? 

Ms. MAJORAS. Oh, no, we have—we have a relationship. Occasionally—to tell you the truth, we overlap more in the international 

arena, because some agencies overseas have the same—still have 

both functions in their agencies; and so, sometimes they want to 

meet with both of us, and we may be consulting. And there may 

be the occasional issue on which we consult with them. But I can’t 

32 

think of anything official I’ve had to consult with them on anytime 

recently. 

Senator DORGAN. I’m going to send you a list of questions about 

this area, because I think there needs to be closer consultation. 

And I also want to explore the issue of whether the Federal Trade 

Commission should retain some kind of a role here, working in cooperation with the Consumer Product Safety Commission. 

It’s clear to me that, with the global economy these days, and 

substantial outsourcing of production, we now insource products 

from all around the world, and, in many cases, we don’t have the 

foggiest idea what the conditions of production were. And now we 

discover that Elmo and Big Bird have lead paint which exceeds the 

amount of lead that we would allow American children to be exposed to. This is not new. I mean, Benjamin Franklin warned us 

about that. So, it’s not as if we’ve discovered some new phenomenon, except that we have just outsourced production, and we 

have plants operating in parts of the world where they want to reduce costs, so they use lead—fast-drying, cheap, bright. The problem is, it can kill children. 

Ms. MAJORAS. Yes. 

Senator DORGAN. And so—— 

Ms. MAJORAS. Yes. 

Senator DORGAN.—I want to explore some of that with you, with 

some written questions. 

Let me ask, if I might, about network neutrality. I’m sure you 

expected I would want to ask you about your statement. 

Ms. MAJORAS. Yes. 

Senator DORGAN. The Federal Trade Commission has made some 

statements—you have made some statements—about the issue of 

network neutrality, or net neutrality. Tell me your impression of 

these issues. 

Ms. MAJORAS. Well, it’s a broad issue, but I’ll try to give you a 

summary. 

We—when I first was trying to figure out what my impression 

of the issues were, probably back in the summer of 2006, my impression was that there wasn’t enough—there wasn’t enough out 

there in the marketplace that I could read, that could fully educate 

us on the issue. We were being asked a lot of questions about 

whether competition laws are sufficient to deal with these issues 

as they come up. And I just—I felt there wasn’t enough good information out there, so I asked my staff to go out and get some. And 

they did. They spoke to dozens and dozens of folks with an interest 

in this area, and then we held a couple of days of public hearings, 

which went over extremely well, because I think people were very 

happy to get together and talk about this issue honestly. 

We then issued a report, in—I believe it was June—in which 

what we concluded was that, in thinking about acting in this area, 

legislators or other policymakers should exercise caution, because 

there’s so much that we still don’t know about what’s happening 

in this marketplace, what’s going to happen in this marketplace. 

There’s no question that people on both sides of the issue say, 

‘‘These Internet service providers are going to have this incentive 

or that incentive.’’ ‘‘No, they’re not. They’re going to have this incentive or that incentive.’’ That could be—either side could be right. 

33 

Variations on what either side believe could be right. And because 

this is such a dynamic area, where we don’t want to squelch the 

innovation that’s going on, squelch the development as we move 

forward, we are concerned that regulating prematurely, and perhaps on such a broad basis, as opposed to trying to take care of 

problems that we know are occurring, really could serve to squelch 

this market in a way that’s harmful to consumers. 

Senator DORGAN. Can I ask what you mean by ‘‘regulating’’? Because my understanding is that, prior to a recent decision by the 

FCC, we had nondiscrimination rules in place, which do not now 

exist. But were those nondiscrimination rules what you define as 

‘‘regulation’’? 

Ms. MAJORAS. They’re part of regulation, yes. 

Senator DORGAN. And so, a regulatory framework that requires 

nondiscrimination, you think that’s inadvisable? 

Ms. MAJORAS. That’s not what the report says. What the report 

says is that, ‘‘Here are the things that one needs to think about before you do it.’’ And we don’t think there’s enough—first of all, we 

don’t think there’s evidence that discrimination is occurring, or 

even that it surely will occur. We don’t think—if it does occur, we 

think there are certainly possible economic scenarios in which, if 

it did occur, it would not be harmful to consumers, necessarily. And 

so, if you have an inflexible rule that prevents it, we’re concerned 

that that may—that may prevent business models from developing 

that would actually be helpful. 

Senator DORGAN. Let me ask you—there was an op-ed piece a 

while back by a local telephone company that provides broadband 

service, and so on, in a region, and the manager of that company 

said, ‘‘You know, we need some additional revenue, and one way 

that I hope to get that revenue is to take a look at some of the big 

folks that are on the Internet and say to them, ‘You’ve got to pay 

a toll charge to get to the people I’m serving.’ ’’ That seems to be 

classically what we exactly want to prohibit in this country. And 

yet, if that telephone company decided to do that on their Internet 

service, to say to a large or a small site out there, ‘‘You’ve got to 

pay money to us in order for us to move your site—or make your 

site accessible to our customers,’’ that would, under current circumstances, that would be all right, wouldn’t it? Because there’s no 

nondiscrimination requirement, and it would be fine for that company to do that. I think that’s a horrible thing to have happen. My 

guess is that your philosophy is, ‘‘Well, if it happens, there’s going 

to be some other alternatives, and competition will solve the problem.’’ Is that your position? 

Ms. MAJORAS. Well, I have to—I have two positions. First of all, 

I don’t know whether it will be completely awful for that to happen. I know that companies like Google and Microsoft don’t want 

to have to pay for it. They like the—they like—they like the fact 

that they’re not. So, I understand, you know, that perspective. I 

certainly understand the perspective of small content providers, 

and we do want to make sure that there are lots of—that we have 

lots of content on the Internet. But I do think that—a couple of 

things. One, I think competition takes—does—likely takes care of 

a lot of it, because the fact of the matter is—I can’t imagine consumers tolerating not getting the content that they want. I mean, 

34 

there has just never been a medium that consumers have believed 

was their own like the Internet. So, I think that these telecom providers have if they haven’t gotten the message, they probably will, 

that this won’t be tolerated. But, moreover, I’m not suggesting that 

if you start to see something that really is harmful to consumers, 

that there might not be a time when some new rules are necessary. 

That’s—you know, that’s obviously part of what—— 

Senator DORGAN. Well—— 

Ms. MAJORAS.—regulators do, and what you do. But I just—to do 

it now, we think—we think—we just have to realize—could create 

more problems. 

Senator DORGAN. But, you see, this gets back to the questions 

I’ve asked about some previous issues. You say, ‘‘Well, don’t worry. 

If there becomes a problem, we’ll deal with it later.’’ I’d like us to 

prevent a problem from existing here. And let me give you an example. When Ed Whitaker, the former CEO of AT&T, then with 

BellSouth, said, quote, ‘‘They don’t have any fiber out there, they 

don’t have any wires, they don’t have anything. They use my lines 

for free. That’s bull. For a Google or a Yahoo! or a Vonage or anybody to expect these pipes for free is nuts.’’ It’s quite clear what 

the interest is, and it’s clear to me where we’re headed. We’re 

headed toward a circumstance where big providers that have a lot 

of muscle and will be able to make it stick, will set up different 

kinds of lanes and freeways here, some toll, some not. And consumers will not know what they don’t have. That’s just a fact. 

Ms. MAJORAS. And I just don’t—I just don’t completely agree 

with that. 

Senator DORGAN. Well, I know you don’t agree with it, but I’m 

right. 

[Laughter.] 

Senator DORGAN. Let me tell you why. Consumers won’t know 

what they don’t have, because there will be providers out there, 

there will be sites out there—I’ll give you an example. I don’t have 

a big thing for Google. I don’t have any contact with Google. But 

Larry and Sergey, just 9 years ago, were moving to a garage with 

a garage-door opener, and had nine employees. That’s 9 years ago. 

And they had an idea. Nine years later, they have a company that 

exceeds the combined valuation of Coca Cola, Ford Motor, and General Motors. Now, would two guys in a dorm room or a garage have 

access to the consumers in X, Y, or Z city if the big interests said, 

‘‘Oh, by the way, you get a shot to go on our toll road if you can 

pay the toll’’? I don’t know. I don’t think consumers will ever know 

what they miss. We created this Internet system through innovation. Innovation was available to everybody under every circumstance, and it was able to be accessed by everybody under 

every circumstance. If we get to a point where we say, ‘‘Now there’s 

no nondiscrimination rules, there’s no rules against discrimination, 

you can discriminate,’’ we won’t know what we miss. We won’t 

know what innovation we squelch. And I would hope that the philosophy at the Federal Trade Commission is not to say, ‘‘You know 

what, let’s wait and see what develops. We’ll respond to it like a 

catcher responds to a foul ball here.’’ Let’s—how about deciding 

that what we’ve built, we built with nondiscrimination requireVerDate Nov 24 2008 06:52 Sep 21, 2012 Jkt 075679 PO 00000 Frm 00038 Fmt 6633 Sfmt 6601 S:\GPO\DOCS\75970.TXT JACKIE
35 

ments. That’s the regulatory framework in which we built this successful venture. 

Ms. MAJORAS. But what I don’t—what I don’t want to see happen—Senator, you and I would not have been able to predict where 

we are—5 years ago, we would not have been able to predict where 

we are today. That makes it very difficult for us to predict where 

the Internet is going, or probably even where we want it to be 5 

years from now, and we just have to remember that if we put rules 

into place here, there will be some unintended consequences. That’s 

just part of what we’re pointing out. There always are. And, again, 

I think that this medium is so dynamic that—no way is Verizon or 

any of these other companies powerful enough to squelch it. The 

amount of consumer-generated content that’s out there, if they suddenly start putting a stop to that, there will be a hue and cry in 

this—across this Nation like no tomorrow, and they’ll lose—you 

know, they’ll lose a lot of customers. So, I just—I don’t disagree 

with you. I don’t want the bad result that you’re talking about. I 

think that there just may be a difference in how we get there. 

Senator DORGAN. I fail, ever, to see a downside from nondiscrimination. I mean, I can’t think of a detrimental impact of 

nondiscrimination. Maybe—— 

Ms. MAJORAS. May I—— 

Senator DORGAN.—you can. 

Ms. MAJORAS. May I offer one? 

Senator DORGAN. Sure. 

Ms. MAJORAS. OK. Today there are certain types of content that 

require faster speeds. And, unfortunately, because there’s—you 

know, I—I’m not always great at technical terms, forgive me, Senator—but you’re—where we’re running out of space, almost—when 

we look at prioritization and who should go first, in terms of transmittal, if, for example, you don’t prioritize certain things, like movies or VoIP or these other things that consumers are really starting 

to want on the Internet, over things that, sure, you’re going to 

transmit, but they don’t need to go as quickly or with greater priority, then you’re going to lose those—the functions, the capability, 

at least in the short run. 

Senator DORGAN. Well—— 

Ms. MAJORAS. So, to be able to prioritize those—that’s a form of 

discrimination. 

Senator DORGAN. We see a different landscape, I guess. I think 

both the lack of informed public policy and the lack of effective 

competition means that we have 1⁄20 the speed at twice the price 

for the same Internet service that many of our foreign competitors 

have. If you’re living in Japan or Korea, you have a whole lot better speed—a whole lot more speed and at a lot less cost. 

What I see in virtually every area of telecommunications is galloping concentration, and I would encourage you, Madam Chair, to 

take a look at the bills you pay every month for your services. Most 

Americans do the same, and they understand there is not robust 

competition to drive prices down, which would be the effect of robust competition. 

But we’ll save that for another day. My hope is that you will 

agree with me that, rather than wait for bad things to happen, we 

might want to preserve the same nondiscrimination rules that we 

36 

have always had with the growth of the Internet. I see no downside 

to nondiscrimination. But you and I will have more back and forth, 

on this issue. 

Because we have another panel, let me thank you for coming, 

and say this. I think the discussions we’ve had about energy prices, 

about the subprime loans, about staffing at the FTC, about deceptive advertising, and about foreign products coming into this country, tainted products and so on, all of these things are really very 

important, and the Federal Trade Commission, I think, is in a position to play a very, very important role. I don’t ask you to come 

up here today to denigrate a lot of good people that serve in the 

Federal Trade Commission. I do have heartburn, from time to time, 

that, especially in recent years, almost anybody that wants to 

merge gets a shot at merging without any oversight. And I know 

you’ve told me today of some circumstances where you have been 

an impediment to these mergers, and I appreciate that, because I 

think there are times when mergers clearly are not in the public 

interest. I want the Federal Trade Commission to be an aggressive 

and an active advocate on behalf of competition and on behalf of 

American consumers. My own belief is that, given the world we live 

in, we need to add resources to the Federal Trade Commission, and 

give the Federal Trade Commission the capability and the resources that it needs to do the job that is required of it by law. 

So, I thank you for coming today, and let me ask you to thank 

the other Commissioners for the Committee. We will be trying to 

report a bill out of the Committee, a reauthorization bill, to finally 

get this through the U.S. Senate and through Congress. Thank you 

very much. 

Ms. MAJORAS. Thank you for your support, Chairman Dorgan, we 

appreciate it. 

Senator DORGAN. Thanks for being here. 

Let me call the next panel up: Dr. Mark Cooper, Mr. Chris Murray, Mr. Michael Calhoun, Mr. Ari Schwartz, and Mr. Marty 

Abrams. 

I want to indicate that your entire statement will be made a part 

of the permanent record, and I would ask that you summarize. I’ve 

had a chance to review your testimony. 

And we will begin, today, with Dr. Mark Cooper, who represents 

the Consumer Federation of America. 

Dr. Cooper, welcome, to you. You’ve appeared before this Committee on a number of previous occasions, and we appreciate your 

appearance today. You may proceed. 

STATEMENT OF DR. MARK N. COOPER, DIRECTOR OF 

RESEARCH, CONSUMER FEDERATION OF AMERICA 

Dr. COOPER. Mr. Chairman, thank you. 

There are certainly some areas where the FTC has done a good 

job, but, for oil and high-speed broadband Internet access, it has 

failed consumers badly. Here, the FTC asserts that there is vigorous competition, when there is not; and has claimed that there 

is no harm, when there is a great deal. The FTC has allowed refining markets and wholesale gasoline markets to become highly concentrated through lax merger review. The resulting tight oligopoly 

imposes severe pain at the pump and in the pocketbook, hundreds 

37 

of billions of dollars of overcharges. The FTC’s analysis of recent 

price spikes ignores fundamental structural problems of its own 

making in oil markets. 

If the subject of the FTC’s 2006 price gouging investigation, mentioned earlier, had been the first price spike in the petroleum industry in recent years, then the report might be plausible. But, as 

every gasoline consumer knows, the 2006 spike was the sixth in a 

string of seven that have occurred in the last 8 years. Given the 

ever-lengthening list of events—fire, flood, hurricane, lightning, 

rust, demand surges—that Federal agencies use to excuse these 

price spikes, the only way one can characterize the FTC’s analysis 

is that the price spikes are not the result of a conspiracy, they are 

the result of stupidity. The industry is simply unable to cope with 

any event that is out of the ordinary, or even do routine spring 

cleaning, without driving the price through the roof. 

What are some of the surprises the FTC identified in the 2006 

price spike? Seasonal effects of summer driving, increased consumer demand for gasoline, refinery outages resulting from hurricane damage, other unexpected or external events, and required 

maintenance. 

Surprise, surprise—consumers drive more in the summer, and 

we drive more as we grow in population and wealth. These two 

facts have been in evidence since Mr. Ford first mass-produced the 

Model T, but they still somehow seem to have snuck up on the oil 

industry. 

Surprise, surprise—refineries need to be maintained, and they 

break. How could the industry not have noticed? Worse still, why 

is there so little spare capacity that the industry has to run at such 

high levels of utilization that they are much more prone to accidents? Accidents don’t just happen, they happen because you overuse your facilities. 

Why is there a deficit of over 3 million barrels a day in domestic 

refining, more than twice what it was a decade and a half ago? 

Why have stockpiles been cut in half so they are inadequate to deal 

with any small blip in supply and demand? 

In fact, five of the six excuses that the FTC gave for the price 

spikes of 2006 are the result of strategic underinvestment in capacity and management mistakes that have created a tight market in 

which you don’t need collusion to put prices up. True competitive 

markets expand capacity. Tight oligopolies increase prices and profits. 

Let me turn to broadband. When Congress passed the Telecommunications Act of 1996, the U.S. was a global leader in the 

Internet. Virtually all Internet traffic in this country traveled on 

telecommunications networks that were obligated to provide nondiscriminatory interconnection and carriage under Title II of the 

Communications Act. But the FCC abandoned the principle of nondiscrimination, allowing a cozy duopoly of telephone and cable companies to dominate the broadband marketplace without any obligation to provide nondiscriminatory access. 

Chairman Majoras was dead wrong in her example. Ed Whitaker 

is not being prevented from prioritizing movies. What he wants to 

do is discriminate in favor of his movie and against the other guy’s 

38 

1The Consumer Federation of America (CFA) is a non-profit association of 300 consumer 

groups, with a combined membership of more than 50 million people. CFA was founded in 1968 

to advance the consumer’s interest through advocacy, research, and education. 2 ‘‘The Failure of Federal Authorities to Protect American Energy Consumers from Market 

Power and Other Abusive Practices,’’ Loyola Consumer Law Review, 19:4 (2007); The Role of 

Supply, Demand, Industry Behavior and Financial Markets in the Gasoline Price Spiral (Prepared for Wisconsin Attorney General Peggy A. Lautenslager, May 2006); Record Prices, Record 

Oil Company Profits: The Failure Of Antitrust Enforcement To Protect American Energy Consumers (Consumer Federation of America, Consumers Union, September 2004). 3This testimony draws on Mark Cooper, ‘‘The Importance of Open Networks in Sustaining the 

Digital Revolution,’’ in Thomas M. Lenard and Randolph J. May (Eds.) Net Neutrality or Net 

Neutering (New York, Springer, 2006); Open Architecture as Communications Policy (Stanford 

Law School, Center for Internet and Society: 2004); ‘‘Open Communications Platforms: Cornerstone of Innovation and Democratic Discourse In the Internet Age,’’ Journal on Telecommunimovies. Establishing priorities for categories of service is differentiation, not discrimination. She got that absolutely wrong. 

The FTC and the DOJ have cheered this decision by the FCC to 

allow this cozy duopoly to come into existence, claiming, ‘‘Two’s 

enough for consumer protection.’’ But theory and empirical evidence contradict that plan. The cozy duopoly in America dribbles 

out bandwidth at 10 to 20 times the—what other people pay 

around the world. 

We have fallen from third, 6 years ago, to at least 15th, maybe 

24th, depending on how you counted. Consumers pay too much for 

too little in this country, and other nations with consumer-friendly 

and competition-friendly policies have become the focal point of innovation. We can see what we’re missing, Mr. Chairman, by looking at those who have less—left us in their dust. 

Efforts to explain away the declining state of the U.S. by population density, market concentration, household size, income levels, 

income inequality, education, and age, among other things, do not 

negate the fact and the finding that the U.S. has fallen behind at 

least a dozen other nations. The success of the Internet, as you 

pointed out, was built on communications networks that were operated in an open and nondiscriminatory manner so that vigorous 

competition between applications and service providers was free to 

provide innovation and consumer-friendly services that drove demand. The way to break out of the current quagmire is not to claim 

that a duopoly is all you need, but to return to the successful procompetitive policies of open communications that made the Internet 

possible and allowed the U.S. to be the world leader in the first 

generation of the digital age. 

The nations that have passed us by have relied on that very policy that we used 30, 20, 10 years ago to achieve leadership. We 

need to get back to that simple policy of nondiscrimination in communications. 

Thank you. 

[The prepared statement of Dr. Cooper follows:] 

PREPARED STATEMENT OF DR. MARK N. COOPER, DIRECTOR OF RESEARCH, 

CONSUMER FEDERATION OF AMERICA

Mr. Chairman and Members of the Committee, 

Thank you for the opportunity to testify. My name is Mark Cooper and I am Director of Research at the Consumer Federation of America (CFA).1

In my comments today I address two areas where the antitrust authorities, the 

Federal Trade Commission (FTC) in particular, have dropped the ball, failing to protect consumers from the abuse of market power. While the two sectors I address— 

the oil industry 2 and high-speed, broadband Internet access 3—would appear to be 

39 

cations, Technology and Intellectual Property, 2:1, 2003, first presented at The Regulation of Information Platforms, University of Colorado School of Law, January 27, 2002. 4Federal Trade Commission, Report on Spring/Summer 2006 Nationwide Gasoline Price Increases. 5 ‘‘U.S. Department of Justice Ex Parte Filing,’’ In the Matter of Broadband Industry Practices, 

WC Docket No. 07–52, 

dramatically different, the underlying problem that afflicts consumers in each of 

these markets is the same—inadequate competition and the failure of antitrust authorities to act to promote competition or prevent anti-consumer, anti-competitive 

behavior by the industry. Federal authorities have allowed a tight oligopoly in oil 

and a cozy duopoly in broadband to engage in strategic under-investment in facilities, creating artificial shortages that allow them to overcharge consumers. 

There are other areas where we think the FTC is doing a good job, including certain aspects of consumer protection, merger review in other industries, and anticompetitive, anti-consumer practices in the drug industry. But the oil industry and 

the broadband industry are extremely important and they are real weak spots. 

The FTC has allowed refining markets and wholesale gasoline markets to become 

highly concentrated through lax merger review. The result is a tight oligopoly and 

severe pain in the pocketbook—hundred of billions of dollars in overcharges and excess profits. The FTC’s analysis of recent price spikes ignores fundamental structural problems of its own making in oil markets. 

The FCC has allowed a cozy duopoly of telephone and cable companies to dominate the broadband access market, without any obligation to provide nondiscriminatory access. The FTC 4 and the DOJ 5 have cheered this decision claiming that 

market forces in a duopoly will protect consumers, but theory and empirical evidence contradict that claim. As a result, the cozy duopoly dribbles out bandwidth 

at prices that are 10 to 20 times as high as in other nations around the world. The 

reliance on this cozy duopoly has been disastrous for the United States. In a short 

half decade, we have fallen from third in the world in broadband penetration and 

now are behind at least a dozen nations (15th) and, by some counts almost two 

dozen. Consumers pay too much for too little and the economy suffers as other nations with consumer and competition-friendly policies become the focal point of innovation. 

Oil Prices 

If the subject of the recent FTC oil price gouging investigation had been the first 

price spike in the petroleum industry in recent years, then the report on the 2006 

price spike might be plausible, but as every gasoline consumer knows, it was not 

the first price spike by any stretch of the imagination. In fact, the 2006 spike was 

the sixth in a string of seven that have occurred in the last 8 years. 

Given the ever lengthening list of unnatural events—fire, flood, hurricane, lightening, rust, demand surges—that Federal agencies use to explain recent price 

spikes, the only way you can characterize the FTC conclusion is that the price 

spikes are not the result of a conspiracy—they are the result of stupidity. The industry is simply unable to cope with any event that is out of the ordinary and even 

deal with routine spring cleaning without driving prices through the roof. When 

there are surprises and unexpected events for which the industry is unprepared, 

prices go up and oil companies just happen to make a lot more money. Its all quite 

innocent; dumb, but innocent—stupid like a fox. 

What are these surprises and unexpected events that the FTC identified in the 2006 

price spike? ‘‘Seasonal effects of the summer driving season . . . and increased 

consumer demand for gasoline beyond the seasonal effects.’’ 

Surprise, surprise—consumers drive more in the summer and more as the population and economy grow. Those two facts have been in evidence since Mr. Ford first 

mass produced the Model T, but they still seem to have snuck up on the oil industry. As Exhibits 1 and 2 show, the long term growth trend and seasonal driving patterns predict the gasoline demand in 2006 almost perfectly. 

40 

Exhibit 1 

Source: Energy Information Administration, Database, Petroleum Consumption. 

Exhibit 2 

Source: Energy Information Administration, Database, Petroleum Consumption. 

Even if there were a bit of a surprise, why is there no spare capacity or stockpiles 

to deal with it? In competitive industries, when there is a seasonal pattern, producers build systems to respond without having to raise prices dramatically, for fear 

that they will lose their customers. Prices fluctuate, but competition drives seasonal 

sectors to shave the peaks. In the oil industry they don’t work that way, they just 

put the prices up. Over the past couple of decades the oil industry has systematically under-invested in storage (see Exhibit 3), reducing the amount of gasoline on 

hand, thereby creating a tight market with little capacity to respond not only to 

genuinely unexpected shifts in demand, but even to routine seasonal patterns. 


912COOP1.eps 912COOP2.eps
41 

Exhibit 3: Gasoline Stocks above Minimum Operational Levels 

Source: Energy Information Administration, Petroleum Database. 

What are these surprises and unexpected events? ‘‘Refinery outages resulting from 

hurricane damage, other unexpected problems or external events, and required 

maintenance.’’ 

Surprise, surprise—refineries need to be maintained and they break. How could 

the industry have been so stupid as not to notice? Never mind that in a competitive 

industry each individual producer would carry more spare capacity for fear that he 

might get caught short if he had an outage or have to raise prices, which would 

cost him his customers (see Exhibit 4). In the oil industry they don’t work that way, 

they just put the prices up. Worse still, the stupidity of the oil industry makes matters worse. When you don’t build enough refineries and you run them at high levels 

of capacity, they break more often. Over the past couple of decades the oil industry 

has systematically under-invested in refining capacity—closing dozens of refineries 

and refusing to build new ones—thereby creating a system that not only cannot respond to accidents, but that cannot even provide routine maintenance without causing price spikes. There is now a shortfall of over 3 million barrels a day of refining 

capacity (see Exhibits 5 and 6). 

Exhibit 4: Spare Capacity in Refining v. All Industry 

Source: Calculated from Board of Governors of the Federal Reserve System, Federal Reserve 

Statistical Release, Industrial Production and Capacity Utilization; Energy Information Administration, U.S. Department of Energy, U.S. Percent Utilization of Refinery Operable Capacity. 


912COOP3.eps 912COOP4.eps
42 

Exhibit 5 

Source: Energy Information Administration, Database, Petroleum Consumption, Refining. 

Exhibit 6 

Source: Energy Information Administration, Database, Petroleum Consumption, Refining. 

What are these surprises and unexpected events? ‘‘Increased price of ethanol . . . capacity reductions stemming from refiners’ transition from methyl tertiary-butyl 

ether (MTBE) to ethanol.’’ 

That summer fuels require oxygenates has been known for well over a decade. 

That everyone in the industry switched to ethanol at the same time creating a temporary shortage was dumb. They did not have to switch, they chose to, en mass, 

even though they had not arranged for adequate supplies. They switched without 

making sure that alternatives would be available. The result is a most remarkable 

pattern of behavior. When ethanol is cheap they don’t use it, when it is expensive 

they all want it. 

Thus, five of the six excuses that the FTC gave for the price spikes of 2006 are 

the result of strategic under-investment in capacity and management mistakes that 

have created a tight market and exploit that tightness. If the cost of inputs, like 

crude and ethanol, and the need to bring expensive imports to market were the 


912COOP5.eps 912COOP6.eps
43 

cause of increases in prices at the pump, then one would not expect the domestic 

spread and refinery margins and oil industry profits to be increasing, but they are 

(see Exhibits 7 and 8). 

Exhibit 7 

Source: Energy Information Administration, Database, Petroleum Consumption, Retail Gasoline (excluding taxes) minus refiner acquisition cost of crude. 

Exhibit 8: Major Oil Company Return on Equity is Far Above Historic 

Levels 

Source: FRS Companies: Energy Information Administration, Form EIA–28 (Financial Reporting System). All Manufacturing Companies: U.S. Census Bureau Quarterly Financial Report, All 

Manufacturing Companies. 

The simple fact of the matter is that this pattern of behavior was made possible 

by the merger wave of the past decade (see Exhibit 9). It has created a situation 

in which the industry does not have to collude to increase prices and profits. It just 

waits for the inevitable driving season to arrive, leavened by inadequate capacity 

and excuses, to put prices up. 


912COOP7.eps 912COOP8.eps
44 

Exhibit 9: Mergers have severely reduced the number of refiners 

Source: http://tonto.eia.doe.gov/FTPROOT/financial/mergers/dwnstream.pdf. 

The FTC adopts a very consumer unfriendly definition of price gouging. The domestic spread on gasoline was 49 cents per gallon higher in 2006 than the average 

for 1990–1999 (see Exhibit 9). However, the FTC assumes that the inflated prices 

of 2001–2005 as the base, so it concludes that the ‘‘extraordinary’’ increase in 2006 

was only 16–21 cents. Because the market is too tight, it estimates that prices could 

have risen by as much as $1.35 to $2.21, so consumers should take solace in the 

fact that the industry left a lot on the table. When it looks at price gouging for individual companies, it assumes that if all the companies raise prices at the same time, 

then none is gouging, even though profits are going through the roof. 


912COOP9.eps
45 

6FTC Staff Report, Broadband and Connectivity Competition Policy, June 2007, p. 10; DOJ, 

Ex Parte Filing, p. 1. 7FTC Staff Report, p. 11; DOJ, Ex Parte Filing, p. 24. 

Broadband Internet 

The FTC and the Department of Justice have made precisely the same mistakes 

in analyzing the broadband market place that have afflicted the FTC’s analysis of 

the oil industry. They see vigorous competition,6 where there is little; they see little 

harm,7 where there is a great deal of damage. 

The decision to abandon the principle of open communications networks after the 

Telecommunications Act of 1996 (the 1996 Act) resulted in a cozy duopoly of the 

telephone and cable companies that has failed to accomplish the most fundamental 

goals of the Telecommunications Act of 1996. In comparison to at least a dozen 

other nations, the closed proprietary networks of the cozy duopoly have: 

• Failed ‘‘to make available to all people of the United States . . . adequate facilities at reasonable charges,’’ 

• Failed to ‘‘encourage the deployment on a reasonable and timely basis’’ of a twoway communications network, with advanced telecommunications capabilities, 

with ‘‘high-speed, switched, broadband telecommunications capability that enables users to originate and receive high-quality voice, graphics, and video telecommunication,’’ and 

• Threatened the vibrant and competitive Internet that Congress sought to preserve in the 1996 Act. 

The failure of the closed, proprietary, and cozy duopoly is evident in a multidimensional context. This model has 

• Failed to deliver any broadband services to substantial numbers of American 

households (around 9 percent, according to the GAO); 

• Failed to deliver bandwidth with data transfer rates comparable to the 

broadband networks which are deployed in other industrialized nations. 

• Failed across the board to deliver facilities that afford two-way communications 

at full broadband functionality and at reasonable prices. 

In addition, 

• Where last-mile broadband networks are available, the prices charged for 

broadband are excessive when compared with the price per megabit available 

in other industrialized nations; 

• The target recipients of advanced broadband facilities, which are capable of providing bandwidth on par with the higher speeds available in other industrialized nations, are households with high incomes, reflecting pricing practices 

which demand extremely high charges for access. 

When Congress passed the Telecommunication Act of 1996, virtually all Internet 

traffic originated by or delivered to the public traveled on telecommunications networks that were obligated to provide nondiscriminatory interconnection and carriage 

under Title II of the Communications Act. The U.S. was the global Internet leader 

by far. But the FCC abandoned the principles of nondiscrimination, first for 

broadband provided by cable companies, then for telephone companies. 

Half a decade latter we have fallen far behind many other nations (see Exhibits 

10, 11 and 12). When it comes to truly broadband communications that Congress 

envisioned in the 1996 Act, compared to many other nations, most of which 

strengthened their commitment to open communications networks, 

• Americans pay over ten times more for far less service than the leading 

broadband nations (see Exhibit 13) and 

• The communications networks being deployed in America relegate the public to 

the role of passive listeners and restrict their opportunity as producers of content and speakers to fully utilize the immense functionality of broadband technologies in civic discourse (see Exhibit 14). 

46 

Exhibit 10: The U.S. Is Falling Behind On Broadband: 3 OECD Nations Were 

Ahead Of The U.S. In 2001, 14 Nations Are Now Ahead of the U.S. 

Exhibit 11: The U.S. Ranks 15th on Broadband Penetration by Households 

and Per Capita 


912COOP10.eps 912COOP11.eps
47 

Exhibit 12: 60% of U.S. States have lower broadband penetration than 

Spain, 40% have lower broadband penetration than Portugal 

% of Nation/State 

HH 

80.9 South Korea 

71.1 Iceland 

64.2 Netherlands 

63.6 Denmark 

63.4 Norway 

61.4 Switzerland 

61.1 Hawaii 

60.7 New Jersey 

59.9 Connecticut 

57.3 Massachusetts 

57.2 Canada 

56.8 New Hampshire 

56.8 California 

53.9 Finland 

53.3 Maryland 

52.6 Rhode Island 

51.8 New York 

51.4 Delaware 

50.5 Japan 

50.4 Nevada 

49.5 Sweden 

48.2 Belgium 

48.2 Florida 

47.9 Washington 

46.9 Kansas 

46.6 France 

46.3 United Kingdom 

46.1 Virginia 

45.7 Luxembourg 

45 Australia 

45 DC 

45 Arizona 

44.6 United States avg. 

44.5 Spain 

44.4 Alaska 

43.8 Texas 

42.9 Nebraska 

42.8 Minnesota 

41.6 Maine 

41.1 Utah 

40.8 Pennsylvania 

40.2 Ohio 

40.2 Vermont 

39.7 Austria 

39 Wisconsin 

38.9 Missouri 

38.3 Portugal 

37.9 Italy 

37.6 Indiana 

37 Oklahoma 

36.8 Michigan 

36.1 Louisiana 

35.6 Wyoming 

34.6 Germany 

34.5 South Carolina 

33.5 Tennessee 

33.4 Montana 

33.3 North Carolina 

32.5 Iowa 

31.7 Kentucky 

31.6 Ireland 

31.4 Idaho 

30.9 New Zealand 

30.8 West Virginia 

30.1 Arkansas 

29.8 New Mexico 

29.4 Alabama 

28.8 Czech Republic 

21.3 South Dakota 

20.4 North Dakota 

20.2 Mississippi 

19.6 Czech Republic 

18.3 Hungary 

15.3 Poland 

13.6 Turkey 

9.2 Mexico 

8.8 Greece 

8.4 Slovak Republic 

Exhibit 13: 

Derek Turner, Broadband Reality Check II, Free Press, August 2006. 


912COOP13.eps
48 

Exhibit 14: The U.S. Ranks 14th in Average Speed 

Source: Information Technology and Innovation Foundation 

The root cause of this failure is the abandonment of the commitment to open communications networks and the reliance on feeble competition between, at best, two 

closed proprietary networks that possess and abuse market power. With inadequate 

competition and little public obligation, the cozy duopoly dribbles out capacity at 

high prices and restricts the uses of the network, chilling innovation in applications 

and services and causing a much lower rate of penetration of broadband in the U.S. 

than abroad. 

Efforts to explain away the declining status of the U.S. by population density, 

market concentration, household size, income levels, income inequality, education, 

age, among other factors do not negate the finding the U.S. is well behind a dozen 

or more developed nations (see Exhibits 15 and 16). 

Exhibit 15: Controlling for Urbanicity, Income and Industry Concentration, 

the U.S. is outperformed by 15 OECD Nations 

Source: Scott Wallstein, Everything You Hear about Broadband in the U.S. is Wrong, Progress 

and Freedom Foundation, June 2007 


912COOP14.eps 912COOP15.eps
49 

Exhibit 16: Lowering expectations does not improve the picture: The U.S. 

ranks 14th on performance and 11 of the 14 nations ahead on 

broadband are also outperforming the U.S. 

Source: Phoenix Center, The Broadband Performance Index, July 2007; OECD rankings 

The demonstrated failure of the cozy duopoly model to achieve the goals of the 

1996 Act, the flawed theory of the benefits of discrimination, the clear initial signs 

of anti-competitive and anti-consumer practices, as well as the extremely dim prospects for vigorous competition in facilities, combine to create a very dismal future 

for broadband consumers in America. The Federal antitrust agencies have turned 

a blind eye to the problem. The only way to break out of this quagmire is to return 

to the successful policies of open communications that made the Internet possible 

and allowed the U.S. to be the world leader in the first generation of the digital 

age. The success of the Internet was built on communications networks that were 

operated in an open and nondiscriminatory manner so that the vigorous competition 

between applications and service providers was free to provide innovations and consumer-friendly service that drove demand. 

Senator DORGAN. Dr. Cooper, thank you very much. As always, 

you seem to have had breakfast and have a lot of energy. 

[Laughter.] 

Senator DORGAN. And we appreciate your being here. 

Mr. Michael Calhoun, the president of the Center for Responsible 

Lending. 

Mr. Calhoun, welcome. 

STATEMENT OF MICHAEL D. CALHOUN, PRESIDENT, 

CENTER FOR RESPONSIBLE LENDING 

Mr. CALHOUN. Thank you, Chairman. 

My testimony today will address the Federal Trade Commission’s 

regulation of the mortgage market, with focus on the subprime 

market, looking at how they can be more effective in protecting the 

integrity of that market. 

I’m the President of the Center for Responsible Lending, which 

is a nonprofit research organization that studies the mortgage market. Equally important, the Center is an affiliate of Self-Help, 


912COOP16.eps
50 

which is a lender for first-time homebuyers, and we have provided 

over $5 billion of financing for first-time homebuyers across the 

country. This participation in the subprime market has given us a 

front-row seat for the mess that we now face in the current crisis. 

I’ll focus my testimony on two key points. First, what is the status of the crisis in the mortgage market? And, second, how could 

the FTC be more effective in reducing or preventing this problem? 

We are now painfully aware of the subprime mortgage market, 

which is, I think, bad news for a lot of people, because of the large 

number of families losing their homes, and, equally, the ripple effects throughout the whole mortgage market and the whole economy. When you look at the features of the mortgages that families 

were sold, it’s no surprise that we have a major problem. The typical subprime mortgage that families have today has a payment 

that, after 2 years, increases by 35 to 50 percent, even if market 

interest rates do not increase at all. Few families can absorb that 

kind of payment shock. To compound matters, lenders sold these 

loans to families based only on their ability to make the initial payments, and those payments could be more than 50 percent of their 

borrower’s gross income, before taxes. When the payment increases 

take effect, we often see monthly mortgage payments that are 

equal to 80 percent or more of a family’s take-home income. To 

make matters even worse, over half of these loans were provided 

without documentation of the family’s income, and lenders and brokers typically, in over three-fourths of these loans, did not include 

any escrow for taxes or insurance, in order to make the monthly 

payments look lower, but creating, again, further financial shock. 

To be clear, these were junk loans, not loans made to junk borrowers. And that’s shown by the fact that, even in the subprime 

market, borrowers and families who received fixed-rate subprime 

mortgages have been able to keep up their payments on those 

loans. In contrast, these exploding ARM loans could continue only 

as long as home values increased by double digits each year so that 

the families could refinance the loans and pay them, in effect, out 

of their home equity. 

