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[Senate Hearing 106-1088]
[From the U.S. Government Publishing Office]

                                                       S. Hrg. 106-1088
 
                        REAUTHORIZATION OF THE 
                     FEDERAL TRADE COMMISSION (FTC)
=======================================================================

                                HEARING

                               before the

     SUBCOMMITTEE ON CONSUMER AFFAIRS, FOREIGN COMMERCE AND TOURISM

                                 OF THE

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                            FEBRUARY 9, 2000

                               __________

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

                        U.S. GOVERNMENT PRINTING OFFICE
77-845                          WASHINGTON : 2002
_____________________________________________________________________________
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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                     JOHN McCAIN, Arizona, Chairman
TED STEVENS, Alaska                  ERNEST F. HOLLINGS, South Carolina
CONRAD BURNS, Montana                DANIEL K. INOUYE, Hawaii
SLADE GORTON, Washington             JOHN D. ROCKEFELLER IV, West 
TRENT LOTT, Mississippi                  Virginia
KAY BAILEY HUTCHISON, Texas          JOHN F. KERRY, Massachusetts
OLYMPIA J. SNOWE, Maine              JOHN B. BREAUX, Louisiana
JOHN ASHCROFT, Missouri              RICHARD H. BRYAN, Nevada
BILL FRIST, Tennessee                BYRON L. DORGAN, North Dakota
SPENCER ABRAHAM, Michigan            RON WYDEN, Oregon
SAM BROWNBACK, Kansas                MAX CLELAND, Georgia
                  Mark Buse, Republican Staff Director
            Martha P. Allbright, Republican General Counsel
               Kevin D. Kayes, Democratic Staff Director
                  Moses Boyd, Democratic Chief Counsel
                                 ------                                

          SUBCOMMITTEE ON CONSUMER AFFAIRS, FOREIGN COMMERCE 
                              AND TOURISM

                   JOHN ASHCROFT, Missouri, Chairman
SLADE GORTON, Washington             RICHARD H. BRYAN, Nevada
SPENCER ABRAHAM, Michigan            JOHN B. BREAUX, Louisiana
CONRAD BURNS, Montana
SAM BROWNBACK, Kansas

                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on February 9, 2000.................................     1
Statement of Senator Ashcroft....................................     1
Statement of Senator Brownback...................................     7
Statement of Senator Hollings....................................     2
    Prepared statement...........................................     4
Statement of Senator Stevens.....................................     5
Statement of Senator Wyden.......................................     6

                               Witnesses

Adler, Jr., Howard, Esq., Baker McKenzie, and Chairman, U.S. 
  Chamber of Commerce Hart-Scott-Rodino Task Force...............    44
    Prepared statement...........................................    46
Anthony, Hon. Sheila F., Commissioner, Federal Trade Commission..     8
Bolerjack, Stephen, Counsel, Antitrust and Trade Regulations.....    58
    Prepared statement...........................................    60
Foer, Albert A. (Bert), President, American Antitrust Institute..    50
    Prepared statement...........................................    52
Jaye, Daniel, Chief Technology Officer, Engage Technologies......    66
    Prepared statement...........................................    69
Leary, Hon. Thomas B., Commissioner, Federal Trade Commission....     8
Mulligan, Deirdre, Staff Counsel, Center for Democracy and 
  Technology.....................................................    74
    Prepared statement...........................................    76
Pitofsky, Hon. Robert, Chairman, Federal Trade Commission........     8
    Prepared statement...........................................    10
Sorrell, William H., Attorney General, State of Vermont..........    71
    Prepared statement...........................................    72
Swindle, Hon. Orson, Commissioner, Federal Trade Commission......     8
Thompson, Hon. Mozelle W., Commissioner, Federal Trade Commission     8

                                Appendix

Adler, Jr., Howard, Esq., Baker McKenzie, and Chairman, U.S. 
  Chamber of Commerce Hart-Scott-Rodino Task Force, supplemental 
  prepared statement.............................................    95
Joint Prepared Statement of Janet L. McDavid, Hogan & Hartson 
  LLP, and John Sipple, Clifford Chance Rogers & Wells...........   100
Response to written questions submitted by Hon. John Ashcroft:
    Sheila F. Anthony............................................    87
    Thomas B. Leary..............................................    87
    Robert Pitofsky..............................................    87
    Orson Swindle................................................    87
    Mozelle W. Thompson..........................................    87
Response to written questions submitted by Hon. Sam Brownback:
    Robert Pitofsky..............................................    91
Response to written questions submitted by Hon. John McCain:
    Robert Pitofsky..............................................    93

                        REAUTHORIZATION OF THE 
                     FEDERAL TRADE COMMISSION (FTC)

                              ----------                              

                      WEDNESDAY, FEBRUARY 9, 2000

                                       U.S. Senate,
                          Subcommittee on Consumer Affairs,
                              Foreign Commerce and Tourism,
         Committee on Commerce, Science, and Transportation
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 10:40 a.m., in 
room SR-253, Russell Senate Office Building, Hon. John 
Ashcroft, Chairman of the Subcommittee, presiding.
    Staff members assigned to this hearing: Robert Taylor, 
Republican counsel; and Moses Boyd, Democratic chief counsel.

           OPENING STATEMENT OF HON. JOHN ASHCROFT, 
                   U.S. SENATOR FROM MISSOURI

    Senator Ashcroft. Good morning, and I thank you all for 
coming, and I am pleased to call this meeting to order.
    Chairman Pitofsky, and Commissioners, thank you very much 
for taking your time to discuss the issues surrounding the 
reauthorization of the Federal Trade Commission.
    It is important to reauthorize the FTC. It is true not only 
because we should ensure that all Federal agencies have 
Congressional authorization before spending taxpayers funds, 
but also because it gives us a forum in which to discuss the 
appropriate role of the Federal Government.
    It also gives us a chance to look at changes in the 
regulated industries. Two recent trends in the way businesses 
are operating are the backdrop for today's hearing.
    Number one is the Internet. The growth in Internet commerce 
and the increase in merger applications are the two main 
focuses of this hearing. As we all recognize, the Internet has 
sparked unprecedented economic growth in the country.
    Entrepreneurship, innovation and market forces, not 
government programs, have provided Americans with access to 
advanced telecommunication services, unlimited information, and 
unlimited opportunities. And I believe these economic forces 
should continue to prosper without unnecessary interference 
from those in Washington.
    In addition, our laws should be technology neutral. The 
government should not pick winners or losers, the markets 
should do that. Consumers should make that determination by the 
kinds of commitments they make.
    I also believe that merger review authority should be 
conducted promptly, efficiently, and predictably. We must 
establish a framework to allow small mergers that will not 
create an anti-competitive impact and make sure that they are 
not burdened with costly government interference.
    The precious resources of Americans should not be 
squandered on the feeding of the bureaucracy unnecessarily, and 
I believe that we can accomplish this goal and continue to 
protect American consumers from anti-competitive mergers, 
which, I think, is what our objective should be. In fact, I 
believe we can provide even better protection.
    Whether mergers are large or small, there should be some 
predictability in the process. It is important that merger 
applicants be given full opportunity to address anti-
competitive concerns before the applications are denied.
    Such a system is necessary to ensure that U.S. companies 
can continue to compete in the growing global marketplace.
    With those principles in mind, I would like to call on my 
colleagues to make opening statements, and it would be my 
privilege now to call upon the ranking minority member of the 
Subcommittee, Senator Hollings.

             STATEMENT OF HON. ERNEST F. HOLLINGS, 
                U.S. SENATOR FROM SOUTH CAROLINA

    Senator Hollings. Thank you, Mr. Chairman. I would ask 
permission to include my statement in the record in its 
entirety.
    Senator Ashcroft. Without objection.
    Senator Hollings. We have a concurrent hearing before the 
Budget Committee on the President's budget.
    Let me say that we are lucky to have a very strong Federal 
Trade Commission, and it has been doing an outstanding job. 
One, I agree with their request. Our Chairman's bill is 
excellent reauthorization proposal.
    Although I do not think the amount is sufficient, I am sure 
we can compromise and negotiate that out especially given that 
the demands upon the Federal Trade Commission are just almost 
insurmountable, including with increased requests for mergers.
    Along that line, I rather agree with Senator Hatch. We have 
got to raise the level of review. We really had in mind large 
mergers, but with the volume involved, and the time required, 
the reality is that we are going to have to include these 
issues with Senator Hatch's bill.
    However, I disagree with his ministerial review on that 
Second Request, the FTC's current process has been working, and 
it is working in a real fine fashion. The distinguished 
Chairman just this morning talked about bureaucracy. I did not 
know you further bureaucratize with appeals, and appeals, and 
appeals as a solution.
    I am at the other end of the spectrum about this cutting 
the size of government, which I agree with, but we have to meet 
every year to increase the size of key agencies, namely at the 
law enforcement level in relation to the Department of Justice. 
Its budget has increased in ten years from $4 billion to $22 
billion. You ought to look at it.
    I mean, everything that we can think of relative to running 
for public office, we seek to make it a federal law, a felony, 
or whatever, and we have got more marshals, more U.S. 
attorneys, more judges, more appeals courts, more bankruptcy 
courts, more reviews here and there, and everything else of 
that kind.
    So, I would oppose a ministerial review of the Second 
Request, which is the main thing I am concerned about.
    With respect to the issue of privacy, the Chairman has 
noted that we are going to have a full Committee hearing on the 
issue--and I thank Chairman McCain for setting that up.
    However, I understand the main thrust this morning is the 
reauthorization of the Commission, which is very, very 
important. You are going to have to be King Solomon to 
determine reauthorization requests, but you are the best entity 
when it comes to protecting America's consumers. You have 
certainly got the jurisdiction.
    You had it with Senator Bryan's bill on children's privacy. 
And it is working. And you have made one report to the Congress 
in another review, and in an appearance in July of last year, 
you noted your preference for allowing market forces to deal 
with privacy, as opposed to legislation.
    If, however, we would have permitted the market forces to 
operate on the economy, we would not have voted 95 to nothing 
for Greenspan's reappointment.
    So government is necessary, and it is going to be necessary 
in this one. I would love for the market forces to operate, but 
the Internet folks have gotten together--they put out a policy, 
but they only got ten percent adherence to that particular 
policy.
    So it is going to ultimately fall with us--you have been 
doing the right thing of meeting with the business folks and 
meeting with the consumer groups. It is going to be tough. It 
is not going to be easy, but we can finesse it.
    We have got to really come along with it.
    One hundred percent of the problem is the Internet. We have 
had privacy with respect to doctors, with respect to financial 
records, and everything else of that kind, with respect to 
lawyers and their clients, but it comes now to the jurisdiction 
of this Committee with respect to the Internet privacy.
    And the gimmick of appointing these task forces is to bring 
in these super-duper folks from Silicon Valley, with pockets 
full of money, and ooh, and ahh, and every other thing like 
that, say, ``Yes, I did not know that.'' And they muck up the 
possibility of really getting good legislation, in my opinion.
    I want to make that observation on the record because I saw 
it happening last year with the provision of Section 271 of the 
Telecommunications Act of 1996. That section was hammered out 
by the Bell companies, along with long distance companies.
    And they are the ones, the lawyers--we politicians like to 
say--wrote the bill--who worked out the 14-point checklist. And 
that is why to their satisfaction, and to everyone else's 
satisfaction, we could get 95 votes.
    Now, they want to extend that monopoly. They can get into 
long distance anytime they want--outside of their monopoly--but 
they do not want to do that. They merely want to extend that 
monopoly.
    But finally, thanks to Bell Atlantic, they have now 
qualified, showing it is possible that it was not really the 
Federal Communications Commission's rewriting the rules or 
anything of that kind.
    They complied in the most complex and competitive area, New 
York, which is now the reason why the other Bell companies can 
comply. The fact is that we can do away with the task forces 
and allow the Committee to perform its work with respect to 
Internet privacy. We will be looking to you folks for 
leadership and guidance on that score. I appreciate it very 
much.
    Thank you, Mr. Chairman.
    [The prepared statement of Senator Hollings follows:]

            Prepared Statement of Hon. Ernest F. Hollings, 
                    U.S. Senator from South Carolina
    Let me take this opportunity to commend the FTC Commissioners, 
including my good friend Robert Pitofsky, for the fine work the agency 
is doing nowadays. I have been advised that morale has never been 
better at the FTC and that you are handling and prosecuting more 
consumer protection cases than ever before in the history of the 
agency, resulting in tens of billions of dollars of savings to 
consumers.
    On this basis, I am strongly supporting the Commission's 
reauthorization. Senator McCain has introduced a bill to reauthorize 
the Commission for the next two fiscal years. That legislation, S. 
1687, is pending before the Committee, and will be a focus of today's 
hearing. I am aware that the FTC--though obviously supporting the 
bill--is requesting a higher level of funding than is provided for in 
Senator McCain's bill. Having reviewed the FTC's request, and the 
authorization amounts in the Chairman's bill, I am certain we will be 
able to come to an agreement on the authorization levels by the time 
the legislation is presented for markup.
    Of course, the Commission, with all of its capable and 
distinguished Commissioners present today, will be able to make its 
case on the record why it needs additional authorization amounts. I am 
sure their testimony will be well received and given the consideration 
it deserves.
    I also would like to comment briefly on two other issues that will 
be discussed today. First with respect to the matter concerning the 
Hart-Scott-Rodino Merger Application Program, it appears that there is 
some consensus that some reforms of the program are needed, 
particularly regarding the thresholds that are used to trigger the 
filing of applications. More complicated is the matter of the FTC's and 
DOJ's substantive review of the applications and their ability to pre-
approve certain mergers. Though I am interested in working on a 
solution to this matter, I am very hesitant to support any reforms that 
will severely hinder the capability of the FTC and DOJ to investigate 
and challenge mergers that they feel threaten competition in the 
marketplace. In fact, I have been one who has been critical of the 
agencies from the other end--believing that they aren't as aggressive 
as they should be in their enforcement. Given the enormous 
consolidation that is occurring in many significant industries, 
including the communications sector, the last thing we need is 
legislation that weakens the authority of the FTC and DOJ.
    Finally, on the issue of privacy, I have made it clear to my 
Democratic and Republican colleagues my concerns about this issue and 
my plans to pursue legislative action. As a recent Wall Street Journal 
poll has indicated, personal privacy is one of the main concerns of 
Americans as we head into the 21st Century. In a survey conducted by 
the Federal Trade Commission (FTC), 87% of the respondents expressed 
concerns about threats to their privacy when they use the Internet. In 
response to a nationwide survey by the National Consumers League, 70% 
of the respondents expressed uneasiness about providing personal 
information to businesses online.
    Initially, we were advised to defer to self-regulation. But studies 
show that self-regulation is not working. In fact, in a survey financed 
by the industry itself, it was discovered that of the 93% of commercial 
websites that collected personal information, only 10% included a 
comprehensive privacy policy. It is clear that we are at the point 
where legislative action is needed. I believe that a minimum, a 
baseline of privacy protection is needed to ensure consumers can 
confidently use the Internet. I look forward to working with my 
colleagues on both sides of the aisle.
    I thank the Chair and welcome the testimony of our witnesses.

    Senator Ashcroft. Thank you very much, Senator Hollings.
    I now call on Senator Stevens.

                STATEMENT OF HON. TED STEVENS, 
                    U.S. SENATOR FROM ALASKA

    Senator Stevens. Thank you very much, Mr. Chairman.
    I am pleased to be able to be here with you this morning. I 
do thank members of the FTC for the conversations that they 
permitted me to have with them about the subject I am going to 
discuss, but I am extremely disturbed with the decision of the 
FTC to litigate rather than negotiate the BP/Arco merger.
    We have watched now for a series of months the negotiations 
that had been taking place with the Commission. There has been 
obviously a substantial delay. And the process that we go 
through in Alaska which is a fairly extensive one in order to 
be able to expand our reserves and increase the throughput of 
the Trans-Alaska pipeline is very difficult.
    Satellite fields, those are the step off fields, their 
development is down. Exploration is down. Heavy oil development 
is down.
    Overall exploration is down. In 1999, the exploration 
budget was half of what was spent in 1998. And in 1999, more 
than half of Arco's added reserves came from improvements and 
revised estimates in their activities. They are not expanding.
    I have communicated to the FTC my opinion that what affects 
consumer prices in California is the supply of oil from Alaska. 
And yet, I think the FTC has been more concerned with 
California refiners than it has consumers or the State of 
Alaska per se. The policy making processes that the FTC is in 
the process of changing have had a substantial impact now on 
our state.
    But we already have had substantial impact from this 
administration. We have lost jobs in our four major resource 
areas. Fisheries is down. Timber is down. Mining is down. We 
now rank last among the states in annual pay growth, although 
we led that before this Administration came to office.
    Also 20 percent of our 20- to 35-year-old people have left 
our state in the last eight years because of the lack of job 
opportunities. And our main resources are oil and gas.
    My state undertook to negotiate with the companies involved 
in a merger, a long negotiation. And the results of that 
negotiation have been ignored by the FTC. This is state-owned 
property where this oil is. We have a state regulatory system 
that is equal to or better than the FTC. And yet, the FTC has 
seen fit now to force this into court.
    But the interesting thing, Mr. Chairman, what goes into 
court is not the position that was negotiated with the FTC 
right up to the last minute. It is the original proposal. The 
original proposal is now before the courts.
    I think that law has to be changed, and I intend to see 
that we try to change it on this bill, if it gets to the floor.
    The problem I really have is that it does seem to me, Mr. 
Pitofsky, that you are trying to change the rules of the game. 
As a matter of fact, you have said so, and it is a difficult 
proposition. I believe that the FTC, if it has this power to 
talk to the people involved in these negotiations, to bring 
about a modification, has the responsibility to negotiate.
    But, Mr. Pitofsky, you have said at one point, ``I have 
made a counteroffer, and it is no.''
    There was no negotiable stance on the part of the FTC. It 
has delayed this, and now we are going to court on the part of 
the original offer as far as the merger is concerned.
    But it is sad to me that of all the mergers that have gone 
by--this is not the biggest merger in history, but this is the 
first one that I have seen the FTC in 31 years here in the 
Senate act the way it has acted on this issue.
    And I have been here for a long time on this Committee, 
longer than any other member except Senator Hollings. It does 
seem to me that the whole process needs to be reviewed. If one 
man can destroy the economy of a state, then I intend to review 
it very deeply.
    Thank you, Mr. Chairman.
    Senator Ashcroft. Thank you very much.
    I now call on Senator Wyden.

                 STATEMENT OF HON. RON WYDEN, 
                    U.S. SENATOR FROM OREGON

    Senator Wyden. Thank you, Mr. Chairman. And having a 
difference of opinion with Chairman Stevens is about the least 
fun assignment that a fairly new member of this Committee can 
have.
    I think he knows that this is an extremely important issue 
on the West Coast, and I am anxious as this process goes 
forward to see if we can find some common ground, but the heart 
of the problem is that seven out of every ten barrels of 
Alaskan crude oil sold on the West Coast are going to come from 
this newly merged entity.
    In my state, one company would control what amounts to 90 
percent of the gas sold in our state. What we have seen over 
the years is a systematic reduction in the number of 
competitive forces we have had in our state.
    There is a reduced number of gas stations. There is a 
reduced number of independents that are a source for 
competition.
    And our concern is that if the deal goes forward as written 
now, in effect this newly merged entity would be able to work 
in our state, essentially through the Arco system, and further 
freeze out the independent gas stations.
    At least what we have had in the past is two big companies 
had to fight among themselves and go at it in the kind of free 
enterprise system; we would not have that in the future.
    Senator Stevens makes a valid point that what will be 
before the court is the original proposal. Frankly, I am just 
as concerned about some of the changes that were made because I 
do not see how the Federal Trade Commission could even monitor 
such a complicated sort of arrangement.
    Some of these anti-trust deals are starting to have so many 
divestments and the like, we are going to have to have whole 
new federal agencies to operate them. And certainly, anti-trust 
law needs to be kept up with the times, and I want to work with 
Chairman Stevens in that regard.
    Frankly, on some of these telecommunication deals, the 
bigger threat is probably the First Amendment than it is direct 
head-to-head competition.
    So I just want Chairman Stevens to know that there is a 
difference of opinion here, and I intend to work as closely as 
we can to see if we can find some common ground.
    One last point, if I could, Chairman Ashcroft, on this 
privacy matter that we are going to be dealing with on the 
third panel: I know that for some, privacy protection is 
becoming the third rail of the digital economy. They just do 
not want to touch it, and they do not want to get near it.
    I think that that is a huge mistake because the fact of the 
matter is that capitalism requires confidence. And if we have 
an Exxon Valdez of privacy where a tremendous amount of private 
data gets out about individuals, their medical records, their 
financial records, where people feel, literally, as a result of 
this information getting out, that their lives are practically 
over, that will do a lot of damage to the work that this 
Committee has done in terms of trying to have a climate that 
makes e-commerce grow.
    This is the Committee from whence the Internet Tax Freedom 
bill came, and we teamed up on a bipartisan kind of basis. That 
was a bill that encourages the growth of the economy.
    You have a tsunami of privacy violations along the lines of 
what we are starting to see. That can do a lot of damage to 
capitalism. Senator Burns and I have put in a bipartisan bill 
on this topic, and I think Senator Hollings made a number of 
good points on it.
    What I have people coming to me and saying is that maybe 
Conrad and I shot too low. Maybe we ought to have more than 
disclosure and opt out, and I just hope that we are serious 
about dealing with these privacy issues because we cannot 
afford a series of calamities that would undermine the most 
vibrant part of our economy.
    And I thank you for the chance to make this statement, Mr. 
Chairman.
    Senator Ashcroft. Thank you, Senator Wyden.
    Senator Brownback.

               STATEMENT OF HON. SAM BROWNBACK, 
                    U.S. SENATOR FROM KANSAS

    Senator Brownback. Thank you, Mr. Chairman. I appreciate 
you holding the hearing.
    Thank you very much, FTC members, for coming here. I look 
forward to your testimony. There are a lot of issues to be 
discussed. We have heard from several people.
    One issue that I want to throw into the mix and I hope you 
will address, is you have a study that is going on about 
marketing of violence to children.
    This Committee had a hearing on this topic less than a year 
ago. There were a number of people testifying that violence is 
actually used as a marketing tool to children to get them to 
buy products.
    You are in the middle of a study on that, and I hope that 
study is going well. And I also hope you are being aggressive 
in pursuing that study, and that you are finding out from these 
companies what their marketing efforts and strategies are.
    We have not been able to secure this information in the 
Senate. I have requested that information and the companies say 
it is not available, that they do not know who they are selling 
these products to, and they do not know their marketing 
strategies, which I find just unbelievable.
    This is a very serious issue for the country particularly 
when we have so much violence. I trust that the aggressive 
pursuit and timely completion of this study is a top priority 
of the FTC, particularly given the importance placed on it by 
both the U.S. Senate and the White House. I also hope that you 
will make a concerted effort to check and verify the 
information supplied to you by the entertainment industry, 
given the interests they have in the outcome of this report.
    There will be more hearings on these topics of violence, 
violence being marketed to children. And that is an area that I 
hope you all are going to address today so I can hear about 
that and some of the other topics that are here.
    Mr. Chairman, thanks for holding the hearing, and I look 
forward to the testimony and some questions.
    Senator Ashcroft. I want to thank the members of this panel 
for attending and being a part of this. And it is a tribute to 
the Commission that so many Senators would make themselves 
available for the hearing.
    I understand that Chairman Pitofsky has an opening 
statement on behalf of the Commission. However, I want to give 
each Commissioner, after his statement, an opportunity to make 
brief statements. We would like to hear from all of you, if you 
want to say anything.
    Since we have a number of witnesses today, I am going to 
ask you to try and keep your remarks to five minutes or less. 
And obviously, there will be no penalty for the ``or less'' 
part.
    Without objections from other members of the Committee, I 
will assure you that your written statements will be made part 
of the record.
    With that in mind, it is a pleasure to welcome you, Mr. 
Chairman, and I thank you for coming, and you may begin your 
testimony.

         STATEMENT OF HON. ROBERT PITOFSKY, CHAIRMAN, 
         FEDERAL TRADE COMMISSION; ACCOMPANIED BY HON. 
       SHEILA F. ANTHONY, COMMISSIONER; HON. MOZELLE W. 
          THOMPSON, COMMISSIONER; HON. ORSON SWINDLE, 
        COMMISSIONER; HON. THOMAS B. LEARY, COMMISSIONER

    Commissioner Pitofsky. Thank you, Mr. Chairman, and members 
of the Committee.
    Let me take a moment to introduce my colleagues. 
Commissioner Sheila Anthony, Commissioner Mozelle Thompson, 
Commissioner Orson Swindle, and our newest Commissioner, Tom 
Leary.
    Both in our consumer protection and protecting competition 
roles, the FTC today is a very busy place. We are encouraged by 
the fact that between those two missions, we estimate, along 
the lines that GPR sets out for estimating these sort of 
things, that we saved consumers $1.6 billion in Fiscal 1999, 
$14 for every $1 that we spent on our operations.
    On the competition side, as several of you have indicated, 
we are most active in merger review. There were three times as 
many merger filings in 1999 as 1991. The total value of assets 
acquired through acquisition was 11 times as great as just 8 
years ago. 29 transactions in Fiscal 1999 exceeded $10 billion 
in value.
    While the merger wave review takes up two-thirds of our 
competition protection resources, we have been active in non-
merger work as well. Perhaps the most notable recent example 
was our suit and then settlement with the Intel Corporation in 
which Intel agreed to discontinue certain allegedly 
monopolizing conduct.
    We drafted an order that we intended to provide guidelines 
to the high-tech industry for refusals to deal with customers 
and competitors. And I am glad to say that the company and we 
described the settlement as a win/win situation.
    On the consumer protection side, we continue to discharge 
our usual responsibilities--challenging deceptive advertising, 
credit abuses, and marketing fraud, especially in the 
telemarketing area. The great change since we were here in 
reauthorization some four years ago is our commitment to 
challenge fraud and invasions of privacy with respect to 
consumers on the Internet.
    We have brought over 100 Internet fraud-related cases in 
the last several years, established a database that 220 law 
officials use, and a consumer help line where consumers can 
register their complaints which then go into our database.
    In 1996, we devoted 14 Commission personnel to Internet 
review. Today, it is 79 personnel, 23 percent of all the people 
we have working on consumer protection issues.
    We also deal with new and significant initiatives that we 
have been asked to take on, and one that Senator Brownback 
mentioned is particularly important, our study of marketing of 
violent entertainment materials to children. I hope to have an 
opportunity to answer questions about that, Senator.
    We have handled these new responsibilities without any 
major increase in budget by restructuring the agency for 
efficiency. We have very constructive relationships these days 
with the states. We have reduced drastically mid-management 
review.
    We make earlier decisions on cases that we will pursue, and 
we have vacated 50 percent of the rules and guides that were on 
our books, mostly obsolete rules and guides, that were on our 
books just five years ago.
    Nevertheless, there is a limit to what we can do with 
present resources, and therefore, the Commission has asked for 
a budget of $165 million and personnel totaling 1,113 in 2001, 
substantially more than this Committee allowed in its 
reauthorization proposal.
    The vast majority of this increase is to staff enforcement 
missions that have grown or have been added in recent years.
    Finally, let me say just a word about Hart-Scott reform 
since the panel that will follow will discuss the issue. Also, 
my newest colleague, Commissioner Tom Leary, will address that 
issue briefly.
    I agree with the Hatch proposal that would reduce the 
number of proposed mergers that need to be filed with the 
government, but I believe the fees on very large transactions 
should be increased so as to adequately finance FTC anti-trust 
enforcement activities.
    If we change the filing requirement, as the Hatch bill 
proposes, 40 percent of the mergers that we now review would 
not have to be filed.
    With respect to the proposal to refer objections to our 
request for information to the judiciary, I believe that would 
lead to unnecessary delay and would put the judiciary in a 
position where they would need to make decisions without 
adequate information. If there are problems, and perhaps there 
are, we can and will address them through internal reforms.
    I would, of course, be delighted to answer any questions 
from members of the Committee and I look forward to an 
opportunity to answer some of the comments by Senator Stevens, 
to the extent I can, because the matter is in litigation and I 
am limited in what I can say, about our BP/Arco initiative. 
Thank you very much.
    Senator Ashcroft. Thank you.
    [The prepared statement of Commissioner Pitofsky follows:]

         Prepared Statement of Hon. Robert Pitofsky, Chairman, 
                        Federal Trade Commission
    Mr. Chairman, the Federal Trade Commission (FTC) is pleased to 
appear before the Subcommittee to present its views on the agency's 
reauthorization. Since our last reauthorization hearing in 1996, the 
FTC has continued to protect American consumers in dynamic domestic and 
world marketplaces. The FTC is the only federal agency with both 
consumer protection and competition jurisdiction over broad sectors of 
the economy.\1\ Congress has charged the FTC with maintaining a free 
and fair marketplace by, among other things, protecting American 
consumers and businesses from unfair methods of competition and unfair 
or deceptive acts or practices. Our national experience demonstrates 
that competition among producers and accurate information in the hands 
of consumers yield the best products at the lowest prices, spur 
innovation, and strengthen the economy.
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    \1\ The FTC has broad law enforcement responsibilities under the 
Federal Trade Commission Act, 15 U.S.C. Sec. Sec. 41 et seq. With 
certain exceptions, the statute provides the agency with jurisdiction 
over nearly every sector of the economy. Certain entities, such as 
depository institutions and common carriers, as well as the business of 
insurance, are wholly or partially exempt from FTC jurisdiction. In 
addition to the FTC Act, the FTC has enforcement responsibilities under 
more than 40 additional statutes and more than 30 rules governing 
specific industries and practices.
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    As a deliberative body and an independent agency, the FTC is well 
situated to study and respond to a changing marketplace, and to 
champion consumer interests in this dynamic setting. The FTC has 
investigatory power and often serves as a research resource for 
Congress. The FTC also has limited regulatory power, which it uses 
sparingly to address specific, widespread problems, often in response 
to express Congressional mandates. First and foremost, however, the FTC 
is a law enforcement agency. It is a small agency, but one with a 
record of achievement for American consumers.
    Highlights of recent accomplishments include:

         Saving consumers an estimated $1.6 billion in fiscal 
        year 1999 from law enforcement actions brought in our consumer 
        protection and competition missions, achieving an estimated 
        consumer savings of $14 for every $1 spent on agency 
        operations.
         Protecting consumers and business from anticompetitive 
        mergers before they occur by reviewing the increasing number of 
        proposed merger transactions filed under the Hart-Scott-Rodino 
        provisions of the Clayton Act. Reported transactions have 
        tripled from 1,529 in fiscal year 1991 to 4,642 in fiscal year 
        1999 and have increased eleven-fold in total value during this 
        period, from $169 billion to $1.9 trillion.
         Targeting 78 percent of FTC antitrust resources in 
        fiscal year 1999 to four sectors of the economy--energy and 
        natural resources, information and technology, health care and 
        pharmaceuticals, and consumer goods and services, thus focusing 
        on industries with major pocketbook benefits for consumers.
         Fighting Internet-related fraud since 1994 by bringing 
        100-plus enforcement actions, which have targeted 300 corporate 
        and individual defendants on behalf of millions of online 
        consumers and small business. The FTC's enforcement actions 
        have collected over $20 million in redress, obtained orders 
        freezing another $65 million, and stopped Internet schemes with 
        estimated annual sales of over $250 million.
         Offering consumers and business toll-free access to 
        the FTC through a consumer helpline. Launched in July 1999 with 
        additional funds appropriated by Congress, 1-877-FTC-HELP 
        allows people from anywhere in the United States to call with 
        questions or complaints and speak to trained counselors. The 
        FTC now receives more than 9,000 consumer inquiries or 
        complaints per week.
         Operating Consumer Sentinel, a secure database 
        developed by the FTC and now shared with over 220 law 
        enforcement agencies in the U.S. and Canada. Currently 
        containing more than 225,000 entries, the database allows law 
        enforcement to identify companies and individuals engaging in 
        fraud and to stop scams as they emerge.
         Safeguarding consumer privacy by implementing the 
        Children's Online Privacy Protection Act and by bolstering 
        industry self-regulation through educational efforts. The FTC 
        continues to monitor consumer privacy in cyberspace by, among 
        other things, conducting surveys to reassess how websites are 
        implementing fair information practices.
         Educating consumers and businesses about their rights 
        and responsibilities, and alerting them to potential frauds, by 
        distributing 8.6 million educational publications in print and 
        online during fiscal year 1999.

    Increased Resources to Meet Growing Challenges. To meet the growing 
challenges in protecting consumers and keeping the marketplace 
competitive, we request that our reauthorization include an increase in 
resources. Over the past decade, the FTC has performed its mission in 
the face of a rapidly changing marketplace. We have done so primarily 
by stretching our resources, re-inventing our processes, and simply 
doing more with less. But if we are to keep up with the growing demands 
that will be imposed by the 21st Century marketplace, we need 
significant additional resources.
    Two marketplace developments have greatly increased the demands on 
the FTC--the explosive growth of the Internet and the dramatic increase 
in corporate mergers. Use of the Internet has grown exponentially since 
commercial web browsers first became available in 1994--123 million 
Americans now have access to the Internet.\2\ Internet purchasing also 
is skyrocketing, forecasted to rise from $20 billion in 1999 to $184 
billion in 2004.\3\ Developing Internet-related policies and halting 
cyberfraud during just the few years of the Internet's existence 
already has taxed the FTC's resources. In 1996, the FTC's Bureau of 
Consumer Protection (BCP) devoted 14 FTEs, about 4 percent of BCP total 
resources, to Internet-related activities. In 1999, the workload 
required 79 FTEs, or about 23 percent of the BCP workforce, which 
overall remained at about the same level as 1996.\4\
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    \2\ Nielsen Media Research and NetRatings Inc., The Nielsen/
Netratings Reporter (visited Jan. 13, 1999) /www.nielson-
netratings.com/press__releases/pr__000113.htm>.
    \3\ Forrester Research Inc., Online Retail to Reach $184 Billion by 
2004 as Post-Web Retail 
Era Unfolds (visited Sept. 28, 1999) /www.forrester.com/ER/
Press/Release/0,1769,164,FF.html>.
    \4\ See Attachment 1. Internet-related initiatives include anti-
fraud law enforcement, consumer and business education, online privacy 
initiatives, and the development of international consumer protection 
guidelines for commerce.
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    Similarly, the corporate merger wave continues into its tenth 
straight year and strains FTC resources. The Washington Post recently 
characterized the merger wave as ``a frenzy of merger madness, capping 
a dramatic wave of global corporate consolidation that has been gaining 
momentum through much of this decade,'' quoting merger experts who note 
that a key force driving merger activity is the Internet.\5\ This 
restructuring may be necessary for companies to compete in the new 
global, high-tech marketplace. At the same time, antitrust review is 
necessary to identify and stop those combinations that could diminish 
competition in specific markets as this restructuring proceeds.
---------------------------------------------------------------------------
    \5\ Sandra Sugawara, Merger Wave Accelerated in '99; Economy, 
Internet Driving Acquisitions, Wash. Post, Dec. 31, 1999 at E1.
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    While the number of Hart-Scott-Rodino mergers has tripled in the 
past decade, the dollar value of commerce affected by these mergers is 
on an even steeper trajectory, increasing eleven-fold.\6\ Overall, 
merger transactions are increasingly larger and significantly more 
complex, requiring more exacting analysis when they raise competitive 
issues. As a result, merger investigation and litigation are more 
resource-intensive than before.\7\
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    \6\ See Attachment 2.
    \7\ The demands from the merger wave and the requirements and 
statutory deadlines under Hart-Scott-Rodino have forced a diversion of 
resources from the FTC's nonmerger responsibilities, such as 
potentially anticompetitive agreements in health care and other 
industries. While in 1991, the FTC spent 56 percent of competition 
resources on merger matters and 44 percent on nonmerger matters; in 
1999, that ratio changed to 67 percent for mergers and only 33 percent 
for nonmergers. The nonmerger cases that have been opened in the past 
several years are proceeding more slowly because of the lack of 
resources.
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    The FTC is working cooperatively with industry and the antitrust 
bar to assess what changes can be made in Hart-Scott-Rodino merger 
investigations to minimize burden and make the process work as 
efficiently as possible. The FTC already has undertaken a number of 
internal reforms to expedite merger investigations and to provide 
parties with more complete information on the issues that give rise to 
an investigation.
    Finally, several other significant initiatives are straining FTC 
resources. Two current examples are studying the marketing of violent 
entertainment materials to children and creating an identity theft 
database. Late in fiscal year 1999, several Senators and the White 
House both asked the FTC to study the marketing of violent 
entertainment materials to children in the aftermath of school 
shootings in Littleton, Conyers, Jonesboro, West Paducah, and Pearl.\8\ 
The entertainment industry is large (over $40 billion a year in sales 
and rentals of movies, video games, and music recordings), and this 
undertaking is substantial: FTC staff is seeking relevant information 
from industry members, parents' and children's advocacy groups, other 
consumer groups, academics, and parents and children themselves, and 
the Commission will issue a report.
---------------------------------------------------------------------------
    \8\ S. 254, 106th Cong. (1999). The specific provision of the 
proposed legislation, Amendment No. 329, passed by a vote of 98-0.
---------------------------------------------------------------------------
    The FTC also has devoted resources to issues involving identity 
theft--using someone else's personal identifying information to commit 
fraud, such as opening a credit card account using the stolen name. 
Congress passed the Identity Theft and Assumption Act of 1998,\9\ which 
directs the FTC to establish a ``centralized complaint and consumer 
education service'' for victims of identity theft. The FTC has 
implemented three parts of the program: establishment of a toll-free 
number (877-ID THEFT) for reporting and seeking information on identity 
theft; a database 
to track these complaints; and a consumer education program, including 
a soon-
to-be-published booklet and a website devoted to identity theft 
issues--www.consumer.gov/idtheft.
---------------------------------------------------------------------------
    \9\ 18 U.S.C.Sec. 1028.
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    The FTC has been both innovative and aggressive in meeting its 
expanding responsibilities. We reorganized and streamlined our 
workforce by hiring cost-efficient paralegals to perform tasks 
previously performed by attorneys, and by moving positions, wherever 
possible, out of administrative offices and into front-line law 
enforcement. We have prioritized our cases, shifting resources, to the 
extent possible, to areas of highest need and with greatest consumer 
impact. We have leveraged our efforts through cooperative arrangements 
with the states and the private sector to obtain the greatest benefit 
for each dollar spent.
    Nonetheless, the growing demands of the marketplace are exceeding 
the FTC's ability at current resource levels to maintain its missions 
adequately. We need additional staff and funds to do the work 
effectively. An increase to the FTC's resources would be a sound 
investment, reaping abundant dividends for American consumers and 
business.
    Forward-Looking Law Enforcement for American Consumers and 
Business. At the brink of a new century, the FTC's law enforcement is 
forward-looking and innovative. We are pleased to describe our 
accomplishments in (1) keeping pace with the dynamic growth of 
electronic commerce, (2) anticipating and responding to the changing 
marketplace to promote consumer and business welfare, and (3) promoting 
efficient law enforcement.

1. Keeping Pace with the Dynamic Growth of Electronic Commerce. The FTC 
is working to keep pace with rapidly expanding Internet activity 
through a multitude of programs and law enforcement efforts.
    Fighting Electronic Fraud. The FTC is fighting to protect consumers 
and business against new high-tech frauds, ingenious scams that exploit 
the design and architecture of the Internet to defraud consumers. FTC 
staff identified two tricks, ``pagejacking'' and ``mousetrapping,'' in 
FTC v. Carlos Pereira,\10\ in which defendants in Portugal and 
Australia allegedly captured unauthorized copies of U.S.-based 
websites, including those of Paine Webber and The Harvard Law Review, 
and produced look-alike versions that were indexed by major search 
engines. The defendants then diverted unsuspecting consumers to a 
sequence of pornography sites from which they could not exit, 
essentially trapping them at the site. The FTC obtained a court order 
stopping the scheme and suspending the defendants' website 
registrations.
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    \10\ FTC v. Carlos Periera d/b/a atariz.com, No. 99-1367-A (E.D. 
Va., Sept. 14, 1999).
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    The FTC also protects consumers from more traditional scams that 
have found new life on the Internet. In fact, most of the FTC's 100-
plus cases challenging Internet fraud concern old frauds on a new 
medium--28 cases challenge credit repair schemes, 13 cases challenge 
deceptive business opportunities, and 11 cases challenge pyramid 
schemes. The Internet can give these old scams a sleek new veneer as 
well as provide access to vastly more victims at little cost.
    Among the most pernicious of old frauds finding a new home on the 
Internet are health-related frauds. The Internet offers consumers 
immediate, free access to health information and a convenient and 
(sometimes) less expensive source for health products. Not 
surprisingly, consumers are turning to the Internet more and more for 
their health needs.\11\ Yet, there are potential risks: the quality of 
Internet information varies widely, and it can be difficult to 
distinguish reliable sites from inaccurate or even fraudulent ones. To 
address the proliferation of health claims on the Internet, the FTC 
implemented Operation Cure.All, which began with two comprehensive 
``surfs'' of the Internet for suspicious health products and ended with 
cease-and-desist actions--four to date.\12\ To educate consumers, the 
FTC publishes online brochures on how to spot health scams, linked the 
FTC website to reliable Internet health sites, and posted several 
``teaser'' Internet sites that mimic health scams and alert consumers 
to potential online health fraud.
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    \11\ One recent poll reveals that 80 million American adults went 
online for health information during the previous 12 months. Harris 
Poll (Aug. 1999).
    \12\ Magnetic Therapeutic Technologies, Inc., C-3897 (FTC Sept. 7, 
1999); Pain Stops Here!, Inc., C-3898 (FTC Sept. 7, 1999); Melinda R. 
Sneed and John L. Sneed d/b/a Arthritis Pain Care Center, C-3896 (FTC 
Sept. 7, 1999); Body Systems Technology, Inc., C-3895 (FTC Sept. 7, 
1999).
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    Maintaining the Competitive Promise of the Internet. Just as the 
work of the FTC's consumer protection mission strives to keep the 
Internet free from fraud, the work of its competition mission strives 
to secure the competitive promise of the Internet. In just a few years, 
the Internet has changed traditional sales and distribution patterns 
for products of all types, promising faster, cheaper, and more 
efficient ways to deliver goods and services. Antitrust scrutiny is 
necessary to ensure that anticompetitive practices do not stunt 
development of these innovations. In 1998, for example, the FTC charged 
25 Chrysler dealers with an illegal boycott designed to limit sales by 
car dealers that marketed on the Internet. The dealers allegedly had 
planned to boycott Chrysler if it did not change its distribution 
methods to disadvantage Internet sellers.\13\ A successful boycott 
could have limited the use of the Internet to promote price competition 
and could have reduced consumers' ability to shop from dealers serving 
a wider geographic area via the Internet.
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    \13\ Fair Allocation System, Inc., C-3832 (FTC Oct. 30, 1998).
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    Using Electronic Tools to Detect, Deter, and Educate about Fraud. 
To stay on top of Internet developments, and to stop cyberfraud in its 
incipiency, the FTC has developed innovative tools. Two of the most 
effective tools are Consumer Sentinel, the comprehensive fraud 
database,\14\ and 1-877-FTC-HELP, the toll-free consumer helpline.
---------------------------------------------------------------------------
    \14\ In 1998, Consumer Sentinel received the Interagency Resources 
Management Conference Award as an exceptional initiative to improve 
government service.
---------------------------------------------------------------------------
    The FTC also holds ``Surf Days'' to use new technology to detect 
and analyze emerging problems in the online marketplace. Through 
organized Internet surfing, FTC staff and its law enforcement partners 
learn about online practices and identify possible targets for law 
enforcement. To date, the FTC and 250 partners have conducted 20 Surf 
Days on topics ranging from pyramid schemes to health claims to 
environmental marketing claims, and have identified over 4,000 sites 
making dubious claims. One way that FTC staff responds when it 
discovers questionable claims is to use e-mail simply to warn website 
operators that their sites appear to violate the law--some operators 
are new entrepreneurs unaware of existing laws. Although the results 
vary, the warnings appear generally effective in prompting operators to 
correct or remove their websites without any formal FTC enforcement 
action.
    Second, the FTC has created ``teaser sites'' to educate consumers 
about exercising caution in dealing with website enterprises. Now 
numbering over a dozen, these sites mimic common Internet scams, such 
as pyramid schemes and business opportunities, and contain the 
customary glowing testimonials and false promises. After a few 
``clicks'' from the home page, the FTC teaser sites warn consumers that 
they could be defrauded by participating in similar schemes and provide 
tips on how to distinguish fraudulent pitches from legitimate ones.
    Finally, the FTC organized the development of www.consumer.gov to 
educate consumers. With more than 100 federal agencies contributing 
information, the website is a one-stop shop for consumers turning to 
the federal government seeking information, from health to money to 
technology.\15\
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    \15\ In 1999, www.consumer.gov received the Vice President's Hammer 
Award, which recognized the site's innovative approach to providing 
online links to the websites of federal agencies.
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    Protecting Privacy Online. Since 1995, the FTC has been at the 
forefront of issues involving online privacy. Among other activities, 
the FTC has held public workshops; examined website practices on the 
collection, use, and transfer of personal information; and commented on 
self-regulatory efforts and technological developments intended to 
enhance consumer privacy. The FTC has issued three reports to Congress 
based on its initiatives in the privacy area.\16\ The most recent, 
Self-Regulation and Privacy Online,\17\ issued in July 1999, examined 
website collection of consumer information, consumer concerns about 
online privacy, and the state of self-regulation. The report 
recommended effective self-regulation at that time instead of 
legislation, but called for further efforts to implement ``fair 
information principles'' and continued FTC monitoring.
---------------------------------------------------------------------------
    \16\ Self-Regulation and Privacy Online: A Report to Congress (FTC 
July 1999) /www.ftc.gov/os/1999/9907/index.htm#13>; Privacy 
Online: A Report to Congress (FTC June 1998) /www.ftc.gov/
reports/privacy3/toc.htm>; Individual Reference Services: A Report to 
Congress (FTC Dec. 1997) /www.ftc.gov/bcp/privacy/wkshp97/
irsdoc1.htm>.
    \17\ Id. The Commission vote to authorize release of the report was 
3-1, with Commissioner Anthony concurring in part and dissenting in 
part.
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    The FTC is particularly concerned about issues involving the online 
collection of personal information from children. In its 1998 privacy 
report, the FTC documented the widespread collection of children's 
information, and recommended that Congress adopt legislation setting 
forth standards on online collection. Four months after the report was 
issued, Congress enacted the Children's Online Privacy Protection Act 
of 1998.\18\ As required by the Act, the FTC issued a rule to implement 
the Act's fair information standards for commercial websites collecting 
information from children under 13.\19\ The rule, which takes effect in 
April 2000, describes what constitutes ``verifiable parental consent'' 
in the collection of information from children.
---------------------------------------------------------------------------
    \18\ 15 U.S.C. Sec. 6501. The Final Rule is available at /
www.ftc.gov/opa/1999/9910/childfinal>.
    \19\ 16 C.F.R. Part 312.
---------------------------------------------------------------------------
    The FTC also has brought law enforcement actions to protect privacy 
online. One action challenged the allegedly false representations by 
the operator of a ``Young Investors'' website that information 
collected from children in an online survey would be maintained 
anonymously,\20\ and another challenged the practices of an online 
auction site that allegedly obtained consumers' personal identifying 
information from a competitor site (eBay.com) and then sent deceptive, 
unsolicited e-mail messages to those consumers seeking their 
business.\21\
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    \20\ Liberty Financial Companies, Inc., No. C-3891 (FTC Aug. 12, 
1999).
    \21\ FTC v. Reverse Auction.com, Inc., No. 00-0032 (D.D.C. Jan. 6, 
2000).
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    Since the 1999 privacy report, the FTC, together with the 
Department of Commerce, held a public workshop on ``online profiling'' 
\22\ to educate the public about this practice and its privacy 
implications, and to examine current industry efforts to implement fair 
information practices. The FTC also has convened an advisory committee 
of e-commerce experts, industry representatives, security specialists, 
and consumer and privacy advocates to examine the costs and benefits of 
implementing online the fair information practices of ``access'' and 
``security.'' \23\ This advisory committee, convened pursuant to the 
Federal Advisory Committee Act,\24\ will provide a written report to 
the FTC in May 2000. Later this month, the FTC will conduct another 
survey on commercial website practices of personal information 
collection and their use of fair information practices of notice, 
choice, access, and security.
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    \22\ Online profiling is the practice of aggregating information 
about consumers' interests, gathered primarily by tracking their 
movements online, and using the resulting consumer profiles to create 
targeted advertising on websites.
    \23\ ``Access'' refers to an individual's ability to review data 
maintained about him or herself and the ability to correct inaccuracies 
in that data. ``Security'' refers to a data collector's obligation to 
protect against loss and the unauthorized access, destruction, use, or 
disclosure of the data.
    \24\ 5 U.S.C. App. Sec. 9(c).
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    Working to Protect Consumers and Businesses in International E-
Commerce Markets. The FTC participates in international forums on e-
commerce with two major goals: tackling cross-border fraud, and 
developing e-commerce policies that facilitate a safe and predictable 
commercial environment for businesses and consumers. To stop 
international fraud, the FTC works with both domestic and foreign law 
enforcement partners to shut down offshore scam artists who target U.S. 
consumers, to repatriate ill-gotten gains moved offshore, and to combat 
cross-border fraud. We enhance international cooperative efforts 
through our involvement in international organizations, such as the 29-
nation International Marketing Supervision Network; and task forces, 
such as the U.S.-Canada Telemarketing Task Force and the Mexico-U.S.-
Canada Health Fraud Task Force. We also participate in information 
sharing arrangements, such as through Consumer Sentinel.
    To develop e-commerce policies, the FTC is active in the public 
policy debate on international consumer protection principles that 
should govern the global electronic marketplace.\25\ The FTC sponsored 
a June 1999 international workshop addressing these issues. 
Additionally, the FTC just announced that it will host, together with 
the Department of Commerce, a workshop this spring on the use of 
alternative dispute resolution mechanisms for consumer transactions in 
the borderless online marketplace.
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    \25\ Attachment 3 lists the international working groups on 
electronic commerce to which the FTC belongs.

2. Anticipating and Responding to the Changing Marketplace to Promote 
Consumer and Business Welfare. Electronic commerce, deregulation, and 
globalization are transforming the American economy. The FTC is 
responding to these changes by shifting resources to those areas where 
consumers and business are at increasing risk from fraud, deception, or 
anticompetitive practices.
    Responding to the Retail Revolution. The United States, indeed the 
world, is undergoing a ``retail revolution.'' To remain competitive, 
retailers--whether brick and mortar or online--are restructuring and 
merging, and seeking new ways to market both new and old products to a 
growing consumer market. Food retailing is experiencing just such a 
period of consolidation. The number of supermarket mergers increased 
from 20 in 1996, to 25 in 1997, to 35 in 1998.\26\ While most 
supermarket mergers do not raise competitive concerns, some do appear 
to threaten consumers' food bills, and the FTC has responded. Five 
supermarket mergers reviewed by the FTC in the past 12 months have 
involved firms with total annual sales of over $110 billion, including 
Albertson's acquisition of American Stores (the second and fourth 
largest chains in the U.S.) and Kroger's acquisition of Fred Meyer, 
which created the largest U.S. supermarket chain. In the last four 
years, the FTC has brought more than 10 enforcement actions involving 
supermarket mergers, requiring divestitures of nearly 300 stores, in 
order to maintain competition in local markets spread across the 
U.S.\27\
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    \26\ ``How Big is Too Big? The Role of the FTC in Supermarket 
Industry Mergers,'' 2 Grocery Headquarters 24 (Feb. 1, 1999).
    \27\ Red Apple/Sloan, C-9266 (FTC Mar. 29, 1995); Schnucks/
National, C-3584 (FTC June 8, 1995); Schwegman/National 119FTC 783 
(July 5, 1995); Stop & Shop/Purity Supreme, C-3649 (FTC April 2, 1996) 
; Ahold/Stop & Shop, C-3687 (FTC July 7, 1996); Jitney Jungle/Delchamps 
C-3784 (FTC Sept. 23, 1998); Albertson's/Buttrey, C-3838 (FTC Dec. 8, 
1998); Ahold/Giant, C-3861 (FTC Oct. 20, 1998); Kroger/Fred Meyer, C-
3917 (FTC June 7, 1999); Albertson's/American Stores, No. 981-0339 
(June 30, 1999); Shaw's/Star, No. 991-0075 (FTC July 6, 1999); Kroger/
John C. Groub, C-3905 (Nov. 8, 1999).
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    The FTC is addressing not only anticompetitive mergers, but also 
anticompetitive practices that could hinder consumers from reaping the 
full benefits of retail restructuring. For example, the Commission sued 
Toys ``R'' Us, the nation's largest toy retailer, alleging abuse of 
market power by trying to stop warehouse clubs from selling popular 
toys, such as Barbie dolls. Although new to selling toys, warehouse 
clubs, such as Costco, were selling them at lower prices and beginning 
to take market share from more traditional retailers, including Toys 
``R'' Us. In response, Toys ``R'' Us allegedly pressured toy 
manufacturers to deny popular toys to warehouse clubs or to sell to 
them only on less favorable terms. The FTC issued an administrative 
order to stop these practices, and the matter is now on appeal in the 
U.S. Court of Appeals for the Seventh Circuit.\28\
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    \28\ Toys ``R'' Us, Inc., No. 9278 (FTC 1998) appeal docketed, No. 
98-4107 (7th Cir. Apr. 16, 1999).
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    Protecting Competition and Consumers in Electric Power 
Deregulation. Deregulation is transforming the huge electric power 
industry, which has annual sales of over $200 billion. The FTC is 
working to ensure that consumers receive the benefits of deregulation 
and that formerly regulated monopolists do not use their market power 
to impede competition. The FTC has provided testimony and other 
comments to Congress on issues of electric power deregulation. FTC 
staff has participated in various industry forums and has provided 
comments to the Federal Energy Regulatory Commission and 13 state 
governments to assist in the transition to a competitive market. The 
FTC also conducted a workshop for state utility regulators and 
Attorneys General on market power and consumer protection issues that 
states are likely to face as they deregulate and restructure the 
electricity industry. The FTC continues to emphasize the need to (1) 
adopt policies that lessen the market power held by the formerly 
regulated monopolies to promote competition, (2) ensure that consumers 
receive accurate and non-deceptive information to make informed 
decisions among the choices that the competitive market should offer; 
and (3) ensure fair and non-deceptive billing practices.\29\
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    \29\ The FTC also has reviewed mergers that affect the delivery of 
electricity to consumers and has taken action when concerned about the 
merger's impact on competition and prices. See PacifiCorp, No. 9710091 
(FTC consent agreement, Feb. 18, 1998) (transaction subsequently 
abandoned); Dominion/Consolidated Natural Gas Co. C-3901 (FTC Dec. 9, 
1999).
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    Protecting Consumers from Deceptive Telecommunications Practices. 
The FTC is addressing consumer protection issues in another 
deregulating industry--telecommunications. While deregulation can bring 
consumers substantial benefits in the form of greater choice in 
products, services, and prices, it also has brought new opportunities 
for fraud and deception. Among the most serious fraudulent practice is 
``cramming''--placing charges for unauthorized purchases of goods and 
services on consumers' telephone bills. In 1998, cramming ranked second 
among complaints received by the FTC's Consumer Response Center, with 
almost 10,000 complaints.\30\ Along with State Attorneys General, the 
FTC has filed law enforcement actions against crammers, seeking 
injunctions and restitution for injured consumers.\31\ The FTC also 
amended its Pay-Per-Call Rule \32\ to require, among other things, 
express verifiable authorization for charges placed on consumer 
telephone bills.\33\ Finally, the FTC commented on the Federal 
Communications Commission's ``Truth-in-Billing'' initiative, designed 
to make it difficult to cram unauthorized charges on to consumers' 
phone bills by making the bills easier to read and understand.\34\
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    \30\ Telecommunications--State and Federal Actions to Curb Slamming 
and Cramming, (GAO/RCED-99-193, July 1999) .
    \31\ FTC v. Interactive Audiotext Services, Inc., No. 98-3049 CBM 
(C.D. Cal., Apr. 22, 1999); FTC v. International Telemedia Associates, 
Inc. No. 1-98-CV-1935 (N.D. Ga., July 10, 1998); FTC v. Hold Billing 
Services, Ltd., No. SA-98-CA-0629-FB (W.D. Tex., July 15, 1998). See 
also FTC v. American TelNet No. 99-1597-CIV-King (S.D. Fla. June 14, 
1999); FTC v. Communication Concepts & Investments, Inc., No. 98-7450 
(S.D. Fla., Dec. 22, 1998).
    \32\ 16 C.F.R. Part 30 (1999).
    \33\ 63 Fed. Reg. 58,524 (Oct. 30, 1998).
    \34\ Truth-in-Billing and Billing Format First Report and Order and 
Further Notice of Proposed Rulemaking, 63 Fed. Reg. 55,077 (Oct. 14, 
1998).
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    The FTC also has worked closely with the FCC on ``dial-around'' 
long distance telephone services, another innovation of the deregulated 
environment. Dial-around allows consumers to bypass their pre-
subscribed long-distance provider by using access codes--a ``10-10-
XXX'' number.\35\ Through national advertising, long-distance carriers, 
both large and small, heavily promote dial-around services, which now 
gross approximately $3 billion per year.\36\ Nearly all of this 
advertising focuses on price claims, and, unfortunately, much of it 
appears deceptive. Early in fiscal year 2000, the FTC and the FCC 
jointly sponsored a public workshop to focus attention on deceptive 
advertising and to examine how both agencies might provide additional 
guidance to industry on advertising these services non-deceptively.
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    \35\ Every long-distance carrier has an access or ``10-10'' code 
that allows callers to access that carrier's network, even if callers 
have previously chosen a different carrier to be their regular long-
distance company.
    \36\ 10-10 Long Distance Calling, Consumer Reports, May 1999, at 
64.
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    Safeguarding Consumer Privacy as Financial Markets Restructure. 
Financial markets also will be restructuring in the wake of the Gramm-
Leach-Bliley Act,\37\ which dismantled Depression-era legal walls 
between the banking, insurance, and securities industries. Despite the 
promise of more efficient financial markets, the new law raises 
concerns about the privacy of personal financial information, given the 
technology available to collect and distribute this information. The 
Act directs the FTC and the bank regulatory agencies to develop rules 
to implement privacy protections, including requiring notice of an 
entity's privacy policies and providing an opportunity, in certain 
circumstances, to restrict the sharing of non-public personal 
information. Release of the FTC's rule is scheduled for May 2000, just 
six months after the President signed the Act.
---------------------------------------------------------------------------
    \37\ Pub. L. No. 106-102, 113 Stat. 1338 (1999)
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    Providing Expertise on the Evolving Pharmaceutical Market. As part 
of its program to study evolving industries, the FTC's Bureau of 
Economics completed a detailed report on the rapidly changing 
pharmaceutical industry,\38\ an industry of increasing importance to 
the nation's aging consumers. Developments in information technology, 
new state drug substitution laws, federal legislation, and the 
emergence of market institutions such as health maintenance 
organizations and pharmacy benefit management firms all have 
contributed to a rapid pace of change in this market. The industry also 
has undergone significant structural changes that include growth of the 
generic drug segment and substantial horizontal and vertical 
consolidation. The report attempts to provide a more complete 
understanding of the competitive dynamics of this market and discusses 
possible anticompetitive concerns and procompetitive explanations for 
new pricing strategies and other evolving industry practices.
---------------------------------------------------------------------------
    \38\ Roy Levy, FTC Bureau of Economics Staff Report, The 
Pharmaceutical Industry: A Discussion of Competitive and Antitrust 
Issues in an Environment of Change (March 1999).
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    In preparing the report, FTC staff drew upon its experience in 
reviewing mergers in the pharmaceutical and health care industries. 
These industries have been in the midst of a merger wave in the last 
several years, and during that time, the FTC has brought 11 enforcement 
actions challenging several of these mergers.\39\ Antitrust scrutiny is 
vital because these transactions could have a substantial and immediate 
impact on large numbers of consumers, possibly threatening higher 
prices and slowing innovation of new life-enhancing products.
---------------------------------------------------------------------------
    \39\ Hoechst AG, 120 F.T.C. 1010 (Dec. 5, 1995); Glaxo PLC, 119 
F.T.C. 815 (June 14, 1995); Upjohn Co., 121 F.T.C. 44 (Feb. 8, 1996); 
Johnson & Johnson, 121 F.T.C. 149 (Mar. 16, 1996); Ciba-Geigy Ltd., 123 
F.T.C. 842 (Mar. 24, 1997); Baxter Int'l, Inc., 123 F.T.C. 904 (Mar. 
24, 1997); American Home Products Corporation, 123 F.T.C. 1279 (May 16, 
1997); Roche Holding Ltd., C-3809 (May 22, 1998); Zeneca Group PLC, C-
3880 (June 7, 1999); Medtronic, Inc., C-3879 (June 10, 1999).
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    Investigating Mergers in a Globalized Economy. Globalization means 
that increasing numbers of the FTC's merger investigations involve 
companies with international ties and require cooperation with foreign 
competition authorities to resolve concerns. For example, in the $80 
billion oil mega-merger of Exxon Corporation and Mobil Corporation, the 
FTC closely coordinated its investigation, not only with the Attorneys 
General of several states, but also with the European Commission. 
Actions brought by United Kingdom and German authorities closely track 
the proposed FTC order. Upon completion of its review, the FTC's order 
would require the largest retail divestiture in FTC history--the sale 
or assignment of 2,431 Exxon and Mobil gas stations in the Northeast 
and Mid-Atlantic, as well as in California, Texas and Guam. In 
addition, certain assets would be sold, including an Exxon refinery in 
California, terminals, and a pipeline.\40\
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    \40\ Exxon Corporation, No. 9910077 (proposed consent order, Nov. 
30, 1999).
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    Similarly, the FTC coordinated with foreign authorities in the 
investigation and eventual settlement of an international 
pharmaceutical merger, of Zeneca Group PLC, based in the United 
Kingdom, and Astra AB, based in Sweden. The parties agreed to divest 
rights to a long-acting local anesthetic to a third party to ensure 
continued competition in this important drug market. The European 
Commission and FTC staff shared their respective analyses of the case, 
and the parties facilitated the process by waiving confidentiality 
rights to permit full communication among FTC and EC staff and the 
parties.\41\
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    \41\ Zeneca Group PLC, C-3880 (FTC June 7, 1999).
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    Formulating Guidelines on Competitor Collaborations. Globalization 
and new technologies are driving companies toward a variety of complex 
collaborations enabling them to expand into foreign markets, fund 
innovation, or lower costs. The increasing use and variety of these 
collaborations among competitors have led to requests for greater 
clarity regarding their treatment under the antitrust laws. In 
response, the FTC and the Department of Justice have issued, in draft, 
the first set of joint guidelines that comprehensively address 
horizontal agreements among competitors.\42\ The draft guidelines seek 
to enhance understanding of the possible antitrust implications of a 
wide range of joint ventures, strategic alliances, and other 
collaborations among competitors, thus encouraging procompetitive 
collaboration and deterring collaboration likely to harm competition 
and consumers.
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    \42\ 64 Fed. Reg. 54,483 (1999).

    3. Promoting Efficient Enforcement. The FTC attempts to leverage 
resources to obtain the greatest efficiency by, among other things, 
working cooperatively with other law enforcement agencies, at both the 
state and federal levels. The FTC also attempts to promote direct and 
immediate benefits for consumers by seeking disgorgement or restitution 
remedies in appropriate cases to put money back in their pockets. 
Finally, the FTC seeks to minimize burden on business throughout its 
enforcement and compliance programs.
    Coordinating ``Sweeps'' to Fight Consumer Fraud. An important 
innovation in the fight against consumer fraud is the ``sweep''--a 
cooperative and concentrated fraud crackdown by federal, state, and 
private groups. These efforts have led to multiple law enforcement 
actions targeting a certain type of fraud, often with extensive press 
coverage, and are more likely to reduce fraud than isolated actions by 
the various state and federal groups. Since 1995, the FTC has partnered 
with state and federal agencies and formed alliances to lead 49 sweeps 
culminating in 1,321 law enforcement actions on a variety of scams. 
These actions include 306 brought by the FTC itself, which have 
prevented an estimated $500 million in consumer injury.\43\ The FTC 
also partners with private sector organizations in education campaigns 
on how consumers can avoid being defrauded.
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    \43\ Attachment 4 provides the list of sweeps the FTC has 
participated in since 1995.
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    Redressing Anticompetitive Price Increases. The FTC won a 
preliminary motion in its effort to give money back to millions of 
American consumers who were faced with sudden and huge price increases 
when they filled prescriptions for two generic drugs for treating 
anxiety. In late 1998, the FTC, along with 10 State Attorneys General, 
filed charges against Mylan Laboratories, Inc., the nation's second 
largest generic drug manufacturer, and others, alleging that the 
company had anticompetitively eliminated much of its competition by 
tying up the key active ingredients for the two drugs.\44\ The 
complaint charges that Mylan's actions allowed it to raise prices of 
two drugs: for one drug, the price increase was 25 times the initial 
level; for the other, more than 30 times. In total, the price increases 
allegedly cost American consumers over $120 million. Trial is set for 
fall 2000.
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    \44\ FTC v. Mylan Laboratories, Inc., CV-98-3115 (D.D.C. 1999) 
(mem).
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    Saving Homes and Stopping Abusive Lending Practices. The dramatic 
growth of subprime lending--lending to higher-risk borrowers--has been 
accompanied by reports of abusive lending practices. The abusive 
practices often involve lower-income elderly and minority borrowers and 
threaten their biggest assets--their homes. The FTC has made abusive 
lending practices an enforcement priority, and last July announced 
settlements \45\ with seven subprime mortgage lenders from across the 
country charged with violating the Home Ownership and Equity Protection 
Act (HOEPA).\46\ The FTC alleged these lenders made loans without 
regard to the consumers' ability to repay the loans, included 
prohibited terms in the loan agreements, increased interest rates after 
default, or imposed illegal prepayment penalties or balloon payments. 
The settlements included injunctive and other relief and consumer 
redress totaling $572,500 with injured consumers receiving an average 
of $2,100 each.
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    \45\ FTC v. Barry Cooper Properties, No. 99-07782 WDK (Ex) (C.D. 
Cal. July 30, 1999); FTC v. Capitol Mortgage Corp., No. 2-99-CV-580G 
(D. Utah July 28, 1999); FTC v. CLS Financial Services, Inc., No. C-99-
1215 (W.D. Wash. July 30, 1999); FTC v. Granite Mortgage LLC, No. 99-
289 (E.D. Ky. July 28, 1999); FTC v. Interstate Resource Corp., No. 99-
CIV-5988 (S.D.N.Y. July 30, 1999); FTC v. LAP Financial Services, Inc., 
No. 3:99-CV-496-H (W.D. Ky. July 28, 1999); FTC v. Wasatch Credit 
Corp., No. 2-99-CV-579 (D. Utah July 28, 1999).
    \46\ 15 U.S.C. Sec. 1639.
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    The FTC also is prosecuting an action against Capital City Mortgage 
Corporation,\47\ a Washington D.C. area mortgage lender. Filed in 1998, 
the complaint alleges that the defendants made high-interest loans (up 
to 24%), many to elderly and minority home owners living on fixed or 
low incomes, without fully disclosing their terms. The loans were often 
interest-only balloon loans, with the full principal amount due at the 
end, allegedly leading to foreclosure and loss of homes when poor 
borrowers could not raise tens of thousands of dollars quickly to make 
these unexpected payments. The action seeks to obtain redress for 
hundreds of victimized homeowners.
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    \47\ FTC v. Capital City Mortgage, Inc., No. 1:98 CV 00237 (D.D.C., 
Jan. 29, 1998).
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    Reducing Burden on Business. While protecting consumer interests, 
the FTC has taken steps to minimize burden on business in the following 
ways:

     Maintained a comprehensive regulatory review program that 
covers all FTC rules and industry guides since 1992. The program 
provides for review of every rule and guide at least every ten years.
     To date, the FTC has repealed roughly half of the guides 
and discretionary trade regulation rules in effect in 1992 (21 of 40 
guides and 12 of 25 rules).
     The FTC has revised other rules to simplify disclosure 
requirements, provide more flexible compliance options, or promote 
international harmonization to facilitate trade. For example, the FTC 
revised its Rule on Care Labeling of Textile Wearing Apparel to permit 
the use of symbols in place of words, relieving manufacturers and 
distributors of the need to translate care instructions into multiple 
languages for trade purposes among NAFTA counties.
     Rules currently under review include those concerning the 
funeral industry,\48\ franchise and business opportunity ventures, pay-
per-call services,\49\ amplifiers used in home entertainment 
products,\50\ home insulation products,\51\ and textile wearing 
apparel.\52\
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    \48\ See Funeral Industry Practices Rule, 16 C.F.R. Part 453 
(1999), Request for Comments, 64 Fed. Reg. 24,250 (May 5, 1999).
    \49\ See Trade Regulation Rule Pursuant to the Telephone Disclosure 
and Dispute Resolution Act of 1992, 16 C.F.R. Part 308 (1999), Notice 
of Proposed Rulemaking, 63 Fed. Reg. 58,524 (Oct. 30, 1998).
    \50\ See Power Output Claims for Amplifiers Utilized in Home 
Entertainment Products, 16 C.F.R. Part 432 (1999), Advance Notice of 
Proposed Rulemaking, 63 Fed. Reg. 37,237; see also Notice of Proposed 
Rulemaking, 64 Fed. Reg. 38,610 (July 19, 1999).
    \51\ See Labeling and Advertising of Home Insulation, 16 C.F.R. 
Part 460 (1999), Advance Notice of Proposed Rulemaking, 64 Fed. Reg. 
48,025 (Sept. 1, 1999).
    \52\ See Care Labeling of Textile Wearing Apparel and Certain Piece 
Goods As Amended, 16 C.F.R. Part 423 (1999), Advance Notice of Proposed 
Rulemaking, 60 Fed. Reg. 67,102 (Dec. 28, 1995); see also Notice of 
Proposed Rulemaking, 64 Fed. Reg. 38,610 (July 19, 1999).
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     Maintained an extensive program of business education and 
outreach to achieve compliance without the burden of formal legal 
action. The efforts have included public workshops, online and hard 
copy business guides, general and individual compliance advice, ``Surf 
Day'' follow-up alerts, trade association and trade press contacts, 
speeches and other presentations.
     Streamlined its administrative trial procedures, 
establishing a one-year start-to-finish procedure for certain 
matters.\53\
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    \53\ 16 C.F.R. Sec. 3.11A (1999).
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     Sunsetted over 10,000 administrative orders, with 
automatic sunsetting of all such orders more than 20 years old.
     Reduced the average time to grant ``early termination'' on 
H-S-R mergers to less than 20 days, even though the statute allows a 
30-day review period.

    Mr. Chairman, we appreciate the opportunity to provide our views on 
the Commission's reauthorization and to report on our accomplishments 
on behalf of American businesses and consumers. We would be pleased to 
respond to any questions you or the other Members may have.

Attachment 3
The Federal Trade Commission's International Organization Participation
 The Organization of Economic Cooperation and Development 
(OECD) Consumer Policy Committee is comprised of the consumer 
protection and related agencies of 29 countries, the Business and 
Industry Advisory Committee, and Consumers International. The Committee 
recently issued international guidelines on consumer protection in e-
commerce, and will continue to focus on related issues. The FTC heads 
the U.S. delegation to this committee.

 Trans-Atlantic Business Dialogue (TABD) is a framework for 
cooperation between the trans-Atlantic business community and the 
governments of the E.U. and U.S, whereby European and American 
companies and business associations develop joint EU-US trade policy 
recommendations. E-commerce continues to be one area of focus for these 
recommendations.

 Trans-Atlantic Consumer Dialogue (TACD) is a framework for 
cooperation between the trans-Atlantic consumer community and the 
governments of the E.U. and U.S, whereby European and American consumer 
associations develop joint EU-US policy recommendations. This group 
also has focused on e-commerce issues.

 Asia-Pacific Economic Cooperation (APEC) Electronic Commerce 
Steering Group involves government and private sector representatives 
from APEC countries. The group is addressing Internet jurisdiction and 
consumer protection in e-commerce.

 Free Trade Area of the Americas (FTAA) Joint Government-
Private Sector Committee of Experts on Electronic Commerce, a 
representative subset of the 34 countries in the Western Hemisphere 
which comprise the FTAA, makes recommendations on how to increase the 
benefits of electronic commerce. Its focus includes consumer 
protection.

 The Global Business Dialogue on Electronic Commerce (GBDe), a 
coalition of international business representatives from the Internet 
industry, has launched a coordinated dialogue at the global level with 
governments and international organizations to address conflicting 
rules and regulations that could create obstacles to global electronic 
commerce.

 The American Bar Association Internet Jurisdiction Project is 
comprised of business representatives, academics and government 
agencies from around. This group plans to issue recommendations on 
Internet jurisdiction for consumer protection as well as other areas at 
an international meeting in London this summer.

 The Internet Law and Policy Forum (ILPF) is a global 
organization of Internet-centric companies that seeks to provide a 
comparative identification and evaluation of legal issues. It is 
currently examining the potential contribution of technology, 
alternative dispute resolution, self-regulation, governmental 
cooperation, and harmonization of laws.

 The International Marketing Supervision Network (IMSN) is a 
membership organization composed of law enforcement and consumer 
protection agencies in OECD countries. The IMSN is a vehicle for 
information exchange and a forum for international law enforcement 
cooperation in the area of consumer protection.

Attachment 4
CONSUMER PROTECTION MISSION ANTI-FRAUD LAW ENFORCEMENT SWEEPS
    Since 1995, the Federal Trade Commission has joined with its 
partners in federal, state, and local government to bring 1,323 law 
enforcement actions in 49 sweeps against fraudulent operators. This 
includes 306 actions by the FTC that have prevented over $500 million 
in consumer injury. Each sweep is supported by an active and creative 
education program aimed at preventing future losses by the public.
FISCAL YEAR 2000
Operation S.O.S.
 Target: Fraudulent business opportunities

 Partners: DOJ, COBRA Task Force (Search Warrant), 8 Attorneys 
General (23 actions)

 FTC cases: 12 Section 13(b) cases; 22 civil penalty cases 
referred to DOJ; to be filed beginning 2/2/00
Operation Misprint
 Target: Bogus office and maintenance supply telemarketing 
schemes targeting large and small businesses and nonprofit 
organizations.

 Partners: Illinois Attorney General's Office (2 actions)

 FTC cases: 13 cases; court orders ending these allegedly 
fraudulent operations were issued in 10 cases; 3 cases are not yet 
final
FISCAL YEAR 1999
Operation Auction Guides
 Target: Deceptive marketing of ``how to'' guides which made 
misrepresentations to induce consumers to pay for auction or business 
opportunity information

 Partners: U.S. Postal Inspection Service, California Attorney 
General, Tulare County, California District Attorney's Office (2 
actions)

 FTC cases: 4 cases resulted in orders for over $18 million in 
consumer redress
Operation Missed Giving
 Target: Fraudulent solicitations for charitable donations

 Partners: 40 state charities enforcement agencies (34 actions)

 FTC cases: 5 cases resulted in orders for over $1.4 million in 
consumer redress
Operation Clean Sweep
 Target: Bogus business operators who ship unwanted and 
unordered cleaning and janitorial supplies to small organizations

 Partners: 2 Attorneys General and U.S. Postal Inspection 
Service (3 actions)

 FTC cases: 1 case resulted in a settlement requiring $110,000 
in consumer redress
Operation New ID--Bad Idea I
 Target: Credit identity scams

 Partners: National Association of Attorneys General, State 
Attorneys General, Treasury Inspector General for Tax Administration, 
and other federal, state, and local law enforcement agencies (14 
actions)

 FTC cases: 22 cases; 16 settlements obtained full consumer 
redress; remaining cases pending final disposition
Operation Advance Fee Loan
 Target: Advance fee loan scams

 Partners: 6 State Attorneys General, state banking officials 
(10 actions); Canadian law enforcement authorities brought several 
criminal actions against Canadian telemarketers

 FTC cases: 8 cases resulted in orders for close to $3.9 
million in consumer redress
Internet Pyramid Schemes
 Target: Internet pyramid schemes; effort included a two-day 
Internet surf to identify sites that may be hosting illegal pyramid 
schemes

 Partners: North American Securities Administrators 
Association, U.S. Postal Inspection Service, Securities and Exchange 
Commission, 27 State Attorneys General, other state and local law 
enforcers (32 actions)

 FTC cases: Filed 1 complaint; court issued an order halting 
the scam and freezing the defendant's assets; the case is in litigation
Operation New ID--Bad Idea II
 Target: Credit identity scams

 Partners: DOJ, U.S. Postal Inspection Service, Attorneys 
General, other state and local law enforcers from 8 states (8 actions)

 FTC cases: Filed 8 complaints for consumer redress or civil 
penalties; cases are pending final disposition
Operation Cure.All
 Target: Deceptive health claims for products advertised on the 
Internet; identified targets in two Internet health claims surf days

 Partners: Food and Drug Administration, U.S. Postal Inspection 
Service, Canadian and Mexican organizations, other federal, state and 
local officials (50 actions)

 FTC cases: 4 cases resulted in settlements with companies 
identified in Internet surf
Small Business Sweep
 Target: Companies that cram purported web design charges onto 
the telephone bills of small businesses

 Partners: State Attorney General (1 action)

 FTC cases: Filed 5 complaints; negotiating settlements
Operation Trip Trap
 Target: Companies that misrepresented the vacation packages 
they sell through fraudulent telemarketing and other deceptive 
practices

 Partners: 21 state law enforcement authorities (47 actions)

 FTC cases: Filed 5 complaints seeking consumer redress; cases 
are pending final disposition
Operation Home Inequity
 Target: Subprime mortgage lenders using lending practices that 
violated various federal laws

 FTC cases: 7 cases resulted in settlements requiring payment 
of $572,500 in consumer redress or a ban from making certain loans
Credit Card Protection Sweep
 Target: Fraudulent telemarketers of credit card protection 
services

 Partners: 6 Attorneys General (3 actions); FTC initiated a 
major consumer education campaign designed to alert consumers of their 
credit card rights, including working with its public and private 
sector partners to distribute over one million educational bookmarks to 
college students

 FTC cases: Filed 2 complaints, not yet finally disposed of, 
and a settlement that includes payment of $100,000 in consumer redress
FISCAL YEAR 1998
Operation Loan Shark II
 Target: Telemarketers of advance fee loans; victims were U.S. 
military personnel and their families

 Partners: 2 Attorneys General, other state officials, Canadian 
law enforcement (3 actions)

 FTC cases: 9 cases resulted in orders for over $215,000 in 
consumer redress
Foreign Lottery Tickets
 Target: Canadian firms targeting U.S. residents in foreign 
lottery schemes

 Partners: Attorney General (1 action)

 FTC cases: 4 cases resulted in orders for close to $1.4 
million in consumer redress
Postal Job Fraud
 Target: private companies that falsely promise postal service 
jobs

 Partners: U.S. Postal Service (8 actions)

 FTC cases: 3 cases resulted in orders for over $245,000 in 
consumer redress
Operation Money Pit
 Target: Fraudulent business opportunities promising returns of 
many times the cost of investments

 Partners: Attorneys General and law enforcement officials in 4 
states (7 actions)

 FTC cases: 3 cases resulted in orders for $4.5 million in 
consumer redress
Operation Show Time
 Target: Seminar operators selling a variety of business and 
investment schemes

 Partners: Attorneys General, securities officials, and other 
law enforcement officials from 11 states (18 actions)
Campana Alerta II
 Target: false and unsubstantiated health claims directed to 
Spanish-speaking consumers

 Partners: Officials from the Mexican government and the FTC 
jointly produced a Public Service Announcement that was broadcast on 
major Spanish-language network affiliates across the United States and 
Mexico

 FTC cases: 3 cases resulted in settlements prohibiting 
unsubstantiated health claims
Operation Net Op
 Target: Get-rich-quick schemes using the Internet and hi-tech 
products to peddle fraudulent business opportunity and pyramid scams

 FTC cases: 6 cases resulted in orders for $4.9 million in 
consumer redress
Operation Eraser
 Target: Fraudulent credit repair companies that promise 
consumers that they can restore their creditworthiness for a fee

 Partners: State Attorneys General, DOJ (11 actions)

 FTC cases: 21 cases resulted in orders for close to $1.5 
million in consumer redress
Project House Call
 Target: Sellers of medical billing business opportunities

 Partners: Florida state officials (1 action)

 FTC cases: 3 cases resulted in orders for $90,000 in consumer 
redress
Risky Business
 Target: Bogus entertainment and media-related investment 
opportunity scams

 Partners: Securities and Exchange Commission and 20 members of 
the North American Securities Administrators Association (55 actions)

 FTC cases: 4 cases resulted in orders for over $36 million in 
consumer redress
Operation vEnd Up Broke
 Target: Vending machine fraud

 Partners: Attorneys General and other state officials from 10 
states (36 actions)

 FTC cases: 4 cases resulted in orders for $565,000 in consumer 
redress and payment of an $11,000 civil penalty
FISCAL YEAR 1997
Operation Missed Fortune
 Target: Get-rich-quick self-employment schemes

 Partners: State security regulators, state Attorneys General, 
other consumer protection officials (64 actions)

 FTC cases: 11 cases resulted in orders for close to $2 million 
in consumer redress.
Operation Trip-Up
 Target: Vacation scams

 Partners: 12 state Attorneys General (31 actions)

 FTC cases: 5 cases resulted in orders for close to $10.7 
million in consumer redress
Operation Waistline
 Target: Misleading weight loss claims

 Partners: Weight-Control Information Network on educational 
issues

 FTC cases: 7 settlements requiring payment of $787,500 in 
consumer redress; letters and a media screening tip sheet sent to 80 
publications that disseminated weight loss advertisements urging them 
to improve their screening
Operation False Alarm
 Target: Fraudulent fund raising done in the name of police, 
fire, and public safety groups

 Partners: 50 state Attorneys General, Secretaries of State, 
and other state charities regulators (54 actions); FTC launched 
nationwide public education campaign with the National Association of 
Attorneys General

 FTC cases: 3 cases resulted in court orders requiring $240,000 
in consumer redress
Operation MagaScheme
 Target: Fraudulent telemarketers of magazine subscriptions who 
conned consumers with phony prize offers and ``free'' subscription 
promises

 FTC cases: 3 cases resulted in orders for over $1 million in 
consumer redress
Project Mousetrap
 Target: Invention promotion industry

 Partners: 2 state Attorneys General (2 actions)

 FTC cases: 5 cases resulted in orders for over $1.2 million in 
consumer redress
Field of Schemes
 Target: Investment-related telemarketing fraud

 Partners: Securities regulators from 21 states and 2 Canadian 
provinces, North American Securities Administrators Association, 
Securities and Exchange Commission, Commodity Futures Trading 
Commission, FBI, and other law enforcement authorities (62 actions)

 FTC cases: 9 cases resulted in court orders for close to $72.5 
million in consumer redress
Project Workout
 Target: Second phase of Operation Waistline targeting 
exaggerated advertising claims made by exercise equipment manufacturers

 Partners: Educational materials issued nationwide in 
conjunction with the American College of Sports Medicine, the American 
Council on Exercise, the American Orthopaedic Society for Sports 
Medicine, and Shape Up America!