This reckless lending is taking a heavy toll on American families, 

costing more than 2 million families their homes. And since most 

subprime loans are refinancings of existing homes, only about 10 

percent of these loans were loans to first-time homebuyers. That’s 

a common misconception. 

This crisis is driving families out of homeownership and out of 

the middle class. It is particularly devastating in communities—for 

example, half of all African-American and Latino loans are 

subprime loans. And these impending foreclosures are the greatest 

threat to their family wealth in a generation. And all observers of 

the market agree, the worst is yet to come. 

This market has not been able to correct itself, as the lack of 

substantive standards has rewarded the least responsible practices. 

Families, but also lenders and investors, have been hurt by this 

lack of market integrity. Federal and State regulators have moved, 

recently, to enact some modest protections, such as the common 

sense idea that they should check to see if families can repay the 

loans after the initial low payments expire. The FTC has taken action to protect consumers in some ways. Much more action is needVerDate Nov 24 2008 06:52 Sep 21, 2012 Jkt 075679 PO 00000 Frm 00054 Fmt 6633 Sfmt 6601 S:\GPO\DOCS\75970.TXT JACKIE
51 

ed by the FTC, and more authority and resources are needed for 

the FTC. 

The announcements and consumer information brochures are 

helpful, but more is needed to protect families in their largest financial transactions. The FTC needs to establish substantive 

standards, as it has done with other credit practices and in other 

fields, previously. Mere case-by-case enforcement means that most 

cases are never addressed when you have an agency of very limited 

resources. 

More tools for the agency are also needed, including joint authority for the FTC and Federal depository regulators, standard rulemaking procedures are needed so the FTC can act in a timely fashion. And a private right of action is needed so that violations of the 

FTC Act are enforceable by consumers. Perhaps most importantly, 

there have been suggestions to preempt existing authority that the 

states have in the mortgage area, and that would make things only 

far worse. We need as many cops on this beat as possible. 

In conclusion, most families rely on their homes not only for the 

physical and emotional shelter, but it’s a repository of most of a 

families’ hard-earned wealth. Over the past few years, we’ve seen 

unscrupulous mortgage brokers and lenders seize that wealth for 

their own gain, at great cost to our communities, families, and the 

Nation as a whole. The FTC, the Fed, and Congress need to act to 

help provide families with the means to safeguard their homes in 

what now are perilous transactions when they take out a mortgage. 

Thank you. 

[The prepared statement of Mr. Calhoun follows:] 

PREPARED STATEMENT OF MICHAEL D. CALHOUN, PRESIDENT, 

CENTER FOR RESPONSIBLE LENDING

Chairman Dorgan, Ranking Member DeMint, and Members of the Subcommittee, 

thank you for holding this hearing and considering this reauthorization in the context of the current turmoil in the subprime mortgage market. I serve as the President of the Center for Responsible Lending (CRL) (www.responsiblelending.org). 

CRL is a not-for-profit, non-partisan research and policy organization dedicated to 

protecting homeownership and family wealth by working to eliminate abusive financial practices. 

We also have direct experience as a subprime lender. CRL is an affiliate of the 

Center for Community Self Help (www.self-help.org), which consists of a credit 

union and a non-profit loan fund. For the past 26 years, Self-Help has focused on 

creating ownership opportunities for low-wealth families, primarily through financing home loans to low-income and minority families, those often targeted for 

subprime loans. Self-Help has provided over $5 billion of financing to 55,000 lowwealth families, small businesses and nonprofit organizations in North Carolina and 

across the country. Our loan losses have been less than 1 percent per year. 

Through this lending experience, I understand the benefits of subprime loans that 

contribute to sustainable homeownership. Unfortunately, when it comes to fair, affordable mortgages and opportunities for lasting homeownership, the subprime market’s record is sorely lacking. The Center for Responsible Lending estimates that 2.2 

million families have lost or will lose their homes as a result of abusive subprime 

loans made in recent years. That is one in every five subprime loans made in 2005 

and 2006, a rate unseen in the modern mortgage market. When we consider the 

subsequent loans subprime borrowers have been refinanced into, the probable foreclosure rate jumps to over one-third of all subprime borrowers. 

My main messages to you today are these: 

1. Problems caused by the subprime market are severe and widespread. 

2. Abusive loans led to today’s devastating foreclosures, and we need to keep 

reckless lenders off the streets. 

52 

3. The FTC could play a vital role in restoring integrity to the subprime market 

and reducing abusive home loans. 

I. The Current Situation: An Epidemic of Foreclosures 

Last December, the Center for Responsible Lending published a report that represents the first comprehensive, nationwide research projecting foreclosures in the 

subprime market. The report, ‘‘Losing Ground: Foreclosures in the Subprime Market 

and Their Cost to Homeowners,’’ is based on an analysis of over six million 

subprime mortgages, and the findings are disturbing. Our results show that despite 

low interest rates and high housing appreciation during the past several years, the 

subprime market has experienced high foreclosure rates comparable to the worst 

foreclosure experience ever in the modern prime market. We also show that foreclosure rates will increase significantly in many markets as housing appreciation 

slows or reverses. As a result, we project that 2.2 million borrowers will lose or have lost their homes and up to $164 billion of wealth in the process. That translates into 

foreclosures on one in five subprime loans (19.4 percent) originated in recent years.1

Since we issued that report, the condition of the subprime market has deteriorated rapidly, and subsequent events have shown our projection to be conservative. 

A recent study by the investment bank, Lehman Brothers, shows that the number 

of 2006-originated loans likely to face foreclosure is 30 percent.2 Headlines appear 

daily in the news detailing the negative ripple effects of bad subprime loans that 

have extended to investors and financial interests in many places throughout the 

world. 

At the same time, many in the lending industry still fail to acknowledge the scope 

of the problem, the damage caused by reckless lending practices, and the need for 

more than cursory solutions. As recently as last month, the Mortgage Bankers’ Association denied that subprime foreclosure rates are of concern for the economy.3

Yet, the Mortgage Bankers’ own figures show that the problem is severe and 

widespread. Last week, the MBA released the ‘‘Second Quarter National Delinquency Survey,’’ the latest figures available on the performance of home loans. The 

survey shows that mortgage loans entering foreclosure have increased in 47 states 

since this time last year. On average, the increases were 50 percent higher. Only 

four states—North Dakota, South Dakota, Utah and Wyoming—did not experience 

increases in new foreclosures. Less than 2 percent of the American population lives 

in those states. 

While the rate of subprime foreclosures is alarming today, the worst is still ahead. 

With 1.7 million foreclosures predicted to occur in the next two to 3 years, it is imperative that Congress take action to assist homeowners struggling today, not just 

protect future subprime borrowers.4

Several factors have driven massive home losses, including dangerous products, 

loose underwriting, broker abuses, investor demands, and Federal neglect. In the 

context of today’s hearing, I will focus on reckless lending, dangerous loans, and the 

need to strengthen protections on the Federal level. 

II. The Role of Reckless Lending 

Under typical circumstances, foreclosures occur because a family experiences a job 

loss, divorce, illness or death. However, the epidemic of home losses in today’s 

subprime market is well beyond the norm. Subprime lenders have virtually guaranteed rampant foreclosures by approving risky loans for families while knowing that 

these families will not be able to pay the loans back. Subprime lenders flooded the 

market with high-risk loans and made them appealing to borrowers by marketing 

low monthly payments based on low introductory teaser rates. 

One of the key findings in our research on subprime mortgages is that subprime 

mortgages typically include characteristics that significantly increase the risk of 

foreclosure, regardless of the borrower’s credit.5 Since foreclosures typically peak 

several years after a family receives a loan, we focused on the performance of loans 

made in the early 2000s to determine what, if any, loan characteristics have a 

strong association with foreclosures. Our findings are consistent with other studies: 

increases in mortgage payments and poorly documented income substantially boost 

the risk of foreclosure. For example, even after controlling for differences in credit 

scores, these were our findings for subprime loans made in 2000: 

• Adjustable-rate mortgages had 72 percent greater risk of foreclosure than fixedrate mortgages. 

• Mortgages with ‘‘balloon’’ payments had a 36 percent greater risk than a fixedrate mortgage without that feature. 

• Prepayment penalties are associated with a 52 percent greater risk. 

53 

• Loans with no documentation or limited documentation of the applicant’s income were associated with a 29 percent greater risk. 

Lenders and mortgage insurers have known for decades that these features increase the risk of foreclosure, yet these characteristics—adjustable-rate loans with 

prepayment penalties, made with little documentation—describe typical subprime 

mortgage loans made in recent years. 

A significant culprit in today’s foreclosure was the proliferation of hybrid adjustable-rate mortgages (‘‘ARMs,’’ called 2/28s or 3/27s), which begin with a fixed interest rate for a short period, then convert to a much higher interest rate and continue 

to adjust every 6 months, quickly jumping to an unaffordable level. Commonly, this 

interest rate increases by between 1.5 and 3 percentage points at the end of the second year, and such increases are scheduled to occur even if interest rates in the general economy remain constant.6 This type of loan, as well as other similar hybrid 

ARMs (such as 3/27s) have rightfully earned the name ‘‘exploding’’ ARMs. 

A. Loose Qualifying Standards and Business Practices 

The negative impact of high-risk loans could have been greatly reduced if 

subprime lenders had been carefully screening loan applicants to assess whether the 

proposed mortgages are affordable. Unfortunately, many subprime lenders—as well 

as lenders writing ‘‘non-traditional’’ mortgages such as ‘‘payment option ARMs’’ and 

interest-only loans—have been routinely abdicating the responsibility of underwriting loans in any meaningful way. 

Lenders today have a more precise ability than ever before to assess the risk of 

default on a loan. Lenders and mortgage insurers have long known that some home 

loans carry an inherently greater risk of foreclosure than others. However, by the 

industry’s own admission, underwriting standards in the subprime market have become extremely loose in recent years, and analysts have cited this laxness as a key 

driver in foreclosures.7 Let me describe some of the most common problems: 

Not considering payment shock: Lenders who market 2/28s and other types of 

high-risk mortgages often do not consider whether the homeowner will be able to 

pay when the loan’s interest rate resets, setting the borrower up for failure. 

Subprime lenders’ public disclosures indicate that most are qualifying borrowers at 

or near the initial start rate, even when it is clear from the terms of the loan that 

the interest rate can (and in all likelihood, will) rise significantly, giving the borrower a higher monthly payment. For example, as shown in the chart below, publicly available information indicates that these national subprime lenders, who were 

prominent in recent years, do not adequately consider payment shock when underwriting ARMs: 

Sample Underwriting Rules For Adjustable Rate Mortgages 8

Lender Underwriting Rule 

OPTION ONE MORTGAGE CORP Qualified at initial monthly payment. 

FREMONT INVESTMENT & LOAN Ability to repay based on initial payments due in the 

year of origination. 

NEW CENTURY Generally qualified at initial interest rate. Loans to 

borrowers with FICO scores under 580 and loan-tovalue ratios of more than 80 percent are qualified at 

fully indexed rate minus 100 basis points. 

These underwriting rules indicate that lenders routinely qualified borrowers for 

loans based on a low interest rate when the cost of the loan is bound to rise significantly—even if interest rates remain constant. In fact, until very recently, it was 

not uncommon for 2/28 mortgages to be originated with an interest rate 4 percentage points under the fully-indexed rate. For a loan with an 8 percent start rate, a 

4 percentage point increase is tantamount to a 40 percent increase in the monthly 

principal and interest payment amount. 

Failure to escrow: The failure to consider payment shock when underwriting is 

compounded by the failure to escrow property taxes and hazard insurance.9 In stark 

contrast to the prime mortgage market, most subprime lenders make loans based 

on low monthly payments that do not escrow for taxes or insurance.10 This deceptive 

practice gives the borrower the impression that the payment is affordable when, in 

fact, there are significant additional costs. Given that the typical practice in the 

subprime industry is to accept a loan if the borrower’s debt is at or below 50 to 55 

percent of their pre-tax income, using an artificially low monthly payment based on 

a teaser rate and no escrow for taxes and insurance virtually guarantees that a borVerDate Nov 24 2008 06:52 Sep 21, 2012 Jkt 075679 PO 00000 Frm 00057 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\75970.TXT JACKIE
54 

rower will not have the residual income to absorb a significant increase whenever 

taxes or insurance come due during the first year or two, or certainly not when payments jump up after year two. 

A study by the Home Ownership Preservation Initiative in Chicago found that for 

as many as one in seven low-income borrowers facing difficulty in managing their 

mortgage payments, the lack of escrow of tax and insurance payments were a contributing factor.11 When homeowners are faced with large tax and insurance bills 

they cannot pay, the original lender or a subprime competitor can benefit by enticing the borrowers to refinance the loan and pay additional fees for their new loan. 

In contrast, it is common practice in the prime market to escrow taxes and insurance and to consider those costs when looking at debt-to-income and the borrower’s 

ability to repay.12

Low/no documentation: Inadequate documentation also compromises a lender’s 

ability to assess the true affordability of a loan. Fitch recently noted that ‘‘loans underwritten using less than full documentation standards comprise more than 50 percent of the subprime sector. . . .’’ 13 ‘‘Low doc’’ and ‘‘no doc’’ loans originally were 

intended for use with the limited category of borrowers who are self-employed or 

whose incomes are otherwise legitimately not reported on a W–2 tax form, but lenders have increasingly used these loans to obscure violations of sound underwriting 

practices. For example, a review of a sample of these ‘‘stated-income’’ loans disclosed 

that 90 percent had inflated incomes compared to IRS documents, and ‘‘more disturbingly, almost 60 percent of the stated amounts were exaggerated by more than 

50 percent.’’ 14 It seems unlikely that all of these borrowers could not document 

their income, since most certainly receive W–2 tax forms, or that they would voluntarily choose to pay up to 1.5 percent higher interest rate to get the ‘‘benefit’’ of a 

stated-income loan.15

Multiple risks in one loan: In addition, regulators have expressed concern about 

combining multiple risk elements in one loan, stating that ‘‘risk-layering features 

in loans to subprime borrowers may significantly increase risks for both the . . . 

[lender] and the borrower.’’ 16 Previously I described a brief overview of the increased risk associated with several subprime loan characteristics, including adjustable-rate mortgages, prepayment penalties, and limited documentation of income. 

Each of these items individually is associated with a significant increase in foreclosure risk, and each has been characteristic of subprime loans in recent years; 

combining them makes the risk of foreclosure even worse. 

B. Broker Abuses and Perverse Incentives 

Mortgage brokers are individuals or firms who find customers for lenders and assist with the loan process. Brokers provide a way for mortgage lenders to increase 

their business without incurring the expense involved with employing sales staff directly. Brokers also play a key role in today’s mortgage market: According to the 

Mortgage Bankers Association, mortgage brokers now originate 45 percent of all 

mortgages, and 71 percent of subprime loans.17

Brokers often determine whether subprime borrowers receive a fair and helpful 

loan, or whether they end up with a product that is unsuitable and unaffordable. 

Unfortunately, given the way the current market operates, widespread abuses by 

mortgage brokers are inevitable. 

First, unlike other similar professions, mortgage brokers have no fiduciary responsibility to the borrower who employs them. Professionals with fiduciary responsibility are obligated to act in the interests of their customers. Many other professionals already have affirmative obligations to their clients, including real estate 

agents, securities brokers and attorneys. Buying or refinancing a home is the biggest investment that most families ever make, and particularly in the subprime 

market, this transaction is often decisive in determining a family’s future financial 

security. The broker has specialized market knowledge that the borrower lacks and 

relies on. Yet most mortgage brokers deny that they have any legal responsibility 

to refrain from selling inappropriate, unaffordable loans, or to put their own financial interest ahead of their clients’.18

Second, the market, as it is structured today, gives brokers strong financial incentives to ignore the best interests of homeowners. Brokers and lenders are focused 

on feeding investor demand, regardless of how particular products affect individual 

homeowners. Moreover, because of the way they are compensated, brokers have 

strong incentives to sell excessively expensive loans. They earn money through upfront fees, not ongoing loan payments. To make matters worse for homeowners, brokers typically have a direct incentive to hike interest rates higher than warranted 

by the risk of loans. In the majority of subprime and similar transactions, brokers 

demand a kickback from lenders (known as ‘‘yield spread premiums’’) if they deliver 

mortgages with rates higher than the lender would otherwise accept. Not all loans 

55 

with yield-spread premiums are abusive, but because they have become so common, 

and because they are easy to hide or downplay in loan transactions, unscrupulous 

brokers can make excessive profits without adding any real value. 

Experts on mortgage financing have long raised concerns about problems inherent 

in a market dominated by broker originations. For example, the chairman of the 

Federal Reserve Board, Ben S. Bernanke, recently noted that placing significant 

pricing discretion in the hands of financially motivated mortgage brokers in the 

sales of mortgage products can be a prescription for trouble, as it can lead to behavior not in compliance with fair lending laws.19 Similarly, a report issued by Harvard 

University’s Joint Center for Housing Studies, stated, ‘‘Having no long term interest 

in the performance of the loan, a broker’s incentive is to close the loan while charging the highest combination of fees and mortgage interest rates the market will 

bear.’’ 20

In summary: Mortgage brokers, who are responsible for originating over 70 percent of loans in the subprime market, have strong incentives to make abusive loans 

that harm consumers, and no one is stopping them. In recent years, brokers have 

flooded the subprime market with unaffordable mortgages, and they have priced 

these mortgages at their own discretion. Given the way brokers operate today, the 

odds of successful homeownership are stacked against families who get loans in the 

subprime market. 

C. Abusive Loan Terms: Prepayment Penalties and Yield-Spread Premiums 

Prepayment penalties—an ‘‘exit tax’’ for refinancing or otherwise paying off a 

loan—are a destructive feature of the subprime market that lock borrowers in to 

high-cost loans, and make it difficult for responsible lenders to refinance them into 

lower-cost loans. Today prepayment penalties are imposed on about 70 percent of 

all subprime loans,21 compared to about 2 percent of prime loans.22 This disparity 

belies any notion that subprime borrowers freely ‘‘choose’’ prepayment penalties. All 

things being equal, a borrower in a higher-cost loan, or in an unpredictable, adjustable rate loan with a very high margin, would not choose to be inextricably tied to 

that product by a high exit tax.23 With common formulations of 6 months’ interest, 

or amounts of approximately 3 percent of the principal, the amount of equity lost 

is significant. For a $200,000 loan, a 3 percent prepayment penalty costs borrowers 

$6,000, eating almost entirely the median net worth for African American households.24

It has long been recognized that prepayment penalties trap borrowers in disadvantageous, higher cost loans. Indeed, this is the penalty’s purpose—in industry 

parlance, to ‘‘build a fence around the borrower’’ or ‘‘close the back door.’’ Less well 

known is the fact that these penalties also increase the cost of the loan at origination because they are linked to higher rates on loans that pay higher so-called 

‘‘yield-spread premiums’’ to brokers.25 Thus, contrary to the claims of some lenders, 

prepayment penalties do not decrease, but, rather, frequently increase the cost of 

subprime loans. 

Yield-spread premiums are a bonus paid by the lender to the mortgage broker as 

a reward for placing the borrower into a higher cost loan than the borrower qualifies 

for. Lenders are willing to pay the premium only where they are sure that the borrower will remain in the higher-cost loan long enough to enable the lender to recoup 

the cost of the premium from the borrower. 

It is important to note that the lender does not allow the broker to get any yieldspread premium if the loan has no prepayment penalty, a result that is common 

in the subprime sector. Yield-spread premiums and prepayment penalties are intertwined in a way that is harmful to consumers and detrimental to competition. For 

a fuller discussion of these issues, please refer to our recent comment letter to the 

Federal Reserve Board, submitted on August 15.26

D. Racial Steering 

Eliminating the practice of steering borrowers to pricier and riskier loans is also 

critical to assuring a fair marketplace that does not impose a discrimination tax on 

borrowers of color. We know that for borrowers of color, the odds of receiving a higher-cost loan are greater, even after controlling for legitimate risk factors, such as 

credit scores.27 We are long past the time when we can—or should—close our eyes 

to this. Tax cuts are popular in Washington. Ending the discrimination tax on mortgage lending is a tax cut that is long overdue, and prohibiting steering is the way 

to do it. 

It serves the interest not only of homeowners, but of the world economy, to assure 

that all families seeking loans who qualify for lower-cost prime mortgages should 

receive a prime mortgage, not a subprime loan. We know that far more people have 

been placed in high-cost loans than should have been.28 Since it is now abundantly 

56 

clear that ‘‘risky loans,’’ as much or more than ‘‘risky borrowers,’’ are a threat, market professionals—loan originators, whether brokers or retail lenders—should be required to assure that borrowers are put into the rate they qualify for. Market incentives that encourage originators to put as many people as possible into the priciest 

(and most dangerous) loans possible helped make this problem; prohibiting those incentives is a necessary part of the solution. 

The subprime market has long cited ‘‘riskier borrowers’’ or ‘‘credit-impaired borrowers’’ as its justification for the higher prices on these loans. The argument is that 

investors need the higher prices to justify their risk, yet that extra price burden for 

the subprime loan puts credit-strapped borrowers that much closer to the edge. 

III. Federal Neglect and the Potential Role of the FTC 

Policymakers have long recognized that Federal law—the Home Ownership and 

Equity Protection Act of 1994 (HOEPA)—governing predatory lending is inadequate 

and outdated. Although the Federal Reserve Board (hereinafter, the ‘‘Board’’) has 

the authority to step in and strengthen relevant rules, they have thus far refused 

to act in spite of years of large-scale abuses in the market, though they will reportedly propose some regulations this year. Other Federal regulators with relevant authority, such as the Office of the Comptroller of Currency, have done very little enforcement, and they have been slow to enact rules. The result: For the majority of 

subprime mortgage providers, there are no consequences for making abusive or 

reckless home loans. 

On July 25 this year, we joined the Consumer Federation of America and other 

concerned groups in presenting testimony before the U.S. House Committee on Financial Services.29 In part of that testimony, we discuss the important role the Federal Trade Commission could play in eliminating abusive lending practices in the 

home loan market. The FTC brings two particular strengths: 

First, the FTC is the agency with long experience in interpreting and enforcing 

the law against unfair and deceptive acts and practices (UDAP) in commerce, having been in that business for well over half a century. This experience contrasts 

sharply with that of the banking regulatory agencies, who only recently even gave 

thought to utilizing such authority.30 In addition to longer experience with UDAP 

concepts, the FTC is also the agency whose chief job is to protect consumers from 

unfair and deceptive acts in commerce, and to protect the integrity of the marketplace for honest and ethical competition. Though the agency, like several others, 

could have done more to prevent the current subprime debacle, it makes little sense 

to prevent the agency with the most experience.31

Second, the FTC is also the agency with the fewest conflicts of interest since, unlike the bank regulatory agencies, there is no structural conflict of interest—it is 

not dependent upon assessments for its funding, does not need to compete with 

other regulators for entities to regulate, and its primary role is to protect consumers, not bank profitability. 

With these strengths in mind, we offer two recommendations: 

1. Enhance the power of section 5 of the FTC Act by expanding the rule-making and 

enforcement authority of the agency. 

Section 5 of the Federal Trade Commission Act prohibits unfair and deceptive acts 

and practices in trade and commerce. Expanding the regulatory and enforcement 

authority of the Federal Trade Commission related to mortgage lending—and many 

other aspects of consumer financial services—would enhance the capacity for appropriate Federal regulatory response, as the Consumer Federation of America, we at 

CRL, and others recommended in earlier Congressional testimony.32 The FTC is the 

agency charged with primary interpretive and enforcement authority under Section 

5, but the Act places that authority as to federally chartered depositories institutions with the Federal financial regulators.33 Though the FRB, NCUA and OTS 

have rule-making authority under the FTC Act, and others have enforcement authority as well, removing limits on the FTC’s capacity to act makes sense. 

While more could have been done with their rule-making authority, the FTC has 

promulgated two rules that have been effective in curbing abuses in the consumer 

finance area. The first, the ‘‘anti-holder rule,’’ abrogates the holder in due course 

rule for credit sales where the seller refers the borrower to the lender or arranges 

or assigns the sales financing.34 (A ‘‘holder in due course’’ is any subsequent owner 

of a check, note or other financial instrument of value.) That rule is based on the 

principle that, after the interest in a debt obligation is transferred, it is fundamentally unfair to separate the borrower’s obligation to pay for a good or service if the 

provider of that good or service failed in its legal and contractual obligations to the 

borrower. 

57 

The anti-holder rule provides an important object lesson for the current foreclosure crisis. It recognized that when the ultimate owner of the obligation sought 

payment from the consumer, the consumer’s ‘‘right’’ to seek redress against the 

originator while still obligated to pay the current holder was largely theoretical. It 

further recognized that those who were in the business of buying up credit obligations were in a far better position to police the marketplace of originators than consumers. That model demonstrates that accountability up the chain is workable, and 

the FTC should be commended for recognizing that. 

Another FTC rule that brought significant reform to the market is the Credit 

Practices Rule, which eliminated abusive contractual remedies that were standard 

practices in the finance company industry.35 This rule was aimed at contracts that 

provided powerful remedies to finance companies in non-negotiated contracts that 

denied due process and other legal rights to borrowers. Though vociferously opposed 

by the industry, the FTC recognized that industry wide practices can be—and sometimes are—inherently unfair or deceptive, and should be simply banned. Their authority to do so has been upheld by the courts,36 and the practical sense of doing 

so without doing harm to the marketplace has been upheld by history. 

Finally, states should be permitted parallel enforcement authority under Section 

5 or their state analogues. It adds considerably to the available resources—more 

‘‘cops on the beat’’—and, like the FTC, they have experience, and are less subject 

to conflicts. 

2. Create a private right of action under Section 5 of the FTC Act. 

Currently, harmed consumers have no right to enforce the Federal FTC Act: only 

public enforcement is possible. Even absent the intrinsic conflicts of interest, enforcement agencies such as the FTC have limited resources. When problems become 

the rule in an industry, rather than the exception, as is the case recently, public 

resources will simply never be adequate. Regulatory investigations are also very 

time consuming, and hold no remedy for homeowners who face foreclosure today. 

It is imperative that consumers be able to wield their own tools when they need 

them. 

Though consumers in many states can invoke their state unfair and deceptive acts 

and practices law, there are significant gaps, such as exclusions for ‘‘regulated entities.’’ Further, with the overly expansive assertion of preemption of state law by 

Federal banking regulators, it is unclear whether we are about to see a constriction 

in the ability of consumers to use their state UDAP laws.37

IV. Conclusion 

The mortgage industry has argued for years that regulation of subprime lending 

would have the unintended consequence of restricting credit, but it is now apparent 

that the current tightening of credit has been caused by the lack of adequate regulation and the reckless lending that followed. If subprime lenders had been subject 

to reasonable rules—the kind of rules that responsible mortgage lenders have always followed—we wouldn’t have the problems we’re seeing today. 

Common-sense protections would prevent this catastrophe from happening again. 

We need a combination of sensible state laws backed by a strong Federal floor. In 

recent years, many states have taken action to curb specific predatory lending practices, but Federal regulators have remained largely passive until recently, and still 

have a ways to go. These recommended changes to the FTC Act will help protect 

families from abusive financial practices and help restrain the market from the excesses of recent years in the future. 

Endnotes 

1 A full copy of the ‘‘Losing Ground’’ foreclosure study and an executive summary appear on 

CRL’s website at http://www.responsiblelending.org/issues/mortgage/reports/page.jsp?itemID= 

31217189. 2Mortgage Finance Industry Overview, Lehman Brothers Equity Research, p. 4 (December 22, 

2006). 3 Comment letter from the Mortgage Bankers Association to the Board of Governors of the 

Federal Reserve Board, p. 4, dated August 15, 2007. 4Moody’s Economy.com, ‘‘Into the Woods: Mortgage Credit Quality, Its Prospects, and Implications,’’ a study incorporating unique data from Equifax and Moody’s Investors Service (2007). 5See note 1. 

6 Here we are describing the 2/28 because it is by far the most common product in the 

subprime market, but the concerns are the same with the 3/27, which differs only in that the 

teaser rate remains in effect for 3 years. 7See e.g., Office of the Comptroller of the Currency, National Credit Committee, Survey of 

Credit Underwriting Practices 2005. The Office of The Comptroller of Currency (OCC) survey 

of credit underwriting practices found a ‘‘clear trend toward easing of underwriting standards 

as banks stretch for volume and yield,’’ and the agency commented that ‘‘ambitious growth goals 

58 

in a highly competitive market can create an environment that fosters imprudent credit decisions.’’ In fact, 28 percent of the banks eased standards, leading the 2005 OCC survey to be 

its first survey where examiners ‘‘reported net easing of retail underwriting standards.’’ See also 

Fitch Ratings, 2007 Global Structured Finance Outlook: Economic and Sector-by-Sector Analysis 

(December 11, 2006). 8See Option One Prospectus, Option One Mortgage Loan Trust 2006–3 424B5 (October 19, 

2006) available at: http://www.sec.gov/Archives/edgar/data/1378102/000088237706003670/ 

d581063l424b5.htm; Fremont Investment and Loan Prospectus, Fremont Home Loan Trust 

2006–1 424B5 (April 4, 2006) available at: http://www.sec.gov/Archives/edgar/data/1357374/ 

000088237706001254/d486451lall.htm; Morgan Stanley Prospectus, Morgan Stanley ABS Capital I Inc. Trust 2007–NC1 Free Writing Prospectus (January 19, 2007) available at: http:// 

www.sec.gov/Archives/edgar/data/1385136/000088237707000094/d609032lfwp.htm; Best 

Practices Won’t Kill Production at New Century, p. 3 Inside B&C Lending (November 24, 2006). 9See, e.g., ‘‘B&C Escrow Rate Called Low,’’ Mortgage Servicing News Bulletin (February 23, 

2005) ‘‘Servicers of subprime mortgage loans face a perplexing conundrum: only about a quarter 

of the loans include escrow accounts to ensure payment of insurance premiums and property 

taxes, yet subprime borrowers are the least likely to save money to make such payments . . . 

Nigel Brazier, senior vice president for business development and strategic initiatives at Select 

Portfolio Servicing, said only about 25 percent of the loans in his company’s subprime portfolio 

have escrow accounts. He said that is typical for the subprime industry.’’ 10See, e.g., ‘‘Attractive Underwriting Niches,’’ Chase Home Finance Subprime Lending marketing flier, at http://www.chaseb2b.com/content/portal/pdf/subprimeflyers/SubprimelAUN 

.pdf (available 9/18/2006) stating ‘‘Taxes and Insurance Escrows are NOT required at any LTV, 

and there’s NO rate add!’’ (suggesting that failing to escrow taxes is an ‘‘underwriting highlight’’ 

that is beneficial to the borrower). ‘Low balling’ payments by omitting tax and insurance costs 

were also alleged in states’ actions against Ameriquest. See, e.g., State of Iowa, ex rel Miller v. Ameriquest Mortgage Co. et al, Eq. No. EQCE–53090 Petition, at ¶ 16(B) (March 21, 2006). 11Partnership Lessons and Results: Three Year Final Report, p. 31 Home Ownership Preservation Initiative, (July 17, 2006) at www.nhschicago.org/downloads/82HOPI3YearReportlJul17- 

06.pdf. 12 In fact, Fannie Mae and Freddie Mac, the major mortgage investors, require lenders to escrow taxes and insurance. 13See Structured Finance: U.S. Subprime RMBS in Structured Finance CDOs, p. 4 Fitch Ratings Credit Policy (August 21, 2006). 14Mortgage Asset Research Institute, Inc., Eighth Periodic Mortgage Fraud Case Report to 

Mortgage Bankers Association, p. 12, available at http://www.mari-inc.com/pdfs/mba/ 

MBA8thCaseRpt.pdf (April 2006); see also 2007 Global Structured Finance Outlook: Economic 

and Sector-by Sector-analysis, Fitch Ratings Credit Policy (New York, N.Y), December 11, 2006, 

at 21, commenting that the use of subprime hybrid ARMS ‘‘poses a significant challenge to 

subprime collateral performance in 2007.’’ 15Traditional Rate Sheet effective 12/04/06 issued by New Century Mortgage Corporation, a 

major subprime lender, shows that a borrower with a 600 FICO score and 80 percent LTV loan 

would pay 7.5 percent for a fully-documented loan, and 9.0 percent for a ‘‘stated wage earner’’ 

loan. 16See Interagency Guidance on Nontraditional Mortgage Product Risks, note 42. 17MBA Research Data Notes, ‘‘Residential Mortgage Origination Channels,’’ September 2006. 18 About one-third of the states have established, through regulation or case law, a broker’s 

fiduciary duty to represent borrowers’ best interests. However, many of these provisions are riddled with loopholes and provide scant protection for borrowers involved in transactions with 

mortgage brokers. In other states, the question has not been specifically addressed. 19 Remarks by Federal Reserve Board Chairman Ben S. Bernanke at the Opportunity Finance 

Network’s Annual Conference, Washington, D.C. (November 1, 2006). 20 Joint Center for Housing Studies, ‘‘Credit, Capital and Communities: The Implications of 

the Changing Mortgage Banking Industry for Community Based Organizations,’’ Harvard University at 4–5. Moreover, broker-originated loans ‘‘are also more likely to default than loans 

originated through a retail channel, even after controlling for credit and ability-to-pay factors.’’ 

Id. at 42 (citing Alexander 2003). 

21See, e.g., David W. Berson, Challenges and Emerging Risks in the Home Mortgage Business: 

Characteristics of Loans Backing Private Label Subprime ABS, Presentation at the National 

Housing Forum, Office of Thrift Supervision (December 11, 2006). According to MBA data, there 

was a 69.2 percent penetration rate for prepayment penalties on subprime ARMs originated in 

2006. Doug Duncan, Sources and Implications of the Subprime Meltdown, Manufactured Housing Institute, (July 13, 2007). A recent CRL review of 2007 securitizations showed a penetration 

rate for prepayment penalties averaging over 70 percent. 22See Berson, id. A recent MBA analysis shows that 97.6 percent of prime ARMs originated 

in 2006 had no prepayment penalty, and 99 percent of 2006 prime FRM had no penalty. Doug 

Duncan, id. 23Marketing jargon in the industry is more honest about the role of prepayment penalties, 

along with high- LTV loans: ‘‘Build a fence around the customer:’’ or bring them in and ‘‘close 

the back door’’ are phrases that surfaced during regulatory investigations of subprime lenders 

in which one of the authors of this Comment was involved. 24 Indeed, according to one study, it would exceed the median net worth in 2002 for African 

American households ($5,988). And it drains almost 7 percent of the median net worth for white 

households that year ($88,651). Rakesh Kochhar, The Wealth of Hispanic Household: 1996–2002 

p. 5, (Pew Center for Hispanic Studies), http://pewHispanic.org/files/reports/34.pdf. 25 Christopher A. Richardson and Keith S. Ernst, Borrowers Gain No Interest Rate Benefits 

from Prepayment Penalties on Subprime Mortgages, Center for Responsible Lending (January 

2005). 

59 

26 Comment letter from the Center for Responsible Lending to the Board of Governors of the 

Federal Reserve Board (August 15, 2007). 27Debbie Gruenstein Bocian, Keith S. Ernst and Wei Li, Unfair Lending: The Effect of Race 

and Ethnicity on the Price of Subprime Mortgages, Center for Responsible Lending (May 31, 

2006). Study finds that African-American and Latino borrowers are at greater risk of receiving 

higher-rate loans than white borrowers, even after controlling for legitimate risk factors. For example, African-American borrowers with prepayment penalties on their subprime home loans 

were 6 to 34 percent more likely to receive a higher-rate loan than if they had been white borrowers with similar qualifications. 28Mike Hudson and E. Scott Reckard, More Homeowners with Good Credit Getting Stuck in 

Higher-Rate Loans, L.A. Times, p. A–1 (October 24, 2005). For most types of subprime loans, 

African-Americans and Latino borrowers are more likely to be given a higher-cost loan even 

after controlling for legitimate risk factors. Debbie Gruenstein Bocian, Keith S. Ernst and Wei 

Li, Unfair Lending: The Effect of Race and Ethnicity on the Price of Subprime Mortgages, Center 

for Responsible Lending, (May 31, 2006) at http://www.responsiblelending.org/issues/mortgage/reports/page.jsp?itemID=29371010; See also Darryl E. Getter, Consumer Credit Risk and 

Pricing, Journal of Consumer Affairs (June 22, 2006); Howard Lax, Michael Manti, Paul Raca, 

Peter Zorn, Subprime Lending: An Investigation of Economic Efficiency, 533, 562, 569, Housing 

Policy Debate 15(3) (2004). 29Testimony of Travis Plunkett, Improving Federal Consumer Protections in Financial Services, Hearing Before the House Financial Services Committee, (July 25, 2007). 30The FTC has had UDAP authority to protect consumers for nearly 70 years. Though the 

bank regulatory agencies were granted parallel enforcement authority in 1975, it is only since 

2000 that they have recognized that. Even so, they have been parsimonious in utilizing it in 

the context of mortgage lending, for example, the OCC’s action against a small bank, Laredo 

National Bank, # 2005–142. In contrast, the FTC took enforcement action against a non-depository subprime lender that was at the time among the top originators of subprime loans, the Associates, FTC v. Associates First Capital, (http://www.ftc.gov/opa/2002/09/associates.shtm#) 

and other major predatory lenders, such as First Alliance Mortgage Company (FAMCO) and 

Delta Funding, in cooperation with other agencies. Abusive practices in servicing is another 

major problem in the mortgage context, and the FTC brought an action against Fairbanks, a 

major subprime servicer, (The FTC has a list of predatory lending cases on its website, 

http://www.ftc.gov/opa/2002/07/subprimelendingcases.shtm. 31 It has been suggested that Congress may need to make clear to the FTC that it will gain 

this authority only if it commits to using it in an appropriate fashion. See Test. of Travis 

Plunkett, note 30. 32See note 30. 33 15 U.S.C. Sec. 45, 12 U.S.C. Sec. 57a(a), 57a(f). See also Julie L. Williams & Michael S. 

Bylsma, On the Same Page: Federal Banking Agency Enforcement of the FTC Act to Address Unfair and Deceptive Practices by Banks, 58 Bus. Law. 1243 (2003). 34 16 C.F.R.433. 35 16 C.F.R. 444. 36 American Financial Serv. Ass’n v. Federal Trade Commission, 767 F.2d 957 (D.C. Cir. 1985). 37For example, given the OTS’ position that its rules ‘‘occupy the field,’’ what will be the impact if it promulgates UDAP rules, as it has recently proposed? (OTS Adv. Notice of Proposed 

Rule Making , Unfair or Deceptive Acts or Practices, Dkt. ID OTS–20007–0015 (http:// 

www.ots.treas.gov/docs/7/73373.pdf). 

Senator DORGAN. Mr. Calhoun, thank you very much for your 

testimony. 