 FTC cases: 4 cases resulted in settlements prohibiting future 
misrepresentations
Campana Alerta
 Target: Deceptive advertisements directed at Spanish-speaking 
consumers

 Partners: Officials from the Mexican government, the Food and 
Drug Administration, and 7 state Attorneys General (10 actions)

 FTC cases: 4 cases resulted in settlements prohibiting 
unsubstantiated health claims
Peach Sweep
 Target: Georgia-based telemarketers

 Partners: 8 Attorneys General, U.S. Postal Inspection Service, 
FBI, U.S. Attorney's Office in Atlanta, local law enforcers, and 
consumer and civic organizations (23 actions)

 FTC cases: 3 cases resulted in orders for $1 million in 
consumer redress
Project Trade Name Games
 Target: Business opportunities to own and service in-store 
carousel racks that display products licensed by well known companies

 Partners: Attorneys General and other officials from 8 states 
(12 actions); educational component launched in coordination with 
industry members, including Disney and Warner Brothers, whose trade 
names were used by scam artists to sell the bogus business 
opportunities

 FTC cases: 6 cases resulted in orders for $29.4 million in 
consumer redress
Operation Yankee Trader
 Target: Fraudulent vending machine business opportunity firms

 Partners: Officials from 3 New England states (7 actions)

 FTC cases: Filed one complaint; preliminary injunction 
obtained
Project Mailbox
 Target: Direct mail scams that prey on senior citizens

 Partners: National Association of Attorneys General, U.S. 
Postal Inspection Service, state Attorneys General, local law 
enforcement officials, AARP (188 actions)

 FTC cases: 2 cases resulted in orders for $565,000 in consumer 
redress
FISCAL YEAR 1996
Operation Roadblock
 Target: Sellers of fraudulent high-tech investments

 Partners: 20 state securities regulators (77 actions)

 FTC cases: 8 cases resulted in orders for more than $12.6 
million in consumer redress
Project Senior Sentinel
 Target: Sweepstakes, recovery rooms, and similar frauds that 
target senior citizens

 Partners: FTC participated in this sweep coordinated by DOJ 
the FBI

 FTC cases: 5 cases resulted in orders for close to $8.5 
million in consumer redress
Operation Loan Shark I
 Target: U.S. and Canadian firms offering advance-fee loans

 Partners: 15 state Attorneys General, British Columbia law 
enforcers (8 actions)

 FTC cases: 5 cases resulted in orders for $2.5 million in 
consumer redress
Operation CopyCat
 Target: Office and cleaning supply fraud operations that 
targeted small businesses and not-for-profit organizations

 Partners: U.S. Postal Inspection Service, state Attorneys 
General, other state and local officials (12 actions)

 FTC cases: 5 cases resulted in orders for $13.7 million in 
consumer redress
Operation Payback
 Target: Fraudulent credit repair telemarketers

 Partners: 10 state Attorneys General (11 actions)

 FTC cases: 4 cases resulted in orders for close to $300,000 in 
consumer redress
Project Jackpot
 Target: Prize promotion schemes

 Partners: State Attorneys General; U.S. Postal Service (48 
actions)

 FTC cases: 8 cases resulted in orders for $1.65 million in 
consumer redress
Project Career Sweep
 Target: Scam artists who falsely promised to obtain jobs for 
consumers in exchange for up-front fees

 FTC cases: 7 cases resulted in orders for over $3.2 million in 
consumer redress
Project $cholar$cam
 Target: Scams aimed at high school and college students 
seeking financial aid

 Partners: State Attorney General (1 action); massive education 
campaign in which the FTC, Sallie Mae, National Association of College 
Stores, and others distributed 2.9 million bookmarks, posters, and 
flyers, and posted warnings at several popular Web sites

 FTC cases: 7 cases resulted in court orders for close to $8.9 
million in consumer redress
Project Net Scam
 Target: Traditional scams marketed on the Internet

 FTC cases: 9 cases resulted in 8 consent agreements and 1 
settlement for $55,000 in consumer redress
Project BuyLines
 Target: 900-number business opportunity frauds

 FTC cases: 7 cases resulted in orders for approximately $15.5 
million in consumer redress
FISCAL YEAR 1995
Project Telesweep
 Target: Business opportunity scams

 Partners: DOJ, state securities regulators, state Attorneys 
General (58 actions)

 FTC cases: 34 cases resulted in orders requiring payment of 
more than $11.2 million in consumer redress and more than $200,000 in 
civil penalties
Recovery Room Sweep
 Target: Telemarketers who misrepresent that they will recover 
all or a substantial portion of the money lost by consumers in previous 
scams

 FTC cases: 6 cases resulted in orders for over $540,000 in 
consumer redress

    Commissioner Anthony. Senator, in the interest of time, I 
have not prepared a statement this morning. And I will defer to 
my colleagues.
    Senator Ashcroft. Well, that is not only interest of time, 
but that is a much appreciated wisdom.
    Commissioner Thompson.
    Commissioner Thompson. Following a wise lead, I agree.
    Commissioner Swindle. Same here.
    Senator Ashcroft. Thank you very much, Commissioner, 
Commissioner, and Commissioner.
    And it looks as if you have almost been set up, but I 
understand that you have----
    Commissioner Leary. Mr. Chairman, members of the 
Committee----
    Senator Ashcroft. You have already been introduced by the 
Chairman as having remarks, and so we are pleased to receive 
them.
    Commissioner Leary. I would like to say something because 
at my confirmation hearing last fall, I assured you and other 
members of the Committee that reform of the Hart-Scott-Rodino 
process was a top priority for me. It still is.
    Some of these reforms require action by Congress; some can 
be implemented by the agencies themselves; and some require 
cooperative efforts among the agencies and the private sector.
    I am speaking now from the standpoint of someone new to 
government service who previously spent over 40 years 
representing business clients on general anti-trust matters, 
and over 20 years specifically on Hart-Scott issues. I 
obviously have different responsibilities today, but I want to 
assure you that my basic philosophy has not changed.
    With the Chairman here, I support Congressional action to 
raise the jurisdictional threshold for pre-merger filings, and 
I also believe it makes sense to have a different fee structure 
for large and small transactions. Like our Chairman, I am not 
wedded to any particular structure.
    I personally would prefer more categories on a scale more 
directly keyed to the size of the transaction. But, however 
they are done, I believe these modifications should be 
justified by considerations of good government and general 
equity rather than as a vehicle either to increase or decrease 
agency funding.
    Ideally, agency funding would be decoupled from filing fees 
entirely. But I recognize that this may not be realistic at the 
present time. I also believe, and I have believed for many 
years, and said so, that it would be a mistake for Congress to 
provide for active participation by the federal judiciary in 
the so-called Second Request process.
    The process really does work well most of the time. I also 
recognize that the process has sometimes failed, and the 
failures are serious. Lawyers in the private bar and lawyers in 
government both have horror stories to tell about massive 
inefficiencies that have resulted from the failure of their 
counterparts to be reasonable, realistic, or considerate.
    As the Chairman has testified, we are committed to visible 
and durable institutional reforms that promptly address 
significant elements of the problem on our side.
    And we are working now with the private bar, hopefully, to 
develop various best practice recommendations applicable both 
to the public and private sectors that are both balanced and 
practical. However, I do not believe that any involvement of 
federal magistrates or the imposition of mandatory cost benefit 
calculations would be a constructive step at this time. They 
would add further cost and delay to a process that can already 
be too burdensome.
    The principal flaw in the Second Request process today is 
that parties on both sides sometimes regard it as a purely 
adversarial proceeding in which they stake out positions, keep 
their cards close to their chests, and jockey for tactical 
advantage.
    Formalistic processes would tend to reinforce these 
unproductive attitudes and lead to more adversarial posturing, 
not less.
    A very small percentage of matters notified under HSR wind 
up in litigation. And it is a mistake to treat the HSR process 
like litigation. I would say here what I have said as a private 
lawyer for many years: The HSR process works best when both 
sides regard it as a mutual educational process rather than an 
adversarial one.
    I am optimistic that the present efforts with the private 
bar will lead to concrete progress in that direction.
    Thank you, Mr. Chairman.
    Senator Ashcroft. I want to thank you very much.
    Let me begin the questioning, I think, since you have all 
made whatever remarks you are going to make.
    I want to pursue this idea that was raised, I think, in the 
remarks of Senator Stevens. In years past, the FTC engaged in, 
and a long time ago, in a fix-it-first policy with respect to 
mergers, and then I think the Reagan Administration and 
succeeding administrations changed that, began to be involved 
in more negotiation.
    And that seems to be in line with what Mr. Leary says is 
necessary, less of a legal battle and more of a cooperative 
approach to developing things.
    And it seems to me that the Senator from Alaska has 
mentioned, and I would inquire: Is the FTC changing its 
position back to--what factors have caused the FTC to just to 
say, ``Well, our negotiating posture is no,'' and go to court?
    Commissioner Pitofsky. Let me start, Mr. Chairman. We have 
not changed our posture. We have surely settled our fair share 
of cases. Most of the cases in which we have a concern, result 
not in litigation, but in some form of settlement.
    Now, the suggestion has been made that we refused to 
negotiate on this matter involving a proposed merger of BP and 
Arco, and let me just take a minute to explain what happened 
here.
    I do not believe that I personally--and I think this is 
perhaps true for my colleagues as well--have ever spent more 
time with the lawyers, and the economists, and the business 
people from two firms seeking to merge than I personally did on 
this matter. I met with them time, and time, and time again.
    And I do not think that I ever laid out in greater detail 
what my concerns were with respect to the impact of this merger 
in Alaska and on the West Coast.
    They are smart people. They realize if those are your 
concerns, this is the way to fix it. They chose in the end, as 
is their right to do, not to give the Commission what the 
majority of the Commission thought was necessary to remedy 
anti-trust problems here, but to take the case to court.
    But we never hid the ball. We never said no. We were 
available to negotiate. They knew exactly where the line was 
and they decided to offer something that fell short of that 
line. I do not think that is a failure to negotiate.
    My other colleagues may want to address that question.
    Senator Ashcroft. I would be happy to hear them on this 
issue. Any of you care to make remarks regarding this question?
    Commissioner Thompson. This is one area where I have to 
agree with the Chairman. I spent a lot of time with the parties 
in this case, and I guess one of my big disappointments was not 
to see any real interest in addressing our substantive concerns 
until not just the eleventh hour, but 11:59.
    That, and to date, there are still areas of concerns which 
they have not addressed, at least in talking to me, at all.
    Now, I think the end result that I am concerned about is 
timing. I am very concerned about all people of the United 
States, including the consumers, and the producers in Alaska. 
But in the end result, I think one of the challenges for us, 
too, is to ensure that in the long run, that there is a 
situation that is better off for all of us.
    I was disappointed in some ways on how the parties chose to 
proceed, but in the end result, I think that we are a market 
responder, that we are left with what they provide us. We 
respond to the transaction that they propose to us, and I think 
that that is the choice that we had.
    Commissioner Leary. Mr. Chairman, I just want to add, as 
one of the two Commissioners who dissented from the decision to 
go forward with the litigation, that people can view specific 
facts on these issues differently but I, at least for my part, 
I do not see this decision as reflecting an institutional shift 
in the agency's basic approach.
    I had, like the other dissenting Commissioner, maybe a 
different view of some factual issues than the majority had, 
but I do not see the decision as an underlying sea change.
    Senator Ashcroft. Any other Commissioner care to make a 
comment to that?
    Commissioner Swindle.
    Commissioner Swindle. Thank you, Mr. Chairman. I was one of 
the other dissenting Commissioners, or the other dissenting 
Commissioner.
    I would disagree with Senator Stevens in the sense that I 
do not think that the Commission was overbearing in any delays. 
I, in fact, made the comment to Mr. Brown, the Chairman and CEO 
of BP, that I thought that there had been delays on the part of 
not only perhaps the FTC, but certainly BP. They were slow to 
come to the table with an offer directly to us.
    As we all know, they were working their deal with the 
state, which is fine. In my mind, personally, it complicated 
matters extremely.
    I agree with Commissioner Leary, I do not see any great 
institutional shift in direction here. This is a very complex 
case as Senator Stevens certainly knows, and those who have 
looked at it certainly know. I just think we were premature in 
our action.
    And that was my statement, or actually a joint statement, 
from Commissioner Leary and myself. Thank you, sir.
    Senator Ashcroft. Senator Wyden.
    Senator Wyden. Thank you, Mr. Chairman.
    I very much appreciate the point that has been made because 
clearly there was a difference of opinion there and a pretty 
vigorous debate. And to know that there were not any major 
policy changes in how the FTC approaches these issues is 
helpful.
    My question I would like to begin with, Mr. Pitofsky, deals 
with what you and I talked about the last time you were here 
when Chairman McCain looked into some of the anti-trust issues 
and I asked you about copycat mergers, which you said at that 
time, was one of the great policy challenges in this field.
    In the oil business, we had first in recent days, British 
Petroleum acquire Amoco in 1998. The FTC approved that, subject 
to certain conditions. Then Exxon and Mobil followed with their 
mega merger which was, again, approved with conditions late 
last year.
    Now we have got BP and Arco going through with their 
proposal. And I think what concerns me is when you have two 
major competitors in one industry merging together in a deal, 
this often prompts the others to come forward and to copy that.
    Now the first merger may make sense, might be sensible, and 
efficient, and the like, but it seems to me where we are 
heading in the oil business is, in effect, you have got 
copycats trying to copy the copycat. And as a result, we are 
going to end up with less and less competition.
    And my question to you is: What are the key factors--I know 
you cannot comment on a particular case that is now pending. 
But what are the key factors in your view which we ought to be 
looking at to determine whether this series of copycat mergers 
crosses the line and brings about too much concentration in a 
vital industry like the oil business?
    Commissioner Pitofsky. Let me start.  I do not want to ever 
imply that any decision about a particular merger is not made 
on the basis of the facts with respect to that merger. Not the 
last one, not the one before that, not the one that people 
rumor might happen afterwards. There was a suggestion that we 
have changed the rules of the game.
    But I would just point to the legislative history of 
Section 7 of the Clayton Act which is what this case is all 
about. Congress said to us, in the clearest terms, that we must 
take a rising tide of concentration and a trend toward 
concentration into account. The courts have supported that. The 
Supreme Court has emphasized trend toward concentration in 
case, after case, after case.
    So when you see a series of mergers like BP/Amoco which we 
approved, Texaco/Shell, a joint venture which we also approved, 
Exxon/Mobil which we have conditionally approved, then the 
fourth one comes along, and the fourth one is not guilty by 
association because of what happened before, but you must take 
into account the level of concentration nationally and locally 
with respect to each and every merger. And, of course, that is 
what we would do, and that is what we have done, industry after 
industry, and case after case, over the last 30 years. There is 
nothing about this that is a departure.
    Senator Wyden. Besides the concern about copycat mergers in 
the oil business--and I was concerned about three of them and 
you mentioned essentially four--I think it is important that we 
have on the record your concern about what this means for folks 
on the West Coast.
    We have the dubious honor in the State of Oregon of paying 
just about the highest gasoline prices in the country. And we 
are very troubled by the trends, you know, fewer stations, 
fewer independents, fewer suppliers.
    I mean, shoot, the day there was the refinery problem in 
California, they raised gasoline prices on my constituents in 
Oregon, and we were getting our gas from a refinery in 
Washington State. So everywhere we look, these arguments do not 
add up to anything other than more bad news for West Coast 
gasoline consumers.
    And I think it would be helpful if you could just lay out 
what the Commission's concerns were about how the BP/Arco 
proposal would reduce competition and ultimately raise prices 
on folks in Oregon, Washington, and California.
    Commissioner Pitofsky. Senator, as appropriate as that 
question is, it would be unwise for me or any of us to answer 
that question because depending on how this plays out, this 
matter may be back at the Commission, and we will then be 
acting in our judicial role.
    We did file a complaint which is public, and we did--joined 
by the AGs of California, Oregon, and Washington, we filed a 
memorandum in support of our complaint. I thought I could make 
that available to people who are concerned about it, but it was 
filed under seal, and it is going to take a little while to 
expurgate some of the information we obtained under commitments 
of confidentiality.
    I think it might be available today, certainly tomorrow. 
And I would like to make that available to you, rather than for 
me to deal with the details of what could very well be a case 
back at the Commission.
    Senator Wyden. That will be fine. It will be helpful to 
have further details certainly. What we want for the record is 
to have what you already found previously, which of course, you 
know, was a matter of public interest and was made available to 
the press. And if you could, update it because this is of 
enormous concern to folks on the West Coast.
    Commissioner Pitofsky. My general counsel tells me that the 
memorandum is on the web now. So, it is available.
    Senator Wyden. Could you then just summarize, you know, for 
us then, what is public information in terms of your big 
concerns?
    Commissioner Pitofsky. I do not think I should do it.
    Senator Wyden. All right. We will just refer everybody to 
the web.
    My time is expired and I hope I will have a chance to ask a 
couple of more, if we could, after my colleagues.
    Senator Ashcroft. I think we might be willing to go in for 
a second round here. There appears to be an interest.
    Senator Stevens.
    Senator Stevens. Thank you very much.
    Mr. Pitofsky, the thing that disturbed me most about this 
situation was that I heard, and I want you to correct me if 
this is not correct, but as these meetings went on with the 
Petitioner, BP, the Commission asked BP to divest itself of the 
Arco production, and it did make the concession that it would 
divest itself of 380,000 barrels a day, roughly.
    The throughput of the pipeline is about 2.1 million 
barrels--was about 2.1 million barrels. It is about 1.2 to 1.4 
now. The combined company would have about 70 percent of that. 
We are dealing with something like 900,000.
    If they divest themselves of 280,000, they are dealing 
with, at the most, 520,000 barrels a day left in BP. BP, when 
it was 1.2 million barrels a day, controlled 1 million barrels 
a day.
    The demand structure in California was roughly 25 million 
barrels, and now it is up. It is up considerably. I do not know 
how high it is now, 30-some-odd, but BP would control then 
520,000 out of this elevated demand.
    And yet you say--as I understand it, you said at that 
point, ``But all right, but you have got to''--but the 
Petitioner had to agree that you would be allowed to approve 
the purchaser of that production, you.
    Now I do not see anything in the Sherman Act or the Clayton 
Act that gives you the authority to approve a purchaser which 
ought to be a competitive sale. Did you request the authority 
to approve the purchaser of the 380,000 barrels a day?
    Commissioner Pitofsky. We asserted that that was part of 
our responsibilities, sir.
    Senator Stevens. On what basis did you have that authority?
    Commissioner Pitofsky. Our role in settling a case on a 
restructuring proposal is to ensure, and the Courts direct 
this, to ensure that the situation after the merger is 
equivalent in competitive terms to before the merger. That 
requires----
    Senator Stevens. Excuse me. In Alaska or in California?
    Commissioner Pitofsky. Oh, I think in both, Senator.
    Senator Stevens. In both.
    Commissioner Pitofsky. Yes. And therefore, we--the 
purchaser of the asset must be sufficient in competence, 
experience, financial resources, and so forth to replace the 
divested company in such a way as to be an effective 
competitor.
    I think several people mentioned the fact that we have 
approved Exxon/Mobil fairly recently, or conditionally approved 
it, but we did the same thing in Exxon/Mobil as we did here. We 
have done the same thing----
    Senator Stevens. Oh, you did not demand the right to 
approve the purchaser. You did not.
    Commissioner Pitofsky. Senator----
    Senator Stevens. You did not demand the right to approve 
the purchaser of the assets divested by Exxon.
    Commissioner Pitofsky. Senator, let me submit a memorandum. 
I do not think that is right. We definitely did. We interviewed 
prospective purchasers. We made it clear to Exxon and Mobil 
that we were not going to allow them----
    Senator Stevens. You interviewed them, but you are saying 
something that should go out competitively that affects--you 
know, my state owns that oil. They own the land and they own 
the oil. They worked out a deal with them. I do not know any 
state in the union that has a relationship between a producer 
that Alaska does because of the fact that we own the land, we 
own the oil. We have the right. They negotiated a position, 
which you ignored.
    Commissioner Pitofsky. Senator, we did not----
    Senator Stevens. Now that you--you did ignore it because 
you did not approve it. If you would have approved it, we would 
not be here today. I would not be here today. You would be, but 
I would not be. And I can assure you that you are going to be 
before more hearings than this before this is over.
    Commissioner Pitofsky. I would like the opportunity to 
explain what----
    Senator Stevens. On what basis did you demand the authority 
to approve the purchaser of that oil?
    Commissioner Pitofsky. Let me say again----
    Senator Stevens. What authority, legal authority now?
    Commissioner Pitofsky. All right. Well, our 
responsibility----
    Senator Stevens. And authority. And authority, sir. This is 
this inherent executive authority, again. Do all Commissioners 
agree with this?
    You have the power to approve the purchaser of oil after 
the proponent agrees to divest itself of production, that you 
have the authority to demand the right to approve who is going 
to purchase that before you approve the merger? Did you all 
agree to that position?
    Commissioner Thompson. Senator, I--leaving aside the 
particular facts of this particular case----
    Senator Stevens. I only have 5 minutes.
    Commissioner Thompson. As a general proposition of law, I 
agree completely with what the Chairman said.
    Senator Stevens. You have the inherent authority to demand 
the right to approve the purchaser of assets that are to be 
divested?
    Commissioner Thompson. The Commission has the authority to 
insist that the competitive problem be fixed, and that may 
include----
    Senator Stevens. I am going to get to that, Mr. 
Commissioner. That is a condition that was not on his proposal.
    Commissioner Thompson. I understand, sir.
    Senator Stevens. If you want to fix the competitive problem 
in Alaska, you would have to reconstruct Arco. Arco is going 
out of existence. Mobil has gone out of existence. Amoco has 
gone out of existence.
    We used to have an enormous number of players out there. 
Now that number is decreasing because of higher costs in the 
future.
    But as a practical matter, the Chairman said he wanted to 
restore the competitive condition in Alaska, too. How are you 
going to do that, Mr. Chairman? How are you going to restore 
the competitive position in Alaska under your approach?
    Commissioner Pitofsky. As we have in scores of other cases, 
we required that the assets be sold to another company, the 
offending asset be sold to another company, that is capable of 
competing effectively with that asset. And unless we know who 
the purchaser is, we cannot--we cannot do that.
    Senator, I would like our staff to submit a memorandum to 
you. I understand how concerned you are about this----
    Senator Stevens. Concerned.
    Commissioner Pitofsky. --as a matter of law----
    Senator Stevens. My state faces bankruptcy if you have this 
delayed for three or 4 years. You have refused to negotiate. 
You sat down, but what offer did you ever make them to settle 
it, now?
    Tell me that, on the record. You said ``what the majority 
believed necessary.'' What was it that you told BP was 
necessary to secure approval?
    Commissioner Pitofsky. Senator, we told them in the 
clearest terms what it would take to settle this case.
    Senator Stevens. No. I was on the phone. You would not tell 
me either. You just said, ``I am going to wait and see what 
they offer.''
    Commissioner Pitofsky. Senator, I do not think this is 
appropriate for me to be discussing confidential negotiations 
in front of the press or outsiders. But the fact of the matter 
is--and I will submit this in a memo as well, exactly what we 
told them was necessary to negotiate a settlement of this case. 
And I will have that in writing to you.
    Senator Stevens. I would like to see it.
    Commissioner Pitofsky. You were misinformed by some people 
about this matter.
    Senator Stevens. I am sorry about the timeframe here. This 
is a matter of survival for my state. If you all do not 
understand that, I wish you would come up and talk to our 
Governor, talk to those of us who are involved in this.
    We have lost our four basic major industries now. And we 
are a state that has a substantial cost of doing business. None 
of us really want to see Arco go away. Do not misunderstand me.
    If I had my way--we would have higher oil prices, and Arco 
would survive forever. But this is a practical matter.
    Now the question is: What happens in the future? How long 
is this going to take? And what was the role of the FTC in 
bringing it about? Now, I believe you stalled this. I believe 
you stalled it because you want to set a new milepost, and you 
hope to get there one of these days.
    And I think you are right. I think there is a new milepost 
being set here. The Commission let a lot of other things go 
through, and now it wants to set up a new standard.
    Commissioner Pitofsky. Senator, if I may, I would like to 
send you a chronology of the negotiations to see who it was 
that delayed bringing this to a conclusion. I will submit that 
to you as well.
    Senator Stevens. All right. But as you do that, tell me 
what you told them each time. Tell me what you told them 
because I checked with you twice, and you said, ``Well, I am 
going to wait and see what they say.'' You never said, ``This 
is what the Commission believes you must do.''
    You did that--I checked with Exxon. You did that with 
Exxon. You told Exxon what you believed that they should do, 
and they said, ``Okay.'' And that went through. You never did 
that with this company. And if you did, then I will stand 
corrected, but I do not believe you did. I have been told you 
did not.
    And I think you did handle this differently than you did 
Exxon. I do not know why, but I am going to find out why.
    Commissioner Pitofsky. That is fair enough, Senator, and I 
would be glad to address all your concerns.
    Senator Stevens. Thank you.
    Senator Ashcroft. Senator Brownback.
    Senator Brownback. Mr. Chairman, I have a whole different 
line of questioning. If the Chairman or Senator Wyden wants to 
continue this line----
    Senator Ashcroft. It is very generous to suggest that we go 
back to Senator Wyden. He may want to----
    Senator Brownback. Or Chairman Stevens, if Ted wants to go 
ahead, I will wait for a little bit.
    Senator Wyden. And I will wait for----
    Senator Brownback. So that you can go ahead and ask----
    Senator Stevens. I do not think we have any problem with 
Oregon or California. We are not in this on the basis of trying 
to have some differences in that regard.
    But I do believe the basic difference with Congress and FTC 
ought to be, have you altered the supply coming from Alaska in 
the years to come? You have. You have delayed it. They are not 
going to be making investments this year they should be making. 
They did not make them last year either.
    And you are going to pay the price in California and Oregon 
when that supply comes down even further. Supply ought to be 
the consideration of Congress in terms of world oil prices 
today, and I do not believe the FTC had its eyes on the supply 
at all.
    Thank you.
    Senator Brownback. I have just one question.
    Senator Wyden. And I thank my friend from Kansas. And 
again, it is obvious feelings run strongly on this Committee. 
And I want to ask just another policy kind of question as it 
relates to the BP/Arco issue so we do not pull you into 
litigation. It is along the lines of the copycat kind of 
question.
    I would like to just ask the question about the impact of 
globalization on anti-trust enforcement. What we have had in 
the past is a lot of these, you know mega-mergers, when 
somebody raises the concern that it violates anti-trust, they 
come back and say it is a global market.
    And they argue that even though a merger is going to create 
a company with a big share of the U.S. market, the company's 
share of the worldwide market is going to be small. That was an 
argument that we saw again in the BP/Arco deal.
    It seems to me that if that now becomes a dominant factor 
in this debate about anti-trust laws, we are headed toward 
toothless U.S. anti-trust laws because then--even a deal that 
results in a gigantic monopoly in the United States that 
clobbers, for example, my constituents in a small state 3,000 
miles from Washington, D.C., a deal that, you know, does have 
huge monopolistic ramifications in the United States. Everybody 
would say, ``It is a small share of the worldwide situation and 
so it ought to go forward.''
    Again, from a policy standpoint, not getting into the 
litigation, my question to you, Chairman Pitofsky, is: How does 
the FTC try to deal with the ramifications of the global 
economy as it relates to trying to enforce the anti-trust laws 
domestically to protect our consumers?
    Commissioner Pitofsky. Let me be brief because my 
colleagues will probably want to address that as well. The 
question of whether a market is local, regional, national, 
hemispheric, or global is a question of fact.
    The FTC held hearings four years ago, extensive hearings, 
in which the widest range of business people, consumer people, 
academics came in and said that as we address that fact 
question, we pretty much got it right.
    My own view is that there are more and more products that 
compete in broader and broader markets, world markets, 
hemispheric markets. And we try to take that into account.
    But, you know, just saying it is a world market, that is so 
common now. That turns on whether or not, you know, in the 
local area--some part of the country, the players after the 
merger can raise price without losing so much business that it 
will make the price rise unprofitable. That is the standard 
that the courts and our guidelines apply. And we do it case by 
case, item by item.
    We cleared Chrysler/Daimler-Benz, at least in part, because 
we believed the local dealers largely compete in a world 
market. There are other--there are other similar product areas.
    There are some areas that most of what they do is a world 
market, but there are pockets of localized competition, so it 
is a fact-intensive inquiry. We have a chapter in our report 
which deals with it.
    Virtually everybody who participated in our hearings said, 
not just us, but the Department of Justice and the Courts have 
got it right. My colleagues may want to address this same 
question.
    Commissioner Thompson. I agree with the Chairman here. Your 
concern about the impact of globalization is one that I think 
concerns all of us. It certainly concerns me.
    But in the end result, you really have to look at the 
application of anti-trust principles to the particular case 
that is in front of you. And whether it is BP, or Exxon, or any 
other case in pharmaceuticals or whatever, you really have to 
look at what the impact is going to be on consumers in the 
United States. And I think that we spend a lot of time trying 
to look at that very, very carefully. There is not a one-size-
fits-all approach.
    Senator Wyden. I am going to give this time back to Senator 
Brownback who has been so gracious.
    I think that what you have said is that you are going to be 
very vigilant in looking at the global kind of issues. And just 
know that I, and I think some others, are troubled by if we 
just say ``The global economy ought to govern here,'' we could 
literally render toothless U.S. anti-trust laws. You all have 
satisfied me that you are going to look at these factors.
    And again, thank you, Sam, for letting me have this extra 
time.
    Senator Brownback. Sure. Thanks.
    And I want to switch to an ``easier'' issue: marketing 
violence.
    [Laughter.]
    In regards to the study you are conducting on marketing 
violence to children, the White House requested and made a top 
priority of this study. The Senate passed a bill 98 to 0 to 
authorize this study. The results are important to us. We are 
hopeful on holding hearings on a final version of this report 
on marketing violence to youth in either May or June. Will the 
report be ready by then?
    Commissioner Pitofsky. May or June? I do not think so. I 
think it will be well into the summer before the report is 
available.
    Senator Brownback. That is going to make it awfully 
difficult for us to give proper oversight to in this year. Will 
you have a preliminary report by then?
    Commissioner Pitofsky. Let me take a little step back 
because I know how interested you are and informed you are 
about this particular issue.
    Actually, our study is going well. The companies who said 
at the outset that they would cooperate on a voluntary basis 
have been as good as their word. They are cooperating on a 
voluntary basis. But there are a lot of aspects to this, the 
rating system, marketing, advertising. There are three 
industries: Music, video games, movies. So it is a major 
project on our part.
    Senator Brownback. Are they providing you with demographic 
purchasing of adult-labeled materials by children?
    Commissioner Pitofsky. We have asked for it, and they have 
indicated that they will provide it. And the----
    Senator Brownback. They indicated that it is available.
    Commissioner Pitofsky. Yes, I think so. Yes, they have, and 
it is available.
    Senator Brownback. And they will be providing that to you?
    Commissioner Pitofsky. Yes.
    Senator Brownback. Will you be verifying the information 
that the industry is providing to you with other objective 
sources?
    Commissioner Pitofsky. We have in mind of doing several 
surveys. One involves parents and children, concerning the way 
in which they understand these rating systems. Another has to 
do with whether or not the retailers are paying attention to 
the rating system.
    I mean, it is not going to do any of us any good if the 
originators say ``for a mature audience'' or ``for adults 
only,'' and then nobody pays attention to that at the retail 
level. So we will do an independent survey of that.
    Senator Brownback. Well, a lot of people suspect that 
adult-labeled entertainment products are actually being geared 
to kids, with the companies knowing that children will purchase 
it. There is often a kind of a forbidden-fruit type of scenario 
where because of ``Well, because I cannot have it, therefore I 
want it more and get it for me.''
    Industry officials know this, and may even plan on it in 
their decisions on how to place and market the product, even 
where it is positioned on the shelves. Sometimes a lot of the 
mature-rated videos are put right next to others that are 
labeled for children.
    Everybody knows that few children are going to be carded 
going into movies. You wonder whether executives just put these 
ratings because kids want to go to these, knowing that they 
will be allowed.
    So I really do hope you look at these issues, and I would 
like to have these hearings. And I hope you pursue that study 
more aggressively and more expeditiously, Mr. Chairman, so that 
we could have a hearing on that information.
    I am going to ask you another line of questions that I have 
been asked about back home, and that is on the Internet 
marketing of pharmaceutical products. And you mentioned that in 
your statement.
    Are you seeing a great deal of fraud happening at some of 
the Internet sites on pharmaceuticals? I notice you have a 
particular program targeted to that on Operation Cure. You have 
had, if I am reading your report right, four cases of cease-
and-desist orders to date.
    Tell me about the nature of that problem. And are you 
anticipating any need for Congressional action in dealing with 
that?
    Commissioner Pitofsky. At this point, I do not see any need 
for Congressional action. We have broad authority to challenge 
deception, unfairness, and so forth. To directly answer your 
question, some of the worst frauds I have seen are now on the 
Internet involving claims about health care. So we are looking 
at it.
    I know that the FDA is looking at the pharmaceutical issue 
as well. These health care claims are a high priority for us. 
We have consumers being told that shark cartilage extract is 
going to cure arthritis, cancer, and AIDS.
    Senator Brownback. All three?
    Commissioner Pitofsky. What?
    Senator Brownback. All three at the same time?
    Commissioner Pitofsky. I do not know. I would be glad to 
give you some examples of some cases that we brought--I have 
been doing this sort of thing for a long time, and I have to 
tell you that the snake oil sales programs that we see on the 
Internet are worse than anything that I have seen in terms of 
taking advantage of a vulnerable audience, worse than anything 
I have seen in other media.
    I do not know why it happens. I think it is probably 
because they feel that nobody is watching, or we cannot find 
them, we cannot detect it, they can change their address. But 
this is raw, fraudulent stuff.
    Senator Brownback. And you are bringing cases aggressively 
against the proponents or the authors of these sort of health 
cures?
    Commissioner Pitofsky. We have.
    Senator Brownback. Now I understand that as well there is a 
lot of marketing of lifestyle type of pharmaceuticals on the 
Internet, some that my Attorney General of the state is saying, 
in a fraudulent manner as well as without prescriptions, 
without a number of things. Is that taking place, too?
    Commissioner Pitofsky. I am not as familiar with that, 
Senator.
    Senator Brownback. Are any of the Commissioners?
    Commissioner Thompson. Just to the extent that I know that 
the Bureau Director, Jody Bernstein, testified last year about 
some of the concerns that we had about some websites marketing 
products generally, without adequate supervision or a 
prescription where one is required. And we are working closely 
with the FDA in trying to get a handle on that.
    Senator Brownback. I would like for you if you could, Mr. 
Chairman, to provide to me some of the examples of the 
fraudulent cases on the marketing of pharmaceutical products 
because I can see the point that you are making about preying 
upon a vulnerable population and now here is a ways and a means 
of being able to do that, and what you are doing in addressing 
these topics. I would appreciate that.
    Thank you for being here; and thank you, Mr. Chairman.
    Senator Ashcroft. Thank you, Senator Brownback.
    Senator Wyden had a sort of followup question or maybe you 
wanted to open a new topic, but please limit this. We have six 
more witnesses, and I think I will be the Senator that 
entertains these witnesses and maybe the Senator----
    Senator Wyden. You have been incredibly kind, and I am 
going to sit with you because I know that you have gone out of 
your way to make time. And I will be brief.
    I wanted to ask one question about privacy. And the 
question is for you, Mr. Pitofsky, if I might. It seems to me 
that there is a giant wave of consumer fear about privacy that 
is headed toward Washington, D.C. This issue has just gone off 
the charts in terms of the polling and the like.
    And I guess my question to you is: On privacy, what steps 
do you think ought to be taken to beat the tsunami before it 
hits the shore, because where we are now, you have got an FTC 
task force working on this. You have legislation in the works.
    The big problem seems to be enforcement. We have a lot of 
sites out there, and they are pretty good, but the question is: 
How do you enforce them? And my question to you is: What do you 
think ought to be done before this tidal wave just engulfs you 
and the Congress and everybody's phone just rings off the hook?
    Commissioner Pitofsky. Well, let me start by saying that 
this is an issue in which, like any good group of 
Commissioners, there are slightly different points of view as 
to what ought to happen.
    But the first thing that ought to happen, we should make 
good on our commitment to Congress to conduct a surf very soon, 
and analyzing the level of privacy protection through self 
regulation. That is going on right now, and we will have that 
report.
    We are going to surf the Net in the next 30 days, and we 
will have the report along with our analysis of it, in a few 
months.
    Secondly, I am increasingly coming around to the view that 
there is no single answer to these privacy questions. Self-
regulation has a role. Legislation has a role. We supported 
legislation with respect to financial records, children, and in 
other areas.
    On the other hand, there is going to be a role for self-
regulation; that is for sure. And what we need, I think, what 
Congress should have from us, is a series of recommendations as 
to the right mix in that area. And we will have that on the 
basis of data very shortly.
    Senator Ashcroft. Let me just--go ahead, Commissioner 
Swindle.
    Commissioner Swindle. Just a comment. I think the Senator 
described the phenomenon of the giant wave of consumer fear 
regarding privacy. I think that may be an excessive 
description.
    I think there is a lot more awareness of what personal 
privacy--how it can be under attack by new technology, but we 
always had privacy concerns. And it goes back to Senator 
Brownback talking about these cure-alls and everything. Those 
things have been around.
    If you ever read Argosy when you were a kid, you know, the 
men's magazine, it always had these miracle cures and all these 
wonderful things. This stuff is not new, but it is just that it 
moves at the speed of light now. It covers so much, so quickly.
    I think as more people become aware, I think we will see 
consumers be more accountable for their own actions. I mean, 
they have a responsibility, too, not to be duped by this stuff, 
but by the same token, the Senator mentioned there are a lot of 
sites out there.
    The last figures I saw about a month or so ago, there are 
roughly 5 million commercial websites in existence. They are 
increasing at about a half a million a month. And I think it 
was Senator Wyden who mentioned in the BP/Arco matter, the 
proposed settlement was so complex we could not monitor it.
    I think the same analogy would hold true in the case of 
websites. It would be impossible for a government agency to 
monitor this.
    Industry has the motive to do it right, satisfied 
customers. As more customers become aware of their personal 
privacy and what might happen, good or bad, I think they will 
demand of the people that they deal with on the Net, that those 
commercial sites--and it does not necessarily have to be 
commercial sites; it can be entertainment or whatever, as we 
have seen in some of the cases here recently--they will demand 
to be satisfied.
    If their demand is commensurate with the growth, I think we 
will see industry come along. I think that ultimately will be 
the best solution of all.
    We are looking, as the Chairman mentioned, at a survey, 
which is our third annual survey I believe now, and it should 
be out in the spring.
    We also have an advisory committee. I think this may be 
what the Senator was referring to on the matter of access and 
security. We have fair information practices, notice, choice, 
access, and security. And when you--the first two, you can 
comprehend those.
    When you start talking about a privacy policy that would 
allow access and gets into the security matter, this is a whole 
new kettle of fish. It is a very complex process, and we are 
having a very distinguished group of people representing all 
aspects of this issue, from technology to advocacy, looking and 
trying to see how we can cost effectively provide reasonable 
access and security.
    I think we need to look at their findings and 
recommendations along with our study. In fact, I think one 
should not precede the other. I think they should sort of join 
hands and march out the door together. So, we are working on 
this, and it is going to be a tough thing to solve.
    Senator Wyden. Just know that when Conrad Burns and I put 
in a bill, that was considered a very moderate centrist bill. 
And a lot of people, including business folks, are hoping that 
becomes public policy because they think we are headed, given 
the Wall Street Journal new poll that says this is one of the 
top concerns in the 21st Century, that we are heading for 
something much more extreme.
    Commissioner Swindle. I think people are more aware of it. 
The more they are aware of it, the more we will hear about it. 
And then it takes on proportions that I think industry will 
have to respond to; otherwise, they lose customers. It only 
takes one little click and you just lost a customer.
    I know one company has been somewhat adamant about saying 
``We want regulations,'' and that is Hewlett-Packard. But I 
have not heard a lot of enthusiasm from others, although there 
is some concern about the states going out and having 50 
different forms of it. But I think that if we move too fast in 
regulation, we will do some severe damage to an industry.
    Senator Ashcroft. You may have just posed a final question 
on this. There are places where I buy my shirts and suits. They 
know that I do not buy button-downs. I buy pointed collars. Do 
you have a plan to ask them not to divulge that, or are you 
only focused on Internet here?
    Commissioner Pitofsky. Oh, that is not an issue that we 
have addressed up to this point. But I am increasingly 
concerned, Senator, that the arguments as to why privacy needs 
to be protected on-line, apply equally to off-line. I take no 
position. I just think that all of us who are concerned about 
privacy have to begin to address that question.
    Senator Ashcroft. But when you request information from the 
entertainment industry, you are asking for information about 
public consumption yourself in some ways. Without being client 
specific, you are violating the privacy of the people who 
consume it.
    Commissioner Pitofsky. I hope not. I hope not.
    Senator Ashcroft. Well, you are finding out something about 
the public that they may not have wanted to tell you.
    Commissioner Pitofsky. Yes, but when we ask----
    Senator Ashcroft. Yes, but----
    Commissioner Pitofsky. --for information from the 
companies, that is not personally identifiable information.
    Senator Ashcroft. That is correct. It is not identifiable 
to an individual. But I think this is a very sensitive 
question. If the lady at the diner knows that I normally say 
``Hold the onions on the burger,'' she should not have to be 
worried about whether she makes a violation in telling somebody 
that.
    It is my understanding that you are conducting--you have a 
committee on on-line access and security made up of consumer 
and business experts.
    Commissioner Pitofsky. We do.
    Senator Ashcroft. When will that report be ready?
    Commissioner Pitofsky. Well, they held their first meeting 
last week. There will be four meetings in total. They will 
advise us specifically on questions that Senator Wyden raised. 
Not about privacy policies----
    Senator Ashcroft. My question was: When will that report be 
ready?
    Commissioner Pitofsky. I hope by June.
    Senator Ashcroft. It seems to me to be a good idea not to 
conduct the privacy sweep until we have the recommendation of 
the advisory group so that we would know what to look for in 
the review.
    Commissioner Pitofsky. I think that they can--excuse me.
    Senator Ashcroft. I just think that if they had some 
special wisdom to impart for some value in this committee--it 
seems to me that it might be a good idea to wait until the 
committee is done before conducting the sweep.
    Commissioner Pitofsky. We are planning to proceed on 
parallel tracks. The first exercise is really data gathering, 
and we are gathering pretty much the same data we gathered 
before, but we are----
    Senator Ashcroft. That is my point. You are gathering data 
which is the same as what you gathered before, but the 
committee might be able to tell us that we need to look for 
different kinds of data or different kinds of practices. That 
is my point there.
    It is my understanding that you are considering internal 
reforms of the merger review process. I want to go back to 
merger review for a moment. And Commissioner Leary sort of 
indicated that there are a lot of things that he thought needed 
to be done, but should be done internally.
    It is a big problem for Congress to decide what we have to 
mandate in the law and what we can count on to be done 
internally. If it should have been done internally, why had it 
not been done?
    And what is the Congress for, if we just ought to rely on 
the good will, or if every time there is a need for reform, we 
come up against it, and the Commission says, ``Well, we were 
about to do something about that, so we are people of good 
will, and we will do something about that''?
    Would you--can you explain or describe the reforms and the 
expected benefits that you would get from the reforms that you 
are now considering?
    Commissioner Pitofsky. Well, first of all, we have 
introduced reforms. I believe the situation is better now than 
it was 5 years ago.
    Let me just give you an illustration. People complain, and 
I understand why they would, about the burdens of Second 
Requests, the great amount of documents that have to be 
produced as a result of our investigations.
    But the fact of the matter is right now, 80 percent of the 
merger investigations that we undertake, and issue a Second 
Request, the target companies never produce all the documents. 
We do it on a quick-look basis.
    Now, I do not know what the number was 5 years ago, but it 
was not 80 percent. So we have modified the burden on the 
business community, which we recognize is substantial, greatly.
    Looking forward, I would advise the Committee that we are 
introducing a reform right now. One of the things I have 
learned from bar association representatives is that they are 
concerned that the staff does not on a regular basis tell the 
parties what it is that is bothering them that leads us to 
introduce a Second Request. I did not do anything about that 
issue because, frankly, I thought the staff was already doing 
that.
    But the bureau director has been directed to tell everybody 
in our agency, ``When you go to a Second Request, you have an 
obligation to tell the parties what it is that leads you to 
this more substantial investigation.'' That will be changed on 
a going-forward basis.
    Senator Ashcroft. Let me ask you this: How effective is the 
process for deciding which agency, the FTC or the anti-trust 
division of DOJ, will be when you are allocating mergers? There 
was a target established of a ten-day target. Is that working? 
Is that being adhered to, and how is it going?
    Commissioner Pitofsky. It is working. I think the 
coordination, cooperation is better than any time in my 
recollection. And we have got it down to about 9.5 days, so we 
have hit the target. And I would like to do even better, and I 
think we can do even better, but we certainly have reduced 
substantially the time it takes to sort this out.
    Senator Ashcroft. Anything else, Senator Wyden?
    Senator Wyden. No, thank you.
    Senator Ashcroft. Let me thank you very much for your 
appearance here today, and I would hope that you would be 
available to answer any inquiries in writing that members of 
the Committee who could not attend today will submit.
    We will try to get anything to you that we would want 
answers from you on relatively quickly. And thank you very much 
for your appearance and for your service to America.
    Commissioner Pitofsky. Thank you very much.
    Senator Ashcroft. Let me thank this group of individuals 
who will address the Hart-Scott-Rodino Act and merger issues. I 
ask them to keep their remarks to 5 minutes.
    And I would be very pleased if, your having done so, you 
wanted to submit additional remarks for inclusion in the 
record, and I am confident that the good will of Senator Wyden 
will provide unanimous consent that that will be done.
    So with that in mind, let me first call on Mr. Howard 
Adler, Junior, of Baker McKenzie here in Washington, D.C. to 
proceed with such remarks as he would make in the 5 minutes.

     STATEMENT OF HOWARD ADLER, JR., ESQ., BAKER MCKENZIE, 
 AND CHAIRMAN, U.S. CHAMBER OF COMMERCE HART-SCOTT-RODINO TASK 
                             FORCE

    Mr. Adler. Good morning, Mr. Chairman, Senator Wyden, I am 
the Chairman of the Hart-Scott-Rodino Task Force of the United 
States Chamber of Commerce. I am here to testify in support of 
S. 1854, which the Chamber supports; but I want to address my 
oral remarks mainly to the issue of the Hart-Scott-Rodino 
filing fees.
    It has long been the position of the Chamber that those 
fees should be abolished, and that the funding of antitrust 
enforcement should be decoupled from the fees collected from 
acquiring companies in the Hart-Scott-Rodino process.
    We understand that a kind of an addiction has developed to 
the filing fees, and that addiction is not going to be cured 
overnight. But we want to plant the seed; we want to start the 
ball rolling for a real reconsideration of the propriety of 
basing the funding of antitrust enforcement on the HSR filing 
fees.
    We heard Commissioner Leary say this morning that ideally 
antitrust should be funded from appropriated funds. I believe 
that if you ask Chairman Pitofsky, or Assistant Attorney 
General Klein what they think, they would agree that in a 
perfect world, the funding should come from public funds. It is 
the Chamber's position that we ought to work toward a perfect 
world. There is no reason why we should settle for less.
    In my prepared statement, we go into considerable depth as 
to why that should be the case. Let me make a few points.
    The filing fee was not part of the original legislation. It 
came into being in 1989 when there were huge budget deficits. 
It appeared to be ``easy money''--a way of funding antitrust 
off-budget. But we are a long way from that today. We have got 
surpluses, and people are arguing about what to do with them. 
So we are in a totally different environment fiscally than we 
were in 1989.
    I should emphasize that the U.S. Chamber supports strongly 
vigorous antitrust enforcement. Everyone benefits; the public 
benefits; our members benefit. Since everyone benefits, 
everyone should pay. Under the present system, most of 
antitrust enforcement is funded by companies that happen to be 
making mergers in a particular year--mergers which in more than 
95 percent of the cases do not even call for a Second Request 
for information. In other words, they are benign competitively; 
they are probably pro-competitive; and they are lawful. Thus, 
we have an irrational system where companies doing what they 
should be doing--that is investing their money in productive 
acquisitions, are funding antitrust enforcement and not the 
public at large. We think it is time to end that irrational 
process.
    Some have said that there is an analogy between the merger 
filing fee and a user or regulatory fee that can properly be 
imposed by a government facility or a regulatory body.
    We have spelled out in our prepared statement why that is 
false. Essentially, a valid user fee must be reasonably related 
to the cost incurred on behalf of the person who is assessed 
the fee and to the benefit he receives. That is not true at all 
with the Hart-Scott-Rodino fees.
    For more than ninety percent of the filings that are made, 
we know from experience that somebody is going to look at it 
for 5 minutes and say, ``This is trivial.'' Yet the $45,000 fee 
has to be paid.
    Another problem with the fees, and particularly with the 
linkage between the fees and the funding, is that it creates 
perverse incentives. Everybody knows that there are huge 
categories of transactions that never present a competitive 
problem. Yet the Federal Trade Commission, in considering 
whether to create new exemptions, is faced with a Hobson's 
choice: Either it continues to call for filings on trivial and 
competitively benign transactions or it cuts down on those 
useless filings and then loses its funding.
    This is a dilemma the FTC would not have if we put the 
funding back where it belongs, that is in treasury funds, which 
is what every other country does.
    So I hope we can at least start a dialogue on this issue 
and have this Committee and others begin to reconsider whether 
in the year 2000, when we are fiscally in such a different 
circumstance than we were in 1989, we should perpetuate the 
present filing fee system.
    Let me say a word on the bill. We support raising the 
threshold. We think it is irrational that in doing that we have 
to raise the fee to $100,000 on larger transactions in order 
``to preserve budget neutrality.'' This is another consequence 
of the ``addiction'' to the Hart-Scott-Rodino fees.
    I have looked at the numbers, while you would think $100 
million mergers would call for more attention than others, in 
fact 95 percent of those mergers do not get a Second Request.
    My time has expired. Thank you very much.
    [The prepared statement of Mr. Adler follows:]

    Prepared Statement of Howard Adler, Jr., Esq., Baker McKenzie, 
  and Chairman, U.S. Chamber of Commerce Hart-Scott-Rodino Task Force
Introduction
    Mr. Chairman and members of the Committee, good morning. I am 
Howard Adler, Chairman of the Hart-Scott-Rodino Task Force at the U.S. 
Chamber of Commerce. The U.S. Chamber of Commerce is a business 
federation representing more than three million businesses and 
organizations of every size, sector and region. The U.S. Chamber of 
Commerce welcomes this opportunity to present its views regarding Hart-
Scott-Rodino (HSR) filing fees and S. 1854, the Hart-Scott-Rodino 
Antitrust Improvements Act. Positions on issues of importance to the 
business community are developed by a cross-section of the Chamber's 
members serving on Committees, Subcommittees and Task Forces. This 
Statement is the product of the Chamber's Council on Antitrust Policy 
and its HSR Task Force. The Task Force was originally set up to address 
the Chamber's members' concerns about the burdensome over-reporting 
required under the existing HSR process. These concerns have been 
exacerbated by the $45,000 filing fee and the over-dependence of the 
Federal Trade Commission (FTC) and the Department of Justice's 
Antitrust Division on revenues derived from those fees. The Chamber 
believes the HSR system is broken and needs to be fixed.
    The Chamber's testimony will address two points: First, there is no 
principled justification for the present HSR filing fees, and they 
should be abolished. Second, although S. 1854, introduced by Senators 
Hatch, Kohl and DeWine, does not solve the filing fee issue, it 
represents a commendable effort to limit the number of unnecessary 
filings and to moderate the abuses of the Second Request process. S. 
1854, therefore, has the strong support of the Chamber.
I. The Present HSR Filing Fee System Should Be Abolished
    Congress originally imposed a $20,000 filing fee in 1989 during a 
period of large budget deficits. The fee was subsequently raised to 
$25,000 and then to $45,000 per transaction. Since 1989, we have gone 
from a time of budgetary deficits to one in which the great political 
debate is over how to use the enormous surpluses we now anticipate. 
Furthermore, the number of reported transactions has escalated from 
2,883 in 1989 to more than 4,500 in fiscal year 1998. As a result, in 
that year, the HSR filing fee extracted more than $200 million from the 
reporting companies, including many Chamber members.
    While budget deficits in 1989 may have made the HSR filing fees an 
attractive expedient, in 2000 the present system is indefensible on 
several grounds: (a) antitrust enforcement benefits all Americans and 
should be paid for by all Americans; (b) the analogy to a user or 
regulatory fee is false; the HSR filing fee is a tax arbitrarily 
imposed on overwhelmingly lawful transactions and which bears no 
relation to either the cost to the Government or the value to the 
``taxpayer''; and (c) the overdependence of the enforcement agencies on 
HSR filing fees creates anomalous incentives and outcomes.
Antitrust Enforcement Should Be Paid For Out of Appropriated Funds
    In urging repeal of the HSR filing fees the Chamber is not 
advocating any curtailment in the funding available to the FTC and 
Antitrust Division. To the contrary, the Chamber supports continued 
antitrust enforcement which maintains a competitive marketplace, to the 
benefit of the Chamber's members and all Americans. The Chamber 
strongly believes, however, that since antitrust enforcement benefits 
all Americans it should be paid for by all Americans and not only by 
U.S. and foreign companies making overwhelmingly lawful and 
procompetitive mergers.
    More than 80 countries, impressed with the U.S. competitive model, 
now have some form of antitrust law. To the best of the Chamber's 
knowledge, no country other than the U.S. funds its antitrust 
enforcement largely from merger reporting fees rather than appropriated 
funds. It is anomalous that the richest of all these countries does not 
also use its general treasury to support this vital and beneficial 
function.\1\ The time has come to decouple antitrust enforcement 
funding from the HSR filing fees.
---------------------------------------------------------------------------
    \1\ It is particularly anomalous because U.S. antitrust enforcers 
generate significant revenues through the collection of fines. For 
example, in fiscal year 1999, the Antitrust Division alone collected 
more than $1 billion in criminal fines.
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The HSR Filing Fees Do Not Qualify As Valid User Or Regulatory Fees
    Superficially, the HSR filing fees resemble user or regulatory fees 
that are often and properly imposed by government entities; however, 
the HSR fees do not meet the well-established requirements for those 
legitimate fees.
    In a June 1994 statement opposing a proposed increase in the HSR 
filing fee,\2\ the Chamber pointed out that that fee is totally 
inconsistent with the Independent Offices Appropriation Act of 1952 
(IOAA), as amended (31 U.S.C. Sec. 9701 (1992)). IOAA provides that 
when a federal agency wants to impose a user fee, that fee must be 
``(1) fair; and (2) based on (A) the cost to the Government; (B) the 
value of services or thing to the recipient; (C) public policy or 
interest served; and (D) other relevant facts.'' (1994 Chamber 
Statement at 9.) There is no way that the HSR filing fees could meet 
these criteria. There has never been even a pretense that the filing 
fees are related to the cost of processing the HSR filings, and any 
attempt to make that argument would fail. In fiscal 1998, according to 
the enforcement agencies' HSR Annual Report, 4,575 transactions were 
reported.\3\ Of that number, less than 10 percent were even cleared to 
one of the antitrust agencies for a competitive review (Id. Table III); 
and substantive Second Request investigations were conducted in only 
125 cases, amounting to less than 3 percent of the reported 
transactions. (Id. Table II.)
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    \2\ Statement of the U.S. Chamber of Commerce in Opposition to 
Proposed Increase of Hart-Scott-Rodino Filing Fee From $25,000 to 
$40,000 per Transaction (1994 Chamber Statement).
    \3\ FTC and Antitrust Division, Annual Report to Congress, Fiscal 
Year 1998, Pursuant to Subsection (j) of Section 7A of the HSR Act (HSR 
Annual Report (1998)) at 25.
---------------------------------------------------------------------------
    Thus, there can be no doubt that the vast majority of HSR filings 
are unconscionably profitable for the government. The vast bulk of the 
more than $200 million collected in fiscal 1998 was used to finance the 
investigation of a small number of anticompetitive mergers and other 
antitrust enforcement. As set forth in the 1994 Chamber Statement (at 
10), ``Since 90 percent or more of the reportable transactions require 
no substantive review, there is . . . no significant cost to the 
Government which must merely receive and review the filing to see that 
it is in one of the categories that historically have presented no 
competitive problem. The disproportion between that ministerial task 
and the [then proposed] $40,000 fee is neither fair nor based on `the 
cost to the Government.' '' On the other hand, for those relatively few 
filings that lead to full-scale enforcement actions, the fee is merely 
a drop in the bucket. Nor can there be a viable argument that the 
overwhelming preponderance of companies whose filings raise no 
competitive issue receive any ``value'' in return for their fees.
    On September 20, 1996, Chairman Archer of the House Committee on 
Ways and Means made the same point in a letter to Congressman 
Livingston, Chairman of the House Committee on Appropriations. Writing 
in opposition to a proposed increase in the HSR filing fee, Chairman 
Archer referred to a Statement issued by the Speaker which sets forth 
criteria for differentiating between `` `true' regulatory fees'' and 
taxes that historically are within the jurisdiction of the Committee on 
Ways and Means. The criteria for a regulatory fee are:

          (i) The fees are assessed and collected solely to cover the 
        costs of specified regulatory activities (not including public 
        information activities or other activities benefiting the 
        public in general);
          (ii) The fees are assessed and collected only in such manner 
        as may reasonably be expected to result in an aggregate amount 
        collected during any fiscal year which does not exceed the 
        aggregate amount of the regulatory costs referred to in (i) 
        above;
          (iii) The only persons subject to the fees are those who 
        directly avail themselves of, or are directly subject to, the 
        regulatory activities referred to in (i) above; and
          (iv) The amounts of the fees (a) are structured such that any 
        person's liability for such fees is reasonably based on the 
        proportion of the regulatory activities which relate to such 
        person, and (b) are nondiscriminatory between foreign and 
        domestic entities.

Archer Letter, at 1-2 (emphasis added). While Chairman Archer was 
writing about a proposed increase in the current $45,000 fee, he 
correctly pointed out that the ``FTC does far more than merely regulate 
acquisitions subject to the Hart-Scott-Rodino Act [and that] there is 
reason to believe that the amount of the current premerger notification 
fees substantially exceeds the costs of the FTC and Antitrust Division 
in evaluating reportable transactions under the antitrust laws.'' (Id. 
at 2.) Accordingly, the current $45,000 fee violates criteria (i), (ii) 
and (iii).
    While the Senate is not bound by either IOAA or the Statement cited 
by Chairman Archer, both of these authorities make clear that the HSR 
fees are not reasonably related to the Government's merger review costs 
or to the ``value'' to the companies that pay the fees. They, 
therefore, amount to ``a tax on a small category of regulated 
entities.'' (Archer Letter at 2.)
    Like Chairman Archer, the Chamber would not object to HSR filing 
fees decoupled from the funding of federal antitrust enforcement ``as 
long as the amount of fees are reasonably related to the relevant 
regulatory cost and fairly apportioned among affected entities.'' 
(Archer Letter at 2.) Other jurisdictions do this \4\ and we believe it 
would be feasible to fashion an appropriate formula in the United 
States, provided the fees are not used to fund general antitrust 
enforcement.
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    \4\ In Germany, ``the fee is determined according to the personnel 
and material expenses of the enforcement agency, with account also 
being taken of the economic significance of the concentration.'' 
[Rowley and Campbell, Multi-Jurisdictional Merger Review--Is It Time 
For A Common Form Filing Treaty?, in Policy Directions for Global 
Merger Review at 9, Appendix IV, note 9.] In Ireland, there is no fee 
for ``Preliminary Merger Notifications.'' [Id. note 12] and in 
Switzerland, no fee is charged for a ``First Phase Assessment'' but an 
hourly rate is charged for a ``Second Phase Assessment.''
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The Present Reliance on HSR Filing Fee Revenues To Fund Antitrust 
        Enforcement Creates Anomalous Incentives and Outcomes
    When less than three percent of more than 4,500 transactions even 
merit a Second Request, it is apparent that there is a vast amount of 
overreporting, creating an unnecessary burden on both American 
businesses and the enforcement agencies. Yet the agencies' dependency 
on filing fee revenues compromises their ability to deal objectively 
with the problem.
    There are, as the Chamber has pointed out, well-recognized 
categories of transactions that historically have not had 
anticompetitive effects (see 1994 Chamber Statement at 5-7); but the 
FTC's ability to eliminate useless HSR reports is frustrated by the 
linkage between the filing fees and the agencies' funding. As the 
Chamber stated on an earlier occasion, ``The Commission is confronted 
with a Hobson's choice; continue to demand substantially useless HSR 
filings or substantially curtail the number of such filings and lose 
needed funding.'' \5\
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    \5\ Comments of the U.S. Chamber of Commerce on Federal Trade 
Commission's Proposed Changes in Hart-Scott-Rodino Rules Issued July 
28, 1995. In April 1996, the FTC implemented certain limited changes in 
the HSR coverage. In light of the 1998 data cited above, those changes 
had only minimal impact. See also Comments of the U.S. Chamber of 
Commerce before the International Competition Policy Advisory 
Committee, April 22, 1999, at 6 (``[T]he incentive to consider the 
appropriate scope of the premerger reporting obligations has been 
adversely affected, because consideration of limitations that may be 
warranted on the basis of competition objectives must now be weighed 
against the collateral fiscal effects.'').
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    Another way to deal with the massive overreporting is to raise the 
size-of-transaction reporting threshold above the $15 million level set 
a quarter century ago.
S. 1854 does this by raising it to $35 million, thereby eliminating 
approximately one third of the filings now required. Regrettably, 
believing it necessary to ``ensure budget neutrality'' (Judiciary 
Committee News Release, November 4, 1999), the sponsors of the bill 
propose to raise the fee for transactions valued at more than $100 
million to $100 thousand, irrespective of whether the transaction 
presents any significant competitive issues. In fact, according to HSR 
statistics, nearly 80 percent of transactions above $100 million were 
not even cleared to one of the agencies for competitive review, and 94 
percent failed to merit a Second Request.\6\ Thus, the proposed 
increase may achieve budget neutrality but, like the basic fee, it has 
no cost or value-based justification. Nevertheless, for reasons 
indicated in Part II of this Statement, the Chamber supports S. 1854, 
despite the fee increase it proposes.
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    \6\ HSR Annual Report (1998), Exhibit A, Statistical Tables, Tables 
I and III.
---------------------------------------------------------------------------
II. The Chamber Supports Enactment of S. 1854
    S. 1854 does two things. It raises the size-of-transaction 
threshold to $35 million and it provides long-needed Second Request 
reform. While the benefits of raising the threshold are diluted by the 
perceived need to ensure budget neutrality, the Chamber nevertheless 
supports this aspect of the bill since it will eliminate hundreds of 
essentially useless low-end filings. In addition, the Chamber is 
particularly in favor of the bill's provisions that deal with what has 
come to be known as the ``Second Request.''
    As originally conceived, the Second Request was to be a simple 
mechanism through which the federal enforcement agencies would be able 
to require the parties to produce at an early stage of the 
investigation a small number of nonprivileged documents that would 
allow the agencies to identify potential antitrust concerns and conduct 
a preliminary antitrust analysis.\7\ More traditional agency 
investigative tools that are subject to judicial review--subpoenas, in 
the case of the FTC and civil investigative demands, in the case of the 
Antitrust Division--were available for more extensive information 
collection. By virtue of the law of unintended consequences, however, 
the Second Request has grown into a huge burden upon the business 
community.
---------------------------------------------------------------------------
    \7\ As Congressman Rodino made clear in the House Debate, 
``[P]lainly, Government requests for additional information must be 
reasonable. The House conferees contemplate that, in most cases, the 
Government will be requesting the very data that is already available 
to the merging parties, and has already been assembled and analyzed by 
them. If the merging parties are prepared to rely on it, all of it 
should be available to the Government. But lengthy delays and extended 
searches should consequently be rare. . . . In sum, a government 
request for material of dubious or marginal relevance, or a request for 
data that could not be compiled or reduced to writing in a relatively 
short period of time, might well be unreasonable. In these cases, a 
failure to comply with such unreasonable portions of a request would 
not constitute a failure to `substantially comply' with the bill's 
requirements.'' [House Debate, September 16, 1976, 122 Cong. Rec. 
H30877.]
---------------------------------------------------------------------------
    The typical Second Request now requires the production of hundreds 
(and frequently thousands) of boxes of documents, each page of which 
must be sorted, numbered and catalogued according to an ever-increasing 
list of agency instructions and requirements. Additionally, the parties 
must respond to extensive requests for interrogatory responses that 
must be compiled into multiple volume answers or condensed into complex 
databases, again subject to whatever instructions and requirements 
agency lawyers and economists may devise at the moment. Indeed, the 
process has spawned a cottage industry of copying vendors, database 
managers and temporary personnel firms, all of them supporting a hugely 
costly process that Congress never intended to exist.
    Effective merger enforcement obviously requires an extensive amount 
of information, and the agencies must have an effective way of getting 
that information in a timely manner. The Second Request process, 
however, has become excessive. Virtually every company that has 
undergone a Second Request investigation can tell horror stories of 
unreasonably broad demands, unnecessary burdens and huge compliance 
costs, all seemingly unrelated to the real issues under investigation. 
All too often many of the document boxes are not even opened.
    The reasons for this excess are twofold. First, the assembly of 
these voluminous submissions takes time, and the statute stays the 
waiting period until compliance with the Second Request has been 
completed. Thus, the more burdensome and time-consuming the Second 
Request, the more time the agency has to conduct its investigation. 
This relationship between time and burden has become so clear that many 
agency staffs now insist that a party promise not to comply before a 
certain date as a precondition to obtaining any meaningful modification 
of the Request. Second, the agencies have absolutely no incentive to 
minimize the burden. For all practical purposes, the agencies' power 
with regard to these requests is functionally unreviewable. Recognizing 
that the parties have no ability to obtain impartial review of their 
Second Request determinations, the agencies have no incentive to narrow 
the requests or to minimize the burden; quite the contrary, their 
incentive is to avoid any risk of missing any conceivably relevant fact 
by insisting that the parties produce everything.
    Modern merger analysis probably has become too fact-intensive to 
return the Second Request back into what Congress initially intended. 
Given the time within which the agencies must investigate these complex 
transactions, the Second Request likely must remain the government's 
principal investigative tool. Effective merger investigation, however, 
does not require that the agencies be totally free to impose excessive 
costs on the parties. S. 1854, sponsored by Senators Hatch, Kohl and 
DeWine, represents a step in the right direction, protecting the 
agencies' need for the prompt submission of necessary information, 
while providing safeguards against unnecessary burdens and agency 
abuse. The proposed legislation improves the Second Request process in 
two principal ways.
    First, it introduces fair standards. The statute currently requires 
that a party substantially comply with a Second Request. The 
substantial compliance standard, however, imposes no limits upon the 
agency in seeking information and does not lend itself to an obvious 
definition of when appropriate compliance has been reached. 
Accordingly, the agencies feel free to ask for just about anything and 
to insist upon strict or literal compliance when it is to their 
advantage to do so.
S. 1854 provides that the agencies can only seek information that is 
not ``unreasonably cumulative or duplicative,'' and that does not 
impose a burden or expense that ``substantially outweighs the benefit 
of the information.'' Additionally, the bill would define substantial 
compliance to mean that a party's submission ``does not contain a 
deficiency that materially impairs the ability'' of the agencies to 
investigate the transaction.
    Second, S. 1854 provides a mechanism through which both the parties 
and the agencies can obtain rapid judicial determinations with respect 
to HSR compliance disputes through proceedings before a federal 
magistrate. The availability of review by a neutral third party will 
introduce needed balance into the Second Request process. Neither side 
will enter into judicial review lightly. If the agency prevails, the 
parties may not proceed with their transaction until compliance has 
been achieved. If the submitting party prevails, the waiting period 
will continue to run. Under this scenario, the prospect of judicial 
review will discipline both sides, so that actual challenges should be 
minimal.
    Because Congress initially believed that the Second Request would 
impose only a minimal burden upon the premerger notification process, 
it did not feel a need to include the types of procedural safeguards 
that would ordinarily accompany this type of governmental discovery 
right; however, now that the Second Request process has emerged as an 
important (and often oppressive) tool in government merger enforcement, 
procedural safeguards are needed. The addition of a minimal amount of 
government accountability--i.e., clearly articulated standards and an 
opportunity for review by an impartial third party--will only benefit 
the overall HSR premerger notification scheme.
    For these reasons, the Chamber strongly supports and urges 
enactment of S. 1854

    Senator Ashcroft. Thank you very much. It is good to have 
witnesses that do not suffer the impairment of color blindness.
    That light comes on, you go off, which is--the Senate is--
is afflicted mightily, and I am glad to see that you are not.
    It is my pleasure now to call upon Mr. Albert A. Foer. He 
is the president of the American Antitrust Institute and--and a 
former FTC official.
    So thank you very much.

    STATEMENT OF ALBERT A. (BERT) FOER, PRESIDENT, AMERICAN 
                      ANTITRUST INSTITUTE

    Mr. Foer. Thank you, Mr. Chairman.
    The American Antitrust Institute is an independent non-
profit education research and advocacy organization.
    I would like to make a brief comment about the FTC 
reauthorization and then turn to proposed changes in the merger 
process.
    To summarize my written statement, the Federal antitrust 
agencies are substantially understaffed and underfunded, in 
view of the law enforcement challenges that they face.
    Given the continuation of unprecedented demands of the job, 
we believe that the authorizations being proposed in S. 1687 
represent only the extreme low end of what is needed.
    The FTC's request to increase its full-time equivalents 
from--from 979 to 1,133 in Fiscal Year 2001 seems well 
justified.
    This would be permitted by a funding level of $165 million, 
and would still leave the FTC one-third smaller than it was in 
1980, when it was not faced with the demands that it is today.
    Turning to the Hart-Scott-Rodino amendments, I am going to 
address four questions. First, what reforms are appropriate 
with regard to Second Requests?
    Before passage of the landmark Hart-Scott-Rodino 
legislation, mergers and similar transactions were effectively, 
though not formally out of the reach of the antitrust laws.
    Under Hart-Scott-Rodino, the antitrust agencies have 
created an administrative system that identifies those mergers 
that are likely to be problematic and quickly allows the vast 
majority to move forward.
    All filings that do not get Second Requests--that is about 
97 percent--are dealt with in an average of 20 days.
    Although you may hear horror stories about the amount of 
data being demanded by the agencies in their Second Requests, 
these tend to caricature reality.
    First, the volume of Second Requests is not very large. In 
1998, it covered 125 transactions, only 2.7 percent of all 
transactions.
    Second, a very few large complicated and hard-fought cases 
may color perceptions of what is involved. Over 85 percent of 
the FTC Second Request transactions are resolved before there 
is substantial compliance with the request.
    Over 70 percent of the FTC Second Requests result in 
productions of 50 document boxes or less and over 60 percent 
result in productions of under 20 boxes.
    The average time to complete a Second Request investigation 
is only three to four months. About 60 percent of Second 
Requests result in successful law enforcement actions. I submit 
that these are very impressive numbers.
    The agencies have a generally strong record of working with 
parties to narrow requests and accommodate to what is feasible.
    Given their workload and the deadlines that HSR imposes on 
them, the agencies have a strong incentive to reduce the size 
of document requests.
    Review of Second Requests by a magistrate sounds better on 
paper than it is likely to be in practice.
    Indeed, we expect it would slow down the merger review 
process and make it more expensive for all concerned.
    The parties would spend a lot of time sparring in and out 
of court. Moreover, it would change the strategic dynamics of 
the pre-merger process.
    The public gets only one bite at the merger apple and it 
should be a full bite.
    At a pre-discovery stage, which we are talking about, 
enforcement officials should not be held to an unrealistic 
standard requiring them to know exactly what data they will 
need or what theory they will ultimately pursue.
    The agencies have demonstrated a willingness to cooperate 
with the private bar in streamlining the HSR process. Instead 
of legislation, therefore, we believe the enforcement agencies 
should be encouraged by this Committee to build on their 
current internal appeals processes; perhaps creating a more 
formally defined route for appeal within each agency structure.
    The second question: Is it appropriate to increase the 
thresholds for pre-merger notification reporting?
    Because of the uncertainties and the tradeoffs--I recognize 
this seems like a done deal, that everybody is in agreement 
that we should raise it--but there are tradeoffs that need to 
be taken into account.
    On the one hand, smaller companies would save time and 
money. On the other hand, we would not only allow 37 to 40 
percent of the nation's merger transactions to effectively 
disappear from the antitrust net, but we would also eliminate 
the antitrust deterrent against any competitive smaller 
mergers.
    So we recommend instead--instead of giving a de facto 
waiver to all these mergers, let's substantially reduce the 
filing fees and direct the enforcement agencies to reduce the 
reporting burden on small merging companies.
    Third question: Is it appropriate to increase the fees 
payable for larger transactions?
    We endorse increasing the fee from $45,000 to $100,000 for 
transactions larger than $100 million.
    And we further suggest there should be created a mega-
merger category for the 4.2 percent of transactions, 193, that 
are larger than a billion dollars.
    And we would urge that the user fee for these be 
considerably higher, for instance, $500,000.
    What effect, fourth question, last question--what effect 
will a reformed fee structure have on antitrust enforcement?
    I basically agree with Howard Adler that the user fee is 
not the right way to fund antitrust, but this is a problem that 
applies to many agencies besides the FTC.
    I also agree with Howard that it cannot be resolved 
immediately. We have to look at where we are.
    So starting from the current situation, it is important 
that any modifications to the filing fees should preserve the 
current anticipated level of funding.
    The analysis in our written statement indicates that S. 
1854 would result in an appropriations reduction of 
approximately $3.6 million, and therefore would not be revenue 
neutral.
    Thank you for this opportunity to present our views.
    Senator Ashcroft. I am grateful to you. Thank you for your 
clear presentation.
    [The prepared statement of Mr. Foer follows:]