Next we’ll hear from Chris Murray, the Senior Counsel of Consumers Union. 

Mr. Murray? 

STATEMENT OF CHRIS MURRAY, SENIOR COUNSEL, 

CONSUMERS UNION 

Mr. MURRAY. Thank you, Subcommittee Chairman Dorgan, for 

the opportunity to represent Consumers Union this morning, the 

nonprofit publisher of Consumer Reports magazine. 

I want to touch on a few different areas focused in the media and 

telecom sectors, and note that the FTC does serve as a critical first 

line of defense for anticompetitive practices, as well as unfair and 

deceptive behavior. 

The first thing we would strongly urge Congress to do is eliminate the constraints of the common carrier exemption. This exemption from FTC jurisdiction was created for a bygone era, that—we 

no longer have a single monopoly provider that’s tightly regulated 

by the Federal Communications Commission. Unfortunately, the 

60 

Commission has been steadily walking away from regulating the 

full bundle of communications, and Congress needs to provide the 

authority for the FTC to fill this critical void. 

We see carriers using aggressive bundling tactics. They’re advertising unlimited services that are sharply limited, and promoting 

plans that are not reflective of actual costs. But what happens 

when a telephone company advertises a misleading promotion that 

bundles a service that’s, today, exempt, such as landline telephone 

service, with a service that is not, such as broadband Internet? We 

would argue that the agency has the authority to deal with the 

problem, but that’s not clearly settled. Conversely, we see areas 

where the FTC already has clear authority and needs to do more 

to prosecute unfair and deceptive practices. I would note recent examples of cable companies who are terminating consumers because 

they’re using too much bandwidth. If a consumer buys a particular 

Internet plan, companies can cap them at that bandwidth, no more 

and no less than what they purchased. We’re not arguing that consumers should get unlimited bandwidth, just that they should get 

whatever bandwidth they’ve been sold. A spokesman for the cable 

company that was terminating these subscribers wouldn’t even tell 

people what the real limit of their plans were. If that’s not unfair 

and deceptive practices, I’m not sure what is. I don’t understand 

how a company can advertise a particular high-speed capacity, and 

then refuse to tell subscribers what they bought. 

So, I would, again, argue that it’s critical, not just in the area 

of common carrier services, but, now that we see these full bundles, 

we need to eliminate the common carrier exemption, and we need 

to have an expectation that the FTC is going to deal with truth in 

broadband advertising across the full bundle. 

Turning to the digital TV transition, we need the FTC to help defend against the digital up-sell. As the Committee is aware, in 2009 

consumers’ analog television sets will no longer work for over-theair broadcast without a digital converter box. Consumer awareness 

of the transition is low, and it’s confusing even for those consumers 

who are aware of it. What equipment will they need? Will cable 

and satellite subscribers need a converter box? Will they need a 

high-definition television set? Will they need a digital cable-ready 

television set? Or will an analog set with this converter box that 

we’re going to see a coupon for, will that be sufficient? 

Alongside this confusion are the inevitable incentives to up-sell. 

You’ve got cable companies who want to get people to buy their 

service. You’ve got consumer electronics manufacturers who want 

to get people to buy new televisions. The incentives are various, 

and the combination of low consumer awareness, technological 

complexity, and financial incentives to up-sell creates a situation 

ripe for deceptive practices. We would ask that the FTC pay special 

attention to advertising during this transition period, to make sure 

that consumers are given the whole truth. 

On identity theft and privacy, I’ll note briefly that the FTC has 

conducted numerous workshops to explore privacy issues. One important workshop is planned this fall regarding online collection of 

consumer behavioral data for marketing uses. Consumers are paying an increasing price for the convenience of shopping online, as 

marketers, data-mining companies, are creating near-complete proVerDate Nov 24 2008 06:52 Sep 21, 2012 Jkt 075679 PO 00000 Frm 00064 Fmt 6633 Sfmt 6601 S:\GPO\DOCS\75970.TXT JACKIE
61 

files of consumer behaviors, matched with public data on zip codes 

and incomes. We commend the FTC also for evaluating the important privacy issues raised by the Google-Doubleclick merger, and 

the growing concern over behavioral tracking. 

Finally, I’ll remind the Committee that the National Do Not Call 

Registry is required to purge its numbers every 5 years, meaning 

that everybody who signed up for this list is going to have to sign 

up for it again, unless Congress takes action. Consumers who 

joined this enormously popular program will again encounter the 

annoyance of advertising at the dinner table, beginning in June 

2008. With this annoyance will also come another round of expenditures for the Federal Government to publicize the availability of 

the list and the necessity of signing up again. Congressman Doyle 

announced, this week, that he will introduce a vehicle in the House 

to make the Do Not Call Registry permanent, and it’s my hope that 

Members of this Committee might introduce a parallel bill and 

pass it expeditiously. 

I can’t help actually just to note, in passing, one of our deep disappointments with the Federal Trade Commission has, indeed, 

been this net neutrality report. The notion that markets are going 

to discipline the right player here is curious. I was on the inside 

of Madison River, one of the few incidents where we’ve seen documented blocking, and what we saw there—it was sheer dumb luck 

that we discovered the blocking in the first place, because we had 

a network engineer as one of the customers who was blocked. He 

ran a trace route, and he called the company up, and the company 

told him they were blocking our packets because they wanted to 

make more from their own service. That is not going to repeat 

itself. We believe we’ve seen blocking in other instances. It’s just 

incredibly difficult to document. And the problem is, the market 

disciplines the wrong player. If somebody has trouble with their 

Internet phone service, who do they call? Do they call their Internet service provider and say, ‘‘Hey, you should sign a better deal 

with AT&T’’? No, they call their Internet phone provider and say, 

‘‘Why is your service junk?’’ 

And the notion that competition is going to prevent this behavior, 

I think, is also a little bit laughable. I live 2 miles north of the 

White House, in Washington, D.C., and I have a choice of precisely 

one provider. I’m not able to get cable modem service in my neighborhood. And so, I’m not quite sure how I, as a consumer, would 

do anything. And, while I hear, ‘‘Ninety percent of consumers have 

a choice between two,’’ I just find that really difficult to believe 

those numbers, when, you know, here I am, in downtown Washington, D.C., in a relatively affluent neighborhood, and I don’t have 

a choice of two providers. 

I thank you for the opportunity to testify today. 

[The prepared statement of Mr. Murray follows:] 

PREPARED STATEMENT OF CHRIS MURRAY, SENIOR COUNSEL, CONSUMERS UNION

Subcommittee Chairman Dorgan, Ranking Member DeMint, and Members of the 

Subcommittee, I am grateful for the opportunity to testify before you today repVerDate Nov 24 2008 06:52 Sep 21, 2012 Jkt 075679 PO 00000 Frm 00065 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\75970.TXT JACKIE
62 

1 Consumers Union is a nonprofit membership organization chartered in 1936 under the laws 

of the State of New York to provide consumers with information, education and counsel about 

goods, services, health, and personal finance. Consumers Union’s income is solely derived from 

the sale of Consumer Reports, its other publications and from noncommercial contributions, 

grants and fees. In addition to reports on Consumers Union’s own product testing, Consumer 

Reports (with approximately 4.5 million paid circulation) regularly carries articles on health, 

product safety, marketplace economics and legislative, judicial and regulatory actions that affect 

consumer welfare. Consumers Union’s publications carry no advertising and receive no commercial support. 2Schering-Plough Corp. v. Federal Trade Commission, 2005 U.S. App. LEXIS 3811, (11th. Cir. 

2005). 3 Hart, Kim. ‘‘Shutting Down Big Downloaders,’’ Washington Post (September 7, 2007). 

resenting Consumers Union, the nonprofit publisher of Consumer Reports magazine.1

The Federal Trade Commission (FTC) serves as a key line of defense against unfair and deceptive practices and anti-competitive behavior. Today I will highlight 

some of the barriers in the Commission’s authority and enforcement powers that 

hinder its ability to protect consumers as well as note a few priority areas in which 

the FTC could do more. 

Given the FTC’s broad authority to protect consumers, Consumers Union intersects with the FTC in many ways. One notable area in which the FTC has led is 

in the area of ‘‘Exclusion Payments,’’ or ‘‘pay for delay’’ settlements, where generic 

drug manufacturers are paid by brand name drug makers to keep generic drugs out 

of a market. The agency prevailed on cases to end the practice of paying off drug 

competitors not to compete, until it was reversed by the 11th circuit in the Schering 

case.2 We support legislation to end these anti-consumer practices and applaud the 

FTC for conducting more investigations with an eye toward bringing more cases. 

These ‘‘pay for delay’’ deals cost consumers billions every year. I hope Congress will 

also act expeditiously to end this practice. 

Today I’ll turn my attention primarily to the telecommunications and media sectors, and what can be done to improve the FTC’s ability to protect consumers in 

these areas. 

Eliminating the Common Carrier Exemption, Policing Truth in Broadband 

Advertising 

First, Congress should eliminate the constraints of the common carrier exemption, 

as it was crafted for a time when a single monopoly telephone provider was tightly 

regulated by the Federal Communications Commission (FCC). As the marketplace 

evolves with a broader array of services, and the FCC steadily backs away from regulating the full bundle of communications that consumers are buying, there is a void 

that is critical for the FTC to fill—and Congress should provide the FTC authority 

to fill it. 

What happens when a telephone company advertises a misleading promotion that 

bundles a service that is today exempt, such as landline telephone, with a service 

that is not, such as broadband Internet? We would argue that the agency has authority to deal with the problem, but this would likely be litigated before it is settled, consuming already scarce agency resources. 

For example, in the Verity case, the agency brought an action against an overseas 

firm billing illegally for ‘‘adult videotext’’ services that consumers didn’t even know 

had been accessed through their phone lines. The company attempted to evade FTC 

jurisdiction by claiming the common carrier exemption. While the FTC eventually 

prevailed, it required litigation at the district and appellate court levels, and Verity 

even attempted an appeal to the Supreme Court, but the case was not accepted. 

When we see carriers using aggressive bundling tactics, advertising ‘‘unlimited’’ 

services that are sharply limited, and promoting plans that are not reflective of actual costs, the case for FTC jurisdiction could not be more clear. 

And the FTC should prosecute ‘‘unfair and deceptive’’ practices wherever they 

may lurk, especially where the agency already has clear authority. We saw recent 

examples of cable companies offering high-speed Internet to their customers, and 

terminating those who use ‘‘too much’’ bandwidth. We’re not arguing that consumers 

should have unlimited bandwidth by any means, just that they should get whatever 

bandwidth they’ve been sold. If a consumer buys a certain amount of connectivity, 

then cap them at amount—no more, no less than what was advertised. In a Washington Post article,3 a spokesman for this particular company wouldn’t even disclose 

to its subscribers how much is ‘‘too much’’! They argue that if limits were disclosed, 

then subscribers would use right up to that maximum capacity. 

63 

I simply don’t understand how a company can advertise a particular high-speed 

capacity, and then refuse to tell subscribers what they really bought. If that’s not 

an unfair and deceptive practice, I can’t imagine what would be. 

The agency needs to act to ensure that consumers get truth in broadband and 

communications advertising, and Congress needs to give the FTC clear, concurrent 

jurisdiction with the FCC to deal with the full range of communications services, 

whether common carrier or otherwise. 

Digital Television Transition—Defending against the ‘‘Digital Upsell’’ 

The digital television transition creates unique vulnerabilities for consumers and 

therefore unique opportunities for businesses to mislead them. Not only is consumer 

awareness of the transition low, the transition is confusing for even those consumers 

who are aware of it—consumers lack clarity on what equipment they’ll need under 

what circumstances. Will cable subscribers need a converter box? For those who 

need a new television now, do they need a digital television? A digital cable-ready 

television? An analog set with a converter box? 

Along with these complexities are strong incentives by a variety of market players 

to upsell to consumers. Cable companies have an incentive to encourage non-subscribers to purchase their service, and to upsell current subscribers to digital cable. 

Retailers and manufacturers have an incentive to sell high-end HDTVs rather than 

more affordable lower definition, smaller-screen digital sets. And they have no incentive to inform consumers that their analog sets will continue to receive digital 

broadcasts as long as they have a converter box. 

The combination of low consumer awareness, technological complexity, and financial incentives to upsell creates a situation ripe for deceptive practices. For vulnerable populations—such as the elderly or low-income households—the potential for 

being misled, intentionally or unintentionally, is significant. 

Last week the cable industry launched a $200 million ad campaign to educate 

consumers about the DTV transition. The ads, which urge cable customers to relax 

because ‘‘cable will take care of them’’ in the digital transition, fail to indicate 

whether cable will convert all digital broadcast signals, or whether consumers will 

need to pay more for a set top box or other services that make it possible for consumers to continue using their analog cable services. 

The cable industry has made a voluntary commitment to offer both digital and 

analog signals to their customers for 3 years—but they have not committed to do 

this nationwide. Their public statements indicate that they would not provide these 

signals to customers in a significant part of the country, including rural areas. After 

this 3 year dual carriage period ends, it is not clear that consumers will not have 

to purchase new equipment or pay more for digital cable service. 

Congress and the FTC should take an aggressive stance to ensure that consumers 

are not taken advantage of. In the last Congress, this Committee reported (in the 

Communications Opportunity Promotion and Enhancement Act) an amendment offered by Sen. Nelson of Florida that imposed on retailers the duty to adequately inform consumers, and made it a violation of law to fail to adequately inform consumers about the availability of digital-to-analog converter boxes or to provide misleading information about the availability and cost of such converter boxes. Consumers Union supported that provision and encourages Congress to make such failure a violation of Section 5 of the FTCA subject to civil penalties. 

Rulemaking and Enforcement Authority 

Despite its broad jurisdiction to take action against unfair and deceptive practices 

by most types of businesses and its broad rulemaking authority to issue specific 

trade rules, the Commission faces significant procedural and judicial hurdles in proposing and adopting new rules and in taking enforcement action against unlawful 

practices. 

Preventative Rules: The Commission faces significant statutory restrictions in proposing and adopting rules to prevent unfair and deceptive practices before they 

occur. First, rulemaking is encumbered by significant procedural requirements, including judicial review according to a higher review standard than most agencies 

face. Second, in order to propose such rules, the Commission must make a showing 

that the practice it seeks to correct is prevalent or widespread. The apparent internal Commission policy not to issue such rules, coupled with its theoretically broad 

but practically cramped authority, means that consumers cannot rely on FTC rules 

to prevent unfair and deceptive practices before they occur. Thus, Congress must 

be more aggressive in ensuring that consumers are protected by mandating that the 

Commission develop rules that protect consumers from unfair and deceptive practices in the emerging priority areas, some of which are outlined below. 

64 

4 Although the Commission’s Section 13(b) authority allows it to avoid the lengthy administrative enforcement process by filing a case directly in Federal district court, except where explicitly authorized by statute, rule or court decree, the Commission cannot seek civil penalties for 

initial violations. 

Examples of these enforcement difficulties abound. When the Commission filed its complaint 

against ChoicePoint for its security breach, it was able to seek civil penalties against the company only because they were authorized under the Fair Credit Reporting Act.4 Had the complaint been premised solely on the company’s Section 5 violations, the Commission could have 

sought only equitable and monetary relief—damages suffered in cases where the breach caused 

ID theft. Without the threat of FCRA-based civil penalties, it is unlikely that the Commission 

would have successfully achieved its record-setting $15 million settlement agreement. And in 

some cases, the actual monetary damages to consumers may be limited, difficult to assess and 

prove or otherwise inadequate to provide for a strong deterrent to unlawful actions. One such 

example is telephone pretexting, an issue which this Committee attempted to address in the 

109th Congress. The Commission has sought explicit civil penalty authority from Congress to 

enforce violations of this type of deceptive practice.4 Such authority is important because when 

consumers phone records are obtained through pretexting, although there may be a severe privacy invasion (as in the case of the Hewlett-Packard board members whose phone records were 

obtained), monetary damages may be scant. In such cases, Section 13(b) provides little deterrence effect and thus is as limited as FTC’s administrative enforcement options. Borrowing the 

words of Commissioner Liebowitz in his dissent in FTC’s DirectRevenue case, in such cases, 

FTC enforcement action becomes merely ‘‘a cost of doing business.’’ 4

5For an accounting of FTC’s actions against companies that fail to comply with their own privacy policies, see http://www.ftc.gov/privacy/privacyinitiatives/promiseslenf.html. 

Enforcement Authority: The Commission’s enforcement authority is likewise constrained. Section 5 of the FTCA empowers the FTC to take action against those who 

engage in unfair and deceptive practices. For example, the Commission has authority to seek civil penalties against those businesses and individuals that violate Section 5, but only after it has issued a cease and desist order, a court has enjoined 

a practice and the order or injunction has been violated.4 This slap on the wrist approach sends a clear message: ‘‘It’s OK to break the law until you get caught, and 

when you do, just don’t do it again.’’ 

The combination of few preventative rules and enforcement limitations encourage 

those who engage in unfair or deceptive practices to roll the dice in hopes that FTC 

resources and enforcement limitations will limit their financial exposure, assuming 

they are ever caught. Congress must step in to ensure that at least for high priority 

issues, the Commission is fully empowered to prevent consumer harm by mandating 

that FTC issue tough regulations or making explicit that certain practices violate 

Section 5 explicitly and by strengthening FTC’s enforcement powers by authorizing 

it to seek strong civil penalties for initial violations. 

Identity Theft and Privacy 

The FTC plays an important role in preventing identity theft, encouraging improved data security measures, and enforcing elements of some key privacy laws. 

FTC has conducted numerous workshops to explore privacy issues; one important 

workshop is planned this fall regarding online collection of consumer behavioral 

data for marketing uses. Consumers will pay an increasingly heavy price for the 

convenience of shopping for goods and services online as marketers, researchers and 

data-mining companies grow ever closer to creating near-complete profiles of consumer behaviors, easily matched with public data on zip codes and incomes. We also 

commend FTC for evaluating the important privacy issues raised by the GoogleDoubleclick merger, and the growing concern over behavioral tracking. 

The Commission also manages the Identity Theft Data Clearing House and conducts important consumer education on prevention of ID theft and mitigation of its 

harms. We are pleased that the FTC has updated its website to provide information 

about state ‘‘security freeze’’ laws—state laws giving consumers the right to freeze 

access to their credit files—that 39 states have now enacted. The security freeze is 

a key tool in preventing new account fraud. Given the essential nature of this protection, more prominent placement of freeze rights information would strengthen 

FTC educational efforts. And finally, the Commission has taken enforcement action 

under Section 5 against databrokers, retailers and other businesses who fail to live 

up to their privacy promises to protect and secure consumers’ personal information, 

or who fail to employ reasonable and appropriate security practices.5

While the Commission’s action to date to improve data security and deter deceptive privacy disclosures is laudable, more must be done to protect consumer privacy 

both by the Commission and by Congress. Continued reliance of FTC’s Section 5 authority, with its significant enforcement limitations (discussed above), leave consumers vulnerable to deceptive and unfair practices that put them at significant 

risk of ID theft. 

65 

Unfortunately, currently the Commission has explicit authority to issue data security rules only for those entities regulated under the Gramm-Leach-Bliley Act. Except under its general rulemaking authority—which, as noted above, the Commission is reluctant to use—the FTC does not have an explicit Congressional mandate 

to issue rules governing the privacy and data security practices of non-GLBA entities. 

We urge Congress to provide the FTC with new enforcement authority for new 

Federal data security mandates for any business operating in interstate commerce 

that collects, stores, or otherwise uses consumers’ sensitive personal information. S. 

1178, reported by the Senate Commerce, Science, and Transportation Committee 

earlier this year, takes an important first step in applying FTC’s GLBA data security rules adopted by FTC to all such businesses. If the rule is violated, the Commission will have authority to seek civil penalties for the initial violation, creating 

greater incentives to secure data. Unfortunately, despite the generality of the data 

security requirements under S. 1178 and FTC’s GLBA data security rules, the legislation also displaces state data security safeguard rules that require stronger or 

more explicit security measures. We urge the Committee not to displace stronger 

state protections in this area, or to significantly strengthen data security safeguard 

mandates. 

But data security requirements are not enough. Consumers also deserve notice 

when the security of their sensitive personal information held by others has been 

breached so they can take steps to protect themselves. Consumers Union strongly 

supports the security freeze provisions of S. 1178 and urges their adoption. We urge, 

however, that Congress strengthen the notice of breach requirement in the bill. 

Under the legislation, notice obligations are not triggered unless the breached entity 

determines that there is a reasonable risk of identity theft. Such ‘‘trigger’’ notice will 

leave consumers in the dark when there is inadequate data for the breached entity 

to evaluate the level of risk. Moreover, the legislation weakens existing protections 

because it displaces far stronger state notice laws that now protect more than half 

of all American consumers. The more consumer protective approach to notice of 

breach provided in S. 495 better ensures that businesses cannot evade notice when 

the security of sensitive consumer data has been breached. 

Finally, it is essential that both Congress and the FTC step up protection of consumers Social Security Numbers (SSNs). SSNs provide the key to a consumer’s financial identity. As a result, the widespread availability and use of SSNs by the 

private and public sector increases consumers’ vulnerability to ID theft by making 

it easier for thieves to obtain the information. 

In comments filed last week by CU before the Commission as part of its inquiry 

regarding private sector use of SSNs, CU reported that in its recent national consumer survey, nearly four in five adults reported that they had been asked for their 

SSN by a business or government entity in the last year. Most consumers clearly 

understood the dangers of providing the number but feared the consequences of refusing to provide it. And nearly all survey respondents supported new laws that 

would restrict the use, sale, purchase, and solicitation of their SSNs. 

Consumers Union encourages adoption of laws creating new Federal protections 

for SSNs to reduce consumers’ vulnerability to identity thieves. The SSN protection 

provisions of S. 1178 provide a starting point, but we have strong concerns that the 

numerous exceptions provided to prohibitions on solicitation, sale, purchase and display swallow the rule and leave consumers unprotected. We also urge the FTC take 

more aggressive action under its existing Section 5 authority to prevent collection, 

use, sale and purchase of SSNs except for credit, investment, tax and employment 

purposes. 

Spam/Spyware 

Consumers Union, in its 2007 ‘‘State of the Net’’ survey found that more than 34 

percent of survey respondents reported a spyware infection in the prior 6 months. 

The chances of being infected with spyware is one in three. One of every eleven consumers infected suffers serious damage. In addition to hardware and software damage, spyware poses grave risks to consumer privacy. 

Consumers will pay an increasing personal price for the convenience of shopping 

for goods and services online as marketers, researchers and data-mining companies 

grow ever closer to creating near-complete profiles of consumer behaviors, easily 

matched with public data on zip codes and incomes. Badware at best assaults consumers computers with unwanted pop-up advertising and, at worst, may unknowingly render their computers a tool for cybercriminals who use thousands of infected 

machines to steal identities, rob banks, and even cripple the Internet with malicious 

denial-of-service attacks. 

66 

We commend FTC for its aggressive stance on spyware, bringing at least eleven 

actions in the past 2 years, although some settlements have produced disappointingly low fines. But more must be done to protect consumer privacy. 

In addition to new authorities for FTC, the agency, despite its good work, can take 

yet a more aggressive stance beyond enforcement of Section 5 violations. It should 

investigate the online marketplace in light of new developments in the field, expose 

marketing practices that compromise user privacy, issue the necessary injunctions 

to halt current practices that abuse consumers, and craft policies and recommend 

Federal legislation that prevents such abuses in the future. 

National Do Not Call Registry 

Finally, I’ll note that the National Do Not Call Registry is required to purge its 

numbers every 5 years, meaning all consumers who signed up for it will have to 

sign up for it again, unless Congress takes action. Consumers who signed up for this 

enormously popular program will again encounter the annoyance of advertising at 

the dinner table, beginning in June 2008. And with this will come another round 

of marketing expenditures for the Federal Government to publicize the availability 

of the List and necessity of signing up yet again. 

132 million citizens put their home and mobile telephone numbers on the list, and 

I’m confident those voters will be distressed to find out that they are again facing 

telemarketing calls unless Congress acts. 

Congressman Doyle announced this week that he will introduce a vehicle in the 

House to make the Do Not Call Registry permanent; it is my hope that members 

of this Committee will introduce a parallel bill, and seek its expeditious passage. 

The Federal Trade Commission is a critical line of defense against unfair and deceptive practices and anti-competitive behavior. The Committee should act to improve the agency’s ability to accomplish its mission, especially by eliminating the 

common carrier exemption. We look forward to supporting the agency’s efforts on 

consumer privacy, spam and spyware, the Do Not Call List, and would urge the 

agency to take a closer look at advertisements concerning the Digital Television 

Transition to ensure that consumers are not misled. 

Thank you Chairman Dorgan. 

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

Finally, next we will hear from Mr. Schwartz. Mr. Schwartz is 

representing the Center for Democracy and Technology. 

Mr. Schwartz, you may proceed. 

STATEMENT OF ARI SCHWARTZ, DEPUTY DIRECTOR, 

CENTER FOR DEMOCRACY AND TECHNOLOGY 

Mr. SCHWARTZ. Thank you very much, Chairman Dorgan. Thank 

you for holding this public hearing today and inviting CDT to participate. 

As more consumers’ services move online, consumer protection 

agencies are facing new challenges. The Federal Trade Commission 

has played a leadership role to meet these challenges, including 

overcoming such difficulties as locating the perpetrators of online 

schemes, keeping up with the rapid pace of technological evolution, 

and following the increasing financial motivation of Internet 

fraudsters. 

In particular, the FTC has been the lead law enforcement agency 

in the world in the fight against spyware. Spyware has become one 

of the most serious threats to the Internet’s future. Consumer Reports magazine estimates that consumers will lose $1.7 billion this 

year to spyware attacks alone. The magazine estimates that almost 

1 million consumers simply gave up fixing their spyware-riddled 

computers and had to throw them away. 

The good news is that consumer losses are down dramatically 

from 2006, when they peaked at $2.6 billion. The main reasons for 

this decrease in the spyware threat are, first, the improvement in 

anti-spyware technology; second, the public pressure on companies 

67 

advertising with nuisance or harmful adware; and, finally, the enforcement of consumer protection law, led by the work of the FTC 

and some State attorneys general. 

The FTC recognized the profound threat posed by the rising tide 

of spyware early, and actively moved to limit its spread. The Commission has been the leading enforcer against spyware, pursuing 

11 cases to fruition in the past two and a half years, including 

three based, at least in part, on the petitions brought my organization, the Center for Democracy and Technology. CDT has learned, 

through our own research, that, as consumer fraud increases, the 

FTC’s ability to work internationally becomes more important. 

Congress passed the SAFE WEB Act late last year to provide the 

FTC powers to promote international cooperation. The FTC’s ability to use this new law, and staff resources that it will need, will 

be very important to monitor. 

In fact, in general, the Commission staff has not grown in equal 

proportion to its new responsibilities, such as SAFE WEB, the 

FACT Act, Gramm-Leach-Bliley, CAN–SPAM, and more. 

Mr. Chairman, you mentioned, earlier, that, according to its own 

statistics, in 2008 the FTC will only be about three-fifths of the size 

that it was almost 30 years ago, in 1979, well before the Internet 

explosion, and decades before the growth of online fraud. For online 

consumer protection to be truly effective in the future, Congress 

will need to appropriate resources commensurate with the FTC’s 

new responsibilities. 

Finally, CDT would like to impress upon the Committee the important role that the FTC has played in promoting good privacy 

practices online. While progress has been made by many of the 

good actors in the industry in this regard, CDT continues to actively urge Congress to take a more comprehensive approach to privacy to ensure that consumers are protected in the new networked 

economy. 

Last year, we were joined in this effort not only by privacy advocates, but also by 14 major companies, including eBay, Microsoft 

and HP. The FTC’s experience on privacy will be essential as this 

effort moves forward. In particular, the Commission will need adequate resources to participate in the discussion to implement whatever legislation emerges from this process. We hope that this committee will be the leader on the general privacy issue, and will continue to promote the urgency of privacy matters with the Commission and on the rest of the Congress, moving forward. 

Thank you for your attention, and I look forward to your questions. 

[The prepared statement of Mr. Schwartz follows:] 

PREPARED STATEMENT OF ARI SCHWARTZ, DEPUTY DIRECTOR, 

CENTER FOR DEMOCRACY AND TECHNOLOGY

Chairman Dorgan, Ranking Member DeMint and Members of the Committee, 

thank you for holding this public hearing on the Reauthorization of the Federal 

Trade Commission (FTC). The Center for Democracy and Technology (CDT) is 

pleased to have the opportunity to participate. CDT is a nonprofit public interest 

organization dedicated to preserving and promoting privacy, civil liberties and other 

democratic values on the Internet. CDT has been a widely recognized leader in the 

68 

1See, e.g., CDT leads the Anti-Spyware Coalition (ASC), a group of anti-spyware software 

companies, academics, and public interest groups dedicated to defeating spyware; In 2006, CDT 

Deputy Director Ari Schwartz won the RSA Award for Excellence in Public Policy for his work 

in building the ASC and other efforts against spyware; ‘‘Eye Spyware,’’ The Christian Science 

Monitor, Apr. 21, 2004 [‘‘Some computer-focused organizations, like the Center for Democracy 

and Technology, are working to increase public awareness of spyware and its risks.’’]; ‘‘The Spies 

in Your Computer,’’ The New York Times, Feb. 18, 2004 [‘‘Congress will miss the point (in 

spyware legislation) if it regulates specific varieties of spyware, only to watch the programs mutate into forms that evade narrowly tailored law. A better solution, as proposed recently by the 

Center for Democracy and Technology, is to develop privacy standards that protect computer 

users from all programs that covertly collect information that rightfully belongs to the user.’’]; 

John Borland, ‘‘Spyware and its discontents,’’ CNET News.com, Feb. 12, 2004 [‘‘In the past few 

months, Ari Schwartz and the Washington, D.C.-based Center for Democracy and Technology 

have leapt into the front ranks of the Net’s spyware-fighters.’’]. 2Testimony of Ari Schwartz, Associate Director, Center for Democracy and Technology on ‘‘Reauthorization of the Federal Trade Commission’’ before the Senate Committee on Commerce, 

Science, and Transportation Subcommittee on Consumer Affairs, Foreign Commerce and Tourism,’’ July 17, 2002. 3 According to the FTC, the Commission had 1,746 FTEs in 1979 (see http://www.ftc.gov/ftc/ 

oed/fmo/fte2.htm) and requested 1,019 FTEs in 2008 (see http://www.ftc.gov/ftc/oed/fmo/ 

budgetsummary08.pdf). 

policy debate about spyware, phishing and related privacy threats to the Internet.1

As we have worked to build trust on the Internet, we have worked closely with the 

Consumer Protection Bureau at the Federal Trade Commission. The Bureau’s work 

is essential to the protection of consumer privacy online. 

Summary 

The FTC’s consumer protection mission with respect to the Internet is expanding 

and becoming increasingly complex. The Commission’s jurisdiction over Internet-related laws has expanded including new laws to fight spam, identity theft and more. 

At the same time, the rapid pace of technological change, the increasing financial 

pay-off for malicious actors and complicated nature of international cooperation has 

increased the complexity of enforcement and the need for adequate resources. Five 

years ago, CDT foresaw these emerging issues when we urged this subcommittee 

to reauthorize the FTC and, in doing so, to ‘‘use its new resources to stop unfair 

information practices as well as deceptive ones.’’ 2 While the Commission has not 

been reauthorized since 1996, it has, under Chairman Majoras, begun to bring more 

cases using its unfairness powers and has assumed a lead law enforcement agency 

role in online consumer protection. 

In particular, the FTC has taken the lead law enforcement role in fighting 

spyware, one of the most serious threats to the Internet’s continued usefulness, stability and evolution. The Commission should be commended for recognizing early on 

the profound threat posed by the rising tide of spyware and for actively moving to 

limit its spread. 

As consumer Internet fraud increases, the FTC’s ability to work with its international counterparts becomes ever more important. At the request of the Commission and with support from groups like CDT, Congress passed the SAFE WEB Act 

late last year to provide the FTC with powers to promote international cooperation. 

Yet, while the Commission clearly recognizes the importance of the new law, we will 

need to closely monitor the Congressional reporting on the law to see if those powers 

are being used effectively to improve international cooperation. 

CDT would also like to impress upon the Committee the important role that the 

FTC has played in promoting good privacy practices online. In particular, the Commission has promoted industry best practices and also shown that it will take action 

when laws are broken. 

For the last decade, CDT has actively urged Congress to take a more comprehensive approach to privacy. Last year, we were joined in the call for comprehensive 

privacy legislation, not only by privacy advocates, but also by 14 major companies. 

CDT urges this Committee to take up general consumer privacy legislation and 

make it clear that the FTC’s unfairness jurisdiction includes violations of the privacy rights of American consumers. As the discussion about privacy legislation 

moves forward, the FTC’s expertise and experience on privacy will be essential. 

Finally, it is important to note that while the Internet revolution and the growth 

of digital technologies have heightened the FTC’s importance to consumer protection, the resources available to the Commission have declined. When adjusted for 

inflation, the Commission’s staff in 2008 will only be 62 percent of the size that it 

was almost 30 years earlier in 1979, well before the Internet explosion.3 For online 

69 

4Poll conducted April 13–20, 2006, by Greenberg Quinlan Rosner Research for the Center for 

American Progress; Center for Responsible Lending; National Military Family Association; and 

AARP. 

consumer protection to continue to be effective, Congress will need to appropriate 

resources commensurate with the FTC’s new responsibilities. 

I. Growth of Internet Commerce Has Led to New Roles for FTC 

The exponential growth of Internet commerce has delivered enormous benefits to 

consumers. With low barriers to entry and a profusion of tools for comparing various 

sellers, e-commerce has lowered prices and expanded consumer choice. Users also 

benefit from the enormous convenience e-commerce provides, conducting transactions from their home offices, laptop computers and increasingly even mobile devices like PDAs and phones. 

These benefits, however, are being undermined by the rise in privacy intrusions, 

fraud and abuse. An entire shadow industry has arisen with the sole purpose of 

gathering personal information on Internet users—often surreptitiously through 

invasive means such as spyware. Most of this information ends up being used to 

bombard users with unwanted marketing, but in the wrong hands it also may be 

used for more malicious purposes, such as identity theft, the fastest growing crime 

in the United States. 

Consumers also are subjected to a constant barrage of annoying and frequently 

offensive spam e-mail. Some of this spam is sent by fraudsters posing as legitimate 

e-commerce sites and financial institutions, These ‘‘phishing’’ e-mails typically try 

to dupe consumers into visiting fake websites where they are prompted to submit 

passwords and personal information, such as a Social Security numbers, which can, 

in turn, be used for identity theft. Making matters worse, many of these scams 

originate overseas, out of reach of U.S. law enforcement. 

Consumers are increasingly alarmed about these kinds of scams, Internet privacy 

intrusions, fraud and abuse. In an April 2006 poll conducted by the Center for 

American Progress, 69 percent of respondents indicated they were very or somewhat 

worried about having their identities stolen, making it the most widely cited risk 

category from a list that included getting cancer, being victimized by violent crime, 

and being hurt or killed in a terrorist attack.4

The FTC is the lead Federal agency responsible for protecting consumers against 

spam, spyware, identity theft and other Internet fraud and is responsible for enforcing the: 

• Children’s Online Privacy Protection Act 

• CAN–SPAM Act 

• Fair and Accurate Credit Transactions Act 

• Do Not Call List 

• Gramm-Leach-Bliley Act 

The Commission also plays a lead role in addressing the growing threats related 

to: 

• Identity theft 

• Spyware 

• Phishing 

• General Internet fraud 

The FTC is also engaged in evaluating and developing responses to changes in 

the online marketplace that may affect consumer protection. One example is behavioral advertising, which involves the compilation of detailed profiles of consumers’ 

online activities for the purposes of serving targeted advertising. Although this practice is not new, the FTC has recognized that the evolution of technology and the 

online marketplace require that the Commission take a fresh look at behavioral 

advertising’s privacy and consumer protection implications. The FTC has scheduled 

a town hall meeting in November to address the issue. In this and many other 

areas, the FTC is constantly looking to educate itself and the public about developing threats online. 

When we take into account the scope of the FTC’s responsibilities it becomes obvious that maintaining aggressive enforcement and comprehensive consumer education requires additional resources for the FTC. The online marketplace will become both more complex and more essential over time. The FTC has been and will 

70 

5Krebs, Brian, ‘‘The Computer Bandit,’’ The Washington Post Magazine, Feb. 19, 2006. 6See, e.g., ‘‘FTC, Washington Attorney General, Sue to Halt Unfair Movieland Downloads,’’ 

Federal Trade Commission, Aug. 15, 2006, http://www.ftc.gov/opa/2006/08/movieland.htm. 

continue to be a critical force in maintaining consumer trust in the Internet. Increased resources are a vital part of making that happen. 

II. New Challenges in Investigating Malicious Internet Actors 

In the early days of Internet crime, a vast number of offenses amounted to little 

more than virtual vandalism. Hackers would often circumvent Internet security as 

a way of showing off to their friends and proving their skills. That trend has long 

been on the decline, as malicious actors on the Internet are increasingly going after 

financial gain first and foremost.5 This means that more consumers are losing more 

money than ever before either as a direct or indirect result of malicious activity online, and that malicious hackers have more financial resources than ever before. As 

a result, the FTC’s consumer protection mission is at its most vital moment. Compensating consumers who have been harmed and putting a stop to fraudulent 

schemes becomes ever more important as fraud and monetary loss become more 

widespread. 

As the FTC’s role in fighting new fraud increases, its job becomes more complicated. One of the great paradoxes of the Internet is that while most Internet 

users are having their movements tracked and traced in ways never before imagined, those that are willing to take the time and energy can hide the tracks of their 

online activities in ways that make them very difficult to find. While this is a huge 

boon for free expression around the world, it also can help criminals and malicious 

Internet operations to evade the grasp of law enforcement. Using just a few simple 

tools, criminals and scammers can quickly and easily cloak their identities and locations. Tracking them down may require the assistance of multiple network operators, applications providers and technical experts to unravel a complex web of online 

identities and cloaking services. 

Tracking individuals online is made more complicated by the fact that many malicious Internet schemes involve groups of companies, affiliates, and individuals acting together to defraud consumers. Not only must the identities and locations of all 

of these actors be traced, but the business arrangements and relationships between 

them must also be sorted out before law enforcers can act. The Internet’s distributed 

nature lends itself to arrangements wherein multiple parties each contribute to form 

a complete operation or business plan. This characteristic has helped to provide a 

wide range of new services, but it may be exploited just as easily for malevolent purposes as for benevolent ones. The complexity of these arrangements will likely continue to grow as malicious Internet users realize that working with many different 

parties complicates enforcement and spreads liability to multiple entities. 

The global nature of the Internet further complicates the task of apprehending 

malicious online actors. Internet scams are increasingly based overseas or in multiple countries at once, adding a whole new dimension to enforcement investigations. 