        Prepared Statement of Albert A. (Bert) Foer, President, 
                      American Antitrust Institute
    These are comments of the American Antitrust Institute concerning 
S. 1687, the Federal Trade Commission Reauthorization Act of 1999, and 
S. 1854, the Hart-Scott-Rodino Antitrust Improvements Act of 1999. The 
American Antitrust Institute is an independent, non-profit education, 
research, and advocacy organization that believes the antitrust laws 
should play a more expansive and effective role in the national 
economy. I am Albert A. Foer, President of the AAI.\1\
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    \1\ Information concerning the AAI is available at http://
antittrustinstitute.org. Albert A. Foer is an attorney with experience 
in private practice and also as C.E.O. of a chain of retail stores. 
From 1975-1981, he held Senior Executive positions at the FTC, 
including Acting Deputy Director of the Bureau of Competition.
---------------------------------------------------------------------------
The Federal Trade Commission Reauthorization Act of 1999
    Early last year the American Antitrust Institute published a 40-
page paper history of antitrust funding, titled ``The Federal Antitrust 
Commitment: Providing Resources to Meet the Challenge.'' Copies were 
made available to the Appropriations Committees at that time and can be 
found at the AAI website.\2\ While some of the numbers require 
updating, the argument we offered remains valid, namely that the two 
federal antitrust agencies, i.e., the Federal Trade Commission and the 
Department of Justice Antitrust Division, are substantially underfunded 
and understaffed, in view of the law enforcement challenges they face. 
In our paper, we urged Congress to contemplate a three-year expansion 
of federal antitrust personnel on the order of 30-50%. At the time we 
wrote, the FTC's budget for f.y. 1999 was $119 million. The increase in 
S. 1687 to an authorization of $149 million in f.y. 2001 would be 25% 
and to $156 million in f.y. 2002 would be 31%. Given the continuation 
of the unprecedented challenges that are before us, we believe that the 
authorizations being proposed in S. 1687 would be at the extreme very 
low end of what is needed.\3\ The FTC's request to increase its FTEs 
from 979 to 1133 in f.y. 2001 seems well-justified.\4\ This would be 
permitted by a funding level of $165 million.
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    \2\ Available at (http://www.antitrustinstitute.org/recent/
23.cfm.).
    \3\ Our primary interest is in the Competition Mission rather than 
the Consumer Protection Mission, which was not the subject of our 
research. Our comments assume that the Competition Mission will receive 
approximately half of the FTC's overall funding.
    \4\ In 1980, this number was 1,719!
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    What are the challenges that require additional federal antitrust 
attention? First, we have a merger wave of unprecedented size and 
scope, which is rapidly restructuring the American and the world 
economy.\5\ The number of merger filings tripled from 1,529 in fiscal 
year 1991 to 4,642 in fiscal year 1999. We are seeing something like a 
15% increase this year. The dollar value of merger filings increased 
over 11 fold during this period, an indication that mergers are 
becoming larger and more complicated. Merger analysis is labor 
intensive. Much depends on careful fact-gathering and analysis. Neither 
the FTC nor the Justice Department is staffed adequately to deal with 
what is arriving each and every day. The result is a rapid movement 
toward more and more concentration in market after market.\6\
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    \5\ The FTC has testified before Congress approximately 38 times on 
mergers and consolidations, in the 105th and 106th Congresses, 
reflecting substantial national concern about this merger wave.
    \6\ As William Satire wrote in the New York Times on December 13, 
1999, ``Oversight pays for itself; indeed. Justice brings in $10 in 
fines for every $1 in its budget. But the F.T.C. and Justice are 
overwhelmed by the rising momentum toward concentration throughout 
American big business.''
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    Second, the promise of deregulation has not been kept. That promise 
was that antitrust would replace direct economic regulation as the 
public's protection against the abuse of market power. It only 
partially happened, with the result that consumers have not yet 
received all of the benefits from competition to which they are 
entitled. More needs to be done in the formerly regulated sectors of 
our economy and special care must be given to the deregulation of 
electricity, where the rules of the new game are yet to be written. The 
FTC has played an extraordinarily important role in helping the States 
adjust to electricity deregulation, but it has depended very largely on 
one lone economist spending only half of his time on this subject.
    Third, the economy has become more of a global marketplace, 
changing the modes and challenges of antitrust. Even as some markets 
become freer and more competitive, others are ruled by international 
cartels. While these are more often under the Antitrust Division's beat 
than the FTC's, both agencies have found that globalization increases 
their workload. For example, antitrust analysis now regularly requires 
understanding the international dynamics of an industry. Discovery 
becomes more time consuming and complicated. Cooperation with foreign 
antitrust agencies--which have proliferated since 1989--takes time.
    Fourth, new technologies have created new antitrust issues, such as 
the potential of network effects creating persistent monopolies. The 
FTC already plays an important role in educating the public on the 
consumer and competition aspects of rapidly changing technology-driven 
markets, but merely keeping on top of developments, not to mention 
developing and carrying out prudent public policies, is especially 
time-consuming at this critical time in economic history.
    The FTC has done a remarkable job of streamlining and improving its 
productivity. However, today, the agency can only be described as 
``strapped''. The FTC's budget request does not contain new programs. 
It does request additional staff to carry out a number of tasks 
Congress has imposed, such as implementing new identity theft 
legislation, and it requests funding for certain internal technological 
improvements, to make it possible, for example, to file Hart-Scott-
Rodino information on-line. Mainly, the FTC seeks funding for 
additional staffing made necessary by the demands of the merger wave 
and the rapid emergence of e-commerce. We urge that the authorization 
be increased to better recognize these needs.
The Hart-Scott-Rodino Antitrust Improvements Act of 1999
    We were also asked to comment on S. 1854, the Hart-Scott-Rodino 
Antitrust Improvements Act of 1999. We direct our comments to the 
following four questions: (1) What reforms are appropriate with regard 
to ``Second Requests''? (2) Is it appropriate to increase the 
thresholds for PMN reporting and, if yes, are the thresholds proposed 
in S. 1854 appropriate? (3) Is it appropriate to increase the fees 
payable for larger transactions and if yes, are the fees proposed in S. 
1854 appropriate? And (4) What effect will a reformed fee structure 
have on antitrust enforcement?
(1) What reforms are appropriate with regard to Second Requests?
    The Hart-Scott-Rodino Antitrust Improvements Act of 1976 brought a 
revolution to the antitrust laws with respect to merger enforcement. 
Before this landmark legislation, mergers and similar transactions were 
effectively, though not formally, out of the reach of the antitrust 
laws. It was nearly impossible to obtain an injunction that would stop 
a merger before it was consummated. Rather, the merger had to be 
attacked after the fact. This assured that litigation would be a 
prolonged process and that in most cases there would be no effective 
remedy, because, as the saying went, it's too difficult to ``unscramble 
the eggs'' once they have been cracked, stirred together and fried. H-
S-R changed all this, very dramatically. Today, mergers are challenged 
before they are consummated. This has brought a much higher degree of 
certainty to the process, speeded it up, and made it possible to obtain 
effective remedies in those relatively few situations where the 
transaction would violate the antitrust laws.
    The antitrust agencies have worked diligently to make the premerger 
notification program effective and they should be congratulated on 
their success. They have created an administrative system that 
identifies those mergers that are likely to be problematic and quickly 
allows the vast majority to move forward.\7\ With respect to those that 
may be problematic, they seek more information through a ``Second 
Request''. About 60% of Second Requests lead to successful law 
enforcement actions, and the Second Request process generally takes 
less than four months.\8\ These are impressive facts, given the 
complexity of today's mergers. It should also be mentioned that a 60% 
success figure is probably about as high as good public policy would 
warrant: if the agencies only sought more information on those 
situations which were more or less automatic ``winners'', they would 
not be casting their net widely enough.
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    \7\ In fiscal year 1998, almost 70% of the filings received early 
termination, on average in less than 16 days. For all filings that did 
not receive a Second Request, the average time for review was less than 
20 days. Letter from William J. Baer, Director, Bureau of Competition, 
FTC, to International Competition Policy Advisory Committee.
    \8\ Id.
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    S. 1854 would modify provisions of the H-S-R Act with respect to 
Second Requests. Second requests would be limited to information that 
(a) is not unreasonably cumulative or duplicative, and (b) does not 
impose a cost or burden on the parties that substantially outweighs the 
benefits to the agencies in conducting their antitrust review. Parties 
would have the right to petition a U.S. magistrate to review whether a 
Second Request meets those standards. In addition, parties would have 
the right to petition a U.S. magistrate for a determination of 
substantial compliance with a Second Request. The waiting period after 
substantial compliance would be extended from 20 days to 30 days.
    We would be pleased to see the waiting period extended from 20 to 
30 days. This would facilitate a more careful evaluation of the 
materials received and would relieve some of the stress that the 
current timeframe imposes on everyone.
    With respect to the other proposals, it is not clear to us that a 
significant problem exists, and we think the solution proposed is 
unworkable. Although you may hear horror stories about the amount of 
data being demanded by the agencies, these caricature the reality. 
First, the volume of Second Requests is not very large. In 1998, it 
covered 125 transactions, only 2.7% of transactions.\9\
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    \9\ This percentage is a little less than typical. The average for 
1987-1997 was 3.58%.
---------------------------------------------------------------------------
    Second, a few very large, complicated, and hard-fought cases may 
color perceptions of what is involved. Over 85% of the FTC's Second 
Request transactions are resolved before there is substantial 
compliance with the request. Over 70% of the FTC's Second Requests 
result in productions of 50 document boxes or less and over 60% result 
in productions of under 20 boxes. The average time to complete a Second 
Request investigation is three-to-four months, and many are completed 
in much shorter time.\10\
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    \10\ FTC letter to ICPAC, note 6 above.
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    The agencies have a generally strong record of working with parties 
to narrow requests and accommodate to what is feasible.\11\ Given their 
workload and the deadlines that H-S-R imposes on them, the agencies 
have a strong incentive to reduce the size of document requests. The 
Antitrust Division has an internal appeal procedure for disputes, 
leading to the Deputy Assistant Attorney General. In 4 years, we 
understand, this process has been utilized only three times, and in two 
of the three situations, the Deputy sided with the merging parties. The 
FTC has an informal process that involves the Director or Deputy 
Director of the Bureau of Competition whenever there is a Second 
Request conflict between the parties and the investigation staff.
---------------------------------------------------------------------------
    \11\ For instance, in 1995, after discussions with the private bar, 
the agencies produced a model Second Request form, so that the bar 
would know what kind of information would be requested and could plan 
ahead accordingly.
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    The reality seems to be that there has been only a handful of 
investigations requiring submission of large numbers of boxes of 
documents. Usually, these were multibillion dollar, multi-market 
transactions that transform entire industries. These are precisely the 
type of transactions where a detailed and probing examination is 
appropriate and where interconnections may not be apparent until data 
is obtained. When an agency issues a Second Request, it does not have 
enough information to evaluate the potential benefits of the 
information requested. Its information in hand is extremely limited. 
Unlike the parties to a transaction, the agency has no company 
officials engaged in the business in question to whom it can turn for 
information about the industry and its products, competitors and 
customers.
    You may hear complaints that the agencies ``game'' the premerger 
rules, using Second Request demands to delay a transaction. The other 
side, too, plays games, of course, sometimes dumping tons of documents 
on an overworked agency staff in the hope of wearing them out and 
causing them to overlook a needle buried in the haystack.
    Introduction of a formal right of appeal in the midst of a Second 
Request places a professionally conducted investigation in an untenable 
chicken-and-egg conundrum: the enforcement officials cannot necessarily 
determine the focus of the investigation until they have examined the 
data; if they are precluded from the data on the basis that they 
haven't identified their theories clearly enough, they will never 
obtain the data needed for a professional evaluation of the various 
possible theories.
    It is also important to understand that a change in the rules will 
affect the strategic dynamics of merger enforcement. Many cases are 
efficiently settled because the merging parties know that they have 
documents that will reveal the anticompetitive nature of their 
transaction and that the data will have to be provided to the 
investigators. By increasing the probability that they will not have to 
provide data (maybe they can persuade the magistrate that it is not 
necessary), we would be reducing the probability of settlement in these 
cases.
    As we see it, the intervention of a review by a magistrate sounds 
better on paper than it is likely to be in practice. Indeed, we expect 
it would slow down the merger review process and make it more expensive 
for all concerned, with the parties spending a lot of time sparring in 
and out of court. Magistrates tend to be busy and there is no guarantee 
that their intervention will be swift. In the worst scenario, if the 
magistrate happens to be unsympathetic to the antitrust laws or 
unfamiliar with how an antitrust case is put together, he or she could 
represent an open invitation for challenges that would have the effect 
of making it more difficult to obtain important evidence and properly 
evaluate the case. Moreover, a magistrate is used to participating in 
civil cases where the plaintiff has had more opportunity to develop the 
facts of the case; here, the government has typically had to rely on 
the initial filings and a few telephone calls. Its Second Request must 
necessarily be broad, often broader than what would be acceptable to a 
magistrate who is used to reviewing discovery in private civil 
litigation. This, it must be stressed, is a pre-discovery situation.
    We are reluctant to see a generally satisfactory administrative 
process be revised by legislation, which can be inflexible and 
difficult to adjust at a later time. The agencies have demonstrated a 
willingness to cooperate with the private bar in streamlining the 
process.\12\ We believe there is a better way to deal with whatever 
Second Request problem exists: the enforcement agencies should be 
encouraged by this Committee to build on their current internal 
processes, perhaps creating a more formally defined route for appeal 
within the structure. Decisions in the relatively few situations that 
will occur can best be made by people who understand how an antitrust 
case is put together and can decide quickly. Importantly, the top 
officials of the agency (perhaps, in the case of the FTC, the General 
Counsel or a designated Commissioner) would have an appropriate 
background for understanding the dynamics of an investigation and an 
incentive not to waste resources. More to the point, however, is that 
we are talking about an investigation of a law violation, not a 
judicial determination of responsibility. It is premature at this stage 
to insert the judiciary into the process.
---------------------------------------------------------------------------
    \12\ They are currently in the midst of a working with an American 
Bar Association task force on Second Requests. Also see note 11 above.
---------------------------------------------------------------------------
    Some may argue that the enforcement agency does not need so much 
data, because they are only preparing for a motion for a preliminary 
injunction and more complete data can be obtained during discovery for 
trial. In the context of modern merger practice, this is misleading. It 
is almost always the case today that the decision of the Federal 
District Court in a preliminary injunction determines whether or not 
the transaction will go forward; in effect, the preliminary injunction 
hearing is the trial and the parties need all their ammunition for that 
one hearing. The public gets one bite at the apple and it should be a 
full bite.
(2) Is it appropriate to increase the thresholds for PMN reporting, 
        and, if yes, are the thresholds proposed in S. 1854 
        appropriate?
    The thresholds for reporting a planned merger were created in the 
original Hart-Scott-Rodino law, dating back to 1976. They have not been 
modified to reflect inflation. If the initial thresholds were in some 
sense ``correct,'' then it is not unreasonable to modify them upwards 
one time and thereafter to index them for future inflation. On the 
other hand, the original thresholds were arbitrary then and remain 
arbitrary now.
    The important question is how many anticompetitive mergers will 
escape federal attention if the threshold is lifted? How do the 
negative effects of this compare to the positive effect of freeing a 
substantial number of transactions from the reporting requirement?
    The fact that a merger is relatively small does not necessarily 
mean that it will not have an adverse impact on competition, if the 
market itself is small. This is frequently the case in industries that 
serve a primarily local market, such as radio broadcasting or certain 
types of medical care. Moreover, there are many situations where the 
dollar size of the transaction is unrelated to its importance. For 
example, in the high tech industries, it is not unusual for a firm to 
have little in the way of revenue, but to own intellectual property 
that can create a new market or bring a big change to an existing 
market. To exempt small transactions from reporting means that the 
parties can go forward and consummate their deal without antitrust 
interference. If the government later determines that the transaction 
was anticompetitive, the only remedy is to try to ``unscramble the 
eggs.'' The cost to the federal government of pursuing relatively small 
mergers after the fact is likely to prove to be too high, with too 
small a return. Therefore, the practical effect of raising the limit 
for reporting will also be to provide a de facto safe harbor from 
federal intervention for mergers that fall under the reporting 
threshold.\13\
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    \13\ Some small mergers that are anticompetitive may be scrutinized 
by State officials, but the States play a relatively small role in 
merger enforcement and many of them are not equipped to challenge 
mergers.
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    How many transactions will be affected? S. 1854 would raise the 
filing threshold from $15 million to $35 million.\14\ The impact of S. 
1854 would appear to be, roughly, the elimination of 37% of the 
currently reported transactions. In absolute numbers, this would be 
approximately 1,700 transactions.
---------------------------------------------------------------------------
    \14\ An initial problem is that official data on premerger 
notification does not neatly correspond with the $35 million benchmark. 
According to the most recent Annual Report to Congress on the Hart-
Scott-Rodino law. for f.y. 1998 of the 4,728 merger transactions 
reported to the FCC and DOJ, 5.2% were smaller than $15 million, 21.7% 
were in the $15-$25 million category, and 25.4% were in the $25-$50 
million category. If we make the assumption (not necessarily precise, 
but an indicator of magnitude) that transactions in the $25-50 category 
are spread equally, then those from $25-$35 million would account for 
10/25ths (.4) of the statistical category, or 10.16% of transactions.
---------------------------------------------------------------------------
    In FY 1998, there were a total of 17 Second Requests by the two 
agencies in the $100 million. In 1998, this would have involved 1,326 transactions. We 
endorse this and further suggest that there should also be a mega-
merger category for the 193 (4.2%) of transactions above $1 billion. 
These are the most complicated and most costly to investigate, on 
average, and we urge that the user fee for these be considerably 
higher, e.g., $500,000.\17\
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    \17\ These largest mergers also have the most dramatic impact on 
the public in terms of plant closings, layoffs, community desertions, 
etc. For this class, we urge that the merging companies be required to 
file information with the public as to the nature of the merger, the 
markets that are involved, and explanations for any claimed efficiency 
gains (including anticipated layoffs and plant closings). To increase 
the transparency of decisions regarding the largest mergers, we suggest 
that the agencies provide a written report when they close the 
investigation after a Second Request has been answered.
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(4) What effect will a reformed fee structure have on antitrust 
        enforcement?
    The federal antitrust effort has become dependent on H-S-R filing 
fees. By law, fees collected by the agencies in conjunction with the 
receipt of premerger notifications are for the exclusive use of the two 
antitrust enforcement agencies.\18\ The funds are split evenly between 
the Antitrust Division and the FTC, although the FTC uses roughly half 
of its funding for consumer protection.
---------------------------------------------------------------------------
    \18\ See Pub. L. No. 101-162, sec. 605, 103 Stat. 1031 (1989), as 
amended by Pub. L. No. 101-302. Title II, 104 Stat. 217 (1990) (``Fees 
collected for [H-S-R filings] shall be divided evenly between and 
credited to the appropriations, Federal Trade Commission, `Salaries and 
Expenses' and Department of Justice, `Salaries and Expenses, Antitrust 
Division'. . . Provided further That fees made available to the Federal 
Trade Commission and the Antitrust Division herein shall remain 
available until expended.'') Filing fees were initially proposed by 
Senator Howard Metzenbaum as a method of supplementing antitrust 
revenues, beginning in fiscal year 1990. The FTC's dependence on filing 
fees has increased from 20% in 1990 to 100% in f.y. 2000.
---------------------------------------------------------------------------
    In recent federal budgets, Congress has tied the agencies' funding 
to the premerger notification income. Again in 2000, 100% of the 
antitrust budget will come from filing fees.\19\ We are not persuaded 
that it is in the public's long-term interest for antitrust enforcement 
to be tied to the level of merger activity in this way. For the moment, 
it provides some stability in funding, but of course this can change if 
the merger wave slows down--or if Congress changes the formulation for 
income. When an agency ``earns'' its funding as a result of a certain 
type of activity, it is subject to a skewing of its activities in favor 
of that activity. Moreover, in the case of antitrust, the merger wave, 
which drives mandatory deadlines under the HSR law, has forced the 
agencies to focus on mergers, to the exclusion of many other types of 
situations that might better deserve their focus. Roughly speaking, the 
two antitrust agencies now must spend 75% of their resources on 
mergers, up from about 33% not so many years ago. This implies that 
other types of antitrust concerns are probably getting less attention 
than they should.
---------------------------------------------------------------------------
    \19\ This arrangement means that Congress can fund antitrust 
without taking anything from any other program's budget. If Congress 
were looking for an additional way to increase antitrust funding, it 
could look to the fines and penalties levied by the Department of 
Justice in antitrust cases. In most past years, this ran in the range 
of $100 million, but last year, as the Department became particularly 
active with respect to international cartels, it was over $ 1 billion. 
This money goes to a fund for crime victims, but some of it could 
probably be diverted to antitrust law enforcement.
---------------------------------------------------------------------------
    However, starting from the current situation, it is important that 
any modifications to the PMN filing fees should preserve the current 
anticipated level of funding. We have seen that the fees which will be 
lost at the $100 million end would be $55,000 (the new fee of $100,000 minus the 
old fee of $45,000) times 1,326 transactions, or $72.9 million. This 
amounts to an appropriations reduction of approximately $3.6 million, 
and is therefore not revenue neutral.\20\
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    \20\ Although it is theoretically possible that some large 
transactions will not be undertaken as a result of the increased cost 
of filing under S. 1854, this seems highly unlikely in view of the fact 
that $55,000 is only .05% of a $100 million transaction. As noted 
earlier, we do not believe that the 37% reduction of the filings will 
actually translate into material savings for the agencies.
---------------------------------------------------------------------------
    Thank you for this opportunity to present the views of the American 
Antitrust Institute.

    Senator Ashcroft. Mr. Stephen Bolerjack is the senior 
counsel of the Ford Motor Company with the Antitrust and Trade 
Regulations Division.
    His practice areas include franchising, antitrust and trade 
regulation.
    It is a pleasure to have you here, Mr. Bolerjack. Please 
proceed.

 STATEMENT OF STEPHEN BOLERJACK, COUNSEL, ANTITRUST AND TRADE 
    REGULATIONS, FORD MOTOR CO., ON BEHALF OF THE NATIONAL 
                  ASSOCIATION OF MANUFACTURERS

    Mr. Bolerjack. Thank you very much, Mr. Chairman, Senator 
Wyden. I am here today representing the National Association of 
Manufacturers, presenting their views on this, and we thank the 
Committee for the opportunity to be here today.
    Three general points, all on the Hart-Scott reform issue. 
Number one, like everyone who has addressed the point so far, 
the NAM believes that merger enforcement by the antitrust 
agencies should not be funded through these fees.
    It creates a built-in conflict of interest at the agencies. 
We lay out in our written remarks other deleterious effects of 
having the fees fund the agencies.
    However, again, as the other speakers have already 
identified, we view this as more of a long-term effort. We do 
not believe these changes can occur immediately.
    But the NAM strongly supports a return to the situation as 
it existed prior to 1989 where the general revenues are used to 
fund the agencies and there not be a linkage between merger 
filing fees, if any, and the funding of the agencies. We are 
proposing the fees be eliminated.
    Point number two: We strongly support an increase in the 
threshold that was passed in 1976 and has not been changed, the 
$15 million threshold.
    Again, as speakers have already addressed, and I will not 
belabor the point, we believe that for several reasons.
    You have the agency staffers looking at very small 
transactions that have little or no chance of imposing an anti-
competitive impact in any market.
    We lay out the statistics in some detail in the written 
testimony, but for transactions $25 million and below, Second 
Requests are issued in approximately \9/10\th of 1 percent of 
all filings. However, there is a $45,000 fee for each of those 
filings.
    The FTC does not publicly release the data based on the 
$35,000--excuse me, the $35 million value of the transaction 
figure.
    For the figure between $25 and $50 million that \9/10\ths 
of 1 percent goes up to approximately 1.3 percent of the 
transactions that are subjected to a Second Request; again, a 
very, very small number.
    And I would also submit that excluding these transactions 
from the filing requirement is not giving a waiver to the 
parties involved. If customers, competitors, or suppliers have 
concerns about a merger, they can certainly raise them with the 
Trade Commission or the Department of Justice.
    They can take action at the Department of Justice by 
issuing a CID. At the Trade Commission there is subpoena 
authority.
    It is not a free pass. It is not insulation.
    The third point is Second Request reform. We have had a 
number of discussions--of horror stories. Everyone agrees there 
are horror stories.
    These requests are incredible. They require the production 
of tens or hundreds of thousands or even millions of pages of 
documents.
    To put things in perspective, we heard some figures about 
production of boxes of documents. Estimate between four and 
five thousand pages of documents per box, so we hear, ``Gee, we 
are doing a great job. The request involved only 50 boxes.''
    That is a quarter of a million pages of documents, all of 
which have to be searched for, photocopied, indexed, and little 
sticky labels applied in the appropriate and designated method.
    The legislation has created a cottage industry of this that 
Congress never intended to establish. It is not going to go 
away.
    The NAM supports merger enforcement at an appropriate 
level.
    The NAM recognizes that the agencies, number one, must 
receive significant amounts of information about problematic 
mergers on a very timely basis.
    There is no one gainsaying that.
    Another point is the ability to internally resolve these 
concerns. We have seen in the past the agencies attempt through 
one method or another, in very good faith, to attempt to 
resolve these concerns.
    And the administration changes. They may view their 
attempts as more successful than their customers, if you will, 
have viewed them.
    We feel that some reform of this must be embedded in 
legislation. And so the NAM strongly supports S. 1854, the 
amendment legislation.
    Thank you for your time.
    [The prepared statement of Mr. Bolerjack follows:]

 Prepared Statement of Stephen Bolerjack, Counsel, Antitrust and Trade 
 Regulations, Ford Motor Co., on Behalf of the National Association of 
                             Manufacturers
    Mr. Chairman, and members of the Subcommittee, my name is Stephen 
Bolerjack. I am before you today representing the views of the National 
Association of Manufacturers (NAM).
    The NAM is the nation's largest national broad-based industry trade 
group. Its 14,000 member companies and subsidiaries, including 
approximately 10,000 small manufacturers, are in every state and 
produce about 85 percent of U.S. manufactured goods. The NAM's member 
companies and affiliated associations represent every industrial sector 
and employ more than 18 million people.
    The NAM's mission is to enhance the competitiveness of 
manufacturers and improve living standards for working Americans by 
shaping a legislative and regulatory environment conducive to U.S. 
economic growth, and to increase understanding among policymakers, the 
media and the general public about the importance of manufacturing to 
America's strength.
    I will focus my comments on the premerger notification regime 
established by the Hart-Scott-Rodino (HSR) Act in 1976. The NAM 
believes that the current system is imposing unneeded costs and delays 
on businesses engaged in an acquisition, and is much in need of reform.
    Filings under the HSR Act are required from both sides for 
acquisitions of voting securities or assets in excess of $15 million 
(or 15 percent of the acquired party), a threshold that has not been 
changed in twenty-four years. Acquisitions involving very small 
businesses, those with total gross sales or assets of less than $10 
million for the business and its owners, do not require a filing. In 
this case, the buyer still must pay a filing fee of $45,000, and the 
parties must serve a thirty-day ``waiting period'' after filing before 
the transaction may be closed. If the antitrust agencies believe the 
deal may present concerns, they can issue a ``Second Request'' for 
additional information, which requires both sides to search for, copy 
and index hundreds of thousands or even millions of pages of documents, 
produce stacks of responses to interrogatories, and provide executives 
for deposition. The deal may not be closed until both sides have 
``fully complied'' with the Second Request, and served an additional 
twenty-day waiting period. The antitrust agencies' determination to 
issue a Second Request, the scope of the information and documents 
required, and the decision whether the parties have provided sufficient 
information to comply, are, in essence, unreviewable in court.
    The NAM was very pleased last year when Senate Judiciary Committee 
Chairman Orrin Hatch raised the question of premerger filing fees with 
the Attorney General during oversight hearings of the Department of 
Justice. The NAM wrote Chairman Hatch to thank him for raising this 
issue since it has been a concern of the NAM for many years. In 
addition, NAM President Jerry Jasinowski also notified members of the 
Federal Trade Commission (FTC) and others with an interest--including 
the full membership of the Senate Committee on Commerce, Science and 
Transportation--that the NAM would try to pursue reform of HSR fees and 
processes. Thus, the NAM was even more pleased when Chairman Hatch 
began discussions and released draft HSR reform legislation for review. 
Prior to adjourning for the first session, Chairman Hatch introduced S. 
1854, the Hart-Scott-Rodino Antitrust Improvements Act of 1999.
    The NAM appreciates your reviewing the topic of HSR reform during 
the FTC reauthorization hearings. The NAM understands that you and your 
Subcommittee intend to work with Chairman Hatch during the second 
session to see what reforms are possible for enactment this Congress. 
Thank you for exploring this issue and for any assistance that you can 
provide in order to bring about sound and meaningful HSR reforms as 
soon as possible.
1. The Filing Fee Should Be Eliminated
    The NAM has long opposed the HSR filing fee. Currently set at 
$45,000 per premerger notification, it is a tax on transactions, not a 
user fee, and should be eliminated. The NAM would like to note that 
House Ways and Means Committee Chairman Bill Archer has expressed 
agreement with this view. In a letter to House Appropriations Committee 
Chairman Bill Livingston dated September 20, 1996, Chairman Archer 
noted that ``the mere reauthorization of a preexisting fee that had 
historically been a tax would not necessarily require a sequential 
referral to the Committee on Ways and Means. However, if such a 
preexisting fee were fundamentally changed, it properly should be 
referred to the Committee on Ways and Means.'' Chairman Archer's letter 
specifically was about the proposal a few years back to substantially 
increase the fees once more without any offsetting reform. A copy of 
Chairman Archer's letter is attached, for the Subcommittee's 
convenience.
    HSR fees have generated more than $200 million in revenue in recent 
years. The fees provide almost all the budget for the Antitrust 
Division of the Department of Justice and the Federal Trade 
Commission--funding not only merger enforcement, but also the 
Division's criminal enforcement efforts and many of the FTC's consumer 
protection activities.
    Dependence on the merger filing fees for agency operations is bad 
public policy for three reasons. First, reliance on filing fees for 
funding exposes the agencies to a substantial funding cut when the 
current merger wave ends, which is inevitable. For example, filings 
dropped more than 40 percent between 1989 and 1991. Second, the filing 
fee eliminates any incentive for the agencies to achieve efficiencies 
by reducing the workload generated by the filings; decisions about new 
exemptions from filing that are warranted based on competition policy 
must be weighed against the resulting funding cuts. Third, 
overburdening the agencies with a large number of filings on deals with 
little or no competitive concerns in order to maintain funding diverts 
resources from matters of real concern.
    Sound public policy requires that this built-in conflict of 
interest be eliminated. Congress should fund the law-enforcement 
missions of the agencies based on the priorities assigned to competing 
funding requests, as it did prior to 1989.
2. The Filing Threshold Should Be Increased
    The $15 million ``size of the transaction'' threshold has been 
unchanged since the legislation was enacted in 1976, and should be 
substantially increased to account for inflation. It should also be 
indexed to account for future inflation, so the same problem will not 
need to be faced in the future. These changes will eliminate the need 
for filings on the smallest deals--those least likely to raise serious 
antitrust concerns but that nevertheless impose needless burdens on the 
antitrust agencies and the filing parties.
    When passed in 1976, the HSR Act was described as covering only the 
largest acquisitions--the sponsors estimated about 150 transactions a 
year. Although the number of filings was never that small, the number 
of filings has rapidly increased in recent years, reaching almost 5,000 
filings in 1998. If the original threshold had been indexed for 
inflation using the Consumer Price Index (CPI-U), it would now be more 
than $40 million and the number of filings would be substantially 
reduced. Using the gross domestic product deflator, the threshold 
should be around $27 million.
    The threshold needs to be changed to account for the inflation of 
the past twenty-four years. The NAM supports the threshold proposed in 
S. 1854, the ``Antitrust Improvements Act of 1999'': $35 million. This 
in essence takes account of inflationary effects since President Ford 
signed the HSR Act and wisely places the updated threshold between the 
two indicators mentioned above.
    In addition, the threshold needs to be indexed to account for 
inflation in the future to assure this problem does not recur. It is 
noteworthy that the fine for violating HSR is indexed to account for 
inflation, but the dollar value for determining whether a filing is 
required is not. Again, S. 1854 remedies this dichotomy. I would note 
as well that the fees--while not part of the HSR Act when passed--have 
more than increased from $20,000 to $45,000.
    Restoring the line drawn in the original statute between small 
mergers, which would not be subject to the expense and delay required 
by premerger notification, and larger mergers, which would remain 
subject to the premerger review system, is unlikely to interfere with 
the mission of protecting competition. The statistics published by the 
FTC indicate that in fiscal year 1998, it received filings on 1,235 
transactions valued at $25 million or less, and issued Second Requests 
in 11 transactions, or less than 1 percent. The agency does not publish 
statistics for transactions valued at $35 million or below, but for 
transactions valued between $25 million and $50 million, an additional 
16 Second Requests were issued in 1,163 transactions, or about 1.3 
percent of the time. Of course, a majority of the Second Requests in 
these larger mergers would likely be in mergers that would continue to 
be subject to premerger review.
    Unfortunately, filing fees generate most of the budget of each of 
the agencies. To assure that the change in threshold, which will 
significantly reduce the number of filings, is revenue neutral, S. 1854 
sets up a two-tier fee system: $45,000 for transactions valued between 
$35 million and $100 million, and $100,000 for transactions over $100 
million. The NAM supports this increase in order to obtain the other 
benefits of the legislation, but continues to believe that filing fees 
should be eliminated.
3. Second Request Reform
    The experience of NAM member companies is that the Second Request 
process is extremely burdensome and cries out for reform, giving due 
recognition to the need of the agencies for information necessary to 
conduct an antitrust analysis of the proposed transaction. Existing 
procedure encourages the agencies to issue requests for any information 
and documents they believe might conceivably be relevant to analysis or 
useful in possible litigation, without regard to the burden placed on 
the parties. The power of agency staffers to insist on literal 
compliance with an overbroad request is functionally unreviewable. 
Since a Second Request automatically extends the deadline for final 
agency decisions, the Second Request option is available for the 
agencies' convenience whenever there is a backlog.
    Responding to a Second Request is an incredible undertaking. It 
frequently requires the parties to review the files of hundreds of 
employees, searching for documents which number in the hundreds of 
thousands or often millions of pages, which must be copied, numbered 
and indexed according to agency requirements. The parties must also 
prepare mounds of responses to interrogatories, frequently developing 
data never used in the course of business or creating databases to 
specifications set by agency lawyers and economists. The cost for this 
process is frequently measured in the millions of dollars, and 
sometimes in the tens of millions. These costs are frequently incurred 
in transactions that go forward as presented to the agency.
    Examples of unreasonable actions by the agencies during the course 
of a Second Request abound. Every practitioner I know can tell stories 
of numerous boxes of documents returned unopened, refusals to eliminate 
demands for documents on subjects completely unrelated to the issues 
under investigation, and refusals by agency staff to even identify what 
they thought the issues were or the basis for any antitrust concern.
    The current procedure provides no incentive whatever for the 
agencies to reduce the burden imposed by a Second Request. There is no 
practical way for the parties to obtain impartial, third party review 
of agency actions taken pursuant to a Second Request. Thus, the 
incentive among agency staff is to insist that the parties literally 
comply with the request to eliminate any possible criticism for missing 
any data. A number of years ago I was discussing a potential Second 
Request with a staffer and requested that a product line that the 
staffer agreed was unlikely to raise competitive concerns not be 
included. The staffer refused to exclude the product line, and frankly 
told me that issuing a full Second Request raised no questions from his 
superiors, but he had to justify any changes from the standard form or 
exclusions of data requested.
    The Second Request procedure is broken. The balance of power is so 
far skewed toward the agencies that these requests are placing an 
enormous burden on business. For this reason the NAM strongly supports 
S. 1854, sponsored by Senators Hatch, Mike DeWine and Herb Kohl. The 
NAM recognizes that some of these problems can be alleviated through 
internal agency procedures. Nevertheless, only legislative changes will 
ensure continued and long-term relief.
    The NAM supports effective merger oversight, and recognizes that 
the agencies need significant amounts of information in a timely manner 
to perform this mission. S. 1854 protects the ability of the agencies 
to obtain needed information, but also protects parties to a 
transaction under review from unnecessary burdens. First, the bill 
limits the ability to issue burdensome requests; the agencies may not 
request information that is ``unreasonably cumulative or duplicative,'' 
or requests that impose a burden or expense on the parties that 
outweighs any likely benefit to the agencies in conducting ``a 
preliminary antitrust review of the proposed transaction.'' This will 
help prevent abuses by staffers insisting on literal compliance with 
unreasonable requests. Second, the bill also sets a standard for 
``substantial compliance''; a party has complied if there is no 
``deficiency that materially impairs the ability of [the agencies] to 
conduct a preliminary antitrust review of a proposed transaction.'' In 
any review by a third party, this focuses attention on the legitimate 
need for the information, rather than on literal compliance with the 
request.
    Finally, S. 1854 provides a procedure for the parties or the 
agencies to obtain review by a federal magistrate of Second Request 
compliance disputes. The availability of review by a neutral third 
party provides balance to a process that is skewed toward the agencies, 
and will provide the incentive, currently missing, for the agency 
staffs to reduce the burden imposed on business. The NAM believes the 
parties will carefully consider all alternatives before invoking the 
procedure and taking the risks inherent in judicial review, and the 
review will not become a part of most or many Second Request 
proceedings.
    For these reasons, the NAM strongly supports and urges enactment of 
S. 1854 and, again, appreciates the opportunity to appear before you. I 
will be happy to try to answer any questions that you may have.

Committee on Ways and Means
U.S. House of Representatives
Washington, DC

                                 September 20, 1996

The Honorable Bob Livingston
Chairman
Committee on Appropriations
H-218 U.S. Capitol
Washington, DC 20515

Dear Chairman Livingston:

    I am writing to you regarding the proposed increase in Hart-Scott-
Rodino fees adopted by the Senate Appropriations Committee in an 
amendment to H.R 3814, the ``Departments of Commerce, Justice, and 
State, the Judiciary, and Related Agencies Appropriations Act, 1997.'' 
I strongly object to any increase in the overall amount of these fees 
and wish to inform you of my opposition, especially as you work on a 
possible continuing resolution.
    As you know, I am committed to protecting the jurisdictional 
interests of the Committee on Ways and Means and to ensuring that all 
revenue measures are properly referred to this Committee. To this end, 
the Committee on Ways and Means relies upon the statement issued by 
Speaker Foley in January 1991 (and reiterated by Speaker Gingrich on 
January 4, 1995) regarding the jurisdiction of the House Committees 
with respect to fees and revenue measures. Pursuant to that statement, 
the Committee on Ways and Means generally will not assert jurisdiction 
over ``true'' regulatory fees that meet the following requirements:

          (i) The fees are assessed and collected solely to cover the 
        costs of specified regulatory activities (not including public 
        information activities and other activities benefiting the 
        public in general);
          (ii) The fees are assessed and collected only in such manner 
        as may reasonably be expected to result in an aggregate amount 
        collected during any fiscal year which does not exceed the 
        aggregate amount of the regulatory costs referred to in (i) 
        above;
          (iii) The only persons subject to the fees are those who 
        directly avail themselves of, or are directly subject to, the 
        regulatory activities referred to in (i) above; and
          (iv) The amounts of the fees (a) are structured such that any 
        person's liability for such fees is reasonably based on the 
        proportion of the regulatory activities which relate to such 
        person, and (b) are nondiscriminatory between foreign and 
        domestic entities.

    Additionally, pursuant to the Speaker's statement, the mere 
reauthortization of a preexisting fee that had not historically been 
considered a tax would not necessarily require a sequential referral to 
the Committee on Ways and Means. However, if such a preexisting fee 
were fundamentally changed, it properly should be referred to the 
Committee on Ways and Means
    Currently, the Hart-Scott-Rodino Antitrust Improvements Act of 1976 
imposes a $45,000 premerger notification filing fee on certain 
acquisitions. Proceeds from these fees are used as offsetting 
collections in appropriating funds for the Federal Trade Commission 
(the ``FTC'') and the Antitrust Division of the Department of Justice 
(the ``Antitrust Division''). The modification proposed by the Senate 
Appropriations Committee would establish a three-tiered fee structure 
(ranging from $25,000 to $95,000). Proceeds from these fees would be 
used to fund entirely the budgets of the FTC and the Antitrust 
Division.
    These increased fees are inconsistent with requirements (i), (ii), 
and (iv) listed above. The FTC does far more than merely regulate 
acquisitions subject to the Hart-Scott-Rodino Act. Indeed, there is 
reason to believe that the amount of current premerger notification 
fees substantially exceeds the costs of the FTC and Antitrust Division 
in enforcing the Hart-Scott-Rodino Act and evaluating reportable 
transactions under the antitrust laws. Under the proposed fee increase, 
any pretext regarding linkage of the fees to regulatory costs is 
abandoned. This is plainly an attempt to fund the entire FTC and 
Antitrust division, which both have broader consumer protection 
responsibilities, by imposing a tax on a small category of regulated 
entities. Accordingly, any additional premerger notification ``fees'' 
are more properly viewed as taxes within the jurisdiction of the 
Committee on Ways and Means.
    The jurisdictional interest of the Committee on Ways and Means 
relates solely to the use of the Hart-Scott-Rodino premerger 
notification fees as a means of generally financing the FTC and the 
Antitrust Division. We do not have an interest regarding how much 
funding should be available to the FTC and the Antitrust Division and 
how Hart-Scott-Rodino fees should be designed (as long as the amount of 
fees are reasonably related to the relevant reguiatory costs and fairly 
apportioned among affected entities).
    I look forward to working with you to address these concerns. With 
best personal regards,

Sincerely,

Bill Archer
Chairman

    Senator Ashcroft. Senator Wyden.
    Senator Wyden. I do not have any questions. I think it's 
been an excellent panel. And you have--you have the challenge 
of trying to compete with the Federal Trade Commission and all 
that we asked of them, but your comments have been very, very 
helpful. And we appreciate it and we will look carefully at 
them as we review the statute. Thank you.
    Senator Ashcroft. Thank you. I would like for any of you to 
answer this for me.
    The proposed legislation is to reduce the workload by about 
40 percent of the cases of merger applications.
    If you were to look at that 40 percent in the last four or 
5 years, and I think this may be your Second Request language, 
Mr. Bolerjack, but how many of those would have been denied as 
mergers of that 40 percent?
    Mr. Bolerjack. That is very difficult to answer. I think if 
you get into our written testimony, even where they imposed the 
Second Request, you are talking about a grand total, for 
mergers of under $50 million, of 26 Second Requests out of--I 
don't have the number handy, not that it matters.
    Senator Ashcroft. Well, what I am asking is not--it seems 
to me that after a Second Request it still might be that they 
do not deny the merger.
    Mr. Bolerjack. Absolutely, yes, sir.
    Senator Ashcroft. So does anyone know the answer to the 
question of how many are denied?
    Mr. Foer.
    Mr. Foer. I have done some analysis that is in the prepared 
statement. The numbers I was working with were from fiscal year 
1998, which were the last published----
    Senator Ashcroft. Yes.
    Mr. Foer. --but what it came down to was probably seven or 
eight mergers a year that would have been stopped or 
substantially changed would fall through the net.
    And I say would fall through the net, because I do not 
think anybody would go after them once the threshold is lifted.
    They would have to be attacked after consummation of the 
merger, which is very difficult, costly and often usually in 
the past did not result in very effective relief.
    So I think that counselors----
    Senator Ashcroft. But the law is the same, is it not? I 
mean, basically the offensive law----
    Mr. Foer. It would be----
    Senator Ashcroft. --so what you are saying is a court would 
not reach the same judgment as the FTC would.
    Mr. Foer. What I am saying is I do not think that the FTC 
or Justice Department would ever challenge these.
    Senator Ashcroft. They would not even think it was worth 
it.
    Mr. Foer. It would not be worth it.
    Senator Ashcroft. So it is not a very--well, that--that 
answers my question.
    Mr. Foer. But I would like to add one more point.
    Senator Ashcroft. Because if it is not worth it to do it, 
why were they doing it in the first place?
    And if--if we take a number of--of things that are worth 
doing down to zero, that should settle this question.
    Mr. Foer. May I respond?
    Senator Ashcroft. Well, I--yes, you can. Go ahead.
    Mr. Foer. Well, first of all, there is a difference in the 
cost benefit analysis, if you are going to seek an injunction 
before the merger or if you are going to have to come after it 
after the eggs have been broken and mixed together and fried. 
That was--that was too difficult to do.
    On relatively small mergers, it just will not be done. And 
these mergers will, in effect, have a free pass.
    Now, is it important? We said--I said seven or eight. But 
if counselors are now----
    Senator Ashcroft. I understand your other point----
    Mr. Foer. Okay.
    Senator Ashcroft. --which you have made in your remarks. I 
got the answer to my question and--but you--you--you--you think 
that there is a certain appropriate chilling effect that the 
filing has.
    Mr. Foer. Yes.
    Senator Ashcroft. And you do not want to lose that?
    Mr. Foer. Yes.
    Senator Ashcroft. I--I understand that.
    Mr. Adler. May I add a comment, Mr. Chairman?
    Senator Ashcroft. Yes, you may.
    Mr. Adler. If you go back to the original intent of Hart-
Scott-Rodino, it was never intended that it was going to pick 
up absolutely every merger. The legislative history shows that 
it was understood that some mergers would not be pre-reported. 
So if you miss seven or eight in the reporting process, that is 
perfectly consistent with the original intent of Congress.
    Senator Ashcroft. Well, if--and if the harm is not so 
egregious as to even when it is understood later on occasion 
the pursuit by the authorities, you've got to wonder whether 
the harm is that substantial to the culture.
    [Pause.]
    Let me just clarify your points about fees. Your point is 
not that these fees just fund the merger supervision 
activities, but that they fund the entirety of the FTC, so it 
is a massive subsidization.
    Mr. Adler. Yes. Because if----
    Senator Ashcroft. But you are against--you would be against 
a fee which just funded the merger supervision?
    Mr. Adler. Yes. Because what you would have would be the 
acquiring companies in thousands of benign and even 
procompetitive mergers cross-subsidizing the enforcement costs 
for the Exxon/Mobils and other huge cases that are very 
resource consuming.
    Senator Ashcroft. Well, you could avoid a cross-subsidy if 
your fee structure were related to cost like bank examiners.
    If they spend 2 days in the bank, they charge 2 days. If 
they spend 2 years, they charge 2 years, so in theory, you are 
against even if they had specific cost allocations, you are 
against it?
    Mr. Adler. No, and we say in our prepared statement that if 
you could fashion a fee that would be related to cost, that 
would be more akin to a user fee, and we would not oppose that. 
Indeed, that is what Germany does.
    Senator Ashcroft. I am not proposing it. I just kind of 
wanted to clarify what your position was.
    I have only been involved in one merger myself. It was 31 
years ago, I think, my wife would remind me.
    There was a fee attendant there too. And I do not know what 
we were subsidizing, but it has been a good merger.
    I do not have any further questions, if the Senator from 
Oregon, I thank you for your kindness and you all have--I--I 
concur with him in that your testimony has been valuable and 
helpful and straightforward. I appreciate it.
    And I would now like to call the next group of witnesses to 
the witness table.
    [Pause.]
    It is my pleasure to welcome you. I thank you for your 
patience, and I am delighted that you are here to help us.
    We first call upon Mr. Daniel Jaye, the Chief Technology 
Officer for Engage Technologies. Engage delivers interactive 
data based marketing products and information services.
    Mr. Jaye, thank you for coming to help us understand better 
this area of concern related to privacy. Thank you.