Law enforcers must cultivate relationships with their foreign counterparts in order 

to increase cooperation when it comes time to conduct investigations. The same is 

true for domestic enforcement across multiple states. The FTC has always had the 

authority and the willingness to cooperate with state attorneys general on enforcement matters, and the Internet makes these cases ever more likely since consumers 

from many different states may be affected by a single online scam.6 In order to 

be fruitful, this cooperation requires all parties to expend extra resources. 

Because of the rapid changes involved with Internet scams, investigations of 

Internet fraud are becoming increasingly technologically intensive. Although vast 

resources may not have been required when the FTC first began investigating online scams, technological advances over the past few years have heightened the level 

of sophistication necessary for successful investigations. If the FTC is to continue 

as a leader in online enforcement, it must keep pace with these changes. The Internet revolution also complicates FTC oversight of completed cases. Before digital 

technologies became pervasive, it was much easier for the FTC to monitor whether 

former defendants were complying with the provisions of their settlement agreements or court orders. The Internet provides simple means for such actors to quickly 

and easily setup new schemes under new monikers in new locations, making it difficult for the FTC to draw links to former businesses or identities and determine 

compliance. 

All of this technological evolution impacts FTC resources in four ways: 

• Training and consultations with outside experts may be necessary in order to 

strengthen the knowledge base of FTC investigators. 

71 

7FTC v. Seismic Entertainment, Inc., et al., No. 04–377–JD, 2004 U.S. Dist. LEXIS 22788 

(D.N.H. Oct. 21, 2004). 8 Remarks of Deborah Platt Majoras, Chairman, Federal Trade Commission, Anti-Spyware Coalition Public Workshop, Feb. 9, 2006, http://www.ftc.gov/speeches/majoras/060209cdtspy 

ware.pdf. 

• Sophisticated equipment may be needed in order to track and understand the 

intricacies of online schemes, and also for the purposes of evidence gathering. 

• The amount of time necessary to conduct investigations may increase due to the 

technical complexities of determining and proving how a particular malicious 

enterprise works and who is behind it. The same is true for oversight, where 

monitoring functions may become increasingly resource-intensive. 

• The pool of resources dedicated to consumer education must be expanded. Frequent and rapid changes in technology can be difficult for consumers with minimal technical expertise to comprehend, and the FTC is a major source of guidance for consumers looking to protect themselves online. 

In all of these ways, the fast pace of technological change demonstrates the need 

for the FTC to expend new resources in order to stay up to speed. 

III. FTC’s Leading Role in Spyware Enforcement: 

Setting An Example for the Future 

Five years ago, very few people were familiar with the term ‘‘spyware.’’ Consumers were just beginning to witness the effects of unwanted software that appeared unexpectedly on their home computers. Since that time, consumers have 

been increasingly deluged with programs that they never knowingly installed on 

their computers. Often these programs make themselves difficult to remove, expose 

users’ personal data, open security holes, and undermine performance and stability 

of their systems. The FTC was one of the first law enforcement bodies to take note 

of this menace. Since then, the Commission has been leading the charge in the 

spyware fight in three key ways: engaging in enforcement actions, developing guiding principles for enforcers, and establishing industry standards. 

The Commission filed the Nation’s first spyware lawsuit by a law enforcement 

agency in late 2004 against a network of deceptive adware distributors and their 

affiliates.7 This case struck at the heart of one of the most nefarious spyware 

schemes on the Internet. The scammers involved were secretly installing software 

that left consumers’ computers vulnerable to hackers, and then duping those same 

users into purchasing fake security software to help repair their systems. Not only 

did the FTC succeed in the case—obtaining a $4 million order against the primary 

defendant and over $300,000 in disgorgement from the other defendants—but the 

investigations in the case opened up several additional leads that contributed to the 

FTC’s pursuit of other malicious software distributors. In the 3-years since launching this first suit, the FTC has engaged in a total of 11 spyware enforcement actions, all of which have ended with settlements or court orders that benefit consumers. In prosecuting these cases, the FTC has used its broad authority to challenge unfair and deceptive practices, recognizing that many spyware behaviors are illegal 

under existing law. However, the FTC has not been haphazard in choosing which 

cases to pursue. As the common characteristics of spyware began to reveal themselves, the FTC established three principles to guide its spyware enforcement efforts: 8

• A consumer’s computer belongs to him or her, not to the software distributor. 

This means that no software maker should be able to gain access to or use the 

resources of a consumer’s computer without the consumer’s consent. 

• Buried disclosures do not work. Communicating material terms about the functioning of a software program deep within an End-User License Agreement 

(EULA) does not meet high enough standards for adequate disclosure. 

• Consumers must be able to uninstall or disable software that they do not want. 

If a software distributor places an unwanted program on a consumer’s computer, there should be a reasonably straightforward way for that program to be 

removed. 

In addition to serving as a guide for the FTC, these principles have helped to direct state law enforcers who have begun to take on spyware cases. The spyware 

space is fraught with gray areas—software behaviors that may be perfectly legitimate in one circumstance may be considered highly malicious in another. Some 

states have passed specific spyware statutes to help clarify these distinctions, but 

72 

9See In the Matter of Zango, Inc., formerly known as 180solutions, Inc., Keith Smith, and 

Daniel Todd, FTC File No. 052 3130 (filed Nov. 3, 2006), available at http://www.ftc.gov/os/ 

caselist/0523130/index.htm; In the Matter of DirectRevenue LLC, DirectRevenue Holdings LLC, 

Joshua Abram, Daniel Kaufman, Alan Murray, and Rodney Hook, FTC File No. 052 3131 (filed 

Feb. 16, 2007), available at http://ftc.gov/os/caselist/0523131/index.htm. 10 I applaud the efforts that industry has made to develop and deploy new technologies to combat spyware, and I hope that these efforts are just the beginning.’’ Chairman Majoras, ASC Public Workshop, Feb. 9, 2006. 11 Cindy Skrzycki, ‘‘Stopping Spyware at the Source,’’ Washington Post, March 6, 2007, D01. 12 ‘‘State of the Net 2006,’’ ConsumerReports.org, Sept. 2006, http://www.consumer 

reports.org:80/cro/electronics-computers/online-protection–9–06/state-of-the-net/0609lonlineprotlstate.htm, and ‘‘State of the Net 2007,’’ ConsumerReports.org, Sept. 2007, http:// 

www.consumerreports.org/cro/electronics-computers/computers/internet-and-other-services/netthreats-9-07/overview/0709lnetlov.htm. 

several of the states that have been most active in spyware enforcement have no 

such laws in place. The FTC’s guiding principles provide a simple, understandable 

baseline for current and future law enforcers as they wade into spyware issues with 

which they may be unfamiliar. In this way, the leadership of the FTC has been a 

vital component in expanding the nationwide pool of law enforcement resources 

dedicated to combating spyware. 

The FTC has also played an integral role in establishing standards for the software industry as a whole. In two of its most recent enforcement efforts, the FTC 

reached settlement agreements with adware distributors that required the distributors to clearly and conspicuously disclose material terms about their adware programs outside of any End-User License Agreement (EULA).9 With these requirements the FTC has set a disclosure guideline that can be applied across the software industry, for the benefit of consumers. Not only were the adware distributors 

themselves forced to abandon deceptive or nonexistent disclosures, but software vendors throughout the industry were also put on notice about what constitutes legitimate behavior. The FTC’s leadership in this respect has helped to curb uncertainty 

in the software industry while creating a better online experience for consumers. 

The FTC has also played key roles in other areas that have helped to quell the 

rise of spyware infections. For example, Chairman Majoras has been actively supportive of the adoption of user-control technologies such as anti-spyware programs.10

The Commission, under the leadership of Commissioner Liebowitz, has warned companies about advertising with nuisance or harmful adware programs.11

Consumers have already seen the benefits of the FTC’s action against spyware 

working in concert with improved anti-spyware technology, self-regulatory programs 

and work by other law enforcement officials such as the state attorneys general. 

Consumer Reports magazine estimates that consumers will lose $1.7 billion from 

spyware in 2007 as opposed to $2.6 billion in 2006.12 While these figures are still 

astoundingly large and consumers are still very much at risk, spyware is one of the 

few areas of Internet fraud that is clearly headed in the right direction. 

The effectiveness of the FTC’s spyware enforcement program in all of these regards—pursuing spyware purveyors, developing guiding enforcement principles, and 

establishing industry standards—has been made possible by two important characteristics of FTC consumer protection operations. The first is that the Commission 

had the freedom to delve into uncharted territory when the threat of spyware first 

became apparent. This flexibility allowed the FTC to build its knowledge of spyware 

early enough to keep pace with the evolution of the threat that it posed. Second, 

the FTC was afforded sufficient resources to engage in the complex, technology-intensive investigations that were necessary to identify unfair and deceptive practices 

and track down the perpetrators of those practices. Having the training and technological expertise to identify and locate spyware purveyors has been critical to the 

FTC’s success in this area. 

Freedom to chart a new course and sufficient resources to engage in technologyintensive investigations will undoubtedly be essential to the FTC’s consumer protection mission as new online threats arise. Internet scams are increasingly complex, 

multi-national, and financially motivated. This makes enforcement an even greater 

challenge that will require the FTC to think, act, and use its resources in new ways. 

The success of the FTC spyware enforcement program shows what a strong leader 

the Commission can become when it is afforded the flexibility and resources necessary to tackle an emerging enforcement problem. As the FTC budget and performance plans are set for the coming years, these two aspects of FTC consumer protection operations should be fully supported and augmented as necessary to ensure 

that future enforcement efforts may be as successful as the spyware program has 

been. 

73 

13 APEC Privacy Framework, 16 APEC Ministierial Meeting, Nov. 2004, http://www.apec 

.org/apec/newslmedia/2004lmedialreleases/201104lapecminsendorseprivacyfrmwk.html. 

IV. International Cooperation is Essential 

The profusion of global commerce over the Internet complicates enforcement of online consumer protections. A victim of Internet crime might reside in the United 

States, but the perpetrator might be overseas, outside the reach of U.S. law enforcement. To protect against global fraud, the FTC was recently granted special authority to work with its counterparts in other countries by the U.S. SAFE WEB Act. 

Collaboration with other countries requires a staff that is knowledgeable about 

cross-border issues, foreign legal regimes and processes, and broader international 

issues pertinent to resolution of fraud questions. Building this knowledge base may 

necessitate staff exchanges, so that staff become familiar with foreign operations 

and build relationships with overseas counterparts. Domestically, the FTC will need 

to develop similar partnerships with U.S. investigative organizations—including the 

Department of Justice—that work on cross-border fraud. 

It is important to note that these partnerships also can be applied to address privacy violations that occur both within and outside of the United States. Privacy 

principles developed by the Asia Pacific Economic Cooperative (APEC), for example, 

anticipate the resolution of privacy violations that occur between the United States 

and countries in Asia.13 The resources, authority, and staff expertise required to address cross-border fraud will be similarly required to address privacy violations 

across international borders. 

The U.S. SAFE WEB Act requires the FTC to undertake a comprehensive reporting plan and deliver updates to Congress within 3 years of the Act’s passage. Because there has been no public reporting of the Commission’s use of the Act to date, 

these Congressional reports will be essential in understanding how these powers are 

being used and if they are effective. 

V. Increased Privacy Threats Will Require Congressional Action 

Privacy is at the heart of online consumer protection. Since the advent of widespread computing, the Internet and distributed databases, it has become far easier 

for businesses to collect, store and exchange information about their customers. Frequently, the information collected includes sensitive or personally identifying data, 

which, if not properly secured, can become a tool for identity theft. Companies also 

may use this data to track consumer preferences and behavior, often without the 

consumer’s knowledge or permission. 

Despite this unprecedented threat, there is still no single comprehensive law that 

spells out consumer privacy rights. Instead, a confusing patchwork of distinct, and 

sometimes inadequate or nonexistent, standards has developed over the years, producing more than a few oddities. For example, we reserve our strongest privacy protections for cable and video records, while travel records and online purchasing data 

are left disturbingly vulnerable, financial privacy laws have major exceptions, and 

some important uses of ‘‘public records’’ are left unregulated. 

Over the past 9 years, CDT has urged Congress to enact a single consistent regime, based on fair information practice principles. Specifically, consumers should 

be able to: 

• know which companies are collecting information from them; 

• provide only information necessary for a transaction; 

• find out what companies are doing with this information beyond the original 

transaction; 

• know who else might have access to their personal data; 

• check to ensure that the data held about them is timely, accurate and complete; 

and 

• obtain assurance that their information is held securely by all third parties. 

We believe that these protections are crucial to address the new threats faced by 

online consumers. Consumers need to be put back in control of their personal information, so that privacy is preserved and fraud and abuse prevented. 

We urge the Senate Committee on Commerce, Science, and Transportation to once 

again take up this issue to ensure that consumers are adequately protected. The 

FTC will need greater resources to take the lead on implementing such legislation, 

but first Congress will need to provide the Commission with the backing authorization to move forward. 

74 

VI. Addressing the Common Carrier Exemption 

Another issue of growing concern that CDT raised at the last FTC reauthorization 

hearing has also remained unaddressed. 

The FTC for many years has asked that the exemption that prevents the Commission from exercising general jurisdiction over telecommunications ‘‘common carriers’’ 

be rescinded. The idea of creating a level playing field is appealing, particularly 

when some communications services fall within the jurisdiction of the FTC. In particular, lifting the restriction in certain areas—such as billing, advertising and telemarketing—would ensure that the agency with the most expertise in these areas 

is taking a leading role. 

However, rescinding the exemption completely could lead to duplication of government regulation and/or confusion for consumers in certain areas. For example, telecommunications companies are already subject to the Customer Proprietary Network Information (CPNI) rules administered by the Federal Communications Commission, which limit reuse and disclosure of information about individuals’ use of 

the phone system including whom they call, when they call, and other features of 

their phone service. At this point, we are not sure it would be wise to take this issue 

away from the FCC. Similar questions may arise with other issues: Which agency 

would take the lead? By which rules would a complaint about deceptive notice be 

addressed? How will these decisions be made? 

The FTC has been thoughtful in these areas in the past, so it is likely that any 

concerns could be addressed. If this proposal should move further, the Commission 

would need to be able to have a detailed examination and plan for dealing with 

similar areas of overlap including the kind of resources needed to dispatch its newly 

expanded duties in the telecommunications space. Congress should also take part 

in studying this issue further. 

VII. Conclusion 

CDT strongly urges the Congress to finally reauthorize the Federal Trade Commission. 

The Internet has touched every sector of the FTC’s consumer protection mission, 

and although digital innovations have simplified some tasks, they bring their own 

new challenges in training, education, oversight, and—perhaps most intensely—enforcement. The Commission has aptly demonstrated its leadership in online consumer protection, and yet it is surviving with pre-Internet staffing. 

As privacy threats increase and become more international, demands on the Commission will only grow. The Committee’s oversight of the FTC’s consumer protection 

mission increases in importance as more individuals move their activities online and 

we thank the members of the Subcommittee for recognizing its importance and inviting us to address these issues today. We look forward to working with you on 

these issues in the near future. 

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

Next we will hear, finally, from Martin Abrams, who is the Executive Director of the Center for Information Policy Leadership. 

Mr. Abrams, thank you very much. 

STATEMENT OF MARTIN E. ABRAMS, EXECUTIVE DIRECTOR, 

CENTER FOR INFORMATION POLICY LEADERSHIP, HUNTON 

& WILLIAMS LLP 

Mr. ABRAMS. Thank you, Mr. Chairman. I am honored to be 

asked to testify on FTC reauthorization. 

I lead the Center for Information Policy Leadership, a think tank 

that develops policy solutions in an information age. We are located 

at the law firm of Hunton & Williams, and supported by 40 leading 

companies. My comments, though, are my own, and do not necessarily reflect the views of the Center’s members, Hunton & Williams, or its clients. And we will be looking forward to the questions. 

Mr. Chairman, information policies’ complexity will accelerate 

over the next 5 years like a race car on the first lap of the IndianVerDate Nov 24 2008 06:52 Sep 21, 2012 Jkt 075679 PO 00000 Frm 00078 Fmt 6633 Sfmt 6601 S:\GPO\DOCS\75970.TXT JACKIE
75 

apolis 500. And if we start now in developing governance structures, we will be lucky to catch up. We will collect more data in 

ways we never anticipated, just yesterday. More of that data will 

be usable by analytic systems, and those analytic systems will be 

used by more people in more places to answer more questions than 

we ever thought possible. Business analytics will be critical to business success, international competitiveness, and meeting consumer 

expectations. Global teams will use the same data set in 15 different locations all at the same time without worry about national 

borders, and consumers need to be protected in this informationdriven economy. 

The FTC, without explicit mandate from Congress, has done a 

laudable job over the past decade as the government’s information 

policy development agency. They have anticipated issues, held 

hearings, workshops, town halls, and requested comments necessary to assure a fair market where consumers’ privacy and security is protected. Mr. Chairman, we can no longer develop information policy as an inferred responsibility related to a consumer enforcement mandate. Information policy in an information age is as 

important as monetary policy in a capitalist society. The FTC reauthorization must include information policy development as an explicit responsibility for the agency. It must be funded at a level proportionate to its importance to our economy. 

Information policy needs to be staffed by a mixture of expertise 

necessary to work with the best and the brightest in business, civil 

society, and academia. And, last, the function needs Congressional 

oversight to assure the FTC does the job necessary to protect consumers while maintaining a platform for successful commerce. This 

policy development function needs to look at new enforcement models where the FTC gives oversight to bodies empowered to resolve 

consumer issues. This function needs the stature to interface with 

foreign officials on equal footing. This function is critical to a safe 

and growing economy over the next 10 years. 

Thank you, and I would be pleased to respond to questions. 

[The prepared statement of Mr. Abrams follows:] 

PREPARED STATEMENT OF MARTIN E. ABRAMS, EXECUTIVE DIRECTOR, CENTER FOR

INFORMATION POLICY LEADERSHIP, HUNTON & WILLIAMS LLP 

Distinguished Chairman, honorable Committee Members, I am Martin E. Abrams, 

Executive Director of the Center for Information Policy Leadership. I am honored 

to testify on information policy, and the opportunities and risks to maintaining a 

safe marketplace for American consumers raised by new developments in the information economy. 

The Center for Information Policy leadership was founded in 2001 by leading companies and Hunton & Williams LLP. The Center was established to develop innovative, pragmatic solutions to privacy and information security issues that reflect the 

dynamic and evolving nature of information intensive business processes and at the 

same time respect the privacy interests of individuals. Since its establishment, the 

Center has addressed such issues as conflicting national legal requirements, crossborder data transfers, and government use of private sector data, with a view to 

how the future direction of business practices and emerging technologies will impact 

those issues. 

The Center and its forty-one member companies believe that difficult information 

policy issues must be resolved in a responsible fashion if we are to fully realize the 

benefits of an information age. Center experts and staff, however, speak only for 

themselves. My comments today reflect my views, and do not necessarily reflect the 

views of the Center’s member companies, Hunton & Williams LLP, or any firm clients. 

76 

I. Summary 

The Federal Trade Commission is charged with many responsibilities as it carries 

out its mission of maintaining a safe marketplace for American consumers. The 

Center has been privileged to work with the FTC on issues related to consumer protection and information policy development, and my comments today focus on that 

aspect of the Commission’s work. 

The FTC is to be applauded for undertaking serious work to helping policymakers 

and the public understand issues around information privacy and security and for 

its thoughtful, rigorous enforcement that improves the safety of the digital marketplace. The FTC has taken on complex, fast-emerging issues and taken important 

steps to address those issues through policy development and consumer education. 

Going forward, however, information privacy and security issues will only become 

more complex and surface more quickly. 

• The FTC must be equipped to address issues related to information security 

and privacy that are more challenging than ever. Emerging technologies for 

data collection, rapid advances in business analytics, and the international nature of data flows challenge traditional frameworks of governance and make 

new demands on enforcement mechanisms. 

• FTC’s role in enforcing legal requirements for privacy and information security 

remains critical. Moreover, to foster consumer trust, the FTC must be prepared 

to undertake oversight of alternative methods of enforcement that respond to 

immediate consumer complaints regarding information use and resolve consumer disputes with companies. 

• The FTC activity in development of information policy internationally is key to 

the protection of American consumers in the global marketplace. The Commission’s work in this area should be recognized and supported. 

Congress’ Reauthorization of the FTC should specifically acknowledge the growing 

importance of the Commission’s information policy development mission, and fund 

its expansion to match the complexity of the information marketplace. As part of 

that mission, it should encourage FTC work on alternative mechanisms to address 

consumer disputes related to information misuse as an adjunct to its traditional enforcement role. Congress’s Reauthorization should recognize and encourage the 

FTC’s prominent role in international information policy development. Having 

charged the agency with this mission, Congress should also provide oversight to ensure that it is successfully carried out. 

II. The FTC must be equipped to address increasingly complex and 

challenging issues related to information security and privacy that 

arise from rapid developments in technology, business analytics and 

international data flows 

The Commission plays a key role in the enforcement of laws governing the privacy 

and security of information and in the development of forward-looking public policy—both domestically and internationally—to address emerging information governance issues. The FTC has done an admirable job in helping policymakers and 

the public understand and respond to issues surrounding information privacy and 

security through its enforcement actions and through its extensive work in workshops, requests for comments and hearings to explore how best to act on these questions. It has provided clear guidance to the market while still allowing time for the 

market and self-regulation to respond. 

In this role, the FTC has taken on difficult issues related to companies’ compliance with privacy policies, data security and data breach, emerging technologies 

such as RFID, and how to write privacy notices that effectively communicate to consumers. The complexity of these issues, however, will pale in comparison to those on the 

horizon, when digital personally identifiable information is ubiquitous, the marginal 

cost of collecting and aggregating it approaches zero, and society relies even more 

heavily on it for business, government, education, and health care. 

This complexity is driven in large part by three developments: the emergence of 

new technologies for data collection, the rapid advances in business analytics, and 

the international nature of data flows. 

A. The Emergence of New Technologies for Data Collection 

The collection of information about people is not new. Companies have collected 

data by phone, at points of sale, online, and through credit applications. Public 

record information collected and sorted by the government is used by companies; 

businesses and organizations also purchase information compiled by other companies about consumers. 

77 

1 Bruce McCabe is the managing director of S2 Intelligence Pty Ltd, a company he founded 

in 2002 to research technology issues for Australian executives and policy-makers. Before founding S2, McCabe held senior research positions at Gartner and IDC. His paper, sponsored by 

Business Object Australia, is attached for the Committee’s review. 

New data collection technologies, however, dramatically change the way and the 

places from which information about consumers is gathered. They vastly increase 

the amount of information available to businesses. Radio devices such as mobile 

telephones, global positioning systems, radio frequency identification tags and wireless sensor networks collect information about an individual’s location, and often 

their activity when they are at that location. Data accessed through search engines 

from social networks identify relationships between people, their interests and other 

individuals. Information collection often occurs in ways that do not involve the active engagement of the consumer, through highway toll tags, keystroke monitoring, 

and security cameras. 

In many cases these technologies make it unnecessary for businesses to engage 

in collection, compilation and organization of data as we traditionally think about 

it. Rather, information can be immediately useful as it is accessed through the 

search of online, publicly available resources and websites. The search, matching 

and use of this information can occur dynamically and in real time. 

This ability to gather information in new environments, in real time, and without 

consumer engagement significantly changes the interaction between the data collector and the individual, and strains our traditional notions of how best to protect 

the privacy interests of individuals in information that pertains to them. Increasingly the FTC will need to understand this new dynamic and to consider creative, 

more effective approaches to protecting the consumers’ interest in the privacy of 

their personal information. 

B. The Rapid Development of Business Analytics 

The application of analytics enables businesses to use information to create value. 

Business analytics includes data warehousing, data mining, business intelligence, 

enterprise performance, management and data visualization. The analysis applied 

by credit reporting organizations to the data they received was an early application 

of data analytics about people, allowing credit grantors to offer credit to consumers 

of more widely varied credit backgrounds while still managing and making appropriate decisions about risk. 

Today, businesses of all sizes use information analytics to predict response, profitability, return visits, and price tolerance. Government agencies use analytics to predict risk and evaluate passengers for flight security and safety, and to manage fraud 

related to health care reimbursement. 

In his paper, ‘‘The Future of Business Analytics,’’ Bruce McCabe 1 describes a 10- 

year view of emerging analytics technologies and how they will impact industries, 

organizations and the workplace. The paper offers detailed predictions about the 

way in which we will analyze and use data to predict consumer behavior, enhance 

marketing, and meeting consumer needs. He predicts that analysis of the information gathered through location tracking devices will enable organizations to gain entirely new insights about their assets, staff, customers, and products. Analysis of information gathered through audio and video will quickly grow in importance. Business analytics systems will be able to take advantage of new algorithms to draw 

inferences from material in discussion forums, customer feedback, and e-commerce 

and auctions sites, to infer overall positive or negative sentiment about companies 

and products. 

McCabe asserts that analytic applications—now only in their infancy—will grow 

significantly because of three factors. First, the cost of technology will continue to 

go down as its power increases. Second, the volume of data available for analysis 

will continue to grow. Finally, unstructured data that is not usable today, such as 

digital pictures, will feed analytic engines as a result of improvements in natural 

language processing, search, inference and categorization. 

C. The International Nature of Data Flows 

Almost all business processes have become international. Consumer services are 

supplied out of India, accounts payable out of Costa Rica, software development is 

conducted in the Ukraine, and clinical trials are conducted in as many as twenty 

countries all at the same time. One global team meeting might require twenty professionals to an look at the same data sets originating from servers in twenty different countries. Industries as diverse as pharmaceuticals, automotive, software development and cosmetics all rely on global teaming and global sourcing. These busiVerDate Nov 24 2008 06:52 Sep 21, 2012 Jkt 075679 PO 00000 Frm 00081 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\75970.TXT JACKIE
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2 15 U.S.C. § 6801 through 15 U.S.C. § 6809. 3Pub. L. No. 109–455. 

4 15 U.S.C. §§ 41–51. 5 15 U.S.C. 7701., et seq. 

6 15 U.S.C. § 1681 et seq. 7 15 U.S.C. Sec. 6801–6809. 

8 Yankelovich, Re-building the bonds of trust: state of consumer trust, crisis of confidence Presented to: 10th Annual Fred Newell Customer Relationship Management Conference 2004 available at www.compad.au/cms/prinfluences/workstation/upFiles/955316.StateloflConsumerl 

TrustlReportlFinal for Distribution.pdf. 9 Accountability agents will likely be very similar to self-regulatory enforcement bodies that 

currently exist for securities regulation and that are overseen by the Securities and Exchange 

Commission. 

ness processes require massive flows of data across international borders in order 

to work. 

All of this data must be protected from loss and alteration, and all of it must be 

used appropriately no matter where in the world it is accessed. The FTC has applied the Gramm-Leach-Bliley safeguards rule 2 to global sourcing whether managed 

by the company or outsourced to a third party company. 

The U.S. SAFE WEB Act 3 passed by the last Congress gives the FTC authority 

to work with privacy enforcement agencies in other countries to protect American 

consumers. Criminals in other countries use the Internet to prey on American consumers, and the SAFE WEB Act gives the FTC the authority to pursue those criminals. 

Because of the international nature of these data flows, the FTC must be involved 

in development of international frameworks for data protection. It must be empowered within those frameworks to protect American consumers when their data is 

overseas. 

The FTC’s international office and FTC Commissioners have also participated in 

meetings at the Asia Pacific Economic Cooperative (APEC) and the Organization for 

Economic Cooperation and Development (OECD). This will be a growing function for 

the FTC if the Commission is to effectively promote American interests in providing 

balanced protections for information and ensure that consumers have redress when 

their privacy has been compromised. 

III. The FTC must continue its enforcement under Section 5 of the FTC Act, 

and begin to undertake an oversight role for alternative consumer 

complaint and dispute resolution mechanisms. 

The FTC has a well deserved reputation in the United States and around the 

world as a tough enforcer of privacy and information security requirements. The 

Commission has used its power under the Federal Trade Commission Act,4 as well 

as specific laws such as CAN–SPAM,5 Fair Credit Reporting Act,6 and the GrammLeach-Bliley-Act.7

This enforcement role is key to fostering consumer trust in the marketplace. 

Using its authority under these laws, the FTC protects consumers by enforcing the 

law against bad actors for their specific illegal practices. In doing so, it sends a clear 

message about appropriate business practices related to information privacy and security, encouraging the reliability and trustworthiness of the information marketplace. However, as a fairly small agency with limited resources, the FTC cannot investigate every occurrence of market abuse. Moreover, it has neither the authority 

nor the resources to resolve individual consumer complaints. 

However, trust in the marketplace remains an important issue to consumers and 

critical to the health of the information-fueled market. Research conducted by 

Yankelovich in 2004 8 about consumer attitude toward industry information practices demonstrates that consumer trust in the information-driven marketplace is 

limited. At the core of these trust issues is the consumer’s inability to resolve disputes about instances of misuse or mishandling of their personal information. 

While the FTC is not the place to bring consumer complaints, it is well positioned 

to oversee market mechanisms to resolve consumer complaints about information 

practices. In the future accountability agents—entities to oversee business practices 

and assist consumers who are unable attain satisfactory resolution of complaints— 

will likely fill the gap of consumer dispute resolution. For example, industry safe 

harbors, will incorporate mechanisms not only to enforce safe harbor provisions, but 

also to resolve complaints brought by consumers related to inappropriate use or failure to protect their information.9 This new FTC role as a regulator of accountability 

agents could be substantially similar to the oversight of the Securities and Exchange Commission for self-regulatory bodies that enforce securities regulations. 

79 

This Commission’s role is anticipated in the APEC Privacy Framework, adopted 

by APEC leaders in 2004. The APEC Framework calls for the transfer of data in 

the Asia Pacific region based on corporate cross-border privacy rules. Under the current vision for the Framework’s implementation, rules would be approved by accountability agencies in the various APEC economies, including the United States. 

The FTC and other privacy regulating agencies in the United States would oversee 

these accountability agencies. In the context of the APEC discussions, the FTC has 

been considering how it would best execute that role. 

IV. The FTC must continue its role in policy development, both 

domestically and internationally 

The FTC plays a key role in the development of effective, forward-thinking information policy in the United States and around the world. The FTC embraced this 

role when it held its first workshop on privacy-related issues more than a decade 

ago. Its domestic policy development work continues with its recent request for comments on the issue of public sector use of the Social Security number and the town 

hall meeting on behavioral marketing on the Internet scheduled for November 1 and 

2. 

While policy development is not explicitly articulated in the FTC Act as a role for 

the Commission, continued FTC involvement in this work is critical to the successful development of sound public policy and effective, efficient consumer protection 

related to information issues. 

This policy development role is especially necessary as the United States and the 

world economy continues to move more deeply into an economy fueled, structured 

and motivated around the collection, use, analysis and sharing of information. This 

transition fundamentally challenges application of laws and regulations originally 

enacted to respond to the demands of an industrial economy and the early years 

of computerization. The FTC has become, and should continue to be, a key venue 

for development of policies to address new developments in the information economy. 

The FTC has been significantly involved in the development of global processes 

to protect consumers in global markets. Just as data flows and valuable uses of data 

occur across borders, criminals also can act regardless of national boundaries. The 

FTC has been actively participating in alliances to develop international governance 

structures for international data flows. Led by Commissioner William Kovacic, it 

works through the OECD Working Party on Information Security and Privacy 

(WPISP) to develop protocols to enable cooperation between law enforcement bodies 

of various countries to promote privacy protection. The FTC also works with the Canadian Federal Privacy Commissioner to foster cooperation with this leading trade 

partner. 

Additionally, the Commission has been deeply involved in development of the 

APEC Global Framework. The FTC is an active participant in the APEC Data Privacy Subgroup, and part of the Subgroup’s Working Party on Cross-border Privacy 

Rules. Ministers of APEC countries, including the United States, approved a project 

to develop protocols for approving corporate rules covering the transfer of data 

across borders just 2 weeks ago. Once developed, these mechanisms would protect 

American consumers as data that pertains to them moves throughout the Asia Pacific region. Under Commissioner Pamela Harbor’s leadership, the FTC has taken 

a leadership role in developing these protocols, demonstrating to other APEC economies the serious commitment of the United States to ensuring the privacy and security of its citizen’s data and the APEC Privacy Framework. 

To facilitate these efforts, the FTC restructured its staff this year to merge all 

international activities into a common office that reports to the Office of the Chairman. The FTC’s work in international forums should be acknowledged as part of 

the reauthorization and supported in future FTC budget requests. 

V. Conclusion 

The challenges raised by the fast approaching developments in the information 

economy cannot be met with yesterdays solutions. Protecting the privacy and security of consumers’ information will require robust information policy that responds 

quickly and effectively to the issues raised by emerging technologies, business analytics and international exposure. The FTC began the information policy process in 

the United States over a decade ago. That effort has been an adjunct to its consumer protection mission, and while admirably carried out, not sufficient for tomorrow’s challenges. 

Development of solid information policy guidance requires a better-funded FTC 

with a defined mission to develop information policy guidance for the United States 

and to participate in international policy development related to privacy and secuVerDate Nov 24 2008 06:52 Sep 21, 2012 Jkt 075679 PO 00000 Frm 00083 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\75970.TXT JACKIE
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1McCabe, B., 2003, High Value Projects in Australian Enterprises, S2 Intelligence. 2See Davenport, H., 2006, ‘‘Competing on analytics,’’ Harvard Business Review, vol. 84, no. 

1, pp. 98–107. 

rity. It also requires research into new, creative mechanisms for enforcing privacy 

and security requirements in a rapidly evolving marketplace. It means staffing with 

technologists and other experts who will work with academia, industry and civil society to develop tomorrow’s answers. The FTC must find ways to delegate and oversee mechanisms to resolve consumer disputes. Finally, this mission must include 

participation in international policy forums in a capacity co-equal to international 

data protection authorities. Congress’ role in this effort is to clearly charge the FTC 

with this mission and encourage its success through regular oversight. 

Thank you again for the opportunity to testify. The Center looks forward to working with the Committee and the Commission to develop innovative, balanced solutions to information privacy and security issues that foster a vital, safe marketplace. 

ATTACHMENT

S2 Intelligence—May 2007 

THE FUTURE OF BUSINESS ANALYTICS

Bruce McCabe 

The rate at which digital information is being produced is increasing exponentially. At the same time, computer scientists are making it possible for machines 

to navigate new information landscapes, conduct deeper and more sophisticated 

analysis of what they find, and deliver the results in more usable and timely ways 

to managers. This paper looks at how business analytics will change over the next 

10 years, the impact of these changes on organisations, and how this will lead to 

new opportunities and challenges in the workplace. 

Introduction 

In recent years, business analytics has become a topic of particular interest for 

managers; the combination of new software capabilities and large amounts of usable 

data has been delivering consistently good results for organisations in every industry. A study of IT projects delivering greatest value in Australia identified business 

analytics as one of three dominant themes 1 and global companies such as Amazon, 

Capital One, Marriot International, UPS and Proctor & Gamble have secured substantial competitive advantages through superior analysis of their data assets.2

Analytics solutions (there is usually more than one) can be found in every corporation and every major government agency, and IT managers are discovering, to their 

surprise, that the investment needed is often relatively modest compared to the 

value returned. Common applications of analytics in organisations are listed in 

Table 1. 

Table 1.—Common Applications of Business Analytics 

Sales trends and forecasts Production scheduling 

Cross-sell/up-sell recommendation Inventory optimisation 

Marketing campaign effectiveness Supply chain bottlenecks 

Product mix in stores Product quality analysis 

Retail layout, shelf allocation Predictive machine maintenance 

Contextual placement of advertising Manufacturing process costing 

Website structuring and linking Asset deployment/utilisation 

Shopping patterns, purchasing triggers Human resource benchmarking 

Capacity utilisation in airlines, hotels Salary/productivity benchmarking 

Service priority in call centres Warranty trends 

Call centre efficiency Network security/threat detection 

Frequently asked questions generation Assessing operational risk 

Expense budgeting Fraud detection 

Procurement optimisation Money laundering detection 

Distribution channel selection Credit risk for loan approvals 

Logistics modelling Loss risk in insurance 

Scheduling and routing of vehicles Likelihood of future illness 

This paper sets out to examine the future and answer the question: How will 

emerging technologies shape the way analytics are used in business over the next 10 

81 

years? It is written for business people. The main focus, therefore, is on business 

outcomes, not IT projects; all managers can use it as they plan for emerging opportunities, challenges and changes through to 2017. 

Sponsorship 

The publication of this paper was kindly sponsored by Business Objects Australia 

Pty Ltd, a supplier of business analytics solutions. More information can be found 

at www.australia.businessobjects.com. 

Using this document 

The discussion in this paper is presented in two parts. Part I describes the key 

technology trends shaping the future of analytics. Part II describes how analytics 

will shape the future of business. 

Predictions are made throughout this paper. Predictions are valuable for planners 

because they force the researcher to distil complex ideas into best guesses, based 

on what is known now, and give the lay person a single crystallised picture of a 

likely future. They offer a point that can be communicated and debated, and which 

can trigger new ideas. 

To get the most out of this document, managers are encouraged to discuss these 

predictions with colleagues in the context of the products, services, markets, competitors and goals applicable to their own organisation. 

While the predictions are written as if factual statements about the future, they 

are, of course, nothing of the sort. Many assumptions—about the pace of technology 

development, commercial value, social acceptance and rate of deployment—lie behind each. The only prediction that can be made with absolute certainty is that real 

outcomes will vary in scale, detail and timing—especially timing. 

Managers are encouraged, therefore, to also read through the underlying technology trends described in Part I. By being conscious of these trends, they can equip 

themselves to adjust their plans when they encounter new technologies and hear 

about new breakthroughs. 

Terminology 

The most useful way to discuss the future is to set boundaries broadly enough 

to capture everything that matters. For the purposes of this document, therefore, 

S2 Intelligence defines business analytics as computer analysis of information to assist managers with business decisions. 

This definition includes data warehousing, data mining, business intelligence, enterprise performance management, date visualisation, executive dashboards, supplychain analytics and many other themes current in business today. It is also broad 

enough to include future, yet to be seen analytics methods and applications. 

When the word routine is used in predictive statements (e.g., ‘‘managers will routinely track online sentiment ratings’’) it refers to when a technology or practice has 

been adopted by a wide range of organisations (i.e., not just leaders and early adopters) for everyday use. 

A knowledge worker is a person that works primarily with information (as opposed to applying physical or manual skills) in their day to day activities. 

When referring to the size of organisations, the following Australian Bureau of 

Statistics derived conventions are used: small enterprises employ 1–19 people; medium enterprises employ 20–200 people; large enterprises employ 200 or more people. 

Methods 

The primary source of data for this report was the repository of approximately 700 

face-to-face and telephone interviews conducted by S2 Intelligence with computer 

scientists, IT practitioners, researchers, business executives, policy-makers and technology leaders since 2005. 

Secondary sources include academic journals, conference proceedings, websites relating to emerging analytics products and services, and previous S2 Intelligence research where business analytics has emerged as a theme. These are referenced in 

the text. 

On completion, a draft copy of this paper was sent to 18 computer scientists, researchers and product managers with expertise in various aspects of business analytics. Feedback received from them was incorporated into the final version before 

publication. 

Feedback 

S2 Intelligence continuously revises and updates its forecasts: all comments, ideas 

and alternative viewpoints on this document are warmly welcomed and can be sent 

to Info@s2intelligence.com.au. 

82 

3See How much information? 2003 at http://www2.sims.berkeley.edu/research/projects/ 

howmuch-info-2003/. 4McCabe, B., 2003, Supplier Relationship Management in Australia and New Zealand, S2 Intelligence. 5GeneWays is an example of natural language processing applied to analyse unstructured research articles (in this case to identify molecular pathways for healthcare, bioinformatics, and 

pharmaceuticals purposes). See http://geneways.genomecenter.columbia.edu/. 

Part I: Technology Trends 

The key technology trends shaping the future of business analytics relate to the 

information that can be analysed, the sophistication of analysis that can be performed, and improvements in how results can be delivered. These may be thought 

of as analogous to the same three themes that define the capabilities of all computer 

applications—input, processing and output. 

1. Processing and storage hardware 

The cost of processing power and computer storage will continue to fall steadily. 

This is a fundamental trend that underpins advances in all types of computer applications. It will be driven in part through continuing advances in design sophistication and manufacturing processes. It will also be driven by increasingly efficient use 

of hardware as organisations move to server and storage farms and apply new techniques to allocate workload more evenly across these assets. 

2. Information volume 

The volume of digital information being produced will continue to grow at an extremely rapid rate. No-one can quantify this exactly, but we can get some sense of 

scale from a 2003 study that estimated the amount of new information being created every year, and stored on print, film, magnetic, and optical storage media, to 

be 5 exabytes per annum—an amount equal to the information contained in 37,000 

libraries the size of the U.S. Library of Congress.3 The majority of this is stored on 

hard disk drives, and annual production is estimated to be growing by 30 percent 

year-on-year. These calculations, it should be noted, apply only to new informationthey exclude duplication of existing information. 

Wherever new pools of business information are created in digital form, new analytics opportunities will follow closely. An example of this has been in the creation 

of purchasing data. Early adopters of electronic requisitioning and procurement systems reported their biggest financial benefit came not from efficient use of supplier 

discounts or fewer purchasing errors, but from analysing the new data they had on 

their purchasing.4 Other new pools of data include audio, video and spatial data, 

described in the pages below. 

Not all digital information, however, is analysable by computers. We can think 

of this in terms of the illustration in Figure 1. The outer cloud represents the total 

pool of digital information-growing fast but much of it off limits to computer-based 

analysis. The inner cloud represents the pool of analysable information, which is expanding as (a) software gets better at dealing with unstructured data, and (b) machine-friendly structure is added to some types of information. 

3. Unstructured information 

Most new digital information exists in the form of text, images, audio and video 

that has little structure or organisation. While it is relatively easy for humans to 

analyse small portions of it (by browsing the web, reading through documents and 

making notes, for example), computers run into difficulties because they are best at 

processing information that is highly structured (organised, for example, using 

standardised formats, fields, records, labels and hierarchies). 

An especially important trend, therefore, will be steady improvement in the ability for computers to navigate and process unstructured information through natural 

language processing, search, inference and categorisation.5

4. Structured information 

Separately, more structure is being added to various information landscapes 

through wider application of machine-readable labels, tags and rules (metadata) 

that act as signposts for computers, enabling them to contextualise the information 

that they find. 

Adding structure data in this way is powerful, but it also requires agreement on 

labels, tags and rules by all interested parties. Consequently, industry wide standards initiatives—which must factor for competing needs across thousands of 

organisations—will remain slow. Faster progress will be concentrated where there 

is especially strong value in undertaking this work, and where a few dominant players can force the pace. Where industry wide initiatives gain traction (the strongest 

83 

6The Semantic Web is an important set of initiatives aimed at applying more structure to 

the web to make it easier for computers to navigate. See http://www.w3.org/2001/sw/ for information on current activities. 7See Polar Rose, www.polarrose.com, for an application of analytics to online images today. 8 A recent paper about the cutting edge of image search and retrieval is Carneiro, G., Chan, 

A.B., et al, 2007, Supervised Learning of Semantic Classes for Image Annotation and Retrieval, 

IEEE Transactions on Pattern Analysis and Machine Intelligence, Vol 29, No 3, pp 394–410. 9See, for example, www.blinkx.tv. 

candidates are health and life sciences) they will significantly boost the possibilities 

for computer-based analysis.6

5. Location 

Location-based (spatial) digital information will increase exponentially. Much of 

this will be accompanied by time-based information. A key driver is the proliferation 

of spatially aware radio devices—mobile telephones, WiFi, GPS, radio-frequency 

identification (RFID) tags, wireless sensor networks—as the costs of these technologies fall. Other drivers include the dramatically improved usability of online location-based services (especially via spatial browsers such as Google Earth/Maps). 

These enable businesses to ‘‘mash-up’’ information, services and maps and publish 

these to any employee or customer that has access to a browser, for almost no cost. 

As location-aware devices and services proliferate, so too will the amount of useful 

data stored within organisations, most of it in a structured form that lends itself 

well to analytics. 

6. Images, audio and video 

The ability to interpret the contents of digital images will improve steadily. Analytics software will move beyond mining textual metadata associated with images 

(i.e., the descriptions and tags stored with them) to analysing the content of many 

images on the fly.7,8

Continuous media, in the form of audio and video files, are extremely rich in information. At the same time, however, they are notoriously difficult for computers 

to navigate and interpret. Business analysis is typically limited to what human operators can watch/listen to and write up in reports. For most businesses this means 

audio and video is excluded from computer-based analysis. 

Steady progress is being made in technologies to navigate and analyse continuous 

media files. The quantity and value of this information, especially collected via the 

call centre, and posted on the web, provides a strong imperative to apply it in business. Developments in the application of natural language technologies to transcribe 

the speech found within continuous media files are especially important. When 

soundtracks are converted to text they can be much more easily searched and 

analysed. A ready benchmark for progress here is the quality of current online services for searching video.9

Structure is also being added to continuous media files. Researchers have developed new languages for describing and time-stamping events within clips, and new 


912ABRAM1.eps
84 

10 An important example is www.annodex.org. 11 E.g., LinkedIn and MySpace at www.linkedin.com and www.myspace.com. 12See, for example, The Friend-of-a-Friend (FOAF) Project, www.foaf-project.org. 13See, for example: Alaman-Meza, B., Nagarajan, M., et. al,, 2006, ‘‘Semantic Analytics on Social Networks: Experiences in Addressing the Problem of Conflict of Interest Detection,’’ Proceedings of the 15th international conference on the World Wide Web, pp 407–416, Edinburgh. 14The STaRControl project exemplifies advanced modelling and machine learning in the context of traffic analysis. See http://nicta.com.au/director/research/projects/sltolz/star/ 

starcontrol.cfm. 

containers for keeping descriptions with the audio or video component.10 As these 

mature, continuous media files will be transported across the web with fully transcribed, time-sequenced audio tracks, and will become as easy to analyse as ordinary text. 

7. Social links 

Social networks are important targets for analysis. Identifying relationships between people, their interests, and other people is extremely valuable in business, 

and the proliferation of websites offering services built around sharing, collaboration 

and networking, a phenomenon sometimes labelled ‘‘Web 2.0’’ is driving an exponential increase in information relating to connections between people. 

This type of information is already associated with structures that can help computer navigation, including e-mail directories, links through citations, dates on blog 

entries, and common membership of online communities 11 and business 

workgroups. Semantic web initiatives will play a role in providing structure as 

well.12

Computer scientists are making rapid progress in analysing this type of data for 

business purposes. An example is conflict of interest detection, where experimental 

systems are detecting potential conflicts by analysing multiple online social networks together.13

8. Search 

The link between developments in search technologies and developments in business analytics will get stronger. Computers must be able to find data before they 

can analyse it. Each step forward in refining the outputs of search engines also represents an improvement in the data that can be sourced for analytics engines. Specialist audio mining tools already allow, for example, keyword searches of news 

clips, earnings announcements and recorded briefings. This also applies to search 

within organisations: enterprise search is rapidly improving in scale and sophistication and soon every knowledge worker will have the contents of their PC indexed 

by a desktop search engine. The parallels with search extend to interfaces, with 

analytics software progressively adopting the flexibility and familiarity of search 

interfaces to improve accessibility by non-specialist employees. 

9. Broader, deeper insights 

Computer scientists are pushing ahead in a range of fields—machine learning, 

data modelling, simulation, categorisation, abstraction, inference engines, heuristics 

and constraint programming—that will make computer analysis deeper, more accurate, and more useful. 

Analytics systems will be able to consider more variables when producing recommendations. Advances in constraint programming will see business computer systems consider more variables when producing recommendations. The quality of 

analysis of the complex, multivariate problems common in logistics, scheduling, and 

rostering will improve steadily. 

The emphasis in analytics systems will steadily shift from measuring to modelling 

business trends and processes. Machine learning methods will help computers generate their own data models, instead of being constrained to human-generated models when trying to identify correlations and relationships.14 Analytics systems will 

progressively incorporate the ability to identify gaps in their own knowledge. 

10. Presentation and usability 

In business situations, timely approximations can be invaluable, while analysis 

that arrives after a decision has been made is worthless. As the scale and complexity of information fed into business analytics increases, so too will the importance of abstraction, summarisation, delivery and presentation. The most valuable 

systems will be those that distil data from many sources into simple pictures that 

managers can digest and act on quickly. Technology developments will produce systems that become progressively better at: 

• Producing simpler and more visual data views and reports. 

85 

15Swivel and Many Eyes are examples of open websites for shared exploration and analysis 

of data. See www.swivel.com and http://services.alphaworks.ibm.com/manyeyes/home. 16See the Health Data Integration project at http://e-hrc.net/hdi/ and the CSIRO’s Privacy 

Preserving Analytics at http://www.csiro.au/science/ps59.html. 

• Allowing data views and reports to be generated by non-specialist employees. 

• Abstraction and summarisation, to give managers more concise output and 

more specific recommendations. 

• Learning from previous requests so that information is displayed in the order 

and priority that individual users prefer. 

• Assessing timing, so that software fades into the background during ‘‘business 

as usual’’ periods but actively pushes information to users when it is of high 

relevance or urgency. 

• Tailoring output to suit the device (e.g., phone, PDA, laptop, web browser) and 

context (static, mobile, making a tactical decision or preparing a strategic plan). 

• Being easily accessible from familiar and everyday applications such as Microsoft Office. 

11. Software as a service 

An increasing proportion of all business software will be provided to customers 

in the form of a service that is accessed over the web, as opposed to a product installed in the customer’s business. This is a gradual, but fundamental IT trend. The 

important technical drivers are improvements in software architecture, integration 

technologies (see Section 12) and network infrastructure. 

Economic drivers are equally important. Decision makers are attracted to the notion of no upfront investment, predictable annual costs, and leaving the management of software, including upgrades and patches, to providers. Pricing and service 

models will mature rapidly through the next 5 years. 

12. Web services 

Global take-up of web services—ubiquitous web based standards for software integration—will make connecting software applications within and between 

organisations dramatically more cost effective. As the cost of integration falls, and 

major software suppliers gradually move to supply their products in more 

modularised form, it will become easier to connect analytics engines with financials, 

office productivity software, specialised purchasing software, planning and collaborative tools, CRM packages other analytics systems and any number of applications 

and information services available on the web. 

This trends applies to individuals as well as organisations: it will become steadily 

easier for any individual to put together and publish their own integrated combinations of web applications, as we are seeing with mash-ups of mapping services 

today. 

13. Privacy preserving technologies 

The maturation of technologies that allow rapid analysis of distributed data will 

make it much easier for organisations to analyse shared information. Shared analysis will get easier for individuals, collaborating workers, and public communities 

of interest.15

An especially important driver will be privacy preserving technologies that automatically strip identifying data from customer records. These are already being applied in the healthcare domain to help researchers locate, aggregate and simultaneously analyse patient data residing in many different hospitals, institutions and 

laboratories.16 Advances in software integration (Section 12) will also be important. 

There is a strong imperative to do this better: shared analysis is important between trading partners that collaborate closely (between big retail chains, for example, and their suppliers of fast moving consumer goods), but is slowed by negotiations and manual data preparation and cleaning procedures. 

14. Human inputs 

Analytics systems will incorporate more inputs directly from humans. When workers combine on-the-spot observations with what they know about the global picture 

their personal analysis is very valuable. Steady improvements in interfaces, machine learning and inference-making will see more of this captured by systems to 

refine reports, forecasts and recommendations. Community effects, as pioneered in 

blogs, wikis and other collaborative models on the web, will also be harnessed this 

way. 

Sophisticated combinations of human and machine analysis are already found in 

hybrid share trading systems that combine algorithmic trading with decisions made 

86 

17 An example of this combination is found in the Mentor system (www.corporate 

knowhow.com). 

by human brokers in the securities industry. Specialist solutions are also emerging 

to analyse combinations of objective and subjective data for human resource management.17

15. Affordability 

Research and development of new analytics technologies will continue to be driven 

in sectors where there is highest value. As with most information technologies, 

broader adoption will follow as technologies mature, fall in price, and become available from more providers. 

The very large relative research and development investments mean that defense 

and healthcare in particular will continue to provide leading indicators for technologies that will eventually find their way into all businesses. 

New technologies will generally follow a top-down progression from initial adoption by corporations to adoption by medium and then finally small businesses. Some 

will become consumer technologies. A similar progression will apply within 

organisations as it becomes cost effective to deploy analytics to more departments, 

employees and devices. 

16. An expanding ecosystem 

Based on many of these trends, we can picture analytics systems as ecosystems, 

as illustrated in Figure 2, that are accepting inputs from an ever wider range of 

sources, and producing outputs for an ever wider range of destinations. 

Part II: Business Impacts 

This section describes how analytics will shape the future of business. The discussion moves back and forth between three levels: industry—changes to interactions 

between organisations; organisation—how organisational capabilities, routines and 

norms will change; and individual—changes that individual workers will experience. 

17. Embarrassment of riches 

Through 2017 the data coming online and made available for businesses will outstrip the capacity to analyse it. 

All organisations will continue to balance infrastructure investments against the 

analytics capabilities they would like to build. Falling costs in storage, servers and 

network bandwidth will be insufficient to keep up with demand to perform complex 

analysis more often, on more data, by more employees. Companies will constantly 

be surprised by the sheer volume of data they are generating and collecting. 


912ABRAM2.eps
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18 CIO Insight, The 30 most important IT trends for 2007, November 17, 2006, 

www.cioinsight.com. 

By 2010, the notion of the information lifecycle, with limits placed on how long 

some types of information should be retained, will become very important. 

Today, on average, companies only utilise 42 percent of internal data that relates 

to their customers.18 In 2010, because the data pool is so much larger, they will 

struggle to improve on this figure. 

By 2011, almost all large organisations will have dispensed with ‘‘keep everything’’ strategies for business data. Managers will routinely consider one of their 

major IT challenges to be choosing what data to throw away, lest they use up storage capacity too rapidly. 

More and more companies will turn to service providers (see Section 18) so they 

can access storage and processing power on an on-demand basis. 

Through 2013, at least one in two organisations that invest in business analytics 

as a key corporate strategy will experience problems with projects that attempt too 

much too fast. 

By 2014, industry leaders will be defined as much by the data they choose not 

to use as by the data that they use. 

In 2017, even leading proponents of business analytics will rarely exploit more 

than 10 percent of the quality business data that is both available and relevant to 

their context. 

18. The analytics economy 

We will see rapid shifts as businesses capitalise on opportunities to provide data 

services, and perform data analysis, on behalf of other companies. Many of these 

‘‘analytics service providers’’ will aggregate data and translate it between formats 

as part of the value they deliver. 

The most successful analytics service providers will offer access to deep expertise, 

specialist skills and experience. Their value proposition will be further enhanced by 

superior IT infrastructure and the processing power they can bring to bear on a 

problem, and they will invest in (or partner with providers of) large-scale server and 

storage facilities. 

Through 2009, most online analytics services will be aimed at people who will 

manually navigate to them and access their analysis using browsers. 

By 2011, significant online data brokers will be found in every industry sector. 

Many will have a background in market research, consulting or finance where they 

built up rich repositories of specialist data. Online retailers will also be pioneers in 

online analytics services. 

By 2012, most specialist research companies (e.g., automotive, demographic, building, real-estate research firms) will be online analytics service providers. 

By 2013, almost all analytics services with business value will be computer accessible, where customers can connect their software directly to the service over the 

web. Very sophisticated services will have emerged. All competitive market research, news, media and advertising businesses will be analytics service providers. 

Leading finance companies will have adapted in-house market analysis systems to 

make them available externally as online services to customers. Much of the value 

provided by advertising companies will be in pre and post advertising analysis. 

By 2015 there will be a substantial global economy built up around merchants 

that buy, sell and rent out their accumulated data on the web. 

At this time, dominant trading partners in every industry will make healthy profits from providing analytics services for other organisations. Specialist insurers will 

sell data and risk analysis services to companies in other sectors. Transportation 

companies will sell data and analysis to other companies for logistics planning purposes. 

By 2016, organisations will routinely blend collections of internal analytics engines and hosted analytics services in such a way that the sources are indistinguishable to users. 

19. Collective insights 

Organisations that work closely together in partnerships and alliances will steadily find themselves pooling more of their data for combined analysis. These networks 

will be underpinned by commercial arrangements that specify rental fees and reciprocal rights. These will lead to additional revenues for data-rich companies and new 

costs for data poor companies. 

Through 2011, data sharing arrangements will expand between large retail chains 

and manufacturers with strong consumer brands. Early adopters of multiorganisational analytics will also be found in the insurance industry (e.g., sharing 

88 

across insurance alliances), finance (e.g., sharing between finance companies and 

mortgage brokers), and business services (e.g., sharing between providers of complementary services). 

By 2013, conducting cross-organisational data analysis will be as routine as conducting cross department data analytics is today. 

By 2014, data sharing networks will exist that span industries, and facilitate aggregated analysis of information owned by hundreds of organisations at a time. 

Manufacturers will analyse data owned by retailers, airlines will access datasets 

distributed across many travel agents, and automotive manufacturers will access 

datasets distributed across car dealerships. Allied groups of insurance brokers will 

generate significant new business through the combined analysis of their social networks. 

By 2016, data sharing will be taking unusual forms and coming from unexpected 

places. Taxi companies, toll operators and courier companies, for example, may pool 

analysis of vehicle movements to gain deeper insights. 

By 2017, industry networks will exist that routinely analyse data stored in more 

than a thousand small businesses. 

20. From microscopes to telescopes 

Although the customer data owned by an organisation will remain one of its most 

valuable assets, the vast amounts of external information available, and increased 

capacity for systems to analyse it, means that the external data pool will quickly 

outstrip the internal one in scale. All businesses will end up analysing significantly 

more data residing outside their organisations. 

By 2011, managers in leading organisations will understand that competitive 

business insights depend more on how they interact with an ecosystem of external 

service providers than on how they process internal data. 

By 2013, managers in large enterprises will routinely receive computer generated 

recommendations based on a thousand times more external than internal data. 

By 2017, managers in large enterprises will routinely receive computer generated 

analysis and recommendations based on a million times more external than internal 

data. 

At this time, companies in the travel industry will monitor cost trends for all destinations they service by crawling massive numbers of web-based data points on 

room prices, vacancy rates, retail prices and bus and train fares. 

21. David becomes Goliath 

Medium and small businesses will rarely own as much information as large corporations. Nor will they be interested in the same types of analysis because there 

is less scope for optimisation in less complex organisations. 

Many kinds of analysis will be valuable, however, regardless of business size, including customer profiling, sentiment analysis and market trends analysis. Smaller 

businesses will also have access to the same data ecosystems, and the same tools 

as these become accessible as services over the web. 

New opportunities for small businesses will also come from ‘‘scaling down’’ the 

cost and complexity of systems that are only practical for large organisations today. 

By 2010, managers in one in five mid-sized companies will access computer analysis of customer and sales data on a daily basis. 

By 2013, managers in mid-sized companies will routinely access computer analysis of sales, production, and supply-side information on a daily basis. 

At this time, managers in a third of small businesses will routinely access at least 

one online analytics service on a weekly basis. 

By 2014, small business managers will routinely reference benchmarks developed 

by pooling data from hundreds of their peers. These benchmarks will typically be 

accessed from within their regular accounting software. 

22. Location-aware enterprise 

The explosion in location-aware chips, tags and devices will see organisations gain 

entirely new insights on their assets, staff, customers and products. 

By 2010, analysis of real time spatial data for mobile and in-the-field assets such 

as vehicles and heavy equipment will be routine in transportation, logistics, mining 

and agriculture. 

By 2013, medium and large manufacturers will routinely analyse data on the location, distribution and utilisation of containers, palettes and roll cages. 

By 2015, organisations in supply chains for big retail chains will routinely analyse 

the movements of hundreds of thousands of fast moving consumer goods. 

By 2017, asset managers in large finance and business services companies will 

routinely analyse, from a single console, the distribution and movement of all corporate assets worth more than ten dollars. 

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19 AVS is an example of a commercial voice risk analysis solution (www.digilog.com), and 

Kishkish is another, available as a downloadable plug-in for Skype users (www.kishkish.com). 

23. Walls have ears 

Audio and video will quickly grow in importance. Sources will come from within 

the organisation as well as from outside. An especially widely used source will be 

audio data from the call centre. 

Images will begin to constitute an important source of business data, especially 

where they are associated with identifying events or changing conditions in a building or commercial environment, or with identifying people and places. 

By 2009, insurance companies will routinely use systems that analyse speech for 

stress and produce real-time risk indicators during calls into claims processing centres. These systems will substantially reduce fraud rates. 

By 2011, personal voice risk analysis will be routinely used by sales representatives in all industries to help verify customer buying intentions over the phone. 

Many of them will do this without the knowledge of clients or their managers.19

By 2014, more than half of large businesses will routinely analyse recorded audio 

in call centres to zero in on anomalies, problem products and customer gripes. 

By 2015, the automated analysis of foot traffic via CCTV, once only available to 

managers in casinos and supermarket chains, will be available as a cheap webcam 

plug-in and routinely used by small retailers routinely to optimise window and shelf 

displays. 

By 2016, audio data mining will be used by one in two large organisations to tune 

the methods of tele-sales and over-the-counter sales people. 

By 2016, large organisations will routinely use software that recognises voice patterns to produce rich insights on when and how customers contact them. 

24. Sentiment tracking 

Business analytics systems will be able to take advantage of new algorithms to 

draw inferences from material in discussion forums, customer feedback, e-commerce 

and auction sites, news clips and analyst reports to infer overall positive or negative 

sentiment about companies and products. 

As sentiment analysis develops and becomes more realistic, it will turn into a key 

metric that is monitored daily in all businesses and industries. Investors and consumers will change their behaviours based on the sentiment analysis available to 

them. 

By 2010, online sentiment analysis will be routinely offered as a service by market research and advertising companies. 

By 2012, sentiment analysis will be routinely used by companies to analyse customer feedback and recorded audio from the call centre, to improve customer service 

outcomes. 

By 2013, managers working in companies with high profile consumer brands will 

routinely perform sentiment analysis of audio, video and textual news feeds. During 

periods of adverse publicity (e.g., product recalls) they will benchmark impact 

against preceding months, and monitor progress as public relations campaigns try 

to repair the damage. 

By 2014, corporate sentiment analysis will incorporate continuous crawling of 

blogs, product rating websites, news services and social networking websites for 

mentions of the company and its products, scoring relevant comments as they go. 

Managers will routinely monitor changes in goodwill and market sentiment on a 

weekly basis, not only for their company but also for their biggest competitors. 

At this time, brokers will routinely use sentiment analysis in valuations and 

share trading. Sentiment analysis will be widely applied by individuals to score online feedback posted about hotels, restaurants, airlines and travel destinations. 

By 2015, high profile professionals and executives will routinely monitor ‘‘personal 

brand awareness’’ based on how frequently their name is mentioned and in what 

context. 

By 2016, random online searches for information on products will be returned 

with customer satisfaction ‘‘meter readings’’ for both the target item and nearest 

equivalent products from alternative suppliers. 

By 2017, executives and company spokespeople will routinely face shareholders 

that call up, with a few mouse clicks, an overall analysis of everything they have 

ever said publicly on a topic. 

25. Reputation wars 

The developments described above will lead companies to move beyond monitoring 

to using technology to actively manage and influence online sentiment. 

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By 2014, companies in the public relations industry will routinely offer automated 

services to help skew online sentiment results and boost online reputations. 

By 2015, the ‘‘reputation wars’’ between reviewer and reviewed will take on the 

resemblance of a subtle but ongoing arms race. Leading providers of sentiment analysis services will be continuously refining their methods for detecting manipulated 

data, and for assessing the trustworthiness and integrity of online sources. They 

will routinely exploit social networking data to detect relationships between the reviewer and the reviewed. 

26. Knowing who you know 

Managers will get very powerful outcomes from social network analysis. Early applications will continue to have an inward facing flavour, but sophisticated online 

tools will also open up a world of new insights. This will produce new social challenges. 

By 2009, large organisations will routinely analyse the structured information in 

e-mail and internal directories to help find people with specialised knowledge, or social connections relevant to a task. 

By 2010, a variety of services will be available online that automatically produce 

social network analyses on any person for anyone that wants it—for free. 

By 2011, entrepreneurs will routinely use web-profiling to find social connections 

to secure deals. Sales reps will automatically profile prospects before calling. Managers and employment companies will profile job candidates as a matter of course. 

At this time, managers in companies of all sizes will routinely use online tools 

to mine people and associations from news stories, blogs and company websites. 

By 2012, online conflict of interest detection will be undertaken routinely and 

automatically during legal disputes, company acquisitions, hiring and selecting contractors. 

By 2013, online social network analysis will routinely incorporate information on 

the identity of people that appear in digital photographs. 

At this time, job candidates will often find themselves confronted with interview 

questions about associations with ‘‘undesirable’’ people or organisations, even if 

these associations were made accidentally. 

By 2017, large companies will routinely mine digital recordings of internal seminars, training sessions and planning meetings to improve the mapping of social networks and knowledge associations between employees. 

The analysis of social network and unstructured data within organisations will 

produce new workplace challenges. Many organisations will experience disruption as 

employees object to having their e-mail archives mined for associations. Other challenges will come from increased scrutiny of personal activities and connections. 

Companies that execute well will be careful to preserve privacy and give individuals 

strong personal control over information sources that are analysed. 

27. ROI-per-customer 

The notion of being able to quantify the value of individual customers, something 

that already exists in many organisations, will become much more comprehensive. 

Analytics systems will produce insights on cost, risk and profitability for individual 

customers, taking into account such things as call volumes, preferred communication channels, product mix, location and sentiment analysis. 

By 2011, dashboards used by customer service and sales personnel in banks will 

routinely emphasise predicted customer value over current/historical value. 

By 2013, large organisations will routinely use data from their customer base to 

model projected take-up, rate of return and profitability for new products and services. 

By 2017, businesses will routinely use projected ROI-per-customer as inputs to 

their long term planning. 

These developments will create new social challenges as ROI-per-customer metrics 

change the behaviour of service and contact centre personnel. Many organisations 

will experience customer backlash and adverse publicity as the service levels begin 

to mirror customer scores. Advanced organisations will quickly learn to accompany 

deployments with new procedures and significant training and education programs. 

28. Bottom-up optimisation 

Local analytics systems will connect and collaborate with one another across complex supply chains and business networks. Such arrangements will allow managers 

to make decisions based not only on rich local information, but also armed with insights about the impact of their decisions on other links in the chain. By empowering local decision-makers this way, connected analytics systems will help optimise 

trading systems from the ‘‘bottom up.’’ 

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By 2012, supply networks in transportation, fresh food distribution, and fast moving consumer goods will routinely employ distributed analytics systems that interact 

and exchange information with one another. Businesses in these networks will significantly improve profit outcomes during adverse events and changeable conditions. 

By 2016, distributed analytics systems will be deployed in all types of collaborative trading networks (including in services sectors) that are complex or changeable and cannot be modelled from the top down. 

29. People meters 

While human resources (HR) management will remain a domain dominated by 

subjective assessments of factors such as morale, job congruence, performance, skill 

levels, leadership and peer collaboration, computer analysis will play a growing role. 

By 2009, managers in large organisations will routinely reference computer analysis when reviewing sales performance, salaries and expenses. 

By 2012, comprehensive H.R. analytics solutions will be routinely deployed by 

management consulting companies as part of their organisational change methodologies. 

By 2013, managers in large enterprises will routinely use dashboards that combine quantitative and qualitative human resource metrics for individual departments and projects. These will provide actionable insights on where to invest in 

training, where reporting structures are inefficient, and where changes to work allocation and staff roles need to be made to address bottlenecks. 

By 2016, as H.R. benchmarking becomes more sophisticated, and bigger datasets 

are collected, large enterprises will build whole-of-company models to analyse 

human resources allocation and performance, and senior managers will routinely access cost versus return estimates for individual employees. 

In organisations where these tools are applied well, employees will find themselves in a more attractive workplace where managers are armed with new and creative ideas, where there is a feeling of constant refinement of management practices, and where individual strengths are better recognised and utilised. 

Considerable learning will be required, however, and many organisations will 

apply these metrics poorly. In these workplaces, employees will find themselves stifled by managers that frequently defer to standardised benchmarks at the expense 

of a deeper understanding of individual strengths and motivations. 

30. 360≥ performance reviews 

Performance reviews will progressively become more realistic. The notion of scoring performance and paying bonuses based solely on targets set at the beginning 

of the year will disappear. This will impact the way performance is measured for 

all managers and employees, but through the next 10 years the main focus will be 

on sales representatives and senior executives. 

As these practices become more common they will transform expectations. Top 

performing executives and sales people, for example, will only want to work for 

organisations where performance is analysed realistically. 

By 2015, sales representatives will be routinely compensated for performance 

against a basket of metrics that include the performance of peers, competitors, and 

the market as a whole. 

By 2018, customer service personnel will be routinely compensated for performance against a basket of metrics including indices of customer satisfaction before 

and after calls, overall satisfaction across the client base, and an online sentiment 

index. 

31. Latency and velocity 

Analysis will become more tightly linked to information sources over time, with 

fewer instances of people having to manually write-up, summarise or reenter information. 

The automation of information collection will be one factor. Examples include palettes and containers broadcasting their location and status in warehouse, loading 

bays or trucks via RFID chips, and moisture, salinity and temperature data feeds 

from distributed sensor networks in agriculture. Additionally, as integration becomes easier and cheaper, we will see more connections between machines that supply information and machines that analyse information. 

Managers will receive insights that are progressively more timely. By exploiting 

information much sooner after it is created, they will make earlier and more effective decisions. Delays in critical business information will, however, remain a fact 

of life. 

Outside the organisation, shareholders and analysts will receive increasingly 

timely analysis and will also embed this in their decisionmaking. A side effect will 

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be a further shift toward ‘‘day trading’’ and some increased volatility in financial 

markets. 

By 2009, executives in the mining sector will routinely access, on a daily basis, 

accurate analysis of the profitability of each mine site. This will be calculated from 

continuous monitoring of data on input costs, deployment of assets and personnel, 

excavation rates and processing yields. 

By 2012, managers will routinely access analysis on the status of manufacturing, 

warehousing, transportation and direct sales operations that is accurate to within 

5 minutes. 

By 2013, more than 65 percent of Australian Stock Exchange trades will be executed by autonomous and semi-autonomous dealing systems. 

By 2015, leading organisations will see more than half of the digital information 

created in an organisation imbedded in analysis used by senior managers within 48 

hours of it being created. 

In 2017, near real-time analytics will be widely available in specific operations, 

but no large organisation will have achieved a capability where senior managers can 

access up-to-the minute assessments of financial position for the business. 

Much is made of the goal of the ‘‘real time enterprise,’’ so why won’t it happen? 

Some of the inhibiting factors have been described below in Section 34. Additionally, 

it will be impossible to eliminate human delays—in updating information like 

progress reports, new hires, expense claims, etc—and also delays in receiving information from channel partners and contractors. More importantly, the imperative to 

have real time access to the ‘‘big picture’’ is imaginary. Senior managers don’t need 

(and won’t pay for) systems that tell them the financial status of a business on an 

hourly basis: at that level of granularity they cannot distinguish between fluctuations and trends, and the organisation is incapable of reacting that quickly to decisions. 

32. Bottlenecks within 

As speed of information becomes an ever greater competitive necessity, analytics 

will increasingly be applied to the efficiency of information systems themselves. 

By 2010, businesses will routinely benchmark the time it takes for sales and service staff to access key information (including analytics outputs) while in the field. 

By 2011, large enterprises will routinely use computer analysis to isolate unnecessary/problematic traffic to improve e-mail practices and reduce ‘‘e-mail overload’’ 

problems. 

By 2014, top-100 companies will routinely embed analytics in business process 

outsourcing arrangements. Software will continuously monitor request and response 

times. Partner managers will review service performance metrics on a daily basis. 

The same metrics will be mirrored to the customer relationship manager working 

for the outsourcer. 

33. Goodbye to budgets 

Organisations will move slowly toward budget-less management, where fixed annual budgets are abandoned and replaced by continuous analysis of spend versus 

return. This will progressively free personnel from onerous bottom-up budgeting, 

and will make organisations more adaptable and responsive to change. 

By 2011, large companies will routinely analyse whole-of-enterprise procurement 

data to identify opportunities to consolidate purchases and get additional discounts 

‘‘on the fly.’’ These insights will be imbedded in requisitioning systems and accessed 

by purchasing officers when they place orders. 

By 2014, at least a quarter of large businesses will routinely use budget-less management in selected projects. 

By 2017, at least a quarter of large businesses will routinely use budget-less management in one or more business units. In advanced organisations, accounting departments will morph into support services, spending most of their time providing 

on-demand ROI projections to managers. 

34. Cultures of confidence 

Data quality, and ensuring managers can trust the outputs of analytics systems, 

will continue to be an important challenge. 

A contributing factor will be the continuous addition of new sources of information 

(especially external sources where there will be duplication, and big variations in 

quality and consistency). Mergers and acquisitions will play a role as well. 

At the same time, analytics systems will become better at calculating and communicating confidence levels and probabilities associated with their outputs. Greater 

transparency of confidence levels in computer analysis will build trust in them, 

which will in turn accelerate adoption. 

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By 2009, large services organisations will routinely offer company-wide training 

on best practices in information management. 

By 2011, many businesses will have simple, organisation-wide, terms for describing quality and confidence levels associated with reports and forecasts. 

By 2013, these will be routinely institutionalised in policies and decision processes. Certain product decisions will only be allowed, for example, if predictions 

reach a ‘‘Level 1’’ (high) confidence level, while market communications will be adjusted mid-campaign on ‘‘Level 3’’ recommendations if they are the best available. 

By 2013, the proliferation of external analysis services being used by different departments will make selecting and quality controlling external data resources a key 

focus in large businesses. 

By 2014, specialist knowledge workers will routinely look up the confidence and 

quality levels for their business reports with a few mouse clicks. 

Managers in retailers, logistics centres and mine sites will routinely click through 

reports to see archived CCTV and web cam footage that provides a deeper understanding of the causes of changes or adverse events. 

By 2016, senior executives will routinely view aggregated confidence levels for toplevel financial analysis with a few mouse clicks. 

In 2017, large companies will still be striving for, but never achieving, ‘‘one 

version of the truth’’ where everyone in the organisation references the same analytics derived from the same high-quality and universally consistent sources. 

35. Silicon and cerebrum 

Organisations will get steadily better at combining analysis made by people with 

analysis made by computers. Human inputs will become an important way to improve quality of analysis. Analysis and collaborative planning tools will merge. Differentiating between human and machine contributions will become impossible. 

By 2011, knowledge workers will routinely share insights with one another by 

posting ad hoc analysis, data visualisations and comments on web pages. Popular, 

useful creations will then be adopted widely within organisations. 

At this time, organisations will routinely link software to websites that exploit 

‘‘wisdom of crowds’’ principles via popular tagging or voting, or facilitate analysis 

mash-ups, to create new sources of business intelligence. 

By 2013, when managers get together to make quarterly sales projections, they 

will not only take into consideration computer predictions, but their projections will 

also become inputs to the analytics system. Each will inform the other to improve 

accuracy over time. 

By 2015, managers in leading organisations will routinely submit new monthly 

reports in forms designed to be read as easily by machines as by people. 

By 2016, workers will routinely note any discrepancies between what computer 

analysis is telling them and what they are actually seeing. Their inputs, along with 

comments on likely causes, will be used to continually refine quality of analysis. A 

point of sale manager in a retail chain may note that sales of some items go up 

when it rains and others only when petrol prices are high; shortly afterwards, an 

administrator will be prompted to add 24-hour weather and fuel price data feeds 

into the system. 

By 2017, top level managers will routinely use combined human and machine projections to model industry scenarios for long term strategic planning. 

By 2018, one in five large enterprises will combine the management of human and 

computer knowledge in the organisation into one strategy. 

36. Knowing what you don’t know 

Self-learning capabilities will be progressively incorporated into mainstream business systems, moving them beyond predictions based on static models. 

By 2012, managers in telecommunications companies will routinely access systems that become better at predicting profitability for handset/plan combinations by 

self modelling handset cost, network cost, call volumes, call times, mix of local and 

long distance, use of non-voice services, credit risk, handset upgrades, and network 

upgrades. 

By 2013, managers in transportation, logistics and distribution companies will 

routinely use systems that automatically accumulate knowledge about the effects of 

urgency, loading times, different types of goods, traffic congestion, vehicle reliability 

and weather. 

By 2017, analytics systems will routinely send suggestions to the IT department 

for trials, experiments and new data sources that can fill knowledge gaps, produce 

deeper insights and generate better predictions. 

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37. Securing information experts 

The new opportunities presented by business analytics will have an effect on roles 

and responsibilities at all levels in the organisation. 

The role of the most senior IT executive will progressively see more emphasis on 

information over technology, making the title of ‘‘Chief Information Officer’’ a more 

accurate reflection of the role. We will see a trend toward multiple senior technology 

managers, each specialising in either strategic innovation, systems operations, and 

information management. 

Although systems will become vastly more usable by non-specialist personnel, demand for specialist skills will still rise. Information and knowledge management experts will enjoy a higher status as the quality and relevance of computer analysis 

becomes more business critical. The responsibility for finding, evaluating, selecting 

and managing external data services will grow in importance, as will the need to 

institutionalise procedures to continuously improve data quality. 