  STATEMENT OF DANIEL JAYE, CHIEF TECHNOLOGY OFFICER, ENGAGE 
                          TECHNOLOGIES

    Mr. Jaye. Thank you, Mr. Chairman. I appreciate the 
opportunity to testify before you today on these issues of 
importance to your Committee, to Internet users, and to the 
future of our Internet economy.
    As you said, I am Daniel Jaye, with Engage Technologies of 
Andover, Massachusetts, a CMGI company.
    Engage is a leading provider of Internet marketing 
solutions.
    Engage's technologies and services allow web site operators 
and advertisers to tailor their commercial and editorial 
content in innovative ways likely to be of the greatest 
interest to a visiting Internet user--all without ever learning 
an individual's identity.
    I would like to address two topics today; first, Engage's 
technology is a powerful example of just how effectively the 
marketplace can and will meet consumer demand for privacy; and 
second; industry self-regulation as meaningful further 
assurance of consumer privacy online.
    Engage's business model not only accommodates, but is in 
fact borne of consumers' interest in protecting their privacy 
online.
    When I joined with CMGI Chairman and CEO David Wetherell to 
create Engage in 1995, we were guided by a few simple but 
fundamental propositions.
    If the Internet was truly to deliver an abundant array of 
information and services that were both affordable and 
appealing to a mass audience, the medium would require 
advertising support.
    And if that support was to prove sustainable, the medium 
would have to demonstrate particular proficiency at delivering 
the right ads to the right audience.
    At the same time, all businesses agree that, in order for 
the Internet to be successful, consumers must have trust and 
confidence in the medium.
    However, different companies have different business 
models.
    In our business, we believed that privacy-sensitive 
technology brings a competitive advantage.
    From the onset, in our approach, marketers do not need to 
know the actual identity of a consumer to effectively market 
online.
    In our approach, they simply need to know the interests, 
general vicinity and broad demographics of a website visitor to 
provide information about the products and services that the 
visitor is most likely to find useful.
    At Engage we do not collect names, e-mail addresses, home 
addresses or personal or other sensitive information of any 
kind.
    And we firewall that non-personally identifiable 
information we collect through a patent-pending technology we 
call dual-blind identification.
    This ensure that individual websites can never determine a 
web browser's identity or know what other sites the user may 
have visited.
    Indeed, Engage itself does not maintain information about 
when a browser visits a particular web page. Instead, we 
accumulate information about the aggregate amount of time spent 
on different types of content to gain some sense of a visitor's 
likely interest, but not who that visitor is or when and where 
they have been on the web.
    Our solution is built upon the principle that it should 
never be possible for us or anyone else to determine or even 
triangulate a visitor's real world identity based on the data 
that we store.
    We have built our business on the fundamental belief that 
consumers will feel comfortable with a technology specifically 
designed to protect their privacy.
    Consumer comfort and security is no less critical to the 
businesses who are our customers.
    Advertisers and website publishers that want to protect 
their brand and retain loyal customers cannot afford to do 
business with companies that ignore consumer privacy concerns.
    And, of necessity, they will ultimately embrace only those 
technologies and practices that can provide tailored and 
effective online advertising without compromising consumer 
privacy.
    This is a powerful marketplace force, and the growing 
industry support of technologies like ours is proof that the 
market is working.
    Beyond the protections inherent in technologies such as 
ours, policymakers can and should rely as well on our 
industry's commitment to and strong self-interest in effective 
self-regulation.
    In the few short years over which the Internet has 
blossomed, the online industry has already made tremendous 
strides in voluntary or industry-mandated adoption of the right 
way to do business.
    Online companies can ill-afford to be out of step with 
rising industry standards for privacy protection.
    Industry self-regulatory programs that establish and 
enforce meaningful privacy principles are thus essential to 
effective consumer privacy protection.
    Our industry has quickly and aggressively risen to this 
challenge.
    The Online Privacy Alliance has brought together more than 
90 associations and corporations in a cross-industry coalition 
that has produced not only widespread implementation of its 
substantive guidelines, but also significant progress in 
consumer education on this subject.
    Consumers wishing to make informed choices about the 
privacy practices of the websites they visit have become 
increasingly familiar with the seal and the guidelines of the 
various third-party organizations that have come to police 
compliance with online privacy standards. These include TRUSTe 
and the Better Business Bureau's BBBOnline program.
    Beyond this--these industry-wide self-regulation efforts, 
other groups have been at work to tailor standards to 
particular segments of the online marketplace.
    We are participating in the Network Advertising Initiative, 
working with our counterparts, to expand industry standards in 
a way that ensures consumer confidence in the privacy afforded 
by the critical marketing support services our businesses 
provide.
    One tool common to this array of programs is the posting of 
privacy statements and the full disclosure in simple language 
and in plain sight, of all data collection and use practices.
    If I can just have a minute to finish on the self-
regulatory principles?
    Senator Ashcroft. Please----
    Mr. Jaye. Thank you. Numerous companies now contractually 
require publishers to post privacy policies.
    Another standard approach affords consumers the ready 
choice to opt out of information collection and use.
    As you know the Federal Trade Commission has encouraged our 
industry's extensive self-regulatory efforts, and now the 
agency has convened a new Advisory Committee on Online Access 
and Security.
    As a member of this committee, the committee is working to 
develop even more effective means to ensure that consumers feel 
and are safe and secure in their online travels.
    These self-regulatory and FTC oversight initiatives bolster 
what are already formidable marketplace checks on online 
businesses' protection of consumer privacy.
    Effective self-regulation of the Internet is not only the 
right thing to do, it is the necessary thing to do.
    In fact, 70 to 80 percent of the ad space on the Internet 
today is unsold or undersold.
    For Web publishers to attain profitability, they must be 
allowed to deploy and use the innovative marketing capabilities 
that initially attracted advertisers.
    Thus, this is not the time to risk undermining the 
effectiveness of online advertising.
    The viability of e-commerce, of an advertising-supported 
Internet, and thus of all of the Internet's tremendous economic 
and societal benefits depends on it.
    Thank you.
    Senator Ashcroft. Thank you. You were true to your one-
minute word. Thank you.
    [The prepared statement of Mr. Jaye follows:]

     Prepared Statement of Daniel Jaye, Chief Technology Officer, 
                          Engage Technologies
    Thank you, Mr. Chairman. I appreciate the opportunity to testify 
before you today on these issues of importance to your Committee, to 
Internet users, and to the future of our Internet economy.
    My name is Daniel Jaye. I am the Chief Technology Officer and Co-
Founder of Engage Technologies, Inc. of Andover, Massachusetts.
    Engage is a leading provider of ``next generation online marketing 
solutions.'' Just what does that description mean, free of at least 
some of the Internet jargon?
    It means that Engage technology and services allow web site 
operators and advertisers to tailor their commercial and editorial 
content in innovative ways likely to be of the greatest interest to a 
visiting Internet user--all without ever learning an individual's 
identity.
    And we know how important that is to Internet companies, as Engage 
is a majority-owned operating company of CMGI, Inc.--an Internet 
incubator and investment company that funds or operates a tremendous 
array of successful Internet businesses.
    I would like to address two topics today: first, Engage's 
technology as a powerful example of just how effectively the 
marketplace can and will meet consumer demand for privacy; and, second, 
industry self-regulation as meaningful further assurance of consumer 
privacy online.
    Let me begin, then, with an explanation of how Engage's business 
model not only accommodates, but is in fact borne of, consumers' 
interest in protecting their privacy online. When I joined with CMGI 
Chairman & CEO David Wetherell to create Engage in 1995, we were guided 
by a few simple but fundamental propositions. If the Internet was truly 
to deliver an abundant array of information and services that were both 
affordable and appealing to a mass audience, the medium would require 
advertising support. And if that support was to prove sustainable, 
online advertising would have to make up in quality what it lacked in 
quantity: the medium would have to demonstrate particular proficiency 
at delivering the right ads to the right audience. At the same time, 
all businesses agree that, in order for the Internet to be successful, 
consumers must have trust and confidence in the medium.
    Different companies have different business models. In our own 
business, we believed that privacy-sensitive technology would bring a 
competitive advantage. So, from the outset, Engage has developed a 
unique technology in which online marketers understand the interests of 
web site visitors based strictly upon anonymous, non-personally 
identifiable information. In our approach, marketers do not know the 
actual identity of a consumer to effectively market online. They simply 
know the interests, general vicinity, and broad demographics of a web 
site visitor in order to provide information about products and 
services that visitor is most likely to find useful. We do not collect 
names, e-mail addresses, home addresses, or personal (or otherwise 
sensitive) information of any kind.
    And we firewall the non-personally identifiable information we 
collect through a patent-pending technology we call ``dual-blind'' 
identification: this ensures that individual web sites can never access 
the identity even of the individual's web browser or know what other 
sites a user may have visited. Indeed, Engage itself does not maintain 
information about when a browser visits a particular web page. Instead, 
we accumulate information about the aggregate amount of time spent on 
different types of content in order to gain some sense of a visitor's 
likely interests--but not who that visitor is or just when and where 
they have been on the web. Our solution is built upon the principle 
that it should never be possible for us (or anyone else) to determine 
(or even ``triangulate'') a visitor's real world identity based on our 
abstracted data.
    We have built our business on the fundamental belief that consumers 
will feel comfortable with a technology specifically designed to 
protect their privacy. Consumer comfort and security is no less 
critical to the businesses who are our customers. Advertisers and web 
site publishers that want to protect their brand and retain loyal 
customers cannot afford to do business with companies that ignore 
consumer privacy concerns. And, of necessity, they will ultimately 
embrace only those technologies and practices that can provide tailored 
and effective online advertising without compromising consumer privacy. 
This is a powerful marketplace force, and the growing industry support 
of our technology is proof that the market is working.
    Beyond the protections inherent in technologies such as ours, 
policy makers can and should rely as well on our industry's commitment 
to--and strong self-interest in--effective self-regulation. In the few 
short years over which the Internet has blossomed, the online industry 
has already made tremendous strides in voluntary or industry-mandated 
adoption of ``the right way'' to do business. And for the same 
competitive reasons I mentioned a moment ago, online companies can ill 
afford to be out of step with rising industry standards for privacy 
protection.
    Industry self-regulatory programs that establish and enforce 
meaningful privacy principles are thus essential to effective consumer 
privacy protection. (Indeed, other countries' forays into governmental 
regulation of privacy have only confirmed the greater efficacy of 
active industry self-regulation.) Our industry has quickly and 
aggressively risen to this challenge.
    The Online Privacy Alliance has brought together more than 90 
associations and corporations in a cross-industry coalition that has 
produced not only widespread implementation of its substantive 
guidelines, but also significant progress in consumer education on this 
subject.
    Consumers wishing to make informed choices about the privacy 
practices of the web sites they visit have become increasingly familiar 
with the seal and the guidelines of the various ``third party'' 
organizations that have come to police compliance with online privacy 
standards. These include TRUSTe, of which Engage is proud to be a 
licensee and sponsor, and the Better Business Bureau's BBBOnline.
    Beyond these industry-wide self-regulation efforts, other groups 
have been at work to tailor standards to particular segments of the 
online marketplace. We are participating in the Network Advertising 
Initiative, working with our counterparts in online network advertising 
to expand industry standards in a way that ensures consumer confidence 
in the privacy afforded by the critical marketing support services our 
businesses provide.
    One tool common to this array of self-regulatory programs is the 
posting of privacy statements and the full disclosure, in simple 
language and in plain sight, of all data collection and use practices. 
And, reflective of how our competitive industry is driven to compete in 
terms of privacy protection as well, Engage has been a leader in 
contractually requiring our customers to post a privacy page disclosing 
their relationship to us and to provide a direct link to our privacy 
page.
    Another standard approach affords consumers the ready choice to 
``opt out'' of information collection and use. In our case, consumers 
need only visit our www.engage.com privacy page, click on our opt-out 
link, and their browser will no longer be the subject of any behavioral 
information collection or use.
    As you know, the Federal Trade Commission has encouraged our 
industry's extensive self-regulation efforts, and now the agency has 
convened a new Advisory Committee on Online Access and Security. I am 
proud to be joining with this broad array of industry and consumer 
representatives working to develop even more effective means to ensure 
that consumers feel--and in fact are--safe and secure in their online 
travels.
    These self-regulation and FTC oversight initiatives bolster what 
are already formidable marketplace checks on online businesses' 
protection of consumer privacy. The needs of our advertisers to 
attract--and not repel--consumers will ensure that we get the job done.
    Effective self-regulation of Internet privacy is thus not only the 
right thing to do--it's the necessary thing to do. In fact, 70-80 
percent of the ad space on the Internet today is unsold or undersold. 
For Web publishers to attain profitability, they must be allowed to 
deploy and use the innovative marketing capabilities that initially 
attracted advertisers.
    Thus, this is no time to risk undermining the effectiveness of 
online advertising. The viability of e-commerce, of our advertising-
supported Internet, and thus of all the Internet's tremendous economic 
and societal benefits depends on it.
    Thank you.

    Senator Ashcroft. It is my pleasure now to call upon the 
Honorable William H. Sorrell.
    Mr. Sorrell is the Attorney General of the State of Vermont 
and it is a pleasure to have you here, Mr. Sorrell.

  STATEMENT OF WILLIAM H. SORRELL, ATTORNEY GENERAL, STATE OF 
                            VERMONT

    Mr. Sorrell. Thank you very much, Mr. Chairman, Senator 
Wyden.
    I am pleased to be here and grateful to the Committee for 
hearing from the National Association of Attorneys Generals on 
certain of the matters that are before the Committee today.
    I have prepared some written comments, which I have filed 
and I hope will be accepted as part of the record of these----
    Senator Ashcroft. Without objection, they will be included 
and so would any submissions by those who join you on the 
panel.
    Mr. Sorrell. Thank you, Mr. Chairman. I want to just--in 
less than 5 minutes--highlight a few of the points that I raise 
in my written comments.
    First of all, we support the reauthorization of the Federal 
Trade Commission.
    The FTC has a long history of excellent work to protect 
consumers in this country.
    At the same time, I want to highlight the fact that the 
Attorneys General around the country have a long history of 
aggressively enforcing our consumer protection laws.
    We are at ground zero, if you will, in dealing with 
consumer fraud.
    We have worked individually. We have worked on a multi-
state basis. We have worked collectively with the FTC, 
particularly in the area of telemarketing fraud--and I think 
effectively as partners.
    But as the chair suggested earlier this morning, we are in 
a changing world and with the Internet the pace of change, as 
we heard at an AG's meeting in Palo Alto, California, last 
month--on the Internet that exponential change is now an 
accepted sociological fact.
    And so we, in trying to exert our traditional enforcement 
powers are struggling to keep up with this rate of exponential 
change.
    We have taken aggressive actions to deal with--Senator 
Brownback was talking--online pharmacies and unlicensed 
practice of medicine and unlicensed pharmacies doing business.
    We have also taken action in a number of states to deal 
with the sale of Bidis, or flavored cigarettes to children.
    We've dealt with issues of false health claims that we 
heard the chair of the Federal Trade Commission talking about 
earlier.
    We have also been very, very concerned about consumer 
privacy, about the collection of information about what 
consumers do, and not just the purchases they make on the 
Internet, but the sites that they browse, and where they browse 
within individual sites.
    And we are very concerned about the technology that allows 
the collection of vast amounts of personal data and very easy 
transmittal of this data to other entities for commercial and 
other purposes.
    We have--through our chair, our president this year, 
Washington Attorney General Christine Gregoire set up a privacy 
study group. And we are very actively concerned as Attorneys 
General--we will be meeting next month and talking about the 
Internet. And we will be talking about privacy. And those will 
be ongoing concerns for us.
    We urge you that whatever you--what action you should take 
in regulating the Internet commerce going forward that you not 
pre-empt the States' ability to go our own ways.
    In the same way that you have given us the authority in 
telemarketing fraud and such to have the States be laboratories 
and to go further, if they wish, to protect individual state's 
consumers.
    We urge you to continue to give us that right to do so as 
it relates to Internet commerce.
    Certainly, with the rate of exponential change, with the 
thousands of websites coming online daily, with those who prey 
upon people, either criminally from child pornography, to 
online gaming, to those who fraudulently conduct online 
commerce, the challenges to the FTC and to the States to try to 
stay abreast of that and to try to regulate those activities 
that prey upon consumers--the challenges are great.
    We need adequate resources to be able to do that. The 
Federal Government has been generous in terms of giving 
resources to the Department of Justice and to the FTC to deal 
with telemarketing fraud, also to the states.
    We have greatly benefited from Federal resources at the 
state level in dealing with telemarketing fraud. We hope that 
as you continue your work in this area relating to the Internet 
that you will see fit to provide adequate resources for us to 
be able to do the job.
    Thank you very much, Mr. Chairman.
    Senator Ashcroft. Thank you, Attorney General Sorrell.
    [The prepared statement of Attorney General Sorrell 
follows:]

      Prepared Statement of William H. Sorrell, Attorney General, 
                            State of Vermont
    Chairman Ashcroft, Senator Bryan, and members of the Subcommittee, 
thank you for your invitation to testify today on issues of importance 
to the state Attorneys General: supporting and strengthening the long-
standing partnership between the states and the Federal Trade 
Commission in protecting this nation's consumers; protecting consumers 
as they navigate the Information Superhighway; and preserving the 
privacy of those consumers.
    The Attorneys General strongly support the work of the Federal 
Trade Commission, with which we have had an ongoing, longstanding, and 
valued partnership. As the Commission stated after the passage of the 
FTC's Telemarketing Sales Rule, which gave the states the ability to go 
into federal court and obtain nationwide relief against fraudulent 
telemarketers, there are now ``fifty-one cops on the beat'' against 
telemarketing fraud. This collective enforcement approach has been very 
successful. Since 1996, the states have obtained more than 300 
injunctions against and over 150 convictions of fraudulent 
telemarketers. Many of those injunctions have been obtained in concert 
with the FTC, and the FTC has served as an invaluable resource to the 
states as they pursue fraudulent telemarketers. In addition, with the 
help of funding from the Department of Justice, the National 
Association of Attorneys General has coordinated the training of over 
500 state and local law enforcers from all 50 states, the District of 
Columbia, and three territories in the investigation and prosecution of 
fraudulent telemarketers. This collaborative effort with district 
attorneys and state and local investigators has allowed state and local 
governments to leverage scant resources and shared expertise in the 
telemarketing fraud arena.
    The states and the FTC have continued their partnership as fraud 
has shifted from the phone lines to cyberspace. Joint state-federal 
enforcement sweeps and surfs--targeting false health claims, fraudulent 
business opportunities, and pyramid schemes--have put cyber-scammers on 
notice that we will continue our ``zero tolerance'' policy, no matter 
the medium chosen to exploit consumers.
    State Attorneys General have recently recognized the need for a 
coordinated, ``real time'' state and local effort to root out Internet 
fraud. Federal, state and local law enforcers are already at work to 
develop a ``24/7'' network of investigators and prosecutors dedicated 
to the detection, investigation, and prosecution of Internet criminals. 
Certainly, increased funding to ensure that the state and local network 
is strong, smart, and well-equipped will, as in the telemarketing 
arena, enable state and local enforcers to provide a valuable 
complement to federal civil and criminal cyber-enforcement efforts.
    We look forward to a continued cooperative relationship with the 
FTC.
    Apart from our coordinated efforts with the FTC, the nation's 
Attorneys General have long been the local cops on the beat protecting 
consumers from fraudulent business practices. In the early 1990's, the 
office of Iowa Attorney General Tom Miller revolutionized telemarketing 
fraud enforcement when it instituted an undercover taping protocol 
through which fraudulent telemarketers' deceptive pitches were captured 
on tape. Iowa's work provided the evidence for myriad state and local 
criminal and civil prosecutions of fraudulent telemarketers, both in 
this country and abroad. Iowa's work grew into the National Tape 
Library, a joint state-federal repository housing tens of thousands of 
fraudulent tape recordings. The National Association of Attorneys 
General currently serves as chair of the joint state-federal steering 
committee that oversees the operation of the Library.
    In fulfilling our mission to protect the consumers in our states, 
we have followed fraudulent scammers as they moved from Main Street to 
the Information Superhighway. The Attorneys General have pursued such 
traditional law violations as deceptive sales, investment and business 
opportunity scams, pyramid schemes, and false health claims onto the 
Internet. In addition, the states have taken the lead on some law 
enforcement problems that are peculiar to the Internet. Led by Kansas 
Attorney General Carla Stovall, the Attorneys General have brought law 
enforcement actions against dozens of defendants for the illegal online 
sale of prescription drugs. The Attorneys General also have attacked 
the illegal sale of India bidis cigarettes to this nation's youth; 
online auction fraud; Internet gambling; and Internet spamming, 
cramming, and slamming. What has emerged as a result of our activity is 
a united and concerted assault at the state level on myriad forms of 
Internet fraud.
    Protecting consumers who travel on the Internet is a priority for 
the state Attorneys General. When she became NAAG's President last 
summer, Washington Attorney General Christine Gregoire deemed the 
Internet as one of the major initiatives of her Presidential year. 
Toward that end, last month NAAG convened a conference at Stanford 
University Law School to address the impact of the Internet and high 
technology on the mission of the Attorneys General. The conference, 
which was hosted by California Attorney General Bill Lockyer, 
highlighted the ongoing Internet-related law enforcement initiatives 
undertaken by the Attorneys General and provided a forum at which 
Attorneys General could grapple with upcoming Net issues and 
challenges. We also addressed the best means by which state Attorneys 
General and their federal and local partners can attack cybercrime.
    The state Attorneys General have a particular interest in 
addressing consumers' concerns about protecting their privacy as 
Internet commerce becomes the norm. NAAG has created a Privacy Working 
Group, which I serve as co-chair. Many Attorneys General have 
introduced legislation that will enhance the privacy of consumers who 
transact business over the Internet. Idaho Attorney General Al Lance, 
Illinois Attorney General Jim Ryan, Minnesota Attorney General Mike 
Hatch, Missouri Attorney General Jay Nixon, New York Attorney General 
Eliot Spitzer, Washington Attorney General Christine Gregoire, and I 
have recently introduced Internet privacy legislation targeting spam; 
prohibiting Internet companies from selling personal information 
obtained from Internet users; and requiring web sites that collect 
information from users to disclose how that information will be used.
    The concerns of the Attorneys General and our constituents are also 
reflected in the Report of Washington Attorney General Christine 
Gregoire's Privacy Task Force. The Task Force included business, 
consumer, and legislative leaders. During a four-month span, more than 
125 consumers testified, wrote to, or e-mailed the Task Force. 
Consumers' concerns included: the frequency with which personal 
information is collected; the entities with whom that information is 
shared; the disclosure of that personal information without the consent 
or knowledge of the consumer; consumers' lack of access to the 
information that is collected from and disseminated about them; the 
accuracy of the information that is disseminated; and the need for 
meaningful regulatory and/or enforcement approaches to these issues.
    In closing, I want to stress a couple of points. First, any federal 
law enforcement approach to protecting consumers who travel the World 
Wide Web must include the states. We ask you to take such steps to 
ensure that the states can play a full and constructive role in the 
effort to police the Internet. Second, we urge you to not preempt the 
states. As fifty-one Attorneys General recently said to each of you 
with respect to pending Electronic Signatures bills, ``[w]e have strong 
concerns about any federal legislation that preempts state laws in 
areas traditionally reserved to the states, particularly when there 
should be no conflict between the federal goals and state jurisdiction. 
. . .'' Consumer protection on the Internet is one such area.
    Thank you.

    Senator Ashcroft. Ms. Deirdre Mulligan has done work 
focusing on developing legal and technological means to 
increase individual control over personal information that is 
held by commercial and governmental parties.
    And it sounds to me like your area of expertise is the 
subject of what we are interested in, so we are very pleased to 
hear from you.
    Would you proceed with your testimony?

   STATEMENT OF DEIRDRE MULLIGAN, STAFF COUNSEL, CENTER FOR 
                    DEMOCRACY AND TECHNOLOGY

    Ms. Mulligan. Thank you. It's a pleasure to be here. And 
you made me realize that I need to rewrite my biography. It is 
a little bit of a mouthful.
    CDT is, as you said, a non-profit. We work on First 
Amendment and privacy issues, particularly in the burgeoning 
area of the digital marketplace.
    We firmly believe that the Internet has much potential to 
offer consumers and individuals a vibrant experience, both for 
our cherished democratic values, and also for the exchange of 
things like goods and services.
    We also believe that the Internet poses some real risks, 
and right now one of those risks happens to be the loss of 
personal privacy.
    We firmly believe that technology has a role to play here. 
As Mr. Jaye has elaborated, there are many technical decisions 
that are being made in the marketplace today about where to 
store data, what kind of data to collect, how to retain it. 
There are standards being developed, such as the platform for 
privacy preferences and tools that will hopefully come to the 
marketplace to enable individuals to exercise realtime control 
over their data.
    We also firmly believe that there is a role for self-
regulation to play and that both through technology leadership 
and through policy leadership, by stepping up to the plate and 
working with the Federal Trade Commission, the state AG's, and 
with consumer organizations and privacy organizations, that the 
private sector can help set benchmarks.
    We also believe that Congress has a role to play here. We 
believe that the Children's Online Privacy Protection Act, 
which was a product of some very fine leadership by members of 
the full Committee, working with the Federal Trade Commission, 
the business community, children's advocates and privacy 
advocates, provided a sound model for crafting public policies 
that can map onto the Internet in an incredibly sensitive and 
technologically appropriate way.
    I have an article that I would like to submit for the 
record. What I would like to do is highlight a few of the new 
issues that are facing consumers today.
    There has, indeed, been an effort in the business community 
to address some consumer concerns. We know that there are 
laudable efforts such as TRUSTe and BBBOnline to promote 
raising the privacy bar in the private sector. There are 
members of those organizations. Unfortunately, those members 
are still relatively small. If you take TRUSTe, right now, 
membership is about 1,000.
    As we heard from Commissioner Swindle, there are about 
three million commercial websites, and they are growing 
tremendously each month.
    You can see that self--self-regulatory agencies have an 
awful lot of water to carry if they want to get from 1,000 to--
3 million and growing.
    We believe that their efforts need to be bolstered and that 
legislation should, in fact, provide a baseline upon which good 
business practices will produce a race to the top.
    But consumers on the Internet looking for privacy policies, 
unfortunately, sometimes find them very difficult to read.
    An expert in communications to the public who has a broad 
range of specialities, particularly looking at consent forms in 
the context of managed care and other things, sent me an 
analysis of a privacy policy of a very large business on the 
web. In his estimation, he said it was basically a graduate 
level reading text and that on average the sentences contained 
about 26 words.
    And he graded the sentences as being ``complex, pompous, 
and very difficult to comprehend.'' I think, in fact, that is 
what many consumers find when they are out on the web.
    However, reading those policies happens to be the core of 
protecting your privacy today. Frequently what individuals find 
is that to maintain control over their information, which is 
core of privacy--an individual's ability to determine what 
happens to personal data--they must ``opt out.''
    There are instances where individuals can act anonymously, 
protecting their privacy completely--but the goal here is to 
facilitate a whole range of interactions, some of them 
commercial where individuals are going to willingly turn over 
information, because they are really interested in the goods or 
service. And the question is what happens to their data after 
that point. Today, the answer is consumers have to take steps 
to protect it. One of the things they frequently have to do is 
opt out. And that means that as an individual you can object 
and tell a company not to use your data for other purposes.
    Today, opting out can be quite a task. It means reading a 
privacy policy at every single website you come to.
    In November, CDT unleashed a new website, and that website 
is designed to help consumers find a single one-stop shop to 
remove their names from profiling databases, marketing lists, 
telemarketing lists, to simplify ``opting out'' by giving 
consumers a single place where they can do this rather than 
having to visit all these separate shops.
    In addition to helping thousands of consumers who were very 
thankful to have this one-stop shop, we found that many of the 
services that were provided by businesses to ``opt out,'' in 
fact, did not work.
    I will use the online profiling companies as an example. 
Features at Flycast and Matchlogic just did not perform and had 
to be corrected. While consumers were being told they could 
take a step to protect their privacy, in fact, the feature did 
not function.
    More troublingly we found that one of the self-regulatory 
seals being displayed was expired.
    Once they have been told that they can protect their 
privacy, we now have--may I take another minute or two of the--
of the Chair's time?
    Senator Ashcroft. You have one more minute----
    Ms. Mulligan. I will wrap up.
    Senator Ashcroft. We have gone a minute over on previous 
cases. Keep going.
    Ms. Mulligan. You have got it.
    Consumers have found that once they finally figured out 
where to look, they are supposed to be looking for privacy 
policies with the business that they were doing business with, 
they now find that there are new ventures on the marketplace, 
ad profiling, and ad management companies that are, in fact, 
reaching through those websites and collecting information from 
consumers.
    These are businesses that consumers have no relationship 
with.
    They are frequently unaware of these organizations. And 
these organizations are reaching through and collecting 
detailed information and creating profiles that are used at a 
whole host of websites to target--as we heard earlier from Mr. 
Jaye--both advertising and content. In other words, this 
information is being used to make decisions about what you see 
and what you view on the Web.
    I look forward to working with the Committee. I thank you 
for holding this hearing. The FTC has played an enormously 
useful role in moving discussions of privacy forward. And I 
hope to continue to be able to work with them. Their funding is 
critically important.
    Senator Ashcroft. Thank you very much.
    [The prepared statement of Ms. Mulligan follows:]

        Prepared Statement of Deirdre Mulligan, Staff Counsel, 
                  Center for Democracy and Technology
I. Introduction
    The Center for Democracy and Technology (CDT) is pleased to have 
this opportunity to testify about privacy in the online environment and 
the Federal Trade Commission's role in developing privacy policy. CDT 
is a non-profit, public interest organization dedicated to developing 
and implementing public policies to protect and advance civil liberties 
and democratic values on the Internet. One of our core goals is to 
enhance privacy protections for individuals in the development and use 
of new communications technologies. We thank the Chairman for the 
opportunity to participate in this hearing and look forward to working 
with the Committee to develop policies that support civil liberties and 
a vibrant Internet.
    To being, I would like to offer three points to guide the Committee 
as it begins to address the protection of individual privacy:

         The Internet presents new challenges and opportunities 
        for the protection of privacy. Our policies must be grounded in 
        an understanding of the medium's unique attributes and its 
        unique potential to promote democratic values. It must also 
        address the unique risks the Internet poses to our values 
        including personal privacy. As many .coms tout the benefits of 
        customized content and personalized advertising they play down 
        the personalized tracking and profiling that support such 
        applications. The Internet will best serve individuals if we 
        recognize the risks to privacy and develop public policies and 
        technologies that address them. There is little doubt that the 
        Internet holds great promise for maximizing our democratic 
        values and growing our economy, however sound public policies 
        play an integral part in ensuring we achieve these goals. I 
        look forward to working with the Committee to explore 
        legislative options for protecting privacy on the Internet.
         Increasingly, the rules that govern society are 
        embodied in computer code. This code, and the products built 
        upon it, can enhance or limit the collection of personal 
        information and can either afford or deny individuals control 
        over their information. Technical decisions including whether a 
        product is designed to keep information on an individual's own 
        computer or on a remote server, what personal information a 
        product collects, and for how long information is retained have 
        important implications for privacy. The availability of robust 
        encryption, the development of strong authentication devices, 
        and the deployment of technical standards such as the Platform 
        for Privacy Preferences are an important component of 
        protecting privacy on the Internet.
         Privacy is a complex value. Ensuring that individuals' 
        long-held expectations of autonomy, fairness, and 
        confidentiality are respected as daily activities move online 
        requires a thoughtful, multi-faceted approach combining self-
        regulatory, technological, and legislative components. These 
        expectations exist vis-a-vis both the public and the private 
        sectors. By autonomy, I mean the individual's ability to 
        browse, seek out information, and engage in a range of 
        activities without being monitored and identified. Fairness 
        requires individuals maintain control over the information that 
        they provide to the government and the private sector. The 
        concept of fairness is embodied in the Code of Fair Information 
        Practices \1\--long-accepted principles specifying that 
        individuals should be able to ``determine for themselves when, 
        how, and to what extent information about them is shared.'' \2\ 
        In terms of confidentiality, we need a strong Fourth Amendment 
        in cyberspace.
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    \1\ The Code of Fair Information Practices as stated in the 
Secretary's Advisory Comm. on Automated Personal Data Systems, Records, 
Computers, and the Rights of Citizens, U.S. Dept. of Health, Education 
and Welfare, July 1973:
      There must be no personal data record-keeping systems whose very 
existence is secret.
      There must be a way for an individual to find out what 
information about him is in a record and how it is used.
      There must be a way for an individual to prevent information 
about him that was obtained for one purpose from being used or made 
available for other purposes without his consent.
      There must be a way for the individual to correct or amend a 
record of identifiable information about him.
      Any organization creating, maintaining, using, or disseminating 
records of identifiable personal data must assure the reliability of 
the data for their intruded use and must take precautions to prevent 
misuse of the data. Id.

    The Code of Fair Information Practices as stated in the OECD 
guidelines on the Protection of Privacy and Transborder Flows of 
Personal Data http://www.oecd.org/ [at the time this hearing was held].
    1. Collection Limitation Principle: There should be limits to the 
collection of personal data and any such data should be obtained by 
lawful and fair means and, where appropriate, with the knowledge or 
consent of the data subject.
    2. Data quality: Personal data should he relevant to the purposes 
for which they are to be used, and, to the extent necessary for those 
purposes, should be accurate, complete and kept up-to-date.
    3. Purpose specification: The purposes for which personal data are 
collected should be specific not later than at the time of data 
collection and the subsequent use limited to the fulfillment of those 
purposes or such others as are not incompatible with those purposes and 
as are specified on each occasion of change of purpose.
    4. Use limitation: Personal data should not be disclosed, made 
available or otherwise used for purposes other than those specified in 
accordance with the ``purpose specification'' except: (a) with the 
consent of the data subject;, or (b) by the authority of law.
    5. Security safeguards: Personal data should be protected by 
reasonable security safeguards against such risks as loss or 
unauthorized access, destruction, use, modification or disclosure of 
data.
    6. Openness: There should be a general policy of openness about 
developments, practices and policies with respect to personal data. 
Means should be readily available of establishing the existence and 
nature of personal data, and the main purposes of their use, as well as 
the identity and usual residence of the data controller.
    7. Individual participation: An individual should have the right 
(a) to obtain from a data controller, or otherwise, confirmation of 
whether or not the data controller has data relating to him; (b) to 
have communicated to him, data relating to him:
      --within a reasonable time;
      --at a charge, if any, that is not excessive;
      --in a reasonable manner, and,
      --in a form that is readily intelligible to him; (c) to be given 
reasons if a request made under subparagraphs (a) and (b) is denied, 
and to he able to challenge such denial; and, (d) to challenge data 
relating to him and, if the challenge is successful to have the data 
erased, rectified completed or amended.
    8. Accountability: A data controller should be accountable for 
complying with measures which give effect to the principles stated 
above.
    \2\ Alan Westin. Privacy and Freedom (New York: Atheneum, 1967), 7.