At all levels we will see growing emphasis on analytical, mathematical and software skills associated with managing information. The average knowledge worker 

will not be asked to become a statistician, but experience relating to information 

management will become more valuable on any resume. 

Like their counterparts in larger organisations, small business managers will also 

find that new skills are required to compete effectively. The ability to bring together 

diverse information sources quickly and effectively will become a more significant 

asset. 

By 2011, most large companies will have established competency centres to help 

business units extract more value from analytics. 

By 2013, the analytics capabilities of a large organisation will be limited more by 

its ability to find and keep suitable staff than by its ability to maintain quality data 

and software. 

At this time, analytics experts will rank among the highest paid IT specialists employed by large organisations. 

By 2014, competition for people will see senior analytics roles most often filled by 

crossing traditional boundaries. Services companies will hire logistic specialists from 

transport companies, retailers will employ spatial information experts from mining 

companies, and manufacturers will source social network analysts from media companies. Experts in defence intelligence and health analytics will find lucrative career 

paths in mainstream business. 

By 2016, organisations will routinely employ experts in knowledge management, 

collaboration and human-computer interaction as they try to blend human and computer knowledge practices, achieve continuous quality improvements, and promote 

a culture of good information practices at all levels. 

38. Insights at your fingertips 

Analytics applications will become a factor in all aspects of business operations. 

At the same time, however, they will not be an intrusive or dominant part of working life. They will become progressively better blended into the everyday working 

environment and hidden behind the scenes. 

Workers will use analytics more often in their personal decision-making, although 

they will not always be aware of it. Websites will provide richer analysis to support 

buying, financial planning and career decisions, and social analytics will help careers by connecting them to more people and communities with the same interests. 

Life will be as complicated as ever: 10 years from now, knowledge workers will 

still be complaining about ‘‘information overload’’ and will rate the inability to manage information as one of their most significant challenges. 

Some organisations will fail to appreciate the importance of blending analytics 

into the background. A common mistake will be promoting ‘‘metatag cultures’’ by 

encouraging employees to add descriptive tags to everything they produce—documents, spreadsheets, web pages, bookmarks, images and e-mails. This onerous approach will produce poor results. More advanced organisations will concentrate on 

using software to scan documents, monitor how they are used, and automatically 

append meaningful metadata. 

By 2009, sales representatives will routinely call up customer analysis while 

working onsite. 

By 2011, one in ten knowledge workers, in all businesses and industries, will access analytics software on a daily or weekly basis. 

By 2013, sales representatives will routinely access customer analysis as they are 

driving to meetings, and more than two-thirds of analytics queries in organisations 

will be made from within the familiar environments of the spreadsheet, browser or 

word processor. 

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20 An early example of a carbon tracking and reporting tool is CarbonView. See www.supplychain.com.au. 

By this time, instead of always working to make computer analysis more accessible, leading organisations will be spending equal time assessing where analytics 

are distracting or counterproductive. 

By 2014, one in five knowledge workers will access analytics software on a daily 

or weekly basis. 

By 2016, nineteen out of every twenty analytics queries will be made with free 

form text entered into interfaces that are as simple as Google’s is today. Workers 

will retrieve even highly structured reports by entering a few keywords—enough for 

systems to suggest a likely match. 

By 2017, senior executives will routinely access analysis that has been distilled 

into one line recommendations (e.g., ‘‘initiate a clearance sale to run down inventory 

on Product A’’) with the option to drill down to the metrics underneath. 

39. Ministry of metrics 

Developments in analytics technologies will impact governments as much as businesses. Dominant themes will remain improving service delivery (in all types of 

services, but healthcare will continue to merit special focus), making government operations more efficient, reducing welfare and tax fraud, and national security. 

Information boundaries will gradually come down between departments and between levels of government. Whole of government analytics will eventually become 

routine. Despite public concerns, citizen data will be routinely analysed across departments and this will produce new challenges. 

By 2012, hospitals will routinely offer services that blend continuous home health 

monitoring with analysis capabilities hosted at the hospital. 

By 2013, the government will be an important player in the provision of external 

analytics services for businesses. Agencies with trade, customs and industry development responsibilities will routinely offer hosted online services relating to markets, trends, opportunities, environmental monitoring, social and economic data. 

At this time, most agencies will institute strong internal access policies for analytics systems because of new exposures relating to privacy and unauthorised/illegal 

use. 

By 2014, computer analysis of e-health records will produce dramatic improvements in early diagnosis and early outbreak detection, and will be applied intensively to improve quality of care. 

At this time, a variety of online services will continuously track public sentiment 

relating to policy and politicians. Changes to baseline metrics (e.g., after new policies are announced, interest rates rise, etc.) will be monitored on a daily basis in 

government. These services will compliment, but not replace, formal polling of the 

electorate. 

Purchasing officers will routinely access whole-of-government analytics to improve 

sourcing and procurement practices. 

By 2016, workers in security agencies and police forces will routinely generate 

automated risk profiles for individual citizens based on data in the public domain. 

By 2017, a national health network will exist that allows researchers to routinely 

analyse pooled health data sets spanning all public and private hospitals, all health 

research institutions and all government health departments. 

40. Environmental analytics 

An important new application for businesses will be environmental sustainability 

reporting, involving measurement and analysis of information relating to such 

things as energy utilisation, water usage and carbon emissions.20

Governments will steadily raise the bar for detailed and timely reporting. Environmental analytics systems will be increasingly direct-connected to regulatory authorities and energy companies. 

By 2010, agricultural businesses will routinely use computer analysis to optimise 

water use and distribution across land assets. 

By 2012, analytics systems drawing upon distributed sensor networks will be 

adopted by a wide range of government agencies, councils, farmers and manufacturers. 

By 2014, all types of organisations will routinely use combinations of analytics, 

sensors and smart meters to monitor and optimise energy use in office buildings. 

By 2016, governments will consolidate and standardise the electronic sustainability reporting requirements for businesses across state, local and Federal jurisdictions. 

96 

Conclusion 

The value of analytics systems will continue to rise rapidly through the next decade. This will be driven by new data sources, continuing improvements in computer 

methods and the development of richer and more convenient ways of accessing the 

outputs. 

For large businesses, the application of analytics to sales, finance, operations, purchasing, quality control and even human capital is already a universal competitive 

necessity. Within a few years, sophisticated analysis will be equally indispensable 

in medium sized companies, and before long to many small businesses. At the same 

time, business analytics will become an enterprise-wide phenomenon where all types 

of managers and knowledge workers benefit from richer methods of analysing digital information. 

A strange and exciting new world awaits. By 2017, audio, video, image and spatial 

information will be incorporated in mainstream business analysis everywhere. Social network information will be aggressively mined for patterns and relationships, 

and the vast pool of commentary and news found on the web will be trawled daily 

by machines that benchmark sentiment and monitor reputations. Many companies 

will have taken steps toward eliminating annual budgeting altogether. 

An analytics economy will spring up. Data rich organisations will enjoy lucrative 

revenues from renting out their information assets, and combined analysis of customer data will be routine between business partners in every sector. In complex 

supply chain networks, analytics solutions will communicate across company boundaries to help optimise the ebb and flow of products from the bottom up. 

These shifts will mean that some aspects of IT management will be turned upside 

down. Managing information will itself become much more critical than managing 

the technology that processes it, and the volume of data sourced externally will 

dwarf the amount owned by the organisation. By 2017, it will become quite impossible, in many business situations, to distinguish between human and computer generated insights. 

The future of business analytics will bring with it new human, social and cultural 

challenges. The detailed insights about us that can be gleaned from public data will 

often make us uncomfortable. Roles and workplace routines will everywhere need 

to adapt to accommodate and exploit new capabilities. For organisations, having the 

right skills will be most critical, and leading companies will always stand out more 

for the qualities of their people than the raw power of their information systems. 

Analytics leaders will do a lot of learning. This learning will define competitive 

advantage because it will be context specific and impossible to buy. Late starters 

may be able to tap into vast quantities of external data, and will certainly access 

powerful solutions, but they will find no short cuts to building a culture that understands data quality, knows the limitations of machine analysis, and strives to continuously improve how the outputs are used to support everyday business decisions. 

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

All of you have provided interesting and, in some cases, provocative, and certainly useful information to us. 

The task of reauthorizing the Federal Trade Commission requires us to take a look at what works and what doesn’t, what 

kinds of things might be necessary to add to the responsibilities of 

the Federal Trade Commission. I started, today, asking about the 

resources. I think the resources are a problem we need to resolve, 

this is clear from the testimony that some of you have provided. 

And with respect to the common carrier exemption, we do need to 

respond, because times have changed, and there is no reason to 

prevent the Federal Trade Commission from working and being aggressive in those areas. 

I think much of the success of an agency, whether it is FERC, 

as I’ve described it earlier, or the Federal Trade Commission, or 

any number of agencies, has a lot to do with the interest that they 

have in pursuing issues aggressively. Frankly, I’ve been here long 

enough to see some people assume the leadership of certain organizations who don’t believe in the organizations, don’t like government, believe there should be no referee or no regulatory authority, 

97 

and all of a sudden they’re appointed to head the agency. So, what 

happens? The agency dies from the neck up, does nothing except 

collect paychecks and strut around and act like it’s important. And 

especially given these days and these times, I think we need something much, much more. The Federal Trade Commission is a commission under the jurisdiction of this Committee, and—I’m not asserting, by the way, that my example was the FTC, but I am saying that I think it’s very important that the regulatory authority 

be exercised aggressively and with some impatience toward practices that disadvantage and injure our consumers. 

Mr. Calhoun, the point you’ve made is really pretty stunning, 

about subprime lenders not disclosing, and not required to disclose, 

the escrow requirements that will have to be borne by the consumer. I mean, that clearly, it seems to me, is deceptive. Would 

you agree? 

Mr. CALHOUN. Yes. And it’s also counterintuitive, because, for example, if you look in the prime market, Fannie Mae and Freddy 

Mac typically require escrows on prime loans, unless there is a 

very large downpayment, and prime borrowers usually have a 

greater capacity to absorb payment—— 

Senator DORGAN. Right. 

Mr. CALHOUN.—shocks. In the subprime market, these would be 

the last loans where you would not escrow. But we talk to brokers 

and lenders, and they say, ‘‘Well, if we do include the escrow, other 

people come out and deceptively undercut us by excluding the escrow.’’ 

Senator DORGAN. Let me ask—because I am not as knowledgeable about this area as perhaps you are, you’ve done a lot of research—for a company like Countrywide, which I think was the 

largest lender—is that the case? 

Mr. CALHOUN. They’re the largest mortgage lender—— 

Senator DORGAN. Yes. 

Mr. CALHOUN.—in the country. 

Senator DORGAN. And if they’re engaged in the subprime area— 

and I understand they were—you’re saying that a large, established company is presenting mortgage information to consumers 

and is not describing the escrow requirements? And I think you 

also testified they are not actually ascertaining or proving the income of the potential borrower. Is that correct? 

Mr. CALHOUN. In the subprime market, almost half of those 

loans were so-called ‘‘no-doc’’ stated-income loans. And doubly deceptive is that the borrowers typically did not realize that they 

would pay a full interest point extra for having it a ‘‘no-doc’’ loan, 

that they could save a full 1 percent on their loan just by bringing 

in their W–2 statement. 

Senator DORGAN. ‘‘No-doc’’ means no documentation? 

Mr. CALHOUN. I’m sorry, yes, no documentation of your income, 

no verification of your income. You just state what your income is, 

and that’s used to qualify you for the loan. 

Senator DORGAN. So, one would, as a consumer, appear before— 

or make known your interest to the largest mortgage company in 

our country and say to them, ‘‘I’d like to get a loan. Here’s my income,’’ with no verification of the income, and, for no verification, 

you pay a higher rate. And, when they tell you what this mortgage 

98 

is going to cost, they’re free to tell you what it will cost without 

your monthly payment, which would include escrows and other 

matters. It seems to me, that, on its face, is deceptive. 

Mr. CALHOUN. And it becomes even more so, because these loans 

were typically sold—the majority of the subprime loans are originated by a mortgage broker initiating the contact with the borrower, rather than the borrower, for example, calling Countrywide. 

Countrywide does a lot of direct solicitation, themselves. And so, 

the broker is coming in, saying, ‘‘You can borrow X dollars. Here’s 

what the payment will be,’’ not telling you that it doesn’t include 

your taxes and insurance, the payment’s going to go way up—— 

Senator DORGAN. Right. 

Mr. CALHOUN.—and that you could save $1,000 or more a year 

just by bringing in your W–2 statement. 

Senator DORGAN. It’s just almost unbelievable that this bubble 

could be created by people who felt that somehow this would work 

out in the end. You indicated that 35 to 50 percent increases in 

payments would ensue, notwithstanding the escrow issues. But, in 

several years—2, 3, 4 years—you’re going to see your payments 

jacked up 35, 50 percent, because your interest rate is going to substantially increase. Your written testimony doesn’t describe it quite 

as clearly. It’s not at variance with what you’ve just said. But what 

you said, I think, is clear as a roadmap to what are clearly, to me, 

deceptive practices by some very large companies. 

Others of you have talked about the telecommunications areas, 

about net neutrality, about other related issues—the oil and gas industry. Dr. Cooper, you have previously testified before this committee on related issues. Your testimony is very helpful to remind 

us that there’s a need to have some passion in pursuing truth here 

with respect to big interests. Big is not always bad, and small isn’t 

always beautiful, but it is the case that, the clogging of the arteries 

of this marketplace is a serious problem for consumers, and we see 

that clogging of the arteries through mergers in virtually every 

area, but none really any more aggressively than in the oil industry, although perhaps telecommunications is a close second. Both 

industries are substantially concentrated. And I appreciate very 

much your testimony on these matters. As we think through how 

we structure and write a reauthorization bill trying to provide additional authority to the FTC, but also trying to stimulate and encourage additional activity I will certainly consider your testimony, 

as well. 

Dr. COOPER. Frankly, Mr. Chairman, the other parts of this body 

and this Committee have actually done the—taken the most important steps to start to deal with this problem. As you’ve pointed out, 

the—it’s fascinating, the big mergers are gone. The double name— 

and you heard about a few small local mergers that the agency actually tried to stop. Of course, in a certain sense, the horse is out 

of the barn. The only way that we will restore some sanity to this 

market is by delivering to the President an energy bill that contains what this body passed, a dramatic increase in the supply of 

non-oil alternatives, a dramatic reduction in the demand for gasoline. That’s the only way we’re ever going to seize back this market 

from the domestic oil companies. And also, in the long run it’s fascinating, from OPEC, the—the Chairwoman pointed out that 

99 

OPEC sets the price of oil. That may be the case, but they get an 

awful lot of help, these days, from the domestic oil companies. 

And let me briefly explain why, because it really does reinforce a point. Three years ago, OPEC was defending $40 a barrel. When 

they met, as they just did recently, they were talking about $40 a 

barrel. In the intervening 3 years—and you quoted from the article 

in The Wall Street Journal that made the point—in the intervening 

3 years, domestic U.S. refiners increased their margins dramatically, showing that there was more rent to be had. As an economist, you know that term. There was more money to be taken out 

of consumers’ pocketbooks. And OPEC is a rent-seeking cartel. And 

so, when OPEC sees the price of gasoline lose touch with the price 

of crude oil, they know that the American consumer can be made 

to pay more, and they want a larger share of that rent. And The 

Wall Street Journal article explicitly said that. This is competition 

between American refiners and OPEC crude oil producers over the 

rent that they want to extract from American consumers. 

And so, there’s a very real sense in which what happens in the 

domestic U.S. oil market influences, dramatically, the price of 

crude oil. The Chairwoman can no longer say, ‘‘OPEC sets the 

price,’’ because what we do here—we consume one-quarter of the 

gasoline in the world—what we do in this market, what domestic 

refiners do, actually sends a strong signal to OPEC about where 

the price of oil can go. 

Senator DORGAN. Dr. Cooper, thank you very much. 

Because we started nearly an hour late, I have an inability to 

ask as many questions of this panel as I had wished to ask. I have 

to be somewhere at 12 o’clock. I hope you will understand. 

I, again, regret the inconvenience to all of you, but I do want to 

tell you that, as we put together a reauthorization bill, your testimony, your comments, your thoughts about how we do that, about 

the Federal Trade Commission, about what is happening in our 

economy, and the role of its regulatory authority are going to be 

very helpful to us. 

So, I appreciate your being here today. And this hearing will now 

adjourn. 

[Whereupon, at 11:55 a.m., the hearing was adjourned.] 

(101) 

1Pub. L. 108–159, 117 Stat. 1952 (December 4, 2003). 

A P P E N D I X 

PREPARED STATEMENT OF HON. TED STEVENS, U.S. SENATOR FROM ALASKA

I would like to thank Chairman Majoras and all the witnesses for being here 

today. This is the Committee’s second opportunity this year to hear from the FTC 

Chairman concerning the Commission’s current activities. 

I appreciate the Chairman’s willingness to testify today, and know that the entire 

Committee is grateful for the Commission’s hard work on the recent ‘‘Broadband 

Connectivity Competition Policy Report’’ and the ‘‘2006 Spring and Summer Nationwide Gasoline Price Increase Report.’’ 

In addition to the written testimony provided to the Committee, I trust that all 

the witnesses will provide their vision for the FTC and how best the Commission 

can protect consumers. 

Practical recommendations on how best the Committee can assist the FTC in fulfilling its mandates will benefit the members of this Committee when the FTC reauthorization legislation is taken up. 

By working in a bipartisan fashion the Committee will have the best opportunity 

to reauthorize the FTC since its authorization expired in 1998. Once again, I thank 

the witnesses for being here. 

RESPONSE TO WRITTEN QUESTIONS SUBMITTED BY HON. DANIEL K. INOUYE TO

HON. DEBORAH PLATT MAJORAS

Question 1. The Commission has recently updated its identity theft website to include information about state ‘‘security freeze’’ laws, which give consumers the right 

to freeze access to their credit files to prevent new account fraud. Thirty-nine states 

have now passed such laws. The state laws usually require consumers to pay a 

small fee to freeze, temporarily lift, or remove the freeze. In addition to state freeze 

rights, under Federal law, consumers have the right to opt-out from pre-approved 

credit card offers; to place, at no cost, a temporary fraud alert on their credit files; 

and to receive a free credit report annually from each of the three credit bureaus. 

The Committee is aware of new web-based businesses providing identity theft prevention services that offer to provide consumers with the above services (freeze, 

fraud alert, opt-out, and annual credit reports) as part of a bundle of prevention 

services, without disclosing that consumers may on their own access these services 

at lower or no cost. 

Is the Commission examining whether such services and promotions comply with 

Section 5 of the Federal Trade Commission Act? Has the Commission evaluated 

whether state laws allow the placement of a security freeze through intermediaries? 

Has the Commission evaluated whether these intermediaries can properly assure 

the identity of their clients seeking to place a freeze? What information should these 

businesses disclose In order to ensure that consumers are not led to believe they 

can only receive services, such as a security freeze, by using such businesses’ services? 

Answer. As consumer concerns about identity theft have proliferated, a number 

of products and services intended to help consumers avoid being victimized have become available. Some of these prevention products and services are mandated by 

state or Federal law. For example, under the Fair and Accurate Credit Transactions 

Act of 2003 (FACT Act),1 which amended the Fair Credit Reporting Act, consumers 

have a number of new rights, including the right to place a fraud alert on their credit files, thus signaling creditors and other potential users of the report to exercise 

caution in verifying the identity of an applicant. Consumer also have the right to 

a free annual credit report from each of the nationwide consumer reporting agencies 

(CRAs). Other prevention products and services are not mandated by law, but are 

sold commercially by CRAs and other businesses. For example, the nationwide 

102 

2FTC v. Consumerinfo.com, Inc., No. SACV050–801 AHS (MLGx) (C.D. Cal. August 15, 2005). 3FTC v. Consumerinfo.com, Inc., No. SACV050–801 AHS (MLGx) (C.D. Cal. January 8, 2007). 4See http://wvvw.ftc.gov/bcp/edu/pubs/consumer/alerts/alt156.shtm; http://www.ftc.gov/ 

bcp/conline/pubs/alerts/fakealrt.shtm. 5 Executive Order 13402 (May 10, 2006). 

6The President’s Identity Theft Task Force, Combating Identity Theft: A Strategic Plan, available at www.idtheft.gov. 7 Id. at 52. 

CRAs and others sell credit monitoring services, which alert consumers to changes 

in their credit reports that might indicate the presence of identity theft. 

The Commission is aware of the potential for consumer confusion about which of 

these products are available by law and which are commercial products, and about 

the cost of the products. The Commission actively monitors the practices of businesses selling these products to ensure that they are not deceptive or unfair. In August 2005, the agency filed a complaint in Federal district court against 

Consumerinfo.com, Inc., a subsidiary of Experian and creator of the 

‘‘freecreditreports’’ promotion.2 The complaint alleged that Consumerinfo deceptively 

marketed ‘‘free credit reports’’ without disclosing that its reports were not associated 

with the FACT Act free annual report program. The complaint also alleged that 

Consumerinfo deceived consumers by not adequately disclosing that consumers who 

ordered the ‘‘free report’’ were automatically enrolled in a credit monitoring service, 

and that those who failed to cancel the service within 30 days would be charged 

an annually renewing membership fee of $79.95. To settle the charges, 

Consumerinfo agreed to a court order requiring them to make clear and prominent 

disclosures (i) that their free reports are not affiliated with the FACT Act program, 

and (ii) of all of the material terms and conditions of the offer. In addition, 

Consumerinfo agreed to offer refunds to deceived consumers, and to pay an additional $950,000 as disgorgement of ill-gotten gains. 

In February 2007, the Commission alleged that Consumerinfo had violated the 

terms of the court order by not making sufficient disclosures about the terms of the 

offer, and the company agreed to pay an additional $300,000.3 The Commission also 

sent warning letters to over 130 Internet firms that purported to be offering ‘‘free’’ 

credit reports, many of which used common misspellings or variants of the approved 

free annual credit report website, annualcreditreport.com. In addition, to help consumers avoid deceptive ‘‘free report’’ promotions, the Commission has published a 

number of educational materials that are available in print and on the FTC website. 

For example, the Commission has disseminated two consumer alerts warning consumers about ‘‘imposter’’ free report websites.4

With respect to ‘‘credit’’ or ‘‘security’’ freezes, as you note 39 states have enacted 

laws giving some or all consumers the right to freeze their credit file to prevent access by third-parties. In addition, the three nationwide CRAs recently announced 

plans to offer credit freezes to consumers nationwide. The laws and programs differ 

in many respects, including who is eligible (all consumers or only identity theft victims), the means by which consumers can place a freeze, and the fees charged for 

placing, temporarily lifting, and removing a freeze. 

As you know, President Bush issued an Executive Order on May 10, 2006, establishing an identity theft task force.5 Comprised of 17 Federal agencies, the mission 

of the task force was to develop a strategic plan to marshal the resources of the Federal Government in a comprehensive effort to combat identity theft. On April 11 of 

this year, the Task Force issued its strategic plan, with 31 recommendations on actions that should be taken to prevent identity theft, ameliorate its impact on victims, and prosecute the criminals.6 I am pleased to note that most of these recommendations have already been implemented or are well along in the process of 

being implemented. 

Among the recommendations of the Task Force was that the FTC, with support 

from other member agencies, conduct an assessment of the impact and effectiveness 

of state credit freeze laws and report the results in the first quarter of 2008.7 The 

Commission staff has made substantial progress in carrying out the assessment and 

is on track to report its results in early 2008. 

In response to your question about the propriety of intermediaries offering to 

place security freezes on behalf of consumers, the Commission is not aware of any 

state law that would prohibit such practices, so long as they are offered in a nondeceptive manner. The Commission will continue to monitor the marketplace for 

these products and services, and is prepared to investigate and act against businesses that make false or misleading claims. In addition, the Commission has and 

will continue to educate consumers on their FACT Act and credit freeze rights so 

103 

8The FTC shares jurisdiction with the FDA over the marketing of food products pursuant to 

a regulatory scheme established by Congress through complementary statutes. Under a longstanding liaison agreement governing the division of responsibilities between the two agencies, 

the FTC has primary responsibility for claims in advertising and the FDA has primary responsibility for claims on product labeling. Working Agreement Between FTC and Food and Drug Administration, 4 Trade Reg. Rep. (CCH) ¶ 9,850.01 (1971). 9Federal Food, Drug, and Cosmetic Act, Sec. 402(b)(2). 21 U.S.C. § 342(b)(2). 10 21 C.F.R. § 101.4(b)(14). 11See Greco-Roman, Inc., Civil Action No. 96–1834 CIV-Davis (S.D. Fla. 1996). 12See FDA Enforcement Report for October 12, 2005, available at http://www.fda.gov/bbs/ 

topics/enforce/2005/ENF000921.html. 

that they can make informed decisions about whether to seek the help of an intermediary in exercising those rights. 

Question 2. According to recent press reports, unscrupulous olive oil producers 

have been branding oils as ‘‘extra virgin olive oil,’’ the highest and most expensive 

grade, even if it is of lesser quality or not even olive oil. In February 2006, Federal 

marshals seized about sixty-one thousand liters of what was supposedly extra-virgin 

olive oil and twenty-six thousand liters of a lower-grade olive oil from a New Jersey 

warehouse. Some of that oil turned out to be mostly soybean oil even though it was 

labeled olive oil. Consumers are willing to pay a significant premium for ‘‘extra virgin’’ olive oil for perceived health and taste benefits. Bad actors should not be able 

to take advantage of this by fraudulently marketing soybean oil or lesser grades of 

olive oil as ‘‘extra virgin olive oil’’ in order to overcharge consumers. What steps is 

the Commission taking to examine whether manufacturers and retailers are violating Section 5 of the Federal Trade Commission Act when they market oil as 

‘‘extra virgin olive oil’’ when it is not? Does the Commission intend to take enforcement action if it determines that manufacturers and retailers are acting in violation 

of Section 5? 

Answer. Issues of adulterated or misbranded food products are primarily within 

the jurisdiction of the Food and Drug Administration (FDA), rather than the Federal Trade Commission.8 Manufacturing and labeling of olive oil must comply with 

FDA’s general provisions on misbranding and adulteration. Under the Federal Food, 

Drug, and Cosmetic Act, olive oil is adulterated if another oil is substituted for the 

olive oil in whole or in part.9 In addition, the FDA has issued specific regulations 

governing the common or usual name permitted for olive oil and other vegetable oils 

and requiring that mixtures of oils must be labeled to show all oils present in order 

of predominance.10 To enforce these standards, FDA has the authority to conduct 

field investigations of manufacturing facilities. When FDA identifies olive oil products that are adulterated or mislabeled, the agency can pursue a seizure action or 

product recall. 

The FDA has taken repeated action to recall or seize adulterated olive oil products 

over the past several years. The Federal seizure in New Jersey in February 2006, 

to which you refer, was the outcome of an FDA investigation. In addition, in 1996, 

FDA obtained a consent decree for the destruction of misbranded olive oil that had 

been adulterated with canola oil.11 The agency also took seizure action in 1997 

against Krinos Foods for using sunflower oil in place of olive oil, and in 2000 against 

Cheney Brothers Inc. for using sunflower and soybean oil in place of olive oil.12 FDA 

staff has advised us that the agency continues to follow up as resources permit on 

specific instances in which it has received information that ‘‘olive oil’’ products are 

adulterated with other vegetable oils. 

We recognize that the passing off of other vegetable oils as olive oil raises issues 

of economic harm to consumers and competition. It may also present potential 

health implications. We believe, however, that the FDA has the investigatory tools 

and enforcement powers best suited to address this problem. As in all matters involving our overlapping authority, the two agencies will coordinate closely to ensure 

effective enforcement. 

RESPONSE TO WRITTEN QUESTIONS SUBMITTED BY HON. BYRON L. DORGAN TO

HON. DEBORAH PLATT MAJORAS

Question 1. As we look to reauthorization legislation, can you tell me what your 

priority would be to include in the legislation? What would be the priorities of your 

fellow Commissioners? 

Answer. As noted in the Commission’s September 12 testimony, the Commission 

continues to support the repeal of the telecommunications common carrier exemption to address the consumer protection challenges posed by technology convergence. 

104 

1Today, the FTC has only 1,074 FTEs, far fewer than 25 years ago. Yet in the last few years 

alone, Congress has passed a variety of important new laws that the FTC is charged with implementing and enforcing, e.g., 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. 

Currently, the FTC Act exempts common carriers subject to the Communications 

Act from its prohibitions on unfair or deceptive acts or practices and unfair methods 

of competition. This exemption dates from a period when telecommunications were 

provided by government-authorized, highly regulated monopolies. The exemption is 

now outdated. Congress and the Federal Communications Commission (‘‘FCC’’) have 

dismantled much of the economic regulatory apparatus formerly applicable to the 

industry, and in the current world, firms are expected to compete in providing telecommunications services. Technological advances have blurred the traditional 

boundaries between telecommunications, entertainment, and information. As the 

telecommunications and Internet industries continue to converge, the common carrier exemption can 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. 

Additional legislative priorities include: prohibiting brand name drug companies 

from paying generic companies not to compete at the expense of consumers, while 

allowing exceptions for those agreements that do not harm competition; ensuring 

that the Commission has authority to impose civil penalties in cases in which the 

Commission’s traditional equitable remedies are inadequate, such as spyware and 

data security cases; and reauthorizing the National Do Not Call Registry and, if necessary, allowing for the permanent registration of phone numbers on the Registry. 

Commissioner Harbour states that her legislative priorities include: repeal of the 

common carrier exemption, in recognition of the convergence dynamic of today’s 

high-tech economy, so the Commission can make even better use of its unique combination of competition and consumer protection expertise for the benefit of American consumers; legislation that would repeal the Leegin decision, to the extent it 

has created per se legality for vertical minimum price fixing agreements, and clarify 

the application of the rule of reason to distribution restraints in the wake of Leegin; 

legislation to ensure that consumers reap the full benefits of competition by generic 

drugs, including generic pharmaceuticals as well as follow-on biologics or 

biosimilars; and legislation granting authority over cigarette testing to one of the 

Federal Government’s science-based public health agencies, and prohibiting the use 

of claims based on the inaccurate Cambridge Filter Method (also known as the ‘‘FTC 

Method’’) for testing tar and nicotine. 

Commissioner Leibowitz states his legislative priorities include consideration of 

the following: increasing FTC resources by ten to fifteen percent annually for the 

next 5 years, including adding fifty or more full-time equivalent employees (‘‘FTEs’’) 

each year; 1 enhancing civil penalty authority, including authorizing the FTC to represent itself in civil penalty cases and authorizing the agency to seek civil penalties 

for certain violations of Section 5 of the FTC Act (where the FTC’s equitable remedies are often inadequate to deter malefactors engaged in fraud); authorizing the 

FTC to promulgate rules under the Administrative Procedure Act to prohibit 

nonbank subprime mortgage brokers and financial service providers from engaging 

in unfair or deceptive acts or practices (the FTC Act’s current ‘‘Magnuson Moss’’ 

rulemaking procedures are much more cumbersome and time-consuming than APA 

procedures); repealing the FTC Act’s exemption for telecommunications common carriers; authorizing the FTC to initiate civil actions under the FTC Act against ‘‘aiders 

and abettors’’ of consumer fraud (the FTC may prosecute those who knowingly assist and facilitate Telemarketing Sales Rule violations, such as electronic payment 

processors and lead list brokers, yet in some instances it can be more difficult to 

pursue enforcement action against similar aiders and abettors outside the telemarketing context); amending the FTC Act to limit appeals of Commission administrative orders to jurisdictions where respondents reside or have their principal place 

of business, or to the U.S. Court of Appeals for the D.C. Circuit (to prevent the 

rampant ‘‘forum shopping’’ that all too often occurs when a party appeals a Commission decision); and modifying the requirement for reports on concentration in the 

ethanol markets from annually to every 5 years (all studies so far have shown that 

there is no market concentration). In addition, outside of the reauthorization, Commissioner Leibowitz’s highest legislative priorities include: prohibiting brand name 

drug companies from paying their generic competitors to delay entering the market 

(such anti-competitive agreements cost both consumers and the Federal Government 

billions of dollars annually); and reauthorizing the Do Not Call Implementation Act, 

105 

including providing for permanent registration of telephone numbers on the National Do Not Call Registry. 

Commissioner Kovacic states that his legislative priorities include legislation prohibiting reverse payments from brand name drug companies to generic companies 

and legislation to repeal the common carrier exemptions, particularly the telecommunications exemption. 

Commissioner Rosch states that he considers the following his legislative priorities: elimination of the requirement that consumers re-register for the Do Not Call 

Registry; enhanced civil penalty authority that would allow the Commission to pursue civil penalties under more circumstances and without providing a referral to the 

Department of Justice; elimination of the common carrier exemption; and prohibition of anticompetitive pharmaceutical patent settlements in which a brand drug effectively pays a generic drug to stay out of a market. 

Question 2. You say in your testimony that you ‘‘would like to work with the Committee to help ensure that [your] reauthorization includes appropriate increases in 

resources to meet these growing challenges.’’ In your testimony you do not state a 

specific number of employees that would be necessary for the FTC to be fully effective, and at the hearing you stated that it’s difficult to bring in a large number of 

new staff. Could you not grow on an incremental basis over a number of years? 

Answer. In my testimony, I highlighted the difficulties that a small agency like 

the FTC faces when it seeks to absorb a large number of new employees at one time, 

in addition to replacing FTE lost due to normal attrition and retirement. There are, 

of course, significant costs associated with such hiring, including the expenses related to recruitment and interviewing, training, facilities, furnishings, desktops, and 

equipment. With the addition of programmatic FTE comes the necessary increase 

in human resources, technology, facilities and records management staff to support 

those new hires. Nonetheless, I believe the FTC can, and should, grow incrementally, and I anticipate that the agency will need an additional approximately 100 

FTE over the next five fiscal years to meet workload demands. 

The FTC continues to face a demanding merger review workload as the volume 

of merger activity has increased significantly since FY 2004. Based on current 

trends, the FTC expects the high volume of merger work to continue to FY 2009 

and beyond. The FTC needs to ensure that it has sufficient staff and resources to 

meet an increasing number of merger investigations. Identifying and stopping anticompetitive conduct also is a priority, and the FTC will continue to pursue aggressively nonmerger matters, particularly in the health care, pharmaceutical, energy, 

technology, and real estate sectors. The FTC also is committed to promoting convergence in competition policy so that foreign enforcement practices do not unfairly 

burden U.S. businesses and consumers participating in foreign markets. In sum, the 

FTC wants to make sure that it has the authority, personnel, systems support, and 

resources needed to ensure that it can vigorously protect American consumers and 

promote a robust and vibrant marketplace free of anticompetitive mergers and anticompetitive business practices. It also must have the necessary resources to educate 

consumers and businesses about the importance of competition and to conduct research and studies on complex legal and economic issues used in developing antitrust policy. 

On the consumer protection side, over the course of the past few years, Congress 

has enacted a number of new laws that charge the FTC, at least in part, with their 

implementation and enforcement, including 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. The FTC needs sufficient 

staff to meet these added obligations, as well as its continuing strategic goal to prevent fraud, deception, and unfair business practices in the marketplace. The FTC 

is committed to protecting consumers from unfair and deceptive practices in the financial services sector (mortgage lending and debt collection), the burgeoning area 

of ‘‘green’’ marketing, and with respect to the marketing and advertising of food to 

children. The agency will work hard to fight spam and spyware, and to understand 

and anticipate other high tech tools fraudsters have yet to exploit. The FTC wants 

to ensure that consumers are fully protected in the areas of privacy and identity 

theft and with respect to deceptive and unfair practices in mobile marketing. The 

agency intends to exploit the tools it has been afforded under the U.S. SAFE WEB 

Act to work with its foreign partners in combating cross-border fraud and to improve compliance with FTC orders. Finally, history has proven the value of a robust 

consumer education program to support each of our consumer protection enforcement initiatives. Accordingly, the FTC expects to expand dramatically efforts to 

keep U.S. consumers abreast of the many challenges posed by unscrupulous marketers in the marketplace. 

106 

2See, e.g., Federal Trade Commission Staff, Broadband Connectivity Competition Policy 40– 

41 (June 2007) [hereinafter Broadband Report], available at http://www.ftc.gov/reports/ 

broadband/v070000report.pdf (discussing enforcement difficulties posed by the common carrier 

exemption). 3 Id. at 131. 

Each of these programmatic areas and the many agency-wide initiatives described 

more fully in my testimony before the Committee, of course, require support in the 

areas of information technology, human resources, financial management, facilities 

expansion, equal employment opportunities, and records management. 

I believe the FTC can meet these new and ongoing challenges with incremental 

staff growth and an overall staff increase over the next five fiscal years of approximately 100 FTE. The FTC will also need significant investment in information technology to: (1) support a more fully developed disaster recovery plan; (2) modernize 

large segments of FTC network infrastructure; (3) provide for increased computer 

storage capacity for e-filing and e-discovery; (4) upgrade litigation support tools and 

contract for forensic acquisition support; and (5) modernize FTC business systems 

components to improve financial management. With any increase in FTE, of course, 

comes a concomitant increase in cost for space/rent, furnishings, desktops, and 

equipment. 

Question 3a. I have seen reports about Comcast cutting off the service of some 

of its customers who it alleges have used too much bandwidth, despite the fact that 

they advertise unlimited service. This sounds like a case of deceptive advertising 

(and a poor business practice). Is this something the FTC will be investigating? 

Answer. Without commenting on the practices of a particular company, I can assure you that if an Internet service provider misrepresents, or fails to disclose, material aspects of its services in advertising or marketing to consumers, it would be 

liable for violations of Section 5 of the Federal Trade Commission Act, which prohibits unfair and deceptive acts and practices. 

For over a decade now, 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. The FTC will 

continue to work to protect consumers in the important area of Internet access. 

Question 3b. If this were a phone company classified as a common carrier, and 

not Comcast, could the FTC have trouble taking action due to the common carrier 

exemption? 

Answer. That is entirely possible. On the one hand, there should not be any jurisdictional obstacle to enforcement of the FTC Act against a telephone company that 

is offering broadband Internet access, because an entity is a common carrier only 

with respect to services that it provides on a common carrier basis. Because 

broadband Internet access provided by a wireline, facilities-based entity, such as a 

telephone company (as in your example in part (b) above), is not provided on a common carrier basis, such access is subject to the FTC’s general competition and consumer protection authority. On the other hand, in practice, as a result of the common carrier exemption, the issue of jurisdiction is often raised and litigated—even 

when FTC jurisdiction appears to be clear.2 In such cases, the FTC is forced to expend substantial time and resources litigating a jurisdictional question, rather than 

enforcing the FTC Act, potentially at the expense of consumers. 

Question 4. Do you believe the FTC should investigate whether the broadband 

providers’ advertised speeds are the actual speeds or if consumers are getting overcharged and deceived? 

Answer. As noted above, for more than a decade, the FTC has monitored the practices of Internet service providers and brought cases where we believe ISPs have 

engaged in deceptive marketing, advertising, and billing practices. As increasing 

numbers of U.S. consumers have chosen to subscribe to broadband services, the FTC 

has been closely monitoring the claims made by broadband providers in marketing 

their services to consumers. With respect to the issue of speed claims, last spring 

we issued a staff report on Broadband Connectivity Competition Policy, which noted 

that ‘‘speed is one of the primary qualitative features on which broadband providers 

are competing.’’ 3 Therefore, it is important that any claims about speed made by 

Internet service providers be truthful and accurate. The FTC will investigate whether broadband providers are making claims about speed that violate FTC consumer 

protection laws. 

Question 5a. Verizon has been cutting their copper wire after they switch their 

customers to fiber. This ensures that another competing company cannot offer service over this old wire. Would the FTC investigate this anti-competitive practice? 

107 

4See, e.g., Verizon Communications Inc. v. Law Offices of Curtis v. Trinko, LLP, 540 U.S. 398 

(2004). 5See Broadband Report, supra note 757, at 155–56. 6 Id. at 156 (‘‘This Report and the findings herein do not reflect a case-by-case analysis of the 

state of competition in each of the localities that may represent relevant markets under the antitrust laws.’’). 7 Broadband Data Improvement Act, S. 1492, 110th Cong. (2007). 

8 Consumer Product Safety Act, Pub. L. 92–573 (1972), H.R. Conf. Rpt. No. 92–1593 (1972), 

reprinted in 1972 U.S.C.C.A.N. 4596; see also www.cpsc.gov/about/faq.html (visited Oct. 18, 

2007); Testimony of Hon. Nancy A. Nord, Acting Chairman, U.S. Consumer Product Safety Commission, before the Senate Subcommittee on Consumer Affairs, Insurance, and Automotive SafeContinued 

Answer. Again, without commenting on the practices of a particular company, the 

FTC will continue to enforce the antitrust and consumer protection laws in the 

Internet access area. Whether Verizon’s alleged practices are anti-competitive under 

the Federal antitrust laws is a question that I cannot answer in the abstract. As 

a general matter, the antitrust laws do not require a company to provide access to 

its proprietary facilities to its competitors.4 In any case, the FTC will continue to 

enforce the antitrust laws in the Internet access area—as it does in other areas 

within its jurisdiction—by carefully analyzing the competitive effects of particular 

conduct and business arrangements within properly defined relevant markets. 

Question 5b. Would the common carrier exemption prevent the FTC from handling this? 

Answer. As indicated in my response to number three above, the FTC has jurisdiction over the provision of broadband Internet access. However, the FTC may encounter enforcement difficulties in this situation due to the fact that, as a result of 

the common carrier exemption, the FTC would have jurisdiction to address potential 

consumer ha= resulting from this practice in the provision of broadband Internet 

access but not in the provision of common carrier voice service, both of which may 

be transmitted over the same copper wire. 

Question 6. You argue, along the talking points of the incumbent broadband providers, that nondiscrimination rules are not necessary because the broadband market is so competitive. Does the FTC currently have sufficient tools to even accurately 

determine whether Americans have access to broadband? 

Answer. In the report, Broadband Connectivity Competition Policy, FTC staff observed that, on a national scale, the broadband market appears to be moving in the 

direction of more, not less, competition, as evidenced by fast growth in consumer demand for broadband, increasing access speeds, declining prices (particularly speedor quality-adjusted prices), and new entrants poised to challenge the incumbent 

cable and telephone companies.5 The report, however, did not conclude that any particular local broadband market regardless of how such market may be defined—is 

competitive.6 In any case, the report acknowledged the existence of substantial 

agreement on the part of both proponents and opponents of network neutrality regulation that increased competition in the broadband area would benefit consumers. 

Based in part on this and other factors suggesting that the broadband marketplace 

remains a dynamic, unsettled environment, the report counseled caution in evaluating proposals to enact regulation at this time. 

The FTC has not engaged in a broad inquiry into the state of broadband infrastructure deployment throughout the United States. However, in implementing its 

statutory mandate, the Federal Communications Commission periodically assesses 

and reports on the state of such deployment. I understand that you are cosponsoring 

legislation that would, among other things, require the FCC to revise its methods 

for assessing broadband deployment.7

Regarding the application of the antitrust and consumer protection laws to specific conduct and business arrangements, the FTC currently has sufficient tools to 

investigate and determine whether violations of such laws may be occurring. In fact, 

the FTC will work to ensure competition and protect consumers in the broadband 

Internet access marketplace. 

Question 7. I understand the Consumer Product Safety Commission is overwhelmed right now with unsafe products and recalls. Can you tell me the history 

of how the Consumer Product Safety Commission grew out of the Federal Trade 

Commission? And are there areas where the FTC has Jurisdiction and could step 

in to help to ensure consumers are not being deceived or that products are accurately labeled? 

Answer. Following a report by the National Commission on Product Safety, in 

1972, Congress created the CPSC with the specific mission of protecting consumers 

against unreasonable risk of injury from hazardous products.8 In so doing, Congress 

108 

ty, Oct. 4, 2007 (available at http://commerce.senate.gov/public/index.cfm?FuseAction=Hearings 

.Testimony&HearinglID=1902&WitnesslID=4134). 9 Consumer Product Safety Act, Pub. L. 92–573, § 30, reprinted in 1972 U.S.C.C.A.N. at 4621– 

4622. 10 Id. at § 30(c), (d), 1972 U.S.C.C.A.N. at 4621. 11See www.cpsc.gov/about/faq.html (visited Oct. 18, 2007). 12Stouffer Foods Corp., 118 F.T.C. 746, 798 (1994); Kraft, Inc., 114 F.T.C. 40, 120 (1991), aff’d 

and enforced, 970 F.2d 311 (7th Cir. 1992), cert. denied, 113 S. Ct. 1254 (1993); Cliffdale Assocs., 

103 F.T.C. 110, 164–65 (1984); see generally Federal Trade Commission Policy Statement on Deception, appended to Cliffdale Assocs., 103 F.T.C. at 174–83. 13 15 U.S.C. § 45(n); see also generally Federal Trade Commission Policy Statement on Unfairness, appended to International Harvester Co., 104 F.T.C. 949, 1070–76 (1984). 14With respect to certain products, the FTC shares jurisdiction over labeling with other agencies. For example, for more than 30 years the FTC and FDA have operated under a Memorandum of Understanding that gives primary responsibility over the advertising of food, overthe-counter drugs, medical devices, and cosmetics, to the FTC, and primary responsibility over 

labeling of these products to FDA. 15See, e.g., FTC v. National Urological Group, Inc., Civ. No. 1:04–CV–3294 (N.D. Ga. Nov. 

10, 2004) (challenging safety claims for dietary supplements containing ephedra and yohimbine, 

which in fact create safety risks by increasing blood pressure); FTC v. Christopher Enterprises, 

Inc., Civ. No. 2:01 CV–0505ST (D. Utah Nov. 29, 2001) (challenging safety claims for products 

containing comfrey, when in fact internal use or application to external wounds can cause serious liver damage; consent order required warning to consumers); Panda Herbal Intl, Inc., C– 

4018 (F.T.C. 2001) (consent order) (challenging marketing claim that dietary supplement could 

be used safely to treat diseases such as HIV/AIDS, when in fact St. John’s Wort ingredient has 

potentially dangerous interaction with drugs used to treat HIV/AIDS; settlement required warning on product); FTC v. Figgie, Inc., 994 F.2d 595 (9th Cir. 1993) (challenging representations 

that heat detectors provided sufficient warning in residential fires to allow occupants to escape 

safely, and responded more quickly than smoke detectors to hot, flaming fires). 16 E.g., Consumer Direct, Inc., 113 F.T.C. 923 (1990) (consent order) (challenging failure to disclose that ‘‘Gut Buster’’ product, a spring-tension exercise device, could break and cause serious 

injury to user; requiring marketer to notify purchasers regarding serious safety risk); International Harvester Co., 104 F.T.C. 949, 1056 (1984) (challenging failure to disclose risk that fuel 

caps on tractors could result in geyser of hot fuel and severe injury or death to tractor operator). 

transferred authority from a number of existing Federal agencies, including the 

then-Department of Health, Education and Welfare, the Department of Commerce, 

the Environmental Protection Agency (‘‘EPA’’), as well as the FTC, to the CPSC.9

From the FTC specifically, the CPSC received only the Commission’s authority relating to flammable fabrics and refrigerator safety.10

Congress directed the CPSC to protect the public against physical injury and 

harm. The CPSC’s tools are directly focused on ensuring that products introduced 

into the stream of commerce and used by consumers are not unreasonably hazardous. These tools include issuance and enforcement of mandatory safety standards, product bans where adequate safety standards cannot be developed, and recalls of products already in the marketplace or purchased. Its jurisdiction applies 

specifically and strictly to consumer product safety.11

Although the FTC also works to protect consumers, it plays a different role than. 

the CPSC. The FTC is primarily a law enforcement agency whose statutory authority allows us to take action against ‘‘unfair or deceptive acts or practices in or affecting commerce.’’ 15 U.S.C. § 45(a) (‘‘Section 5’’). A representation, omission, or practice is deceptive if (1) it is likely to mislead consumers acting reasonably under the 

circumstances; and (2) it is material—that is, likely to affect consumers’ conduct or 

decisions with respect to the product at issue.12 An act or practice is unfair if the 

injury to consumers it causes or is likely to cause (1) is substantial; (2) is not outweighed by countervailing benefits to consumers or to competition; and (3) is not 

reasonably avoidable by consumers themselves.13

Accordingly, the FTC has taken action against deceptive advertising and labeling 14 of products, including deceptive claims that a product is safe.15 In addition, 

in particular factual circumstances, the Commission has challenged the failure to 

disclose safety risks as an unfair practice.16 The Commission’s actions can result in 

consumers’ receiving accurate and important information. However, the CPSC is the 

agency tasked with addressing products that pose unacceptable safety risks and 

keeping them out of the hands of consumers. 

Question 8. The FTC identified ads with claims for very low monthly payment 

amounts or interest rates, without adequate disclosure of other important loan 

terms. And the FTC is now advising more than 200 advertisers and media outlets 

that some mortgage ads are potentially deceptive or in violation of the Truth in 

Lending Act. Your letters are a good step, but I wonder what more the FTC could 

have done or could do in the future. 

109 

17See, e.g., Mortgage Servicing: Making Sure Your Payments Count, available at http:// 

www.ftc.gov/bcp/edu/pubs/consumer/homes/rea10.shtm. Home Equity Loans: Borrowers Beware!, available at http://www.ftc.gov/bcp/edu/pubs/consumer/homes/rea11.shtm. 18 An act or practice is deceptive if (1) there is a representation or omission of information 

that is likely to mislead consumers acting reasonably under the circumstances; and (2) that representation is material to consumers. See generally Federal Trade Commission Policy Statement 

on Deception, appended to Cliffdale Assocs., 103 F.T.C. 110, 174–83 (1984). An act or practice 

is unfair if (1) it causes, or is likely to cause, substantial injury to consumers; (2) the injury 

is not reasonably avoidable by consumers; and (3) the injury to consumers is not outweighed 

by countervailing benefits to consumers or to competition. 15 U.S.C. § 45(n). 19FTC v. Mortgages Para Hispanos.Com Corp., No. 06–00019 (E.D. Tex. 2006); FTC v. Diamond, No. 02–5078 (N.D. Ill. 2002); United States v. Mercantile Mortgage Co., No. 02–5079 (N.D. 

Ill. 2002); FTC v. Associates First Capital Corp., No. 01–00606 (N.D. Ga. 2001). 

Answer. The Commission takes deceptive mortgage advertising very seriously, 

and has undertaken several initiatives to address it. Of course, the FTC can and 

will do more to address deceptive mortgage advertising. We continue to monitor the 

marketplace and will take enforcement action as appropriate. 

The FTC has developed a multi-pronged approach to address mortgage deceptive 

advertising concerns. First, as you note, the Commission recently advised over 200 

advertisers and media outlets that some mortgage ads with claims for very low 

monthly payment amounts or interest rates, without adequate disclosure of other 

important loan terms, are potentially deceptive or in violation of the Truth in Lending Act. Letters to advertisers are advising them to review their ads, and to read 

business and consumer education materials on the FTC’s website to learn about relevant laws and requirements. Letters to media outlets are advising them about the 

potentially deceptive advertising, with guidance on screening ads for questionable 

claims. 

Second, the Commission has brought and will continue to bring appropriate cases 

against mortgage advertisers who violate Section 5 of the FTC Act or the Truth in 

Lending Act. In the last decade, the agency has brought 21 actions alleging deceptive or unfair practices against companies in the mortgage lending industry, focusing in particular on the subprime market. Several of these landmark cases have resulted in large monetary judgments, collectively returning more than $320 million 

to consumers. We are continuing our law enforcement activity, with several nonpublic investigations involving mortgage advertisers who may have violated the FTC 

Act or the Truth in Lending Act. 

Third, to help consumers recognize deceptive mortgage ads, the Commission has 

published a Consumer Alert, ‘‘Deceptive Mortgage Ads: What They Say; What They 

Leave Out.’’ The brochure alerts consumers about mortgage ads that offer low rates 

or payments without disclosing the true terms of the deal as the law requires. In 

addition, this June, the Commission issued a brochure for consumers facing the possibility of losing their home because they cannot make their mortgage payments, 

and warning them about foreclosure scams. These new publications, as well as several previously released materials are available online at www.ftc.gov.17

Question 8a. Mr. Calhoun testified of no disclosure of escrow requirements and 

no disclosure of the penalty for not showing a proof of income. How can the FTC 

help in this area? 

Answer. The Commission believes that it is critical for consumers to understand 

the terms of their loans and the implications of these terms. Subprime borrowers 

can make better-informed decisions if they are made aware that their mortgage payments will not include an amount to be placed in escrow for taxes and insurance 

and that therefore they will have to pay these amounts themselves. Subprime borrowers similarly can make better-informed decisions if they understand that their 

mortgage payments are higher than they otherwise would have been because they 

have not been required to document their income. 

The FTC uses two primary means to help subprime borrowers who do not receive 

this information. First, in some factual circumstances, a lender’s failure to disclose 

information related to escrows and no-documentation loans may be an unfair or deceptive act or practice in violation of Section 5 of the FTC Act,18 and the FTC can 

commence a law enforcement action to challenge those acts and practices. For example, the FTC has brought enforcement actions against brokers and lenders who represented to consumers that their monthly payment included amounts for a tax and 

insurance escrow, when it did not.19 More generally, the Commission has been aggressive in challenging unfair or deceptive acts and practices in mortgage lending, 

110 

20The Commission’s June 13, 2007 testimony before the House Committee on Financial Services described in detail the agency’s activities in the financial services sector. The Commission’s 

statement is available at www.ftc.gov/os/2007/06/070613statement.pdf. 21 Home Equity Lending Market; Notice of Hearings, 72 Fed. Reg. 30380 (May 31, 2007). 22 15 U.S.C. § 1604. 23 12 U.S.C. §§ 2603–04. 24 Economic Growth and Regulatory Paperwork Reduction Act of 1996 (Pub. L. 104–208, 110 

Stat. 3009), Section 2101. 25 Joint Report to the Congress Concerning Reform to the Truth in Lending Act and the Real 

Estate Settlement Procedures Act (July 1998). 

focusing in particular on the subprime market.20 Second, the FTC engages in substantial consumer education efforts to assist subprime borrowers in understanding 

the terms of their loans and the implications of these terms so that they can make 

better-informed decisions. 

The Commission also notes that the Federal Reserve Board (FRB) is considering 

escrow and no-documentation loans issues in its ongoing rulemaking under the 

Home Ownership and Equity Protection Act.21 The FRB has said that it intends to 

take action by the end of the year. The FTC will monitor developments in this area, 

and will consider what changes, if any, should be made to its strategy to help 

subprime borrowers make better-informed choices in this context. 

Question 8b. If you had the authority to create rules of disclosure in this area, 

what could you do? 

Answer. Federal agencies other than the Commission currently have the authority 

to promulgate rules specifying mortgage disclosure requirements. These rules are 

for the entire industry and are enforceable by all relevant agencies. The FRB has 

responsibility for disclosure of certain loan costs under the Truth in Lending Act.22

The Department of Housing and Urban Development (HUD) also has responsibility 

for disclosure of settlement costs under the Real Estate Settlement Procedures 

Act.23 I believe that the public interest would be best served if the FRB and HUD 

continued in their role of promulgating and implementing mortgage disclosure rules, 

including any reforms that are needed, rather than having the FTC impose additional mortgage disclosure requirements. 

It has been recognized for many years that federally-required mortgage disclosures need to be improved. In 1996, Congress directed the FRB and HUD to simplify 

and improve mortgage disclosures and create a single mortgage disclosure form.24

The FRB and HUD provided Congress with formal recommendations for mortgage 

disclosure reform in 1998.25 Since that time, various parties have advanced other 

proposals for improving mortgage disclosures, including substantial efforts to develop a single mortgage disclosure form. 

Nevertheless, the Commission has a role to play in mortgage disclosure reform. 

Building on prior work, the FTC staff has used its expertise in consumer research 

methodology to test mortgage disclosures to determine which convey to consumers 

the information they need to make better-informed decisions. In particular, the 

Commission’s Bureau of Economics (‘‘BE’’) recently conducted a study of mortgage 

lending disclosures that examines how consumers search for mortgages, how well 

consumers understand current mortgage cost disclosures and the terms of their own 

recently obtained loans, and whether better disclosures could improve consumer understanding of mortgage costs, consumer shopping for mortgage loans, and consumers’ ability to avoid deceptive lending practices. The BE research included thirty-six in-depth interviews with recent mortgage customers, and quantitative testing 

with over 800 mortgage customers to explore their understanding of mortgage costs 

and terms disclosed in both current forms and a prototype disclosure form developed 

for the study. 

The BE study found that: (1) the current federally required disclosures fail to convey key mortgage costs to many consumers; (2) the prototype disclosures developed 

by the FTC staff significantly improved consumer recognition of mortgage costs; (3) 

both prime and subprime borrowers failed to understand key loan terms when viewing the current disclosures, and both benefited from improved disclosures; and (4) 

improved disclosures provided the greatest benefit for more complex loans, for which 

both prime and subprime borrowers had the most difficulty understanding loan 

terms. The study also suggests that, in actual market transactions, subprime borrowers may face even greater difficulties understanding their loan terms than found 

in the study, and may benefit the most from improved disclosures. The study results 

are consistent with the FTC’s view that consumer testing often is critical in the development and evaluation of consumer disclosures. 

Comprehensive mortgage disclosure reform is needed. The best role for the FTC 

in enhancing the mortgage disclosures consumers receive is not to issue more mortVerDate Nov 24 2008 06:52 Sep 21, 2012 Jkt 075679 PO 00000 Frm 00114 Fmt 6601 Sfmt 6621 S:\GPO\DOCS\75970.TXT JACKIE
111 

gage disclosure rules but to assist the Federal agencies who have issued such rules 

in revising and developing better disclosures. In particular, the FTC can assist in 

providing its expertise to determine whether proposed disclosures under development would be effective. The Commission would be pleased to work with the FRB 

and HUD in their efforts to improve mortgage disclosures. 

Question 8c. Do you agree with Mr. Calhoun that Section 5 of the FTC Act should 

be expanded related to mortgage lending? He believes this would enhance the capacity for appropriate Federal regulatory response. What expansion would you seek? 

Answer. Mr. Calhoun testified that Section 5 of the FTC Act should be expanded 

so that the FTC had jurisdiction over banks. While the Commission has an important role in ensuring compliance with the FTC Act for financial services companies 

that are not banks, it does not have experience in applying Section 5 to banks themselves. The Federal banking regulators, which closely supervise the banks, thrifts 

and credit unions under their respective jurisdictions, have broad expertise with respect to those depository institutions. I believe the public interest is best served if 

the Federal banking agencies continue to have jurisdiction over those institutions 

under Section 5. 

Question 9. In May, this committee passed important price gouging legislation. 

One of those tools would give the President the authority to declare a national energy emergency and makes it illegal for any supplier to sell, or offer to sell, crude 

oil, gasoline, or petroleum distillates at an excessive price for use in the emergency 

declared area. I understand that the FTC opposes that additional authority. Why? 

Answer. Federal antitrust law is designed to prevent the abuse of private market 

power that may empower sellers to charge prices other than those that they would 

charge in a competitive market. This is based on the long-standing premise that 

competition—and market prices—provide the best choices in quantity, quality, and 

prices of goods and services for consumers. Thus, law makers should hesitate to 

make it illegal for sellers to charge a price that results from the interplay of market 

conditions—even if that price may seem high. 

During times of unusual product shortage—such as occurred in many parts of the 

country after Hurricanes Katrina and Rita, and undoubtedly will occur in a period 

of any significant emergency—market prices will rise as demand temporarily outstrips supply. These rising prices help clear the market—that is, equalize supply 

and demand—without the need to resort to long lines or other inefficient methods 

of product allocation. Indeed, high or rising prices provide the incentive for suppliers 

to take the financial risk to bring extra product into the affected market—as the 

petroleum companies did by shipping additional supplies of gasoline from Europe 

and other foreign locations into the United States after the 2005 hurricanes—while 

encouraging consumers to conserve gasoline by forgoing or postponing unnecessary 

automobile trips while product is short. Any price gouging law runs the risk of 

dulling both of those incentives and exacerbating and prolonging the emergency conditions. 

I would anticipate especially serious consequences from any price gouging legislation that failed to take account of factors addressing costs and market conditions. 

Such legislation would severely restrict price flexibility in times of market disruption stemming from a natural disaster. This could extend the period of supply/demand imbalance beyond what it would have been if businesses were able to price 

according to market conditions. In addition, some price increases by firms in the 

face of temporary product shortages are reasonable or even necessary for the firms; 

even some advocates of price gouging legislation have recognized that a wholesaler 

or retailer needs to recover its increased costs and must be able to respond to unusual market conditions. Any legislation that prohibits ‘‘excessive’’ prices without allowing for increased costs (including reasonably anticipated replacement costs) or 

temporary market dislocations may have especially harmful effects in emergency 

conditions. 

Another problem raised by price gouging legislation is how to define the offense 

clearly so that wholesalers and retailers can comply with the law—especially when 

such firms face potential criminal penalties for violating the prohibition against 

gouging. Because price flexibility is crucial for the efficient functioning of the economy (perhaps even more so during emergency disaster periods), defining an offense 

of price gouging has proved particularly challenging. Price gouging legislation would 

entail the difficult policy decision of how to draw a line between legal and illegal 

conduct—particularly conduct subject to criminal sanctions—in an area where any 

line is difficult to discern and where it is important not to discourage conduct that 

ultimately is benign or procompetitive, and in particular where such conduct may 

help to alleviate shortage conditions. 

112 

26 In 2004, the FTC’s Bureau of Economics published the third in a series of reports on mergers in the petroleum industry. In 2005, the Commission issued a report on the factors that determine the prices of gasoline. In May 2006, the Commission delivered its report to Congress 

on its investigation of possible gasoline price manipulation and the pricing of gasoline following 

Hurricane Katrina. And in August 2007, the Commission delivered to the President a report 

on the causes of gasoline price increases during the spring and summer of 2006. In addition, 

the Commission’s economists have conducted several petroleum industry merger retrospectives 

and have engaged in individual research on pricing and other competition issues in the industry. 

Although it is impossible to predict exactly how affected businesses may react, 

price gouging legislation that does not define the violation clearly or does not account for increased costs or market conditions may impel firms—especially small 

businesses lacking sophisticated legal counsel, such as many gasoline retailers—to 

shut down temporarily or stay out of the affected market rather than risk violating 

the price gouging statute, especially if the offense is punishable as a serious crime 

and offenders are subject to imprisonment and large fines. That result would benefit 

no one. 

Question 10. I have noted in Mr. Cooper’s testimony an interesting line of argument from this Administration and from industry. Prices go up because of a list of 

seemingly reasonable unnatural events. This includes fires floods, hurricanes, and 

other events. Other surprises include a larger than expected driving season, increased consumer demand, refinery outages, the increased price of ethanol, and 

more. a. If industry continues to consolidate to capture a larger and larger share of the 

market and then we experience consistent ‘‘surprises’’ that impact prices, is there 

not something about this situation that is more systemic that the FTC needs to investigate and act on? 

b. What is it about the nature of this oil and gas industry that we simply accept 

these price fluctuations due to ‘‘surprises’’ as business-as-usual? 

Answer. In addition to reviewing all major petroleum industry mergers, Commission staff has looked at both merger and nonmerger issues at all levels of the petroleum industry and published their findings in a series of reports that help explain 

the workings of the industry.26 The empirical work contained in these reports forms 

a picture of an industry that has restructured substantially in recent years, as well 

as an FTC program of vigorous antitrust enforcement that has maintained competition as that process unfolded. 

Our economists’ work demonstrates that, despite some increases over time, concentration for most levels of the U.S. petroleum industry has remained low to moderate, and there is compelling evidence that the industry has become more efficient 

in recent years, to the ultimate benefit of consumers. For example, economies of 

scale have become increasingly significant in shaping the petroleum industry. The 

United States has fewer refineries than it had 20 years ago, but the average size 

and efficiency of refineries have increased, along with the total output of refined 

products. Overall crude oil distillation capacity in the U.S. petroleum. industry increased from 15.3 million barrels per day in 1996 to 17.1 million barrels per day 

in 2005—equivalent to the addition of approximately 15 average-sized refineries. 

Moreover, today the petroleum industry is less vertically integrated than in past 

years. Several significant refiners have no crude oil production, and integrated petroleum companies today tend to depend less on their own crude oil production, 

while a number of independent retailers purchase refined products on the open market. Finally, some significant independent refiners have built market share by acquiring refineries that were divested from integrated majors pursuant to FTC enforcement orders. 

Despite these efficiency gains, there are two fundamental reasons why unpredictable market disruptions—such as fires, floods and hurricanes may cause large 

swings in the prices of refined petroleum products. First, consumer demand for gasoline and other petroleum products is highly inelastic. That means that, on average, 

consumers do not reduce demand much when prices for these goods rise, particularly in the short run, because many consumers lack adequate short-run substitutes 

for gasoline to power their cars. This facet of consumer demand can lead to sharply 

higher prices during periods of market disruption. Illegal conduct does not have to 

be present for this phenomenon to occur. Moreover, in the case of refined petroleum 

products, variability in the prices of key inputs—crude oil since the 1970s, and ethanol more recently—has contributed significantly to fluctuations in the prices of gasoline and other refined products. Refiners, however, have no significant control over 

crude oil and ethanol markets. 

Second, the supply of refined products also is inelastic in the short run. Therefore, 

over a short period of time, it is costly or difficult to increase output significantly 

113 

in response to higher prices. Redundant facilities and systems are expensive to build 

and maintain, and modem business practice is to keep inventories low in order to 

enhance efficiency (thereby keeping prices lower because maintaining inventory is 

expensive). These factors sometimes impose limitations on the responsiveness of 

supply all along the distribution chain immediately following market disruptions. 

Thus, when an unexpected contingency occurs—such as a pipeline break, a disruption in the supply of crude oil from a foreign country, or an extreme weather event— 

it may take some time for the distribution system to adjust and supply product in 

alternative ways so as to bring prices down. Similarly, when demand is stronger 

than anticipated, it takes time for refiners to readjust their output slates and production schedules in response to higher prices, for additional shipments to flow from 

one part of the country to another, or for imports to arrive from abroad. For example, it takes several weeks for pipeline shipments from Gulf Coast refineries to 

reach the Midwest. One way to eliminate this problem might be to require building 

additional capacity, or to require higher inventory levels that would be available 

during disruptions even if they sat idle during normal times. But these would be 

expensive strategies, particularly because, even if there are many unexpected contingencies every year, they do not occur in a smooth and predictable pattern; rather, 

they tend to affect different areas, have differing effects, and last different lengths 

of time. To be sufficient to eliminate price spikes stemming from all of these contingencies, additional capacity or inventory levels would need to be adequate to handle 

all possible events at all locations and times. Thus, in return for a damping of price 

spikes during emergencies, consumers would experience higher prices over the 

longer term stemming from the need to cover the costs of these redundancies. 

Of course, the fact that supply and demand conditions in the oil and gas industry 

can give rise to significant price fluctuations in response to a natural disaster, other 

potential disruptions, or input cost changes does not necessarily mean that pricing 

in this industry uniformly results from competitive forces. Nevertheless, previous 

FTC studies of specific periods of relatively high gasoline prices, or of possible price 

manipulation more generally, did not uncover evidence of conduct that might be actionable under the antitrust laws or of inappropriate conduct that might have arisen 

from industry consolidation. Although the results of those past studies do not guarantee that future examinations of pricing in the industry would reach the same conclusions, there is no question that a careful investigation will always be a prerequisite to properly ascertaining the causes of unusual price movements. 

RESPONSE TO WRITTEN QUESTIONS SUBMITTED BY HON. OLYMPIA J. SNOWE TO

HON. DEBORAH PLATT MAJORAS

Question 1. The National Do Not Call Registry has been incredibly successful. 

However, this success hasn’t really migrated over to other areas under the FTC jurisdiction—primarily with identity theft and SPAM e-mails. Approximately 15 million Americans were victimized by some sort of identity-theft related fraud during 

a twelve month period ending in mid-2006. And an estimated 12.4 billion spam emails are sent a day, which clog our inboxes and waste our time due to reading and 

deleting them. 

Why this disparity—why has the DNC registry been so successful in curtailing 

unwanted telemarketing calls but yet other laws in place and the enforcement of 

those laws have not produced similar results with identity theft and SPAM e-mails? 

Is it primarily the Commission’s limited ability to seek civil penalties as you mention in your testimony or are there additional factors that exist? 

What additional resources are necessary to curtail the growing trends of these activities—the number of identity theft victims has increased 50 percent over a 3 year 

period and SPAM e-mails are expected to increase over 60 percent from 2006 to 

2007? 

Answer. The National Do Not Call Registry has significantly reduced the number 

of unwanted telemarketing calls received by consumers. Its success hinges on high 

compliance rates and effective enforcement against those who illegally place calls to 

registered telephone numbers. Unfortunately, spam and identity theft present far 

more vexing problems for which there is no simple solution. 

Spam 

Unlike in telemarketing, where the Commission can more readily identify the 

telemarketer or seller responsible for a telephone call, spammers use a variety of 

techniques to hide their identities, including spoofing (the falsification of an e-mail’s 

header information), open relays (unsecured mail servers through which spammers 

can have their messages forwarded), open proxies (misconfigured servers that perVerDate Nov 24 2008 06:52 Sep 21, 2012 Jkt 075679 PO 00000 Frm 00117 Fmt 6601 Sfmt 6621 S:\GPO\DOCS\75970.TXT JACKIE
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1 Established by Executive Order in May, 2006. Exec. Order No. 13,402, 71FR27945 (May 10, 

2006). 

mit unauthorized users to send mail as if it is originating from the misconfigured 

server), and zombie drones (computers infected with malware that causes the computers to become part of a botnet through which spam can be sent). Each of these 

spamming techniques makes it difficult, if not impossible, to identify spammers 

through e-mail headers and significantly impedes law enforcement. 

To combat the threat of spam, the Commission has been a leading advocate of domain-level authentication technologies that would help ISPs and law enforcement 

identify the domain from which an e-mail was sent. While not a panacea, these 

technologies could vastly improve the effectiveness of other anti-spam technologies 

(such as reputation and accreditation services) and hold significant promise in reducing the effectiveness of phishing campaigns. The Commission is encouraged that 

these technologies are beginning to be widely deployed. 

In addition, spam can be sent from anywhere in the world to anywhere in the 

world. This international nature of spam often presents challenges for law enforcement. Congress enacted the U.S. SAFE WEB Act last year to give the FTC additional tools to combat cross-border fraud, including spam, spyware, and other online 

threats. Among other things, the U.S. SAFE WEB Act makes it easier for the FTC 

to cooperate and exchange information with foreign counterparts in combating spam 

and other cross-border consumer problems. The Commission is actively using the 

tools provided by the U.S. SAFE WEB Act in its fight against spam. 

The Commission is also doing its part to combat spam through law enforcement 

and consumer education, as outlined in its September 12 testimony. CAN–SPAM 

added civil penalties to the Commission’s arsenal in spam enforcement actions. 15 

U.S.C. § 7706(a). This authority has proven especially useful in spam cases where 

the Commission’s traditional equitable remedies would have provided inadequate relief. For instance, in seven cases alleging violations of CAN–SPAM and the Adult 

Labeling Rule, 16 C.F.R. § 316.4, the Commission obtained more than $1.1 million 

in civil penalties. Civil penalty authority enabled the Commission to obtain significant monetary judgments without having to demonstrate and attempt to monetize 

the intrusion suffered by consumers who received pornographic e-mail. 

Identity Theft 

Unlike telemarketers who are often legitimate marketers trying to comply with 

the law, identity thieves are criminals who deliberately flout it. Further, identity 

theft is a far more complex problem than receiving telemarketing calls. Indeed, because identity theft can be committed in a variety of different methods, can be tremendously lucrative, and can go undetected for significant periods, its eradication 

requires nothing short of major changes in how we tackle this devastating crime. 

Although the Commission itself does not have criminal prosecutorial authority, I 

served as co-chair of the President’s Identity Theft Task Force,1 which released several recommendations this spring to improve criminal prosecution of identity theft. 

FTC staff is involved in the implementation of some of these recommendations. For 

example, one of the Plan’s major recommendations is to increase coordination 

among law enforcement agencies to facilitate identity theft investigations and prosecutions. The Commission will continue to support that goal through its Identity 

Theft Data Clearinghouse, the Federal Government’s central repository of identity 

theft victims’ complaints. The Commission is also participating in several training 

sessions for law enforcement such as regional identity theft training seminars for 

local police and investigators on victim assistance and identity theft investigations 

and the development and expansion of training for Federal prosecutors on how to 

develop an effective identity theft prosecution. For example, just last month, the 

FTC worked with DOJ, the Secret Service, the U.S. Postal Inspection Service, and 

the American Association of Motor Vehicle Administrators to provide training for 

local law enforcement in the Chicago area; in December, we will conduct similar 

training in North and South Carolina. In addition, the Identity Theft Task Force 

forwarded legislative recommendations to Congress that seek to close existing loopholes for the prosecution of some types of identity theft. 

In addition to criminal prosecution, the Identity Theft Task Force’s recommendations focused on identity theft prevention through improved data security and victim 

recovery. The FTC is also leading efforts to develop a comprehensive record on the 

use of Social Security numbers in the private sector, with the goal of developing recommendations on how we can limit the availability of this valuable information to 

criminals, while at the same time preserving the many beneficial purposes for which 

SSNs are collected, used, and shared. The Commission solicited and received more 

than 300 public comments on this issue and will hold a workshop on SSN usage 

115 

on December 10 and 11. In addition, this past spring, the Commission hosted a 

workshop on authentication, bringing together academics, business groups, consumer advocates, and others to explore new developments in the rapidly changing 

field of identity management. FTC staff is working on a report that will describe 

what we learned at this workshop, such as information about technological and policy requirements for developing better authentication processes, which will assist all 

policymakers addressing this pernicious crime. 

With respect to victim assistance, the Commission has already implemented many 

of the Task Force recommendations, including publishing a ‘‘Victims’ Statement of 

Rights,’’ and launching a standard police report http://www.idtheft.gov. for identity 

theft victims. The FTC and DOJ are coordinating with the American Bar Association to support more victim assistance through pro bono programs and are developing a training curriculum for victim assistance counselors in the court system. 

Your question asks about civil penalties. Currently, the Commission does not have 

authority to seek civil penalties in data security cases unless a special statute, such 

as the Fair Credit Reporting Act, has been violated. The Commission recommends 

that Congress pass legislation to provide the Commission with civil penalty authority in data security cases. We believe the threat of civil penalties will serve as an 

important incentive for companies to maintain data security, thus deterring identity 

theft. 

In terms of resources, the Commission has requested 10 additional FTE for FY08 

to work on data security and identity theft issues. 

Question 2. Last year, the FTC published the ‘‘Business Opportunity Rule’’ as a 

Notice of Proposed Rulemaking. It is my understanding that the Commission will 

report later this year on the NPRM’s status and likely make recommendations regarding next steps. The proposed rule would eliminate some existing requirements 

as well as many of the current disclosures. However, it would then propose new 

waiting periods and disclosure requirements for sales of ‘‘business opportunities.’’ 

Some concerns have been voiced regarding these new rules. Primarily, that the new 

waiting period might delay legitimate business efforts and apply a cumbersome administrative process to business’s recruiting efforts. Also additional privacy concerns 

have been raised regarding the new disclosure requirements. Can you elaborate on 

the current status of the regulation and how the FTC plans to address the concerns 

that have been voiced? 

Answer. Currently, FTC staff is carefully considering the many thoughtful comments received in response to the NPRM for the business opportunity rule—including several from Members of Congress—on all the issues implicated by this rulemaking proposal. 

Among the issues under careful consideration is whether the proposal goes too far 

in its attempt to curb abuses inflicted on the public by pyramid schemes that purport to be business opportunities, and whether this proposal, if adopted, would result in unintended and unnecessary compliance burdens on legitimate multilevel 

marketing companies. The concerns about the proposed waiting period and privacy 

concerns implicated by the disclosure of prior purchasers have been articulated 

clearly and in detail in the comments the Commission received. 

While it would be premature to comment on the Commission’s views on these 

issues, the Commission’s aim has been to craft a business opportunity rule that is 

narrowly tailored to address the abusive practices of business opportunity promoters 

that result in substantial consumer injury. The goal is to reduce unnecessary compliance costs by having a narrowly-focused rule that requires only the most essential 

material disclosures and that prohibits the unfair or deceptive practices identified 

over the course of the FTC’s many years of law enforcement against bogus business 

opportunity sellers. 

The Commission staff is giving careful consideration to the concerns articulated 

by legitimate MLM companies and Members of Congress as it formulates recommendations to the Commission on the next steps in this rulemaking proceeding. 

Rulemaking under authority of the FTC’s special rulemaking statute, 15 U.S.C. 57a, 

provides numerous opportunities for public comment and oral participation with respect to any rulemaking proposals. Further, without prejudging this matter in any 

way, it should be noted that the final rule adopted at the end of an FTC rulemaking 

proceeding is often considerably refined, as compared to the initial proposal put 

forth at the start of the proceeding. 

Question 3. There is growing concern about a form of identity theft, phishing— 

where a fraudulent e-mail is sent in order to deceive the recipient into giving personal or financial account information. 