    I have attached a law review article that elaborates on these three 
points, authored by CDT's Executive Director, Jerry Berman, and myself. 
I will devote the remainder of my testimony to providing the Committee 
with an overview of important privacy issues on the Internet and some 
thoughts on the roles of the Federal Trade Commission and Congress as 
we seek policies to protect privacy.
II. Privacy policies on the Web
    Last July, I provided the Subcommittee on Telecommunications with 
CDT's report, ``Behind the Numbers: Privacy Practices on the Web.'' The 
report concluded that Fair Information Practices were the exception 
rather than the rule on the World Wide Web; private sector enforcement 
programs covered a very small segment of commercial Web sites; and 
individuals' privacy concerns remained largely unaddressed. The report 
was based in part on the Georgetown Internet Privacy Policy Survey, 
released last July, which found that while more Web sites were 
mentioning privacy, only 9.5% provided the types of notices required by 
the Online Privacy Alliance, the Better Business Bureau and TRUSTe.
    The Georgetown Survey found that an increased number of Web sites 
provided consumers with some information about what personal 
information is collected (44%), and how that information will be used 
(52%). But, on important issues such as access to personal information 
and the ability to correct inaccurate information, the survey found 
that only 22% and 18% respectively of the highly trafficked Web sites 
surveyed provided consumers with notice of their rights. On the 
important issue of providing individuals with the capacity to control 
the use and disclosure of personal information, the survey found that 
39.5% of these sites said that consumers could make some decision about 
whether to be re-contacted for marketing purposes--most likely an 
``opt-out''--and fewer still, 25%, said they provided consumers with 
some control over the disclosure of data to third parties.\3\
---------------------------------------------------------------------------
    \3\ This number is generated using the data from Q32 (number of 
sites that say they give consumers choice about having collected 
information disclosed to outside third parties)--64--and dividing it by 
256 (the total survey sample (364) minus the number of sites that 
affirmatively state they do not disclose data to third-parties (Q29A) 
(69) and the number of sites that affirmatively state that data is only 
disclosed in the aggregate (Q30) (39)).
---------------------------------------------------------------------------
    While a year has passed, a recent report indicates that adherence 
to Fair Information Practices is not the norm on the Web. A report 
released last week on the privacy policies and practices of health Web 
sites found that while 19 of the 21 Web sites surveyed had privacy 
policies, they failed to meet Fair Information Practice Principles.\4\
---------------------------------------------------------------------------
    \4\ Report on the Privacy Policies and Practices of Health Web 
Sites, Janlori Goldman and Zoe Hudson, Health Privacy Project, 
Georgetown University, and Richard M. Smith. http://ehealth.chcf.org 
[at the time this hearing was held].
---------------------------------------------------------------------------
    Overall, reports and surveys over the past year have found that 
even the most frequently trafficked consumer Web sites do not 
adequately inform individuals about how their personal information is 
handled. More troubling is the finding that health Web sites, where 
individuals divulge sensitive information, are not providing 
individuals' personal information with strong privacy protections. At 
the same time these same busy consumer-oriented Web sites are 
collecting increasingly detailed personal information.
III. New threats to individuals' privacy
    It is difficult for individuals to limit the use and disclosure of 
their personal information. Where ``privacy statements'' are posted 
they are frequently written in complex and confusing language. An 
expert in communicating with the public provided CDT with an analysis 
of a prominent company's privacy statement. He found the statement to 
be written at the graduate school reading level with each sentence 
averaging 24 words.
    If a consumer finds a privacy statement and successfully deciphers 
it she frequently finds that if she fails to ``opt-out'' (object) her 
name, address, and other personal information will be shared with 
undefined ``others.'' Today, to limit the reuse of personal information 
an individual must search every Web site for an opportunity to ``opt-
out,'' and hope that the opt-out features work as promised, which CDT 
has found is not always the case.
    On November 15, CDT launched a new Web site, ``Operation Opt-Out,'' 
to give consumers a simple one-stop location to ``get off the lists''--
the mailing and telephone lists and profiling databases that have 
proliferated with the digital economy. Operation Opt-out has assisted 
thousands of individuals to limit the use of their personal 
information.
    In addition to helping individuals, Operation Opt-Out produced 
useful information about whether companies do what they say. During its 
second week Operation Opt-Out ran a feature on how to ``opt-out'' of 
the online profiling or ``network advertising'' companies data systems. 
We found several problems with the opt-out features offered by the 
online profiling companies. Problems ranged from broken ``opt-out'' 
features at Flycast \5\ and Matchlogic,\6\ to Matchlogic's display of 
an expired TRUSTe seal.
---------------------------------------------------------------------------
    \5\ To Flycast's credit, they were quick to fix this problem once 
we contacted them, however, we have no idea how long the opt-out was 
broken and how many consumers were effected by this problem.
    \6\ Matchlogic now provides an online opt-out feature.
---------------------------------------------------------------------------
    Individual's ability to limit the use and disclosure of their 
personal information by businesses with which they have chosen to 
interact remains difficult. But of increasing concern are the 
activities of online profiling companies, or network advertisers, who 
collect data without the individual's knowledge or consent. With 
growing frequency, navigational and other data is being captured by 
advertising networks or ``profiling companies.'' With the permission of 
the Web site, but not the individual, these profiling companies place 
unique identifiers on individuals' computers. These identifiers are 
then used to track individuals as they surf the Web. The individual's 
profile grows with time, because online profiling is a continuing 
collection of his online behavior, despite the fact that the individual 
disconnects. The navigational data collected may include information 
such as Web sites and Web pages visited, the time and duration of the 
visit, search terms typed in search engines' forms, and other queries, 
purchases, ``click through'' responses to advertisements, and the 
previous page visited. In addition to long lists of collected 
information, a profile may contain ``inferential'' or ``psychographic'' 
data--information that the business infers about the individual based 
on the behavioral data captured. From this amassed data, elaborate 
inferences may be drawn, including the individual's interests, habits, 
associations, and other traits.\7\
---------------------------------------------------------------------------
    \7\ A psychographic study ``joins consumers' measurable demographic 
characteristics with the more abstract aspects of attitudes, opinions 
and interests.'' Data mining specialists code demographic, media, 
purchasing and psychographic data from surveys, throw them together and 
analyze them until some groups with shared characteristics can be 
distinguished from all other groups. They can identify those groups 
most likely to buy specific products and services by including 
questions relating to a product about past buying habits or future 
intentions to purchase. Every kind of psychographic study adds the 
dimension of psychology and/or lifestyles to a demographic inquiry and 
uses quantitative survey techniques. Cf. Rebecca Piirto HEATH, 
Psychographics: Qu'est-Ce Que C'est?, Marketing Tools, Nov.-Dec. 1995; 
http://www.demographics.com/publications/mt/95__mt/9511__mt/MT3gg.htm 
(last viewed on Nov. 12, 1999).
---------------------------------------------------------------------------
    The practices of online profiling companies have far-reaching 
impacts on consumers' online privacy. The companies that engage in 
profiling are hidden from the individual. They reach through the Web 
site with whom the individual has chosen to interact and, unbeknownst 
to the individual, extract information about the individual's 
activities. In the rare instances where individuals are aware of the 
fact that a third party is collecting information about them, they are 
unlikely to be aware that this information is being fed into a growing 
personal profile maintained at a data warehouse,\8\ on which data 
mining \9\ can be exercised.
---------------------------------------------------------------------------
    \8\ A ``data warehouse'' is a system used for storing and 
delivering huge quantities of data, while data warehousing refers to 
the process used to extract and transform operational data into 
informational data and loading it into a central data store or 
``warehouse''. Data warehousing allows data from disparate databases to 
be consolidated and managed from a single database., which in turn 
allows for the development of longer and more ``accurate'' profiles 
more efficiently and less expensively.
    \9\ ``Data mining'' is ``a set of automated techniques used to 
extract buried or previously unknown bits of information from large 
databases.'' (Ann CAVOUKIAN, Data Mining: Staking a Claim on your 
Privacy (Information and Privacy Commissioner of Ontario, Canada), Jan. 
1998, http://www.ipc.on.ca/web__site.eng/matters/sum__pup/PAPERS/
datamine.htm (last viewed on Oct. 6, 1999). A successful data mining 
operation will make it possible to unearth patterns and relationships, 
and afterwards, use the new information to make proactive knowledge-
driven business decisions. Data mining focuses on the automated 
discovery of new facts and relationships in data. For more information, 
cf. Kurt Thearling, From Data Mining to Database Markering, Oct. 1995, 
http://www3.shore.net/kht/text/wp9502/wp9502.htm (last viewed on Oct. 
17, 1999).
---------------------------------------------------------------------------
    At many Web sites individuals are told that ``cookies'' are 
harmless bits of data that help customize and personalize their 
experience. While ``cookies'' themselves are not per se bad, the use of 
``cookies'' to secretly tag and monitor individuals across multiple Web 
sites undermines individuals' ability to determine to whom and under 
what circumstances to disclose information about themselves. The 
practices of these profiling companies undermines individuals' 
expectations of privacy by fundamentally changing the Web experience 
from one where consumers can browse and seek out information 
anonymously, to one where an individual's every move is recorded.
    While several of the companies engaged in profiling state that they 
do not correlate information with identifying information such as name, 
and e-mail address, this does not on its own address the privacy 
concerns at issue. The highly detailed nature of the profiles and the 
capture of information that can be reasonably easily associated with a 
specific individual raise questions about the claims of anonymity and 
promises of non-identifiability. While the companies, in some 
instances, may not be tying information that they gather about 
individuals' use of the Internet to their name and address, the 
information may be quite capable of revealing the individual's 
identity, through the use of various computer tools and software.
    While the name and e-mail address of the individual may remain 
obscure, the information the individual is able to access, the offers 
made to the individual are being determined by the business based on 
specific information collected about the individual. While the concern 
raised by the use of information about the individual to alter what 
information they see in the context of advertising may appear 
relatively trivial, this same practice, and perhaps data, can be used 
to make other decisions about the individual that even a privacy-
skeptic may find objectionable. The info collected about the individual 
could be used to alter the prices at which goods or services, including 
important services such as life and health insurance, are offered, 
employed by a government, and could be used to alter the information 
viewed by individuals. While the impact of altered advertisements on 
the individual--harm? benefit?--can be disputed, these other examples 
indicate that there is a privacy interest in information about 
individuals actions and interactions when it is collected and used to 
make decisions about them.
    Recently it has become clear that DoubleClick intends to attach 
identities to the extensive profiles they collect about individuals' 
online activities. It is unclear whether other online profiling 
companies will follow a similar path. DoubleClick's privacy statement 
had stated that its cookies identified computers, not people--that it 
couldn't link its ``cookies'' to names and home addresses or other 
elements of personal identity and didn't want to do so. After its 
purchase of the consumer transaction database Abacus, DoubleClick 
acknowledged that it intended to tie surfing habits and online searches 
to personal identity. DoubleClick's Abacus Alliance has arranged to 
collect names, addresses, and other personal information from Web sites 
where Internet users knowingly register. So far, at least ten Web sites 
(the Company hasn't said who they are) have agreed to participate by 
providing DoubleClick the identity of their subscribers. Thus, 
DoubleClick, to whom an individual has never revealed her identity, may 
have access to an individual's name, credit card number, and home 
address.
    As these companies merge with each other and with companies such as 
Abacus that maintain detailed personally identifiable profiles about 
individuals' offline activities, the consolidation of offline and 
online profiles will erode the distinction between online and offline 
identity. Online companies are aware of the sensitivity this raises. 
Consumers have shown an aversion to having their online activities tied 
to their identity. Finally, recent revelations about government demands 
for access to individual profiles created in the consumer marketplace 
warn us that even the most benign information, such as grocery 
purchases, that provides insights into individuals' behavior are sought 
out by the government.
    The profiling activities of these companies pose unique threats to 
individual privacy.
IV. Consumer Reaction to Profiling
    On February 1, 2000, CDT launched a consumer campaign to alert 
consumers to the threat that online profiling poses to privacy and to 
encourage consumers to say no to DoubleClick's plans to create a data 
system to track individuals' online and offline activities and their 
identities. At CDT's Web site consumers are able to ``opt-out'' of 
DoubleClick's tracking activities, send a letter to DoubleClick's CEO 
and send a letter to several prominent companies that use DoubleClick's 
services. In less than three days 13,000 people used our Web site to 
opt-out of DoubleClick's tracking; over 6,000 individuals sent messages 
to DoubleClick's CEO; and, in the first 36 hours, over 4,400 e-mail 
messages were sent to prominent DoubleClick affiliates. Several 
companies have responded to consumer concerns and clarified their 
policy of not disclosing subscriber information to DoubleClick.
    We believe that the public's voice is important when evaluating 
whether a business' practices comport with individuals' expectations of 
privacy. The e-mail we received from individual citizens and the 
participation of thousands of individuals in our campaign indicates 
that many individuals object to DoubleClick's practice of tracking and 
monitoring individuals and do not want information about their identity 
included in such a system.
V. The Federal Trade Commission's role in protecting individual privacy
    Over the past five years the Federal Trade Commission's activities 
in the area of information privacy have expanded. The Commission has 
convened seven workshops to explore privacy on the Internet, issued 
several reports, conducted surveys, and brought several important 
enforcement actions in the area of privacy. Finally, the Commission 
played a pivotal role in shaping the Children's Online Privacy 
Protection Act and crafting rules to implement it that map onto the 
Internet. The Commission's work has played an important role in 
bringing greater attention to privacy issues and pushing for the 
adoption of better practices in the market place.
    While the Commission's contributions to the protection of 
individual privacy have and will continue to be important, their 
mission and jurisdiction places limits on their involvement in many 
important privacy issues such as government collection and use of 
personal information. They are not able to provide the forum for all 
privacy discussions--and there are many important privacy discussions 
waiting to occur.
    However, keeping with its mission, the FTC must have the resources 
and staff to continue their privacy agenda. The upcoming Web survey, 
the Advisory Committee on Online Access and Security, the ongoing 
exploration of online profiling are important. The detailed and 
thorough work of the Commission enables advocates, businesses, and 
policy makers to better understand the privacy issues and to choose the 
appropriate tools to address them. Over the next few months the 
Commission's work will produce reports and surveys that will aid this 
Committee as it evaluates the growing number of legislative proposals 
to protect privacy and examines the role of ongoing self-regulatory 
efforts. It is important that the FTC be provided with funding to hold 
workshops, issue reports, enforce the Children's Online Privacy 
Protection Act, and take action against abuses of privacy in the 
marketplace.
VI. The role of Congress
    As Congress moves forward this year, we look forward to working 
with you and all interested parties to ensure that fair information 
practices are incorporated into business practices on the World Wide 
Web. We must adopt enforceable standards, both self-regulatory and 
legislative, to ensure that information provided for one purpose is not 
used or redisclosed for other purposes without the individual's consent 
and to ensure that the Fourth Amendment follows our personal 
information into cyberspace.
    The challenge of implementing privacy practices on the Internet is 
ensuring that they build upon the medium's real-time and interactive 
nature to foster privacy and that they do not unintentionally impede 
other beneficial aspects of the medium. Implementing privacy 
protections on the global and decentralized Internet is a complex task 
that will require new thinking and innovative approaches. Both 
legislation and self-regulation are only as good as the substantive 
policies they embody. As we said at the start, crafting meaningful 
privacy protections that map onto the Internet requires us to resolve 
several critical issues. While consensus exists around at least four 
general principles (a subset of the Code of Fair Information 
Practices)--notice of data practices; individual control over the 
secondary use of data; access to personal information; and, security 
for data--the specifics of their implementation and the remedies for 
their violation must be explored. We must wrestle with difficult 
questions: When is information identifiable? How is it accessed? How do 
we create meaningful and proportionate remedies that address the 
disclosure of sensitive medical information as well as the disclosure 
of inaccurate marketing data? For the policy process to successfully 
move forward these hard issues must be more fully resolved.
    The Federal Trade Commission and several members of the full Senate 
Commerce Committee are well aware of the hard issues that must be 
resolved and are working to address them. I am a member of the Federal 
Trade Commission's Committee on Online Access and Security tasked with 
exploring how to implement the important principle of providing 
consumers with access to their data and what security measures are 
appropriate to protect personal information on the Internet. I believe 
that the work of that Committee will provide useful information to 
Congress as it examines options for protecting privacy. I would welcome 
the opportunity to provide the Committee with information about our 
progress and look forward to working with members of this committee, to 
develop a framework for privacy protection in the online environment.
    The Online Privacy Protection Act, S. 809, introduced by Senators 
Burns (R-MT) and Wyden (D-OR), the Electronic Rights for the Twenty-
First Century (E-RIGHTS), S. 854, introduced by Senator Leahy (D-VT), 
forthcoming proposals, and the Children's Online Privacy Protection Act 
of 1998 (COPPA) provide an excellent starting point for this 
discussion. COPPA demonstrated that Congress could take action to 
protect privacy and ensure consumer trust in electronic commerce. By 
providing some flexibility to the Federal Trade Commission Congress 
ensured that technology and innovation would not be unintentionally 
stunted by efforts to protect children's privacy. The leadership of 
Internet-savvy members of this Committee and others will be critical as 
we seek to provide workable and effective privacy protections for the 
Internet.
VII. Conclusion
    No doubt, privacy on the Internet is in a fragile state. Providing 
protections for individual privacy is essential for a flourishing and 
vibrant online community and marketplace. It is clear that our policy 
framework did not envision the Internet as we know it today, nor did it 
foresee the pervasive role information technology would play in our 
daily lives. Providing a web of privacy protection to data and 
communications as they flow along networks requires a unique 
combination of tools--legal, policy, technical, and self-regulatory. I 
believe that legislation is an essential element of the online privacy 
framework and we look forward to working with this Committee toward 
that end. Whether it is setting limits on government access to personal 
information, ensuring that a new technology protects privacy, or 
developing legislation all require discussion, debate, and 
deliberation. I thank the Committee for the opportunity to share our 
views and look forward to working with the members and staff and other 
interested parties to foster privacy protections for the Digital Age.

    Senator Ashcroft. Senator Wyden.
    Senator Wyden. Thank you, Mr. Chairman. I know both of us 
are supposed to be somewhere at 1 o'clock. And you have been so 
kind to me. Would you like to go and ask your questions first?
    Senator Ashcroft. I do not think I have got questions to 
ask. There are a lot of questions that could be asked.
    Senator Wyden. Yes.
    Senator Ashcroft. I mean this is kind of like--should be 
like a law school class. I mean, I should be asking you are you 
in favor of allowing businesses to sell at a discounted price 
to people who are willing to let their data be involved in a 
data base, you know, or--you know, are you willing to let the 
costs reflect--I mean, I think there are lots of very 
interesting questions here.
    But I think you have done a great job of sort of priming 
this pump. And I hope you would keep information flowing to us, 
because there are just--there are a lot of very interesting 
things.
    I--some people want--Ms. Mulligan mentioned that some 
people want to be able to be included on lists.
    I know I like the Cool Fares that come out from Continental 
Airline, so I want them to know that I am interested in their 
fares. And they ship them to me every Tuesday in case I can get 
somebody from my family to go visit my son in Houston. And I 
want to know about that.
    So some of the information, we all want people to have. 
Others, we do not. And getting this properly managed, well----
    I have no questions. I want to say that there could--there 
are lots of questions. I do not think I have the time to do it 
today.
    I need to be out of here in 2 minutes, as the seconds fly.
    Senator Wyden. John, thank you. And I'm going to ask a 
couple of real quick ones.
    And what is your pleasure? Would you like me to adjourn at 
that point?
    Senator Ashcroft. My sense is that if you would like to ask 
questions, then you are welcome to do so and I----
    Senator Wyden. I will do two or three minutes worth.
    Senator Ashcroft. --and I would invite the members of this 
panel to submit in writing any additional comments they would 
like to make.
    And I thank them all for coming. And I thank you for being 
willing to continue the hearing.
    Senator Wyden. I thank you for giving me all the time this 
morning.
    A couple of just real quick questions. Again, sorry, that 
we are just so jammed for time.
    Question for you, Mr. Sorrell. I have not been any big fan 
of preemption. We have worked very closely with the attorneys 
general since my days with the Gray Panthers. I am going to 
consumer rights causes.
    And I guess at the same time, if the Internet is not 
interstate commerce, I do not know why you have an Article 1, 
because, I mean, this seems to me to be about the clearest, 
most straight forward, you know, case of an area where you 
really ought to have, you know, Federal jurisdiction.
    What would be your response to that?
    Mr. Sorrell. Well, Senator, I thank you. Telemarketing 
fraud is not limited to a state by state operation.
    Frankly, a lot of the telemarketers since the states have 
become more aggressive in--in moving against fraudulent 
telemarketers have moved north of the border and they are 
operating out of Canada right now.
    So clearly the extent of e-commerce is more than what is 
happening in the telemarketing area. And the speed of it is 
more.
    I guess the question is: Is it sufficiently different in 
kind and scope that a national standard makes sense or should 
the individual states as their own laboratories be able to for 
themselves to--to--to balance that issue between not wanting to 
retard or deny to its state's consumers the benefits of e-
commerce, but at the same time, be able to go further?
    You suggested earlier that--that you have submitted a 
bill--introduced a bill and you are being told that maybe you 
should have gone further on the issue of opt-in versus opt-out.
    If the Congress decides, for example, that there should be 
an opt-out standard, why would not Vermont, which has gone 
further than a number of other states on privacy issues--for 
example, the access to personal credit histories and such--why 
should not Vermont balancing that issue of the--the--the 
potential drag or potential hindrances to Vermont consumers, be 
able to go further if protecting consumers even more than a 
national standard if that is what Vermonters want to do?
    Senator Wyden. I just remained concerned about the 
possibility of 50 standards and, you know, you are a small 
Oregon business or a small Vermont business, and all of a 
sudden you are trying to do business with a kind of blizzard of 
various state kind of rules.
    And I would like to think that maybe there are some lessons 
that we have learned in the past in terms of how to come up 
with something that makes sense for you all--and hang on just a 
second--makes sense for you all, and addresses what I think is 
inherently an interstate, you know, activity--the Internet to 
me is an interstate. I think you might as well get rid of, you 
know, Article 1.
    Now, in the Electronics Signatures Bill, we specifically 
allow the states to enact their own electronic transaction laws 
as long as they are consistent with the Uniform Commercial 
Codes, Uniform Electronic Transactions Act model.
    This assures that the Federal and the state laws 
specifically recognize that it is inherently, you know, 
interstate in nature and yet that was something that the state 
AG's supported.
    They said, ``You know, that is something that we think is 
fair on both sides.''
    And my question would be not that kind of model be a good 
one for us to look at in the privacy area as well, given the 
fact that you all have been willing to support that in the 
Electronics Signature?
    Mr. Sorrell. First, I--I do not--I do not want to suggest 
that states necessarily are going to go further than whatever 
Congress will do, because we do not know what Congress will do.
    But I want to express a concern on behalf of the states 
that if the states's hands are tied and they are not able to go 
further, we think that would be unfortunate.
    As to the electronic transfers issue, I really have to 
study that issue more because I was under the understanding 
that we maintained flexibility in that--in that area.
    So I would like the opportunity to submit something in 
writing to the Committee in response to your question.
    Senator Wyden. Let--let--let us do that. It is very 
important. You know, we are anxious to work with you, as I say.
    I--I think you all perform an enormous service. Oregon has 
a fabulous attorney general, Hardy Myers, who----
    Mr. Sorrell. Yes. He is--he is one of the good ones.
    Senator Wyden. Right.
    Mr. Sorrell. There are a lot of good ones. Hardy is very 
good.
    Senator Wyden. Yes. Right. I talk to you now continually 
and, frankly, the thing I am looking for is something that 
might serve as a model.
    And our understanding was that states could enact their own 
electronic transaction laws as long as it was in line with the 
Uniform Commercial codes effort in this area.
    And if you guys would take a look at this and give it to us 
for the record, my question is: Does this have some promise as 
a kind of model that would be fair to you folks and--and----
    Mr. Sorrell. I know that in Vermont right now, we are 
debating in the commerce committee in--in the House what--which 
Vermont laws are to be exempted from the Digital Signatures 
provisions, and it is hotly contested right now.
    Senator Wyden. Yes. Ms. Mulligan, just one question. And I 
feel sort of like Senator Ashcroft. I would stay here for hours 
asking you all questions if we were not so under the gun and I 
think you know we are probably one of the more conspicuous 
consumers of CDT, you know, work in terms of using your 
products.
    And my question to you is it is not unlike what I asked Mr. 
Pitofsky is, you know, we have got this tidal wave of, you 
know, consumer fear coming and I really see the tsunami hitting 
the shore here quickly.
    My question to you is: What is your sense of how you 
establish in law a kind of baseline of conduct to make it clear 
that you are sending a very powerful message to bad actors, you 
know people are not willing to do even the minimal in terms of 
privacy protection, are not willing to even enforce, you know, 
the minimal.
    How do you have a baseline of conduct for the bad actors so 
that you deal with them, while at the same time encouraging and 
rewarding the companies that adhere to the kind of standards 
that you all and others that lead this field have been putting 
forward.
    Ms. Mulligan. Thank you for the question. We have really 
appreciated your leadership on this issue.
    And I think that the bill that was introduced by yourself 
and Senator Burns certainly sets out a model similar to the 
Children's Online Privacy Protection Act where you are looking 
to create incentives for good industry behavior.
    There is a notion of safe harbors. Now, the safe harbors do 
not mean anybody can sail in. It still involves the FTC and a 
public review, ensuring that those safe harbors actually meet 
the concerns that need to be addressed.
    But it does allow for the flexibility that, I think, you 
and I both believe is critically important.
    And I think that the rulemaking under Children's Privacy 
Protection Act, highlights that there are still going to be 
issues that come up.
    I think that because the Act provided flexibility, the FTC 
can hear new issues and new proposals can come in.
    If there is a new industry that springs up and it needs its 
own--it believes it has a different approach that needs to be 
examined, it can come in with a proposal for a safe harbor and 
it can get a fair shake to see if it meets the test.
    And I think that is the kind of flexibility that will make 
sure that any proposal that comes through, at least this 
Committee, is technically astute.
    And I think that is critically important. We do not want a 
law that is out of date.
    Senator Wyden. Well, I should quit while I am ahead. You 
all are the people that we are going to be calling often, all 
three of you, in terms of trying to work on these kinds of 
issues.
    Because I think everybody is struck by how--the velocity at 
which this issue is moving. People have known it was important, 
but now in poll after poll, these privacy issues are like the 
second or third biggest concern, you know, in the country.
    It sort of goes education, you know, prescription drugs and 
privacy in some sort of, you know, order. So we are going to be 
counting on the input and the Counsel of all three of you 
frequently.
    And unless you have anything to add further, just in the 
interest of time, we will let you go at this point. So the 
Subcommittee is adjourned.
    [Whereupon, at 1:02 p.m., the hearing was adjourned.]
                            A P P E N D I X

   Response to Written Questions Submitted by Hon. John Ashcroft to 
Robert Pitofsky, Sheila F. Anthony, Thomas B. Leary, Orson Swindle, and 

                          Mozelle W. Thompson
    Question 1. The FTC has announced that it will conduct another 
sweep of privacy policies posted on commercial web sites within the 
next few weeks. The Commission has also established an Advisory 
Committee on Online Access and Security, made up of consumer and 
business experts, to study the complex issues involved in providing 
consumer access to, and security of personally identifiable 
information. Both the survey and the Commission recommendations will 
help this Committee and Congress determine if privacy legislation is 
necessary and if so what type of legislation would be necessary. It 
would make sense for the Commission to provide the data from the sweep 
and the recommendations of the Advisory Committee in one package that 
will help the Committee interpret the data from the results of the 
survey. Will the Commission issue both of these reports in one package 
or will one report precede the other?
    Answer. As your question indicates, the Commission is conducting a 
survey of commercial web sites to help determine whether self-
regulation has continued to improve the protection of consumer privacy. 
The survey will be qualitative as well as quantitative: it will look 
beyond the mere existence of policies and examine the adequacy of those 
policies. In particular, we are looking for clear disclosure of what 
type of information is collected and what is done with it, whether 
consumers can exercise choice about how information is collected and 
shared, whether access to information is afforded along with any 
ability to correct errors, and what, if any, sort of security is 
provided.
    As you also note, the Commission has established a Federal Advisory 
Committee on Online Access and Security to advise the Commission on the 
cost and benefit issues of access and security in the online context. 
The Advisory Committee's report, which need not reach any consensus 
views, is expected in mid-May, also will provide information relevant 
to the Commission's consideration of how to best address the fair 
information principles of online access and security.
    The survey of web sites, analysis of the data, and the work of the 
Advisory Committee are parallel but complementary initiatives. Assuming 
these projects are completed on schedule, we will address them in 
reporting to Congress.
    Question 2. There is a natural tension between access and security 
of private data. The broader the requirements for data access, the 
greater the danger from hackers or other inappropriate disclosures. We 
just saw Yahoo shut down for three hours on Monday by hackers. 
Yesterday, E-bay, Amazon.com, CNN and Buy.com were shut down as well. 
How will the FTC balance the interest of consumer access to data versus 
the need for data security?
    Answer. The Federal Advisory Committee on Online Access and 
Security currently is considering how to balance issues involving the 
interplay between the interest in providing consumers with access to 
their data and the need for appropriate security for that data. In 
examining how and what information is collected and stored, the 
Committee also will consider whether the consolidation of consumer 
information databases to facilitate access makes the information more 
vulnerable to security breaches by hackers. Another issue addresses 
whether technology provides sufficiently sound authentication 
mechanisms to permit access and protect security simultaneously. We 
look forward to reviewing the Committee's findings and recommendations 
on these important issues.
    Question 3. How will the FTC address the question of barriers to 
entry for small and mid-sized Internet business that might not have the 
staff and financial resources to provide the same or similar levels of 
access and security as larger or more well established e-businesses?
    Answer. The Commission is sensitive to the special issues that may 
be presented to particular sectors of the business community and took 
care to ensure that representatives from small and medium sized 
companies and from industry associations were appointed to the Advisory 
Committee. The Advisory Committee is considering the costs and benefits 
of providing online access and security for small and medium 
businesses. We expect the Advisory Committee's report to examine 
whether access and security issues raise special concerns for these 
sectors, and the Commission also will consider these points in its 
report on online privacy.
    Question 4. During the hearing Chairman Pitofsky mentioned that one 
way to address privacy may be through a mix of legislation and self-
regulation based on the type of information collected. Usually, 
consumers list health records, financial records and information about 
children as sensitive enough to require protection under the law as 
opposed to self-regulation. What other areas would you consider of 
interest to require protection?
    Answer. The Commission has supported legislation requiring privacy 
protections for the most sensitive types of personal information, 
including the Children's Online Privacy Protection Act (information 
collected from children) and the privacy provisions of the Gramm-Leach-
Bliley Act (personal financial information). Additionally, the 
Commission has indicated its support for HHS's proposed privacy rules 
governing medical records. The question remains, however, how best to 
address other aspects of online privacy, including issues involving 
profiling, as discussed in response to Question 5 below.
    In June 1999, a majority of the Commission concluded that self-
regulatory initiatives should be given greater opportunity to develop. 
These industry initiatives have resulted in notable progress. In 1999, 
a study showed that the posting of at least one privacy disclosure had 
increased in one year from 14 percent to 66 percent of Web sites 
surveyed. Nonetheless, the Commission has challenged industry to 
continue this progress by improving both the quantity and quality of 
privacy disclosures.
    The Commission is in the process of assessing the progress of 
industry self-regulatory initiatives through its comprehensive survey 
of commercial Web sites, described in response to Question 1. Moreover, 
the report of the Advisory Committee will provide the Commission with 
additional important information that will assist it in addressing 
online privacy protection for consumers.
    Question 5. Currently, much of the discussion of privacy had 
focused on the Internet. However, we are beginning to see the merger of 
information collected both online and offline. Do you believe it will 
continue to make sense to draw a distinction between information 
collected online and offline?
    Answer. The FTC has focused much of its attention to privacy on the 
Internet because this has been identified as a principal concern to 
consumers. Indeed, surveys consistently tell us that many consumers are 
reluctant to purchase products or services from Web sites because of 
privacy concerns. These apprehensions are understandable in light of 
technology that makes it possible to collect, store, manipulate and 
disclose personal information on an unprecedented scale and at 
unprecedented speed.
    As your question recognizes, however, new issues are emerging. We 
are concerned about the growing industry practice of collecting online 
``profiling'' data from consumers, with or without their knowledge, 
that may be merged with information from any source, online or offline. 
A related issue to consider is to what extent the reasons behind our 
efforts to protect online privacy also apply to information gathering 
in the offline world.
    Question 6. H.R. 1858, the ``Consumer and Investor Access to 
Information Act'' gives the FTC enforcement authority over the sale or 
distribution of certain public databases. Have you had a chance to 
review this bill and determine how you would enforce such a regulation? 
Do you feel the FTC is the appropriate agency to enforce the provisions 
of this bill?
    Answer. Last summer, the Commission had the chance to review and 
comment extensively on H.R. 1858, the proposed ``Consumer and Investor 
Access to Information Act of 1999,'' in response to a request from 
Chairman Tauzin of the House Subcommittee on Telecommunications, Trade 
and Consumer Protection. As noted in that 1999 statement, the 
Commission appreciates the recognition of its experience with the 
underlying enforcement issues that the proposed vesting of enforcement 
authority reflects. At the same time, however, the statement observes 
that the enforcement burden would appear to be considerable. No federal 
administrative agency has previously had jurisdiction over claims of 
misappropriation or infringement of intellectual property-type rights, 
and the Commission would be hampered in its efforts to provide 
effective enforcement without a commensurate increase in its resources.
    The Commission's statement identifies several complex rule-making 
and adjudicative issues raised by H.R. 1858, such as the amount of 
investment by the database's creator, the degree of subsequent copying, 
disaggregation of governmental and private content in databases, 
determination of what constitutes misuse, and evaluation of effects of 
the duplicate database on the original database creator's market and 
returns to investment. If called upon to enforce the legislation, the 
Commission would exercise its best judgment as to enforcement 
priorities, in keeping with its statutory responsibility to issue 
complaints ``if it should appear to the Commission that a proceeding by 
it . . . would be to the interest of the public.'' 15 U.S.C. Sec. 45. 
Competitive implications would appear to be appropriate considerations 
in this context.
    A complete copy of the Commission's 1999 statement is attached for 
your reference.*
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    *The information referred to has been retained in the Subcommittee 
files.
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    Question 7. Under S. 1854 a magistrate must use the standards 
``unreasonably cumulative or duplicative'' and ``imposes a burden or 
expense that substantially outweighs any likely benefit'' to evaluate 
the propriety of an agency's Second Request. Some have argued that this 
standard is vague and will be difficult for the magistrate to use. How 
do you respond to those concerns?
    Answer. The Commission opposes S. 1854's provisions for revising 
the ``Second Request'' process. The current LISR premerger notification 
process is essentially sound, allowing the agencies to clear roughly 97 
percent of the notified transactions within the initial waiting period 
without issuance of a Second Request. We recognize that there have been 
some cases where the Second Request process has not been entirely 
satisfactory. The antitrust agencies and the private bar are currently 
engaged in a cooperative effort to improve the process, and we expect 
visible results. In fact, as a result of information developed during 
this process, the Commission has just approved a new appeals process 
for parties who have disputes with staff attorneys regarding a Second 
Request. Achieving the desired improvements to the Second Request 
process does not require legislative change. Moreover, we are concerned 
that the provisions in the bill would handicap and delay the agency's 
efforts to assess whether proposed mergers are likely to be 
anticompetitive, with little or no industry benefit. In fact, some have 
argued that S. 1854 contains provisions that will make the merger 
review process considerably more cumbersome for government and industry 
alike.
    Although the limitations on the Second Request process contained in 
S. 1854 may sound reasonable in theory, in practice they are 
unworkable. At the time a Second Request is issued, the agency 
generally cannot evaluate the cost-benefit trade-off of a request. At 
that point, the agency has only limited knowledge about the competitive 
concerns raised by the transaction, and thus about the potential 
benefit of the information to the investigation. The agency also is 
unfamiliar with the manner in which particular parties maintain their 
records, and thus has no way to weigh the costs of submission against 
the benefits, or to determine which requests will be cumulative or 
duplicative. Typically, these concerns are addressed successfully 
through negotiation, during which the parties provide information 
relevant to the need for particular material. Imposing the bill's 
unworkable constraints on the scope of the Second Request at the outset 
would hinder the agencies' ability to conduct the investigations 
necessary to halt anticompetitive transactions.
    Because only a single Second Request is allowed, an agency cannot 
address burden concerns by staging requests through a narrow initial 
request and then serving additional requests as it learns more. The 
``staging'' of information to he supplied is currently addressed 
through negotiations between the agencies and the parties, using 
information the parties provide to the agency and other information 
staff develops to winnow its areas of competitive concern.
    S. 1854 would appear to limit the agencies' ability to obtain 
materials needed for a preliminary antitrust review. This approach 
fails to recognize the basic structure of the HSR statute, which 
requires the agency to seek a preliminary injunction at the conclusion 
of its investigation where warranted by competitive concerns. Courts 
often examine the entire substance of the agency's case, usually 
pursuant to parties' requests, even in preliminary injunction actions. 
For example, in the FTC's most recent preliminary injunction action, 
the court held a seven-week hearing and examined the entire case in 
detail.\1\ Thus, even where the matter before the court is a request 
for preliminary injunction, the agency must be prepared to present its 
entire case on the merits. The bill's limitation would seriously harm 
the agency's ability to do so.
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    \1\ FTC v. Cardinal Health, Inc., 12 F. Supp 2d 34 (D.D.C. 1998).
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    S. 1854 would limit agency premerger investigations even further. 
In non-merger investigations, the agency may seek any materials 
relevant to the investigation. Under S. 1854, parties could fail to 
provide some of the required information, yet claim substantial 
compliance with the request. The agency could then insist on submission 
only of information whose absence would ``materially impair'' the 
antitrust review. ``Materially impair'' is an extraordinarily high 
standard, and the bill apparently would allow a party to claim 
substantial compliance and refuse further submissions regardless of the 
burden--even if that burden is small and the information is relevant. 
Imposition of so high a standard would obviously create perverse 
incentives to make less than candid disclosures.
    The bill's restrictions on Second Requests would likely lead to 
instances of both under-enforcement and over-enforcement. If 
investigations are too severely limited, the agency could be unable to 
obtain enough information even to identify competitive problems that 
may exist in a proposed merger. Where the agency is able to identify 
problems, it could still be unable to obtain enough evidence through a 
narrowed Second Request to initiate an action to enjoin the merger 
temporarily. In other instances, the bill's Second Request restrictions 
could put the agency in the untenable position of filing suit within 
the statutory time limits, but before it had an appropriate opportunity 
to discover information needed to evaluate adequately the likely 
competitive effects of a merger. This information deficit would force 
the agencies to rely heavily on post-complaint discovery in preliminary 
injunction actions, and deprive the agencies and the merger proponents 
of an important opportunity to avoid litigation. This could result in 
unnecessary lawsuits and waste of resources--of the parties, the 
agencies, and the judiciary.
    The bill would also create a magistrate judge review process for 
Second Requests that would be impracticable and impose delay on both 
the agency and the parties investigated. The bill would permit review 
by a magistrate judge of the scope of the Second Request and of any 
claim of deficient submissions. The fundamental flaw is that magistrate 
review would likely involve too much delay--through preparation, 
hearing, and the magistrate's decision process--in an inquiry that 
should proceed as expeditiously as possible. We believe that the HSR 
review process works best when it is least adversarial. Magistrate 
review and other formalistic elements would inject an adversarial tone 
throughout the process, and hamper ready resolution of potential 
antitrust concerns.
    The Commission recognizes that there are instances in which the HSR 
Second Request process may have imposed unnecessary costs and burdens 
on merging parties. While we believe that these instances are rare, we 
are committed to exploring ways to improve the process. Specifically, 
the Commission is currently conducting an internal review of its HSR 
procedures and practices. As part of this review process, Commission 
staff is meeting with members of the antitrust bar and the business 
community to listen to their concerns.
    This process is already yielding effective results. The Commission 
has just put in place a new appeals process for parties who believe 
that compliance with portions of the Second Request should not be 
required. Under this new appeals process, parties who have exhausted 
reasonable efforts to obtain a modification to a Second Request from 
the lead staff attorney and the Assistant Director in charge of the 
investigation may file a petition with the General Counsel of the 
Commission. The General Counsel is independent of the Bureau of 
Competition which conducts merger investigations. After a party has 
filed a petition, the General Counsel will hold a conference with the 
petitioning party and the investigating staff. The conference shall 
take place within seven business days of the petition. The petitioning 
party and the investigating staff may both submit, no later than three 
business days before the conference, a five-page brief to the General 
Counsel setting forth their positions with regard to the requested 
Second Request modification. The General Counsel is then required to 
issue a final decision on the petition within three business days after 
the conference. Thus, the entire appeals process should take no longer 
than 10 business days.
    As the internal review process continues, we will make additional 
appropriate changes to its HSR procedures and practices. These changes 
will be made public. We believe that this internal review process is 
likely to yield better results than the proposed legislation.
    Question 8. This year at least 22 states will consider legislation 
affecting Internet privacy and online fraud. As more state legislatures 
address these issues, are you concerned that a patchwork quilt of 
Internet regulation will spring up making it difficult for businesses 
and consumers to determine which laws apply?
    Answer. As you note, legislation is pending in several states that 
would mandate privacy protections, often in terms that vary from state 
to state. For example, California proposes to restrict Internet service 
providers from disclosing personal information without consent; New 
York is considering restrictions on the collection and disclosure of 
personal information by both online service providers and financial 
institutions, among others. Differences in legal requirements across 
state boundaries may lead to confusion among consumers and businesses 
and could add to compliance costs for businesses. This highlights the 
need to carefully consider the impact of legal regulations, at the 
federal or state level, on consumers and businesses.
                                 ______
                                 