Consumer Reports found in 2006 that approximately 2.4 million Americans have 

been victims of phishing attacks and the total losses associated with phishing is 

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2 According to the Anti-phishing Working Group, the financial services sector was the most 

targeted industry sector at 95.2 percent of all attacks in the month of June. 3See http://www.ftc.gov/bcp/workshops/spamsummit/draftltranscriptlday2.pdf. At 85. 4See http://www.dmnews.com/cms/dm-news/e-mail-marketing/42251.html. 

more than $600 million, just in 2006 alone. A report from ICONIX indicates that 

approximately 59 million phishing e-mails are sent a day and the number one country were most of the phishing e-mails/websites originate is the U.S. 

There was even a recent account of one phishing attack that fraudulently utilized 

the name of the FTC, which is a tad ironic since the Commission is responsible for 

prosecuting e-mail fraud. What can the government do to curtail this e-mail and 

website based fraud? Could current law be changed to better address this issue in 

providing more explicit tools for law enforcement to prosecute the bad actors that 

are behind these phishing schemes? 

Answer. Phishing spam—e-mail that attempts to trick recipients into providing 

personally identifiable information to scam artists posing as legitimate businesses— 

has increased significantly in recent years. To combat phishing, the Commission has 

maintained an aggressive anti-spam and anti-phishing program by hosting public 

workshops to gain new insights from experts, disseminating consumer education, 

spurring the development of industry-driven technology, and pursuing law enforcement actions. 

This summer the Commission hosted a workshop, ‘‘Spam Summit: The Next Generation of Threats and Solutions,’’ to examine how spam has evolved and what 

stakeholders can do to address it. Workshop participants described how spam is 

being used increasingly as a vehicle for more pernicious conduct, such as phishing 

and the delivery of viruses and spyware. This spam goes beyond mere annoyance 

to consumers—it can result in significant harm by shutting down consumers’ computers, enabling keystroke loggers to steal identities, and undermining the stability 

of the Internet. The Spam Summit illustrated that criminal law enforcement, industry-driven technologies, public/private partnerships, and international cooperation 

are paramount for managing the spam problem. 

The FTC also fights phishing by maintaining a vigorous consumer education program. The Commission’s consumer education materials (located at 

www.onguardonline.gov) aim to inform consumers of the dangers of phishing and 

urge them not to reply to an e-mail or pop-up message that asks for personal or 

financial information, use anti-virus and anti-spyware programs and a firewall, and 

forward suspected phishing messages to the FTC at spam@uce.gov. The FTC’s consumer alert, ‘‘How Not to Get Hooked by a Phishing Scam’’ has been visited over 

1.1 million times since 2003, and the OnGuard Online article on phishing has received over 600,000 unique visits in the last 2 years. 

The Commission is redoubling its efforts to stop illegal spam and phishing 

schemes. First, in the upcoming months, we plan to convene a half-day antiphishing roundtable with the goals of identifying opportunities for outreach and securing commitments from key stakeholders in the anti-phishing community, including consumer and industry groups. Second, we plan to produce a video with important information about phishing. Third, we are working with the anti-phishing community to mobilize members of the financial sector and revitalize consumer education outreach efforts, including promotion of the OnGuard Online materials. 

Working with the financial sector will be critical, given that financial services is the 

industry sector most targeted by phishers.2

Finally, we continue to encourage the industry’s adoption of domain-level e-mail 

authentication as a significant anti-spam and anti-phishing tool. Domain-level authentication would ensure that a message that purports to be from an e-mail address at a domain actually came from an address at that domain. In other words, 

if a phishing message purported to be from a financial institution’s domain, but actually came from an IP address not associated with the financial institution, the 

message would not be properly authenticated. As a result, the message would not 

reach the consumer’s in-box. At our Spam Summit this summer, we learned that 

industry has made great strides with e-mail authentication—50 percent of legitimate e-mail is now authenticated.3 A recent study indicates that Internet Service 

Providers are now applying negative scoring to unauthenticated messages.4 We look 

forward to working with industry as they continue to advance in their e-mail authentication efforts. 

The Commission has not recommended any modifications to current law to cover 

phishing e-mails. The FTC already has the necessary legal authority to pursue civil 

actions against phishers. On the underlying behavior in phishing scams is often 

criminal and covered by criminal statutes. 

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5Some have suggested that consumers have a greater risk of identity theft in the paper environment. In most surveys, including those conducted by the FTC and Javelin Research, roughly 

half of all victims do not know precisely how their data was captured by the thief. (See 

www.ftc.gov/bcp/edu/microsites/idtheft/downloads/synovatelreport.pdf; www.javelinstrategy 

.com/products/99DEBA/27/delivery.pdf.) Among those who do know how their data was obtained, most of them can point to a specific incident where their purse, wallet, or postal mail 

was taken. 

Question 4. With respect to consumer education about identity theft and how to 

avoid becoming a victim, the FTC has distributed close to 3 million brochures and 

tens of thousands of educational kits as well as created the OnGuard Online 

website, which has received some 3.5 million visits to date. Have you been able to 

gauge the success of your outreach and educational efforts? Are you performing surveys on consumer knowledge about identity theft and ways to protect themselves? 

Answer. Education and outreach are core elements of the FTC’s campaign against 

identity theft. The FTC’s product distribution figures are one measure of the success 

of the FTC’s educational campaigns. As you allude to in your question, the FTC has 

distributed more than 2.6 million Deter, Detect, Defend brochures since 2006, recorded more than 3.2 million visits to the program’s website, and disseminated 

55,000 kits. The Commission, which directs its education efforts to businesses as 

well, introduced a new data security guide in March 2007 to help businesses secure 

customers’ sensitive personal information. The Commission has distributed more 

than 120,000 copies of the guide. In fact, it’s initial printing (22,000 copies) was exhausted in 5 days. The guide also has been accessed 25,000 times online since its 

release. 

The FTC develops its advice for consumers based on its enforcement experience, 

information it collects during FTC conferences and workshops, and consultation 

with industry representatives, consumer advocates and academics. The FTC occasionally conducts original research, such as its fraud survey, which informs its messages for consumers. 

Another measure of the success of FTC efforts is how many consumers it reaches. 

The Commission receives about 15,000 to 20,000 contacts each week from consumers seeking information on how to recover from identity theft or how to avoid 

becoming a victim. We provide these consumers with important educational information. 

A third way to gauge the Commission’s outreach efforts is to consider the willingness of the private, public, and non-profit sectors to use the campaign materials 

without changes. Hundreds of industry, consumer advocacy, law enforcement, and 

community groups distribute the Commission’s identity theft materials. Several 

prominent national groups, including the National Association of Realtors and the 

Direct Marketing Association, have co-branded and reproduced copies of the materials to distribute among their members. 

We have also conducted surveys on identity theft generally. In September 2003, 

the FTC released a survey which described the extent of identity theft in the United 

States and detailed the Commission’s ID Theft program from its inception in 1998. 

See http://www.ftc.gov/opa/2003/09/idtheft.shtm. The FTC expects the results of 

a follow-up survey to be released later this year. 

Question 5. In a recent survey, 80 percent of Internet users voiced concern about 

being victims of online identity theft. But yet, most identity theft actually takes 

place offline through the stealing of paper bills, account statements, credit cards, 

etc. and only about 9 percent of identity theft crimes occur online. In fact, many 

recommend that utilizing online banking and bill paying services would reduce the 

threat of identity theft given the encryption and authentication technologies used, 

as well as the lack of any paper billing or statements to steal. 

How can we effectively make sure people protect themselves online but at the 

same time assuage their concerns and reluctance about conducting business with or 

purchasing products online from legitimate businesses? Or is this concern of online 

identity theft not a major hindrance to the growth potential of e-commerce? 

Answer. Identity thieves use various techniques to steal consumer data in order 

to commit identity theft.5 With respect to the online environment, certainly, consumer concerns about online identity theft can be a potential obstacle to the growth 

of e-commerce. Our message to consumers has been that computers and the Internet 

offer tremendous benefits in terms of choice, convenience, and competition. They 

should continue to take advantage of these benefits, while exercising caution to secure their information and their money. Our consumer education contains actionoriented advice in plain language. Our goal is to educate consumers about sound 

computer security practices, and we believe that this goal is best accomplished with 

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deed, all of the materials we discuss in our September 12 testimony, adopt this approach—from our nationwide Deter, Detect, Defend campaign to our materials on 

OnguardOnline. 

In addition, our business outreach efforts recognize that identity theft undermines 

consumer trust in the marketplace. Part of our outreach message to industry has 

been that safeguarding consumers’ information from identity theft is simply good 

business. If businesses do not protect such information, they will lose consumer 

trust. We continue to promote this message in encouraging businesses to implement 

sound data security procedures. 

Question 6. The 2006 FTC study on the price of gasoline and price gouging in the 

aftermath of Hurricane Katrina concluded that market forces were exclusively the 

drivers in price increases. Since that time the U.S. Senate’s Permanent Subcommittee on Investigations as well as report from the Attorney Generals of Illinois, 

Iowa, Missouri and Wisconsin have concluded that derivatives trading activity 

placed upward pressure on energy prices. Do you believe that the two separate reports, the Permanent Subcommittee on Investigations and the State Attorneys Generals were accurate? 

Answer. I understand that this question refers to the June 27, 2006, report by 

the staff of the Senate Homeland Security Permanent Subcommittee on Investigations entitled ‘‘The Role of Market Speculation in Rising Oil and Gas Prices: A Need 

to Put the Cop Back on the Beat,’’ and to the report entitled ‘‘The Role of Supply, 

Demand and Financial Commodity Markets in the Natural Gas Price Spiral,’’ prepared in March 2006 by Dr. Mark N. Cooper for the Midwest Attorneys General 

Natural Gas Working Group. Although FTC staff reviewed those reports when they 

were issued, I am not in a position to opine on their accuracy. Both reports appear 

to address issues largely outside of the FTC’s primary areas of expertise, and any 

questions regarding the accuracy of those reports should be addressed to their authors or to the CFTC and FERC, which have the relevant expertise. 

Question 6a. Does the FTC work in conjunction with CFTC to ensure that the futures markets are not manipulated? 

Answer. The FTC does not work regularly in conjunction with the CFTC on questions of futures market manipulation. The two agencies have significantly different 

missions: the FTC is an antitrust and consumer protection law enforcement agency, 

while the CFTC is a sectoral regulatory agency with a different statutory mandate. 

To the extent that issues within the purview of the CFTC also indicate that there 

may be a violation of the laws that the FTC enforces, we would, of course, seek relevant information from the CFTC and, as appropriate, would provide the CFTC 

with information relevant to that agency’s mission. With regard to manipulation of 

the futures market, however, the FTC generally lacks regulatory or law enforcement 

authority with particular reference to futures trading. If it appears that arguably 

anticompetitive conduct may affect, or may be affected by, futures trading—for example, an anticompetitive merger that impedes the proper functioning of futures 

markets—the FTC itself would conduct any appropriate investigation pursuant to 

the antitrust laws that it enforces. I note, for instance, that our 2006 report to Congress on our investigation of possible gasoline price manipulation included a chapter 

that considered manipulation of futures prices through the use of physical assets 

and also considered possible manipulation of bulk spot futures prices through the 

inappropriate reporting of transactions to price reporting services. 

Question 6b. Does the FTC need additional authority to ensure that these markets 

are being fairly conducted? 

Answer. Congress entrusted the CFTC with the authority to police manipulative 

and other unlawful conduct in commodity futures markets. I note that the CFTC 

has brought enforcement actions recently involving alleged manipulation in markets 

for propane, and the Department of Justice obtained a guilty plea from an official 

of BP for manipulation of propane futures. I do not believe that the FTC, which does 

not have substantial familiarity with futures markets, should duplicate or intrude 

on the CFTC’s mandate. 

Question 6c. Will the role of speculation be considered in future reports? 

Answer. The FTC’s May 2006 report to Congress on our ‘‘Investigation of Gasoline 

Price Manipulation and Post-Katrina Gasoline Price Increases’’ considered whether 

control of certain physical assets, such as product storage facilities, might be used 

to manipulate gasoline futures prices by creating ‘‘squeezes’’ in the related commodity markets. Such squeezes could force short sellers to offset their futures contracts at inflated prices. In fact, this concern was one reason why the FTC challenged BP’s acquisition of ARCO in 2000 and obtained relief to address the specific 

concern about the transaction’s possible adverse effects in crude oil futures. Although future FTC reports may revisit this type of futures market manipulation— 

119 

particularly insofar as mergers might enhance the potential for such behavior—we 

are unlikely to address purely speculative behavior in futures markets. Rather, we 

would defer on that topic to agencies such as the CFTC, which has more expertise 

and a direct enforcement interest in that area. Similarly, as the FTC’s case involving the BP/ARCO merger illustrates, the FTC would take prompt and strong action 

if any attempt to manipulate futures markets constituted an antitrust violation (including a referral to the Department of Justice if we uncovered evidence of criminal 

conduct). Absent evidence of an antitrust violation, however. I would expect the 

CFTC—the agency with primary jurisdiction in this field—to continue as the appropriate regulator of commodities futures markets. I also would expect the Federal 

Energy Regulatory Commission (‘‘FERC’’) to continue to play an important role in 

markets for natural gas. For example, in ‘‘High Natural Gas Prices: The Basics,’’ 

issued in 2006, FERC outlined what it is doing to prevent manipulation in natural 

gas markets, including implementation of a Memorandum of Understanding between FERC and the CFTC to facilitate the detection of such manipulation. See 

http://www.ferc.gov/legal/staffreports/high-gas-prices.pdf. 

Question 7. There has been substantial debate over the proper definition of ‘‘price 

gouging.’’ In your written testimony last year, Ms. Majoras stated that ‘‘although 

widely understood to refer to significant price increases (typically during periods of 

unusual market conditions), the term ‘‘price gouging’’ similarly lacks an accepted 

definition. It is not a well-defined term of art in economics, nor does any Federal 

statute identify price gouging as a legal violation.’’ The Senate passed an energy bill 

that included a price gouging law. Specifically, the language of the bill makes it a 

Federal crime to sell energy products at ‘‘unconscionable levels.’’ The bill also stipulates in section 604 that it is unlawful for any person, directly or indirectly, to use 

or employ any manipulative or deceptive device, in contravention of such rules and 

regulations as the FTC may prescribe as necessary for the public interest. How 

would the FTC define ‘‘unconscionable levels’’ if given authority by Congress? 

Answer. ‘‘Unconscionable levels’’ has no established legal or economic meaning. 

The FTC would be guided first by the provisions of the enacted statute, and I note 

that legislation under consideration in both Houses sets forth a number of elements 

and factors to be considered. 

Section 602(4)’s definition of ‘‘unconscionably excessive price,’’ for example, requires reference to increased wholesale and operational costs, the prices charged by 

other firms in the same geographic market, and the impact of local, regional, national, and international market conditions. These are important considerations. I 

expect that, if the FTC were charged with defining ‘‘unconscionably excessive’’ pricing in the absence of other guidance, we also would take account of not only actual 

increases in replacement costs, but also the supplier’s reasonable anticipation of rising costs as an emergency persists, as well as the risks that a supplier might take 

on in order to bring additional supply to the affected region. 

Moreover, in determining whether price gouging has in fact occurred and should 

be prosecuted, the Commission likely would consider, among other factors, the elements currently set forth in Section 603(b), including whether the price at issue 

would reasonably exist in a competitive and freely functioning market, and whether 

the supplier actually increased the amount of gasoline supplied to the area during 

the emergency period. 

Question 7a. Under section 604 what regulations or rules do you envision the FTC 

ratifying with this additional authority? 

Answer. The Commission would consider carefully how best to implement whatever legislation is enacted. Although it may be premature to suggest any specific 

plan or conclusions at this point, I anticipate that the agency would begin implementing Section 604, if enacted, by identifying practices that might be viewed as 

market manipulation and examining the likely effects of a prohibition of such practices on prices, markets, and consumers. I anticipate that the FTC’s approach would 

be informed in part by its examination of various possible forms of manipulation addressed in the above-referenced report that we submitted to Congress in May 2006. 

That report discussed, for example, practices related to gasoline production, transportation, inventory, spot pricing, and futures markets. Given the key roles that the 

CFTC and FERC play with respect to potential market manipulation, I would anticipate working closely with those agencies during this process. If the Commission 

identified any practices that manipulate, rather than respond to, markets to consumers’ detriment, and if such practices were not already illegal, those practices 

presumably would be the focus of any regulation. 

Question 7b. Do you believe that a Federal price gouging law should be enacted? 

Answer. For the reasons discussed in my testimony last year, I remain 

unpersuaded that such legislation would produce a net benefit for consumers. BeVerDate Nov 24 2008 06:52 Sep 21, 2012 Jkt 075679 PO 00000 Frm 00123 Fmt 6601 Sfmt 6621 S:\GPO\DOCS\75970.TXT JACKIE
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1FTC had ‘‘insufficient resources to combat the abusive and deceptive telemarketing practices 

by itself’’ and the FTC ‘‘will continue to need the states’ resource assistance in combating telemarketing fraud.’’ H.R. Rep. No. 103–20, at 3 (1993). 

cause prices play such a critical role in a market-based economy, attempts to cap 

or control prices can lead to the misallocation of resources to the detriment of consumers. In a period of shortage—particularly with a product, like gasoline, that can 

be sold in many markets around the world—higher prices create incentives for suppliers to send more product into the market, while also creating incentives for consumers to use less of the product. I f price signals are not present or are distorted 

by legislative or regulatory command, markets may not function efficiently and consumers may be worse off. 

If Congress proceeds with price gouging, then I believe it should consider several 

factors in order to enact a statute that will be most likely to attack unwarranted 

price increases while having the smallest adverse impact on rational price incentives. Any price gouging statute should define the offense clearly. A primary goal 

of a statute should be for businesses—as well as law enforcers and courts—to know 

what is prohibited. An ambiguous standard would only confuse consumers and businesses and would make enforcement difficult and arbitrary. 

The challenge in crafting a price gouging statute is to be able to distinguish gougers from those who are reacting in an economically rational manner to the temporary shortages resulting from the emergency. It seems beyond dispute—and acknowledged by those on all sides of the debate about price gouging legislation—that 

standards governing price gouging should incorporate important mitigating factors, 

such as an allowance for increased costs (including anticipated costs) that businesses face in the marketplace. Enterprises that do not recover their costs cannot 

long remain in business, and exiting businesses would only exacerbate the supply 

problem. Furthermore, cost increases should not be limited to historic costs, because 

such a limitation could make it uneconomic for retailers to purchase new product 

at the higher wholesale prices. There also should be consideration of local, national, 

and international market conditions that may be a factor in the tight supply situation. International conditions that increase the price of crude oil naturally will have 

a downstream effect on retail gasoline prices. Local businesses should not be penalized for factors beyond their control. 

Question 8. There was a recent article in The Washington Post about Comcast and 

how the company disconnected broadband service to some its heaviest users. The 

company cited that these high usage customers were draining network capacity 

therefore slowing down the network and degrading Quality of Service of others customers. Yet it seems as if Comcast didn’t utilize the best process or disclosure of 

its policy regarding this matter, given that some customers were unclear as to what 

the specific download limits were and the company continues to decline to reveal 

these limits. While this seems to be limited to just Comcast, does this type of business practice concern the Commission given the lack of appropriate disclosure as to 

what the bandwidth and download limits are for customers? 

Answer. Without commenting on the practices of a particular company, I can assure you that if an Internet service provider misrepresents, or fails to disclose, material aspects of its services in advertising or marketing to consumers, it may be 

liable for violations of Section 5 of the Federal Trade Commission Act, which prohibits unfair and deceptive acts and practices. 

For over a decade now, the FTC has enforced the consumer protection and antitrust laws in countless 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. The FTC has devoted 

and will continue to devote significant resources to the important area of Internet 

access. 

RESPONSE TO WRITTEN QUESTIONS SUBMITTED BY HON. BYRON L. DORGAN TO

MICHAEL D. CALHOUN

Question 1. Did FTC drop the ball on deceptive advertising due to lack of resources? 

Answer. Congress has recognized that the FTC has insufficient resources to combat abusive and deceptive practices.1 While we would prefer that the FTC do more, 

the simple fact is that the FTC is hard-pressed to address all of the widespread 

abuses in the mortgage market with its limited resources and current constraints 

of the FTC Act. Moreover, it must be remembered that it is also responsible for enforcement oversight of all other financial practices by all non-depositories: fair credit 

121 

3See FTC v. Capital City Mortgage Corporation (D.D.C.) (announced 1998); FTC v. Cooper 

(C.D.Cal.);, FTC v. Capitol Mortgage Corp. (D.Utah), FTC v. CLS Financial Services, Inc. 

(W.D.Wash.), FTC v. Granite Mortgage, LLC (E.D.Ky.), FTC v. Interstate Resource Corp. 

(S.D.N.Y.), FTC v. LAP Financial Serv., Inc. (W.D.Ky.), and FTC v. Wasatch Credit Corp. 

(D.Utah) (Announced on July 29, 1999, these cases were part of ‘‘Operation Home Inequity,’’ an 

FTC enforcement and consumer education campaign seeking to curb abusive practices in 

subprime mortgage lending); United States v. Delta Funding Corporation and Delta Financial 

Corporation (E.D.N.Y.) (Settlement by national subprime lender for asset-based lending, announced on March 30, 2000), FTC v. Nu West, Inc., et al., (W.D.Wash.) (2000), FTC v. First Alliance Mortgage Co., et al (C.D.Cal.) (2000), FirstPlus Financial Group, Inc. Docket No. C–3984 

(deceptive advertising consent agreement, 2000); FTC v. Citigroup Inc., et al., (N.D.Ga.) (misleading and deceptive statements and claims case, 2001). 

reporting, debt collection practices, ‘‘credit card cramming’’ to name a few. And of 

course, its charge is not just in the financial practices sector in any event. Telemarketing fraud, health and food advertising—it is expected to do much with relatively little. Congress could help the FTC do more on mortgage abuses by providing 

the agency with increased funding to carry out the task. 

To its credit, the FTC has been active in challenging lenders who are engaged in 

abusive lending practices with the limited resources it has. These efforts include filing complaints and consent orders for alleged violations of the Home Ownership and 

Equity Protection Act (‘‘HOEPA’’), the Truth in Lending Act (‘‘TILA’’) and its implementing regulation, Regulation Z, and the FTC Act.2 The Commission has also 

worked with states to increase and coordinate enforcement efforts. Additionally, the 

FTC has implemented consumer education efforts to help consumers avoid potential 

abuses. 

The FTC should expand its efforts to eliminate deceptive advertising in the mortgage market, in part by compelling mortgage brokers not only to cease deceptive advertising, but also to engage in corrective advertising: (1) to dispel the residual effects of deceptive advertisements; (2) to help restore competition to the state that 

prevailed before unfair practices and deceptions influenced the market; and (3) to 

deprive lenders from falsely obtained gains to which advertising may have contributed. 

Additionally, the FTC Act should be expanded and funding should be provided so 

that the FTC has the legal authority and the resources to do more. 

However, as we discuss in connection with disclosures, below, deceptive advertising is only a part of the problem. Advertising that does not include deceptive 

statements do not protect consumers from deceptive statements at closing, nor from 

practices that are unfair, though not technically accompanied by deception. As we 

discuss below, certain acts should be specified to be unfair and deceptive—period. 

That makes a ‘‘bright line’’ that lenders have long claimed to want, reduces uncertainty, and makes compliance and enforcement much simpler. 

Question 2. The FTC identified ads with claims for very low monthly payment 

amounts or interest rates, without adequate disclosure of other important loan 

terms. And the FTC is now advising more than 200 advertisers and media outlets 

that some mortgage ads are potentially deceptive or in violation of the Truth in 

Lending Act. These letters are a good step, but I wonder what more the FTC could 

have done or could do in the future. 

a. You testified of no disclosure of escrow requirements and no disclosure of the 

penalty for not showing a proof of income. How can the FTC help in this area? 

b. What are other disclosure problems the FTC should address? 

c. If the FTC had the authority to create rules of disclosure in this area, what 

could they do? 

Answer. CRL supports the FTC’s efforts to require lenders to be more accurate 

in advertising mortgage loan products. In too many cases involving abusive loans, 

mortgage lenders initially used an illusory and deceptive monthly mortgage payment to lure in borrowers and convince them to accept loans with terms that were 

actually much more costly. However, increased disclosure will not be sufficient to 

address abusive lending practices. The FTC has extensive experience in addressing 

unfair and deceptive practices and we would recommend enhancing the FTC’s power 

to address deceptive practices like the failure to escrow for taxes and insurance or 

the failure to document income directly, in addition to what it is already doing to 

address advertising and disclosure concerns. 

A common fallacy is that borrowers consciously choose and accept the loan terms 

they get because they read and sign an array of disclosure documents during the 

loan closing. In fact, most terms on a standard mortgage contract are buried in preprinted loan documents, and are dictated by the lender, not negotiated by consumers. Further, the documents outlining critical loan terms are typically only three 

to five documents out of dozens in a standard loan closing. 

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3 Robert Couch testimony before the U.S. House of Representatives Financial Services Subcommittee (November 2003), cited in ‘‘Financial Education: No Substitute for Predatory Lending 

Reform,’’ Issue Paper No. 7, Center for Responsible Lending (September 13, 2004). 4See, e.g., ‘‘B&C Escrow Rate Called Low,’’ Mortgage Servicing News Bulletin (February 23, 

2005), ‘‘Servicers of subprime mortgage loans face a perplexing conundrum: only about a quarter 

of the loans include escrow accounts to ensure payment of insurance premiums and property 

taxes, yet subprime borrowers are the least likely to save money to make such payments . . . 

Nigel Brazier, senior vice president for business development and strategic initiatives at Select 

Portfolio Servicing, said only about 25 percent of the loans in his company’s subprime portfolio 

have escrow accounts. He said that is typical for the subprime industry.’’ 5See, e.g., ‘‘Attractive Underwriting Niches,’’ Chase Home Finance Subprime Lending marketing flier, at http://www.chaseb2b.com/content/portal/pdf/subprimeflyers/Subprimel AUN.pdf (available 9/18/2006) stating, ‘‘Taxes and Insurance Escrows are NOT required at any 

LTV, and there’s NO rate add!’’, (suggesting that failing to escrow taxes is an ‘‘underwriting 

highlight’’ that is beneficial to the borrower). ‘Low balling’ payments by omitting tax and insurance costs were also alleged in states’ actions against Ameriquest. See, e.g., State of Iowa, ex 

rel Miller v. Ameriquest Mortgage Co. et al, Eq. No. EQCE–53090 Petition, at ¶ 16(B) (March 

21, 2006). 6 In fact, Fannie Mae and Freddie Mac, the major mortgage investors, require lenders to escrow taxes and insurance. 

As former MBA President Robert M. Couch has explained, ‘‘Consumers rarely use 

these forms and disclosures to compare prices or identify the terms of the transaction because, quite simply, they cannot understand what they read nor what they 

sign. In addition, the mandated forms lack reliable cost figures, a fact that impedes 

prospective borrowers from ascertaining true total cost.’’ 3

Other issues that hinder disclosures from being effective include the complexity 

of many mortgage products and the difficulty of comprehending many disclosure 

forms that are allegedly in ‘‘plain English.’’ For example, according to the commonly 

used Flesch Readability Score, the Truth in Lending form disclosures are comparable to reading The Wall Street Journal or Harvard Business Review. In short, 

improved disclosures are not likely to help borrowers, and in some cases they may 

make the situation worse. 

Another factor is simply that people tend to trust professionals with whom they 

deal (and, of course, they should be able to do that). When there is an express or 

implied conflict between what is ‘‘disclosed’’ in a mass of papers and what the professional tells the consumer, it is the oral information that most consumers rely on. 

Disclosure has not proven to be an effective way to prevent this deceptive practice— 

many subprime loans do include a warning that escrows are not included in the 

monthly payment, but brokers have been effective at focusing borrower attention on 

the loan and away from additional costs that will arise later. While it is already 

a deceptive practice to mislead or deceive people with oral statements, or contradict 

written statements, that becomes a much more difficult case to prove. Typically, 

only after many consumers have been harmed—enough to establish evidence of a 

pattern and practice—can an enforcement action be brought. 

Rather than disclosure, simple and easily enforced prohibitions are the preferred 

alternative. As you note in your question, two common subprime practices that contributed to the current high rate of subprime foreclosures were the failure to escrow 

property taxes and hazard insurance and the failure to properly document income 

in underwriting the borrower’s ability to repay a subprime loan. Both of these deceptive practices should be prohibited for subprime and nontraditional mortgages. 

Failure to escrow: Less than a quarter of subprime loans include escrows for taxes 

and insurance.4 This deceptive practice gives the borrower the impression that the 

monthly payment is affordable when, in fact, there are significant additional costs 

that are not included in the loan payments. When lenders include escrow funds as 

part of the borrower’s monthly house payment, they ensure that these funds are 

available when due, and they also make the true cost of the loan more transparent. 

Responsible lenders have always understood that establishing an escrow account is 

even more important for lower-income borrowers or those with high debt burdens 

and less disposable income. Yet, in stark contrast to the prime mortgage market, 

most subprime lenders make loans based on low monthly payments that do not escrow for taxes or insurance.5

When homeowners are faced with large tax and insurance bills they cannot pay, 

the original lender or a subprime competitor can benefit by enticing the borrowers 

to refinance the loan and pay additional fees for their new loan. In contrast, it is 

common practice in the prime market to escrow taxes and insurance and to consider 

those costs when looking at debt-to-income and the borrower’s ability to repay.6

Low/no documentation: Inadequate documentation also compromises a lender’s 

ability to assess the true affordability of a loan. Fitch Ratings, the international ratings firm, recently noted ‘‘loans underwritten using less than full documentation 

123 

7See, e.g., Testimony of Michael D. Calhoun, Before the U.S. Senate Committee on Banking, 

Housing and Urban Affairs; Subc. on Transportation, Housing and Urban Affairs, Ending Mortgage Abuse: Safeguarding Homebuyers, Appx. 1, (June 26, 2007), available at http:// 

www.responsiblelending.org/pdfs/senate-testimony-m-calhoun-june-26-2007.pdf. 8 Under 15 U.S.C. 57a(f), when the FTC issues a rule on a topic that relates to financial institutions, each of the agencies authorized to promulgate UDAP rules under that section must issue follow-up rules applying the FTC rule to its institutions, unless the agency finds that such 

acts or practices are not unfair or deceptive, or the Board of Governors of the Federal Reserve 

System finds that implementation of similar regulations with respect to banks, savings and loan 

institutions or Federal credit unions would seriously conflict with essential monetary and payments systems policies of such Board, and publishes any such finding, and the reasons therefor, 

in the Federal Register. This authority has been exercised only once only—in 1985, when the 

Federal Reserve Board adopted a version of the FTC’s Credit Practices Rule and made it applicable to banks and thrifts. See 12 CFR § 227. 

standards comprise more than 50 percent of the subprime sector. . . .’’ ‘‘Low doc’’ 

and ‘‘no doc’’ loans originally were intended for use with the limited category of borrowers who are self-employed or whose incomes are otherwise legitimately not reported on a W–2 tax form, but lenders and brokers have increasingly used these 

loans to inflate borrower incomes and put the borrower into an unaffordable loan. 

The unwarranted, unnecessary, and widespread use of stated income, and lo- or 

no-doc loans facilitated the epidemic of unsustainable lending. Lenders may evaluate the risk of a loan before approving it, but without adequate documentation of 

income, a lender’s approval of a loan is meaningless. Even as the problem became 

undeniable, too many loans continued to be made on this basis into 2007. Based on 

one CRL review of 10 mortgage-backed securities, we found that, on average, more 

than one-third—37 percent—of these recently securitized subprime loans were approved based on stated income or reduced documentation standards for verifying the 

borrower’s income.7 The vast majority of borrowers have readily documentable W– 

2 income; by putting them in low-doc loans, lenders are either charging them up 

to 1 percent higher interest for no reason, or inventing non-existent income in order 

to make them a loan that is doomed to fail. 

As Comptroller of the Currency, John Dugan, has stated, ‘‘Sound underwriting— 

and, for that matter—simple common sense—suggest that a mortgage lender would 

almost always want to verify the income of a riskier subprime borrower to make 

sure that he or she has the means to make the required monthly payment. Most 

subprime borrowers are salaried employees for whom verifying income by producing 

copies of W–2 forms is just not that difficult.’’ 

We see no justification for lenders failing to use readily available data on a borrower’s income, and do not believe that it would be sufficient for lenders to simply 

disclose to borrowers that other options are available. The financial incentives for 

lenders to offer and encourage borrowers to accept no- or low-doc loans are simply 

too great to see disclosure as a significant counter. After filing for bankruptcy, the 

CEO of one mortgage lender explained it this way to The New York Times, ‘‘The 

market is paying me to do a no-income-verification loan more than it is paying me 

to do the full documentation loans,’’ he said. ‘‘What would you do?’’ 

Question 3. How should Section 5 of the FTC Act be expanded to mortgage lending? 

Answer. Give the FTC enforcement authority for all matters arising under the 

FTC Act, and give consumers the power to protect themselves. 

The FTC Act should be expanded in several ways. First, Congress should provide 

the Federal Trade Commission concurrent and independent rulemaking and enforcement authority over national banks and thrifts for all matters covered by the FTC 

Act. This would empower the FTC to bring enforcement actions against national 

banks and thrifts for unfair and deceptive practices. The FTC has nearly 70 years 

of extensive experience protecting consumers from unfair and deceptive practices by 

non-bank entities. But the FTC Act denies the FTC the essential authority to protect consumers from regulated financial institutions. 

All four of the primary banking regulatory agencies have an inherent conflict-ofinterest that has resulted in limited enforcement of those institutions within their 

regulatory authority. All four receive significant funding from industry sources, and 

no appropriated funds from Congress. The FTC Act already authorizes three Federal 

financial regulators (the OTS, the FRB and NCUA) to issue regulations prohibiting 

unfair or deceptive acts or practices. Perhaps due to the conflict-of-interest, the regulators have failed to issue such regulations and to exercise their authority under 

the FTC Act, except in the one instance where the law mandated it.8 Indeed, the 

OCC did not even acknowledge the authority to bring enforcement actions against 

their regulated banks committing unfair and deceptive acts and practices until 

2000. After waiting 25 years to bring any enforcement action, that agency has still 

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9Williams, Julie L. and Michael S. Bylsma, On the Same Page: Federal Banking Agency Enforcement of the FTC Act to Address Unfair and Deceptive Practices by Banks, 58 Bus. Law. 

1243 (2003). According to one 2004 Congressional report, state banking agencies and state attorney generals’ offices employ nearly 700 full time examiners and attorneys to monitor compliance 

with consumer laws, more than seventeen times the number of OCC personnel allocated to investigate consumer complaints. See Comm. on Fin. Servs., 108th Cong., Views and Estimates 

on Matters to Be Set Forth in the Concurrent Res. on the Budget for Fiscal Year 2005, at 16 

(Comm. Print 2004), available at http://financialservices.house.gov/media/pdf/FY2005Views 

lFinal.pdf, cited in Wilmarth, supra note 10, at 316 & n.359. In the area of abusive mortgage 

lending practices alone, State bank supervisory agencies initiated 20,332 investigations in 2003 

in response to consumer complaints, which resulted in 4,035 enforcement actions. By contrast, 

the OCC’s record of consumer protection enforcement is an embarrassment. The agency lists 

only eight actions in a section on its website captioned ‘‘[a]ctions the OCC has taken against 

banks engaged in abusive practices.’’ See OCC, Consumer Protection News: Unfair and Deceptive Practices, http://www.occ.treas.gov/Consumer/Unfair.htm (last visited Aug. 28, 2006). The 

OCC stayed its hand for more than a quarter century before bringing its first action in 2000 

to address unfair and deceptive practices under Section 5 of the Federal Trade Commission Act. 

Even then, the action came only after a decade in which the target bank ‘‘had been well known 

in the . . . industry as the poster child of abusive consumer practices’’ and after ‘‘[a] California 

state prosecutor . . . embarrassed the OCC into taking action.’’ See Duncan A. MacDonald 

(former General Counsel, Citigroup Inc.’s Europe and North American card business), Letter to 

the Editor, Comptroller Has Duty to Clean Up Card Pricing Mess, Am. Banker, Nov. 21, 2003, 

at 17; See also Frontline: Secret History of the Credit Card (PBS television broadcast Nov. 23, 

2004) (transcript available at http://www.pbs.org/wgbh/pages/frontline/shows/credit/etc/ 

script.html). 10 Because the FTC has a much broader portfolio for enforcement—it has enforcement authority over the vast majority of actors in commerce doing business with consumers except for those 

expressly carved out, like financial institutions—and because it is primarily funded by appropriations, new responsibilities must be accompanied by additional resources if the agency is to 

be able to do its job properly. 

done little with it.9 In view of the obvious conflict of interest in supervising the 

same institutions that fund their budgets, they should not be vested with sole enforcement power with respect to consumer protection matters. 

Unlike the banking agencies, the FTC lacks the inherent conflict of interest that 

paralyzes the banking regulatory agencies. The FTC has no responsibility to protect 

the profitability of financial institutions. Its sole mandate is to protect consumers 

from the unlawful and deceptive practices prohibited by the FTC Act. As such, it 

is appropriate for the FTC to be vested with full authority under the FTC Act over 

all entities that engage in unfair and deceptive practices. The FTC should be given 

concurrent and independent enforcement authority with regard to all matters arising under the FTC Act, in the same way that state attorneys general have independent authority to enforce applicable state laws against state banks. 

Concurrent rule-making authority, however, would also require a change to the 

FTC’s own UDAP rule-making authority. Since 1975 Congressional amendments, 

the FTC’s own UDAP-rule-making process has been made much more cumbersome, 

time-consuming, and resource-intensive than the standard ‘‘notice-and-comment’’ 

rule-making procedures that the bank regulatory agencies could use. Concurrent 

rulemaking would require that the procedures be harmonized, and permitting the 

FTC to use the notice-and-comment process permitted the banking agencies is the 

most sound.10

Giving authority to the FTC will be an imperfect solution: the FTC’s record in recent years with respect to non-bank entities is less than perfect. As such, we recommend a third change to the FTC Act. Consumers, who currently have no right 

to enforce the Federal FTC Act, should be provided a private remedy under Section 

5 of the Act. Currently, the Act permits only public enforcement. While state and 

Federal agencies must protect consumers, it is imperative that consumers not be denied the ability to protect themselves with a private right of action. Although consumers in many states can invoke their state unfair and deceptive acts and practices law, many state laws have significant gaps, such as exclusions for ‘‘regulated 

entities.’’ Additionally, Federal banking regulators’ overly aggressive assertion of 

preemption may hamstring consumers’ ability to resort to their state UDAP laws. 

Because the FTC cannot pursue an action on behalf of any individual consumer, 

consumers should be allowed to protect themselves. 

Æ