   Response to Written Questions Submitted by Hon. Sam Brownback to 
                            Robert Pitofsky
    Question 1. The latest the Senate will be able to adequately review 
the FTC report on marketing violence to children in a hearing would be 
in July. We would like to review it sooner, preferably in May. When 
will the final FTC report on the marketing of violence to children be 
ready for Senate review? If the final report is not ready until June or 
July, can we expect a preliminary report in April or May?
    Answer. I recognize the importance of the issues we are studying 
and the need to complete the report as quickly as possible. I believe 
the report will offer parents important information on the operation of 
industry self-regulatory efforts, and will also provide a basis for 
improved self-regulatory efforts.\1\
---------------------------------------------------------------------------
    \1\ Indeed, some industries have taken steps to improve the 
operation of the system since the study was initiated. For example, the 
Interactive Digital Software Association (the trade association for the 
video game industry) announced an advertising campaign to increase 
awareness of video game ratings among parents, which included the use 
of public service announcements by Tiger Woods and the requirement that 
television ads announce a game's rating in the audio portion of the ad. 
IDSA and the Entertainment Software Rating Board, which rates video 
games, announced the formation of an Advertising Review Council. The 
Council issued advertising guidelines designed to avoid inappropriate 
or deceptive advertising, a program whereby game magazines would screen 
advertisements for compliance with the ad guidelines, and an 
advertising complaint review process.
---------------------------------------------------------------------------
    Given the scope of the Commission's study, it would be difficult if 
not impossible to issue the report sooner than late summer. The 
Commission staff sent information request letters to 51 companies, 
including movie studios, video and computer game manufacturers and 
software developers, music recording companies, retail store outlets, 
and movie theater chains. The letters requested extensive information 
and documents, including general background on the companies and their 
sales figures; marketing plans for products that have been rated or 
labeled due to violence; Internet advertising and marketing 
information; information on audience demographics; policies or 
practices to restrict or limit the sale of rated or labeled products; 
research regarding purchasers of rated or labeled products; and 
complaints received about violence in products or advertising. The 
companies are still in the process of submitting the requested 
documents and information, and we do not expect to receive full 
productions until the middle of April.\2\ Staff may also need to follow 
up with some of the companies. In addition to the requests to the 
industry members, staff is gathering information from an array of other 
sources. For example. staff is contracting with an independent survey 
firm to conduct a nationwide survey of parents and children to learn 
their understanding and use of the various rating systems, and also is 
conducting Internet surfs to review online marketing and product 
accessibility. In addition, staff has collected information from the 
industry trade associations and ratings groups, as well as from 
parents' and children's advocacy groups.
---------------------------------------------------------------------------
    \2\ The request letters were sent right after the New Year, 
following a four-month Paperwork Reduction Act-required public comment 
process.
---------------------------------------------------------------------------
    Question 2. To ensure the accuracy of the information you retrieve, 
I assume that you will be corroborating the information received from 
entertainment industry sources with outside sources. What steps are you 
taking to corroborate industry information?
    Answer. Staff is taking a number of steps to ensure the accuracy of 
the information we are receiving. First, staff directed the companies 
to certify their responses as correct and complete and to list any 
responsive materials being withheld. The letters specifically state 
that anyone who knowingly and willfully makes false statements or 
representations to a United States government agency is subject to 
fines and/or imprisonment. In addition, staff is conducting its own 
advertising monitoring. For example, staff has contracted with a 
company to screen print advertisements for the products in question, so 
that we can see where the products are being advertised. Staff is 
videotaping certain television programs popular with teens and 
reviewing their advertising. In addition, staff has contracted with a 
television monitoring service to provide information on where 
advertisements for the products ran. Staff has also asked parents and 
children's advocacy groups to provide information on the advertising of 
rated products in media popular with young people.
    Question 3. One of the best indicators of whom violent 
entertainment is being marketed to is who buys it. Have you been able 
to obtain demographic purchasing data of adult-rated or labeled 
entertainment products?
    Answer. I agree that data on the demographics of purchasers of 
entertainment products that are rated as inappropriate for children due 
to violence would be valuable to our study. Staff has asked each of the 
companies for any information they have on the ages of the target 
audiences for their entertainment products that are rated or labeled 
due to violent content, as well as any information on the actual 
purchasers of these products. Thus, to the extent that the companies 
have this information, it is responsive to our requests and should be 
provided. Staff is also purchasing data on teen attendance at movies 
and similar demographic purchasing data.
    Question 4. Will the final FTC report include information on the 
total amount spent by children on adult-labeled entertainment products?
    Answer. Staff has requested that the companies provide information 
on their total sales as well as sales of products that are rated due to 
violent content. Staff has not requested data on the amount spent by 
children on products rated as inappropriate for children. Based on what 
we know at this time, it is unlikely that such data exist. Moreover, 
the data are unlikely to be broken down according to the product's 
rating or it may not be clear if a child or adult purchased the 
product. (For example, one marketing company surveys opening-night 
movie theater attendance in select cities for some films. This survey 
will yield what percentage of the audience was under 18 on opening 
night in those cities, but it will not indicate whether a parent or a 
child purchased the child's ticket.) Accordingly, it may not be 
possible to report on the total amount spent by children on these 
products.
    Question 5. Will you be investigating the cross-marketing of 
characters and themes from adult-rated video games and movies to 
children via toys, action figures, and Halloween costumes?
    Answer. Staff has requested that the industry members provide 
information regarding the cross-marketing of their products through 
whatever means, including toys, action figures, Halloween costumes, 
fast-food promotions, etc. Staff also requested information on the 
relationship between the licensors and the licensees, including control 
over advertising and packaging copy to help us learn the workings of 
these cross-marketing arrangements.
    Question 6. Will the report contain information on which 
entertainment companies market adult-labeled entertainment to children, 
and how much profit they gain as a result?
    Answer. Within the constraints of the confidentiality provisions of 
the Federal Trade Commission Act and the Commission's Rules of 
Practice, the study will report on the practices of a broad cross-
section of the entertainment industry, including the major film 
studios, music recording companies, video and personal computer game 
manufacturers, movie theater chains, and electronic goods and mass 
merchandise retail stores. The report may contain publicly available 
information regarding sales and profitability, for example from such 
sources as annual reports, other reports for investors, or public 
filings with the Securities and Exchange Commission. However, the 
Commission is prohibited by Section 6(f) of the Federal Trade 
Commission Act, 15 U S.C. Sec. 46(f), from making public trade secrets 
or other confidential commercial or financial information.
    Question 7. In your testimony before the Committee, you stated that 
the process for determining which agency, the Department of Justice, 
Antitrust Division or the FTC will review a merger was down to about 
9.5 days. It is my understanding that this represents an average time 
period. How many mergers take longer than ten days and do you have a 
list of transactions that have taken longer?
    Answer. During FY 1999, the FTC and Justice cleared 422 HSR merger 
investigations to each other. Of these, 77% were cleared before the 
10th day of the HSR waiting period (i.e., within 10 days of the date on 
which the parties submitted their HSR premerger notification forms to 
the agencies). Issues of clearance need to be resolved as early in the 
HSR waiting period as possible, so that investigating staff has as much 
of time as possible to investigate the proposed transaction. Without 
sufficient time to obtain preliminary information about a transaction 
during the initial waiting period, staff may believe it necessary to 
seek the issuance of Second Requests that ultimately prove to have been 
unnecessary.
    Our Second Request statistics demonstrate that issuance of Second 
Requests because of insufficient time is highly unlikely. Of the 47 
transactions cleared to the FTC after the 10th day of the HSR waiting 
period in FY 1999, the Commission issued only 3 Second Requests.
    We keep careful records of clearance requests that required longer 
than 10 days. From those records we review problem areas to improve the 
processes of coordination between our agency and the Antitrust 
Division.
    Question 8. During the hearing you mentioned that you are currently 
working with the anti-trust bar to resolve problems affecting the Hart-
Scott-Rodino Act merger process. How are these discussions going and 
when do you expect to complete this process and make additional 
recommendations for changes to the process?
    Answer. Over the past few months, we have engaged in an ongoing 
dialogue with members of the private bar and members of the business 
community that we believe is providing information helpful to 
improvement efforts by both agencies Our discussions have included 
representatives of the Antitrust Section of the ABA, the New York City 
Bar Association, the National Association of Manufacturers, the Chamber 
of Commerce and the American Antitrust Institute.
    In addition, over the past year the Premerger Notification Office 
has conducted a regular series of brown bag lunches used to solicit 
practitioners' views on improvements to the HSR process. Input has 
proven invaluable in determining areas of the HSR rules that require 
substantive revision, as well as assisting in improvements to the 
administrative process.
    Our effort to hear and appropriately address concerns continues. 
Within the next two or three months, we believe we will implement a 
number of changes to the HSR process to address concerns raised by the 
business community and private bar, and we are already undertaking 
improvement efforts. The Commission's Bureau of Competition has 
instituted a formal review of all proposed Second Requests in the 
Bureau Director's office to make certain that the requests are no 
broader than necessary. To encourage better communication between staff 
and parties to the transaction, the Bureau Director is directing his 
staff, soon after a request has been issued, to offer by to meet with 
the parties to discuss the anticompetitive concerns raised by the 
proposed transaction. So that modification proposals for Second 
Requests are resolved expeditiously, the Bureau Director is directing 
his staff to respond to each modification request within five business 
days of receipt of the modification proposal.
    Moreover, the Commission has just put in place a new appeals 
process for parties who believe that compliance with portions of a 
Second Request should not be required. Under this new appeals process, 
parties who have exhausted reasonable efforts to obtain a modification 
to a Second Request from the lead staff attorney and the Assistant 
Director in charge of the investigation may file a petition with the 
General Counsel of the Commission. The General Counsel is independent 
of the Bureau of Competition which conducts merger investigations. 
After a party has filed a petition, the General Counsel will hold a 
conference with the petitioning party and the investigating staff. The 
conference shall take place within seven business days of the petition. 
The petitioning party and the investigating staff may both submit, no 
later than three business days before the conference, a five-page brief 
to the General Counsel setting forth their positions with regard to the 
requested modifications. The General Counsel is then required to issue 
a final decision on the petition within three business days after the 
conference. Thus, the entire appeals process should take no longer than 
10 business days.
    We are working on other possible modifications as well, and based 
upon our continuing work with the private bar and the business 
community we expect these to be implemented in the near future.
                                 ______
                                 
    Response to Written Questions Submitted by Hon. John McCain to 
                            Robert Pitofsky
    Question 1. Given that the FTC will not complete its 
congressionally-mandated report on ``Marketing Violence to Children'' 
until it is too late for the Senate to hold hearings on the content of 
this report, will you agree to submit an interim or preliminary report 
to the U.S. Senate no later than May 31, 2000?
    Answer. I recognize the importance of the issues the agency is 
studying and the staff is striving to complete the report as quickly as 
possible. I believe strongly that it is essential to the integrity of 
the study that its specific findings be reported in context once the 
entire review is complete. Staff is still in the process of receiving 
information and documents from industry members and does not expect to 
have received full returns until mid-May. Agency staff is also 
commissioning a survey of parents and children about the entertainment 
rating systems and their purchasing behavior, and does not expect to 
receive that data until June. A partial report based on an incomplete 
review of the data runs a risk of error, as well as of unfairness, by 
possibly penalizing those companies that provided information in a more 
timely manner than others.
    In addition, issuing a preliminary report would raise several 
procedural difficulties. Almost all the information received has been 
marked confidential; under the Federal Trade Commission Act and our 
Rules of Practice, we are required to give the companies notice before 
such information can be released. The companies then have the 
opportunity to challenge that release in federal district court, and 
the Commission is prohibited from releasing the information until the 
court rules. The industry members have already voiced strong concerns 
about our study and the release of any marketing information they deem 
confidential. A preliminary report increases the risk of early 
intervention by industry and ultimate delay.
    Staff remains available to brief the Committee or its staff on the 
status of the report, as well as on the methodology followed in 
conducting this study.
    Question 2. Will you provide a list of the companies from which you 
requested information?
    Answer. The following is a list of the companies and trade 
associations from which staff requested information. This list has not 
been made public:
Video/Personal Computer Game Companies
Acclaim
Activision
Apogee Software
Capcom
Eidos
Electronic Arts
GT Interactive
Id Software
Interplay
Konami
Midway Games
Sega
Sierra
Movie Studios
Metro-Goldwyn-Mayer
Miramax Films
New Line Cinema
Paramount Pictures
Sony Pictures Entertainment
Twentieth Century Fox
United Artists
Universal Studios
Walt Disney Company
Warner Bros.
Movie Theaters
AMC Theatres
Carmike Cinemas
Cinemark Theatres
General Cinema
Loews Cineplex
National Amusements
Regal Cinemas
Music Recording Companies
BMG
EMI
Sony Records
Time Warner
Universal Music Group (includes Polygram)
Music Television Channels
Black Entertainment Television (BET)
Music Television (MTV)
Retailers
Amazon.com
Babbage's
Best Buy
Blockbuster Video
cdnow.com
Electronics Boutique
E-Toys.com
Hollywood Video
Musicland (includes Sam Goody)
Target Stores, Inc.
Tower Music
Toys `R' Us
Trans World Entertainment Corp. (includes Record Town, Saturday 
Matinee, and Camelot)
Wal-Mart
Trade Associations
Entertainment Software Rating Board
Interactive Digital Software Assn.
Motion Picture Assn. of America
National Assn. of Recording Merchandisers
National Assn. of Theatre Owners
Recreational Software Advisory Council
Recording Industry Assn. of America
Video Software Dealers Assn.

    Question 3. Will you provide the Senate with information pertaining 
to the amount of money spent by children on adult-rated products, as 
well as toys, action figures, Halloween costumes, and dolls based on 
characters or themes from adult-labeled products?
    Answer. Agency staff is seeking information regarding the amount of 
money spent by children on adult-rated products, as well as toys and 
other products based on characters or themes from adult-rated products. 
Staff has asked each of the companies for any information they have on 
the ages of the purchasers of these products. Staff has also requested 
that the industry members provide information regarding the cross-
marketing of their products through whatever means, including toys, 
action figures, Halloween costumes, and dolls. Thus, to the extent that 
the companies have this information, it is responsive to the requests 
and should be provided. The information staff has received thus far, 
however, suggests that the marketers and the retailers do not routinely 
collect and record the ages of those purchasing their products. As a 
result, staff is looking for other sources for this data. For example, 
staff is purchasing data on teen attendance at movies and similar 
demographic purchasing data. Although surveys are occasionally 
conducted, staff has not yet found a source for comprehensive data on 
the ages of purchasers. In addition, the sales data for these 
industries may not be broken down according to the product's rating or 
the rating of the product on which it is based. Accordingly, it may be 
difficult to construct accurate data on how much money children spend 
on adult-rated products and related toys, etc.
    Question 4. The amount of money spent by children on adult-labeled 
entertainment products is of obvious importance to this study. Will you 
provide Congress with that information?
    Answer. Staff has requested that the companies provide information 
on their total sales as well as sales of products that are rated or 
labeled due to violent content. As explained above, however, it does 
not appear that theaters and other retailers make it a practice to 
record the ages of their customers. Accordingly, it likely will not be 
possible to report comprehensively on the total amount spent by 
children on these products.
    Question 5. Will the final report include information on 
methodology and level of responsiveness of each company, should the 
Congress or the White House feel the need to extend the research 
period?
    Answer. The final report will describe how staff collected the 
information, including the methodologies used to conduct the study, and 
will attach as appendices the survey instruments and demand letters 
used to collect the information. Almost all of the companies contacted 
expressed a willingness to comply voluntarily and are currently 
supplying the information requested. Each company was directed to 
certify its responses as correct and complete and to list any 
responsive materials being withheld; the agency will report which 
companies provided those certifications and note any companies that 
failed to supply any of the key materials requested.
                                 ______
                                 
      Supplemental Prepared Statement of Howard Adler, Jr., Esq., 
 Baker McKenzie, Chairman, U.S. Chamber of Commerce, Hart-Scott-Rodino 
                               Task Force
    I respectfully request permission to supplement my Statement before 
the Subcommittee of February 9, 2000, to add to the record relevant 
portions of the Final Report of the International Competition Policy 
Advisory Committee to the Attorney General and Assistant Attorney 
General for Antitrust (``ICPAC Report''). That Report is the product of 
an intensive two-year study of international antitrust issues by a 
distinguished committee appointed by the Attorney General.\1\ It was 
presented to Attorney General Reno and Assistant Attorney General Klein 
on February 28, a little more than two weeks after my testimony.
---------------------------------------------------------------------------
    \1\ The Co-Chairs of ICPAC were James F. Rill, Assistant Attorney 
General for Antitrust in the Bush Administration, and Paula Stern, 
former Chairman of the International Trade Commission. Its Executive 
Director was Merit E. Janow, Professor in the Practice of International 
Trade in the School of International and Public Affairs, Columbia 
University. Members of ICPAC were Zoe Bard, President, The Markle 
Foundation; Thomas E. Donilon, Senior Vice President, General Counsel 
and Corporate Secretary, Fannie Mae; John T. Dunlop, Lamont University 
Professor, Emeritus, Harvard University; Eleanor M. Fox, Walter J. 
Derenberg Professor of Trade Regulation, New York University School of 
Law; Raymond V. Gilmartin, Chairman, President and Chief Executive 
Officer, Merck & Company, Inc.; Vernon E. Jordan, Jr., Senior Managing 
Director, Lazard Freres & Co. LLC; Steven Rattner, Deputy Chairman, 
Lazard Freres & Co. LLC; Richard P. Simmons, Chairman, Allegheny 
Technologies Incorporated; G. Richard Thoman, President and Chief 
Executive Officer, Xerox Corporation; and David P. Yoffie, Max & Doris 
Starr Professor of International Business Administration, Harvard 
Business School.
---------------------------------------------------------------------------
    The Advisory Committee addressed three issues of major importance 
for the global economy and international competition: 
``multijurisdictional merger review; the interface of trade and 
competition issues; and future directions in enforcement cooperation 
between U.S. antitrust authorities and their counterparts around the 
world, particularly in their anticartel prosecution efforts.'' (ICPAC 
Report at 1.) Because the Committee's analysis and recommendations on 
the first of these topics bear directly on the subject of the February 
9 hearing, I have asked the Subcommittee to add the following excerpts 
from the Report to the hearing record.\2\
---------------------------------------------------------------------------
    \2\ The full Report can be found at http://www.usdoj.gov/atr/icpac/
finalreport.htm.
---------------------------------------------------------------------------
    The Advisory Committee analyzed with great thoroughness the merger 
review practices in the approximately 60 countries that now have some 
form of merger control. It found that the number of merger control 
regimes, the divergences in reporting thresholds and requirements, and 
a variety of deficiencies in reporting thresholds, review time periods, 
and other practices created a significant burden on international 
trade. It, therefore, recommended ``a number of practices designed to 
rationalize the application of review procedures.'' (Id. at 13.) 
Moreover, believing that ``one of the most effective ways in which the 
United States can stimulate global reform is leading by example,'' the 
Committee recommended that the United States should ``examine its own 
merger review system in an attempt to identify and correct those 
aspects of the system that create uncertainty and unnecessary 
transaction costs.'' (Id. at 13.)
    In so recommending, the Advisory Committee relied on the U.S. 
Chamber's plea for U.S. reform.

        In light of the proliferation and disparity of filing 
        requirements around the globe, the increasingly complicated 
        regulatory framework, and the associated escalation of 
        transaction costs to meet the demands of the myriad 
        jurisdictions, the United States can serve an important role by 
        establishing a benchmark for the rest of the world. Before the 
        United States can legitimately lay claim to a position of 
        global leadership in the field of merger review, however, the 
        US. first needs to conduct a balanced, candid assessment of its 
        domestic requirements.

(Id. at 123-24) (emphasis added). In line with that recommendation, the 
Committee conducted such an assessment. It made a number of 
recommendations, several of which add support to the positions 
advocated by the Chamber in its February Statement and, by so doing, 
support the objectives of S. 1854. The following excerpts incorporate 
the essence of the Committee's recommendations with regard to (a) The 
HSR Reporting Threshold; (b) The Need to Delink Funding of Antitrust 
Enforcement From the HSR Filing Fees; and (c) The Second Request 
Process.
A. The Recommendations Re. the Filing Fee Threshold
    The Advisory Committee strongly recommends an increase in the HSR 
size-of-transaction threshold to somewhere in the range of $33 million 
to $43 million, with three members advocating an increase to $50 
million. The following excerpts highlight the factual basis and 
reasoning for this recommendation:

          [T]he Advisory Committee recommends that the current 
        notification thresholds be carefully reviewed to ensure that 
        they are only as broad as necessary to identify transactions 
        that may cause an appreciable anticompetitive effect. While 
        recognizing that small transactions are not necessarily 
        competitively benign, the Advisory Committee finds that the 
        notification thresholds currently employed by the premerger 
        notification regime are too low and capture too many lawful 
        transactions. The Advisory Committee believes that the United 
        States will not be well positioned to advocate that other 
        jurisdictions review and revise their own premerger 
        notification thresholds until it has addressed these same 
        issues in its own system. (Committee's emphasis)

                                 * * *
          [O]nly a small percentage of transactions captured by the 
        notification thresholds currently in place leads to enforcement 
        action. Indeed, no enforcement action is taken against more 
        than 98 percent of all notified transactions. In addition, the 
        annual level of filings made with the U.S. antitrust agencies 
        has increased significantly since the HSR Act was enacted. The 
        Advisory Committee believes that this increased level of 
        filings is attributable not only to increased merger activity, 
        but also to the failure to adjust the notification thresholds. 
        They have not been changed since the HSR Act was enacted in 
        1976.

                                 * * *
          Enforcement statistics for 1998 suggest that adjusting the 
        notification thresholds to keep up with inflation measured in 
        1998 dollars should not materially compromise the enforcement 
        mission of the US. antitrust agencies. Depending on the base 
        year and deflator used, that calculation would mean increasing 
        the size-of-transaction threshold in the $33 million to $43 
        million range. Although data are not publicly available for 
        that range, HSR statistics show that raising the threshold to 
        $25 million or $50 million would have eliminated approximately 
        25 to 50 percent of transactions notified in fiscal year 1998. 
        (Chamber's emphasis)
          In 1998 transactions valued below $25 million raised few 
        competitive concerns. In that year, the agencies received 
        filings on 1,235 transactions valued at $25 million or less. 
        The agencies issued Second Requests in only 11 (less than 1 
        percent) of these transactions. Indeed, in 95 percent of the 
        1,235 transactions, neither agency sought clearance to even 
        contact the parties. The filing fees alone in the 1,224 
        transactions in which no Second Request was issued, however, 
        cost the acquiring parties $55.1 million.
          Likewise, only 27, or just over 1 percent, of the 2,398 
        transactions valued at $50 million or less received Second 
        Requests. Although Second Request investigations represented 
        only a small percentage of notified transactions valued below 
        $50 million, almost 9 percent of all investigated transactions 
        involve transactions valued at less than $25 million and 
        approximately 20 percent of all investigations involve 
        transactions valued at less than $50 million, indicating that 
        some small transactions raise sufficient antitrust concerns to 
        warrant a more complete investigation.
          If a transaction is not captured by the thresholds, however, 
        the agencies have the authority to investigate and take 
        enforcement action, if needed. For example, in each of the last 
        two years the DOJ opened more than 50 investigations of 
        transactions that were not reportable under the HSR Act. 
        Although the agencies contend they have very little ability to 
        detect nonreportable transactions, the Advisory Committee 
        balances that concern with the recognition that only a small 
        fraction of transactions that fall below notification 
        thresholds will pose the threat of competitive harm. Thus, the 
        Advisory Committee concludes that increasing the filing 
        threshold in the $33 million to $43 million range should not 
        materially affect the quality of Clayton Act enforcement 
        efforts. Three Advisory Committee members advocate raising the 
        size of the transaction threshold higher, to $50 million. 
        (Chamber's emphasis)

    To sum up, the Report strongly supports raising the filing fee 
threshold roughly to reflect inflation since 1976. Doing so would set a 
good example for foreign merger authorities, and ``should not 
materially compromise the enforcement mission of the U.S. antitrust 
agencies.'' ICPAC Report at 127. In view of the findings of the 
Advisory Committee, the $35 million threshold proposed in S. 1854 is at 
the very low end of the range recommended in the Report. The U.S. 
Chamber agrees with the three Committee members who advocated raising 
the size of action threshold to $50 million, and urges Congress to 
adopt the $50 million size of transaction threshold.
B. The Recommendation to Delink Filing Fees from Antitrust Enforcement 
        Funding
    In recommending an increase in the reporting threshold, the 
Advisory Committee recognized the unfortunate fact that antitrust 
funding has become dependent on HSR filing fees. Echoing the view 
expressed by Commissioner Leary and the Chamber at the February 9 
hearing, the Committee stated,

        ``Ideally, no competition authority should be dependent on 
        filing fees for its budgets, staff salaries, or bonuses. A 
        linkage of this nature may skew incentives to revise 
        notification thresholds because consideration of limitations 
        that may be warranted on the basis of competition-oriented 
        objectives must be weighed against the collateral fiscal 
        effects. Another risk that must be considered is that the 
        ability of competition authorities to fund their law 
        enforcement activities may be compromised when the current 
        merger wave subsides.'' (Chamber's emphasis.)

(ICPAC Report at 105-06.) Because this undesirable dependency on filing 
fees presently exists, the Committee specified that the increase in the 
filing threshold should not be done at the expense of the antitrust 
enforcement budget. Its preferred solution, like the Chamber's, is 
total delinkage of the fees from the budget. The following excepts 
reflect the Committee's reasoning on this point.

          Any efforts to revise notification thresholds must account 
        for the fact that filing fees currently constitute a 
        significant source of revenue for the U.S. antitrust agencies. 
        To ensure that the DOJ and FTC will be able to pursue their 
        enforcement missions vigorously, it is imperative to provide 
        alternative sources of funding to offset the loss of any funds 
        that may result from revision of HSR thresholds. (Committee's 
        emphasis) This goal may he accomplished by delinking the fees 
        from the budget and by direct funding from general revenue. If 
        funds are not directly appropriated, alternative funds may be 
        realized in a variety of ways, including raising the filing 
        fee, adjusting the fee based on the size of the transaction, or 
        assessing the fee based on the complexity of the transaction 
        and the amount of work performed by the reviewing agency, 
        although these alternatives would not accomplish delinking the 
        fees from the budget. (Chamber's emphasis).
          The existing linkage between filing fees and funding for the 
        DOJ and FTC creates a conflict of interest for the agencies and 
        also exposes them to substantial funding cuts if filings were 
        to decrease, as occurred between 1989 and 1991 when filings 
        dropped more than 40 percent. The Advisory Committee is of the 
        view that filing fees should be delinked from funding for the 
        agencies, but that any efforts to do so must occur in an 
        environment where sufficient funds are assured from other 
        sources. This step would be beneficial both for the United 
        States and for those countries around the world that have 
        followed the US. lead in implementing filing fees and have 
        linked them to agency budgets. (Chamber's emphasis)

(ICPAC Report at 129.)

    While finding the linkage of ``filing fees to agency budgets 
clearly . . . undesirable as a matter of sound public policy'' (ICPAC 
Report at 106), the Committee recognized the necessity of accomplishing 
that goal without denying appropriate funding to the enforcement 
agencies. As noted, the Committee's preferred method is ``direct 
funding from general revenue'' (id. at 129); however, the Committee 
recognized several alternatives under which the HSR filing fees would 
more closely resemble a traditional regulatory or user fee:

          For example, the revision of thresholds could be accompanied 
        by measures to increase filing fees for reportable 
        transactions, or to levy filing fees scaled to the size of the 
        transaction. Similarly, filing fees also could be assessed 
        based on the amount of work performed by the reviewing 
        authorities. In Germany, for example, the size of the filing 
        fee for a transaction depends upon the economic importance and 
        complexity of the case. Filing fees generally range from 
        DM10,000 to DM100,000 (for straightforward cases, it is 
        typically less than DM20,000). In exceptional cases, the fee 
        may amount to as much as DM200,000.(39) Similarly, in 
        Switzerland, no fee is required if a transaction is cleared 
        within the initial review period. A filing fee is imposed if a 
        second-stage investigation is opened and is based on the amount 
        of work performed by the agency.

(Id. at 106.) The Committee explicitly recognized, however, that 
``these alternatives would not accomplish delinking the fees from the 
budget'' (id. at 129) and ``that when a transaction must be reviewed in 
several jurisdictions, filing fees will quickly mount.'' (Id. at 106.)
    For all of the reasons stated in the Chamber's February 9 
testimony, in its submission to the Advisory Committee, and in the 
ICPAC Report, the Chamber strongly believes that total delinkage of 
agency funding from the HSR filing fees can only be accomplished by a 
return to the practice of funding the highly important antitrust 
enforcement activities through general funds, as was the practice at 
the time HSR was enacted. While the other funding alternatives cited by 
the Committee would be a modest improvement over the present system, 
the Chamber agrees with the Committee that they would not accomplish 
delinkage and would foster costly and undesirable proliferation of 
filing fees around the world. The Chamber is also concerned that an 
uncapped fee based on work performed by the antitrust agency could lead 
to excessive investigating.
C. The Second Request Process
    Although the Advisory Committee does not recommend legislative 
reform of the Second Request process, its study revealed the serious 
defects in that process that have caused the Chamber to support the 
reform provisions of S. 1854. The following excerpts reflect these 
findings of the Committee:

          Although the HSR system avoids placing undue burdens on 
        merging parties at the initial filing stage, it is by far the 
        most demanding in the second-stage review process with respect 
        to the information and documents that merging parties are 
        required to provide. The Advisory Committee recognizes, 
        however, the flexibility of the U.S. system that enables the 
        agencies and merging parties to resolve issues in many matters 
        with only limited production of documents and information. Data 
        provided by the U.S. agencies indicate that more than half of 
        all firms complied only partially with the Second Request and 
        that many transactions were resolved with the submission of 50 
        or fewer boxes of documents. (Emphasis added)
          Many business groups and practitioners that appeared before 
        the Advisory Committee, however, perceive the Second Request 
        process to be ``unduly burdensome.'' The Advisory Committee too 
        is concerned that the data may not indicate the full extent of 
        the burden. For example, even if parties ultimately did not 
        substantially comply with the Second Request, they may still 
        have undertaken a full document search to be prepared to comply 
        fully with the Second Request in the event that settlement 
        negotiations break down. In addition, in a handful of notable 
        instances, merging parties have been required to submit 
        hundreds of boxes of documents, multiple gigabytes of 
        computerized data, and extensive answers to dozens of 
        interrogatory questions. These instances fuel the perception of 
        the unduly burdensome nature of the Second Request process. 
        (ICPAC Report at 137)

                                 * * *
          The U.S. agencies can take several measures to address 
        perceptions regarding the Second Request process. First, the 
        Advisory Committee recommends that when the agencies issue a 
        Second Request, they give the merging parties their reasons 
        (either orally or in writing) for not clearing the transaction 
        within the initial review period. An explanation of the 
        substantive concerns prompting the Second Request will 
        facilitate transparency in the merger review process and will 
        help the parties to understand that the Second Request is based 
        on genuine substantive concerns rather than on strategic 
        motivations. (Id. at 139)

                                 * * *
          Merging parties and agency staff frequently are able to 
        negotiate modifications to the scope of Second Requests. The 
        level of willingness to engage in productive negotiations of 
        this nature appears to vary greatly among staff members and 
        merging parties, however, and modification requests sometimes 
        may not be resolved in a timely fashion. To institutionalize a 
        willingness to engage in productive modification negotiations, 
        the Advisory Committee recommends that the agencies impress on 
        agency staff the importance of being open to negotiating timely 
        modifications to the scope of requests. Success in this 
        endeavor also requires a willingness on the part of merging 
        parties and their advisors. (Emphasis added)
          When modification negotiations break down, parties should be 
        encouraged to use the appeals process. Since its inception in 
        1995, however, that process has never been used at the FTC and 
        has been used only three times at the DOJ. . . . Because the 
        agencies want the appeals process to be used, the Advisory 
        Committee recommends that the agencies make the procedure more 
        attractive to merging parties. Commentators have suggested this 
        can be achieved by making the appeals process more expeditious 
        and its outcome more transparent. Further, the agencies should 
        actively encourage merging parties to use the process as well 
        as to involve direct supervisory officials in the modification 
        negotiation process, when necessary.
          The Advisory Committee recommends that the agencies attempt 
        to institutionalize these and other best practices to ensure 
        the integrity and effectiveness of the Second Request process. 
        The institutionalization of these best practices is 
        particularly important because at least some of the perceived 
        problems identified by the private bar appear to stem from 
        differences in practices by individual staff attorneys. Thus, 
        the agencies at the highest levels should articulate principles 
        or best practices to guide staff during the Second Request 
        process and should ensure that procedures are practiced 
        consistently throughout the agencies. (Id. at 140-41)

    The U.S. Chamber generally agrees with the Committee's descriptions 
of the problems but questions whether these long-standing deficiencies 
can be resolved through voluntary institutionalization of best 
practices. S. 1854 provides a legislative clarification as well as an 
effective appeals process that the Chamber, for reasons set forth in 
its February 9th Statement, believes should be enacted.
                                 ______
                                 
Joint Prepared Statement of Janet L. McDavid, Hogan & Hartson LLP, and 
              John Sipple, Clifford Chance Rogers & Wells
    My name is Janet McDavid. I practice law at Hogan & Hartson LLP in 
Washington, DC. I am the current Chair of the Section of Antitrust Law 
of the American Bar Association, but I am providing this statement 
today in my individual capacity and not on behalf of either the ABA or 
the Antitrust Section. John Sipple of Clifford Chance Rogers & Wells 
assisted in preparing this statement. John is a former head of the 
FTC's Premerger Office and is also active in the Antitrust Section, but 
he also is providing this statement in his individual capacity.
    The Antitrust Section is studying S. 1854, but we have not yet 
completed our analysis. Nor have we sought ABA approval to take any 
position on the Bill. We do hope to be in a position to discuss these 
issues in greater detail soon and to provide final views on various 
elements of the Bill. Today, both John and I are providing our personal 
views on the pros and cons of the major elements of the Bill without 
taking any position on the merits--our views are not necessarily the 
views of the ABA or the Antitrust Section.
    My practice has been almost entirely in the area of antitrust law 
for more than 20 years. During that period, I have spent well over two-
thirds of my time on investigations of mergers, acquisitions, and joint 
ventures by the Federal Trade Commission and Antitrust Division, so I 
am very familiar with the process. Most recently, I represented Mobil 
in its merger with Exxon and American Electric Power in its merger with 
CSW.
    I believe that the merger review process is one of the most 
important law enforcement responsibilities of both Agencies, and they 
generally do an excellent job with inadequate resources. However, in 
recent years I have become increasingly concerned about problems in the 
merger review process in transactions being reviewed at both the FTC 
and the Antitrust Division. The problems I have encountered are not 
universal. In fact, there are many staff in both Agencies who conduct 
efficient, focused, fair reviews of mergers. As Chair of the ABA 
Antitrust Section, I have set up a small working group of lawyers from 
the private bar and both Agencies to work together to try to improve 
the process from the perspective of both the merging parties and the 
Agencies. That work began last Fall and is continuing.
    I should emphasize that not all of the problems that I have 
observed in the process are the fault of the Agencies. There are those 
in the private bar who are not cooperative in the process, who withhold 
or delay providing information requested by the Agencies, and who even 
mislead the Agencies. That conduct makes it hard for the Agencies to do 
their job properly. There are no provisions in S. 1854 to address those 
problems by private lawyers and their clients. But it is important to 
remember that this is not a one way street with and that not all of the 
problems are on the Agency side.
    S. 1854, the premerger reform legislation introduced by Senators 
Hatch, DeWine, and Kohl, has several critical elements. The first two 
elements relate to filing thresholds and filings fees. The other major 
elements make substantive revisions to the standards governing Second 
Requests and establish procedures for review by a Federal Magistrate in 
the District of Columbia. Again, I want to emphasize that we are 
presenting only our personal views, and that we are identifying both 
pros and cons of the major elements of the Bill without taking any 
position on the Bill.
S. 1854 increases the size of transaction threshold under the HSR Act 
        from $15 million to $35 million.
Pros:
         Many HSR filings are unnecessary. Each year, the 
        Agencies conclude that at least 70% of filings raise no 
        competitive concerns at all. Serious investigations are 
        conducted in only about 10% of filings. As a result, the 
        premerger notification reporting net is being cast far too 
        wide. These unnecessary filings impose substantial burdens on 
        the business community--legal fees, filing fees, and time 
        devoted to compliance.

         The proposed increase in the transaction threshold 
        will decrease the burden on the business community by reducing 
        the number of transactions subject to the notification and 
        waiting period requirements of the HSR Act. It is estimated 
        that approximately one third of the 4,642 transactions reported 
        in FY 1999 fall below the proposed $35 million threshold and 
        will no longer require notification if S. 1854 is enacted.

         The size of transaction dollar threshold has not been 
        raised since the HSR Act was enacted in 1976. As a result, in 
        real dollars, the reporting threshold has fallen to a level 
        equivalent to about $4.5 million in 1976, requiring 
        notification for many transactions that the law was never 
        intended to reach. The proposed increase is an adjustment that 
        is long overdue.

         Increasing the threshold is essentially a cost benefit 
        analysis, weighing the burden on the business community against 
        the interests in having the antitrust Agencies notified of 
        every transaction prior to its consummation. Although the 
        antitrust Agencies will not receive notification for some 
        smaller transactions that may raise competitive concerns, the 
        burden placed on the business community for smaller 
        transactions arguably outweighs the benefits to the antitrust 
        agencies. In any event, the Agencies can and do review 
        transactions that are not reportable
Cons:
         Fewer filings will mean less revenue for the antitrust 
        enforcement Agencies (which are funded almost entirely by 
        filing fees), unless the filing fees are increased.

         Since the FTC and the Antitrust Division will no 
        longer be notified of transactions valued at $35 million or 
        less, some transactions that raise serious antitrust concerns 
        may go undetected by the enforcement Agencies or be consummated 
        prior to detection. Although the Agencies are empowered to 
        investigate transactions that are not subject to the HSR Act 
        requirements, the detection of smaller transactions that may 
        violate the antitrust laws is more difficult and will depend on 
        complaints, reviewing the trade press, and other means.

         The increase in the dollar threshold will result to 
        some extent in the loss of the deterrent effect that results 
        from the recognition that a transaction must be notified to the 
        enforcement Agencies before consummation.
S. 1854 establishes a two-tiered filing fee structure based on the 
        dollar value of the transaction and increases filing fees.
Pros:
         A filing fee based on the dollar value of the 
        transaction appears to be more equitable than a flat filing 
        fee. Larger transactions may be more complex and require 
        greater Agency resources.

         The funding for the antitrust Agencies will not be 
        adversely affected by the increase in the size of transaction 
        dollar threshold (which reduces the number of filings) because 
        the two-tiered structured is designed to make the threshold 
        increase revenue neutral.
Cons:
         Funding the budgets of the FTC and the Antitrust 
        Division through filing fees sets a bad example for other 
        nations that have adopted or are about to adopt merger 
        notification requirements. If the use of filing fees to fund 
        antitrust enforcement Agency budgets is adopted by other 
        jurisdictions (as it has been), transaction costs will increase 
        for multinational transactions.\1\
---------------------------------------------------------------------------
    \1\ Many people have questioned whether it is appropriate to fund a 
law enforcement function, such as antitrust enforcement, through user 
fees at all.

         Funding almost the entire budget of both the FTC and 
        the Antitrust Division from revenues derived from filing fees 
        is inequitable because it requires firms involved in reportable 
        transactions to fund the enforcement activities of the Agencies 
        unrelated to the review of mergers and acquisitions. For 
        instance, the filing fee funds the consumer protection function 
        of the FTC and non-merger antitrust enforcement work of the FTC 
---------------------------------------------------------------------------
        and the Antitrust Division.

         Since the budgets of the Agencies are based on filing 
        fees, the Agencies have no incentive to adopt new exemptions, 
        they can do under the HSR Act, to exempt classes of 
        transactions that are unlikely to violate the antitrust laws. 
        Thus, as a matter of public policy, provisions should be 
        included in S.1854 to eliminate this disincentive.

         The creation of a two-tiered filing fee structure will 
        be more difficult to administer than a flat filing fee or a 
        filing fee based on the total assets or annual net sales of the 
        acquiring person. The total assets or annual net sales are 
        relatively easy to determine using the most recent, regularly 
        prepared financial statements. The precise value of a 
        transaction is much more difficult to determine.

         The change in filing fees creating a two-tiered system 
        based on the value of the transaction will pose many valuation 
        issues and require several changes to the HSR Rules. Basing the 
        filing fee on the value of the transaction will require the 
        modification and adoption of several new rules. For example, 
        rules will be required to address the following issues:

          --How will parties determine the value of a transaction when 
        notification is filed based on a letter of intent or an 
        agreement in principle rather than an executed agreement?
          --Will the affidavit requirement require modification to 
        require parties attest that a ``good faith valuation'' has been 
        performed?
          --How will parties determine the value of an exclusive 
        license?
          --What is the dollar value of a voting securities acquisition 
        involving the purchase of shares for the 15%, 25% or 50% 
        thresholds? Is the value of the transaction to be based on the 
        value of the shares meeting the reporting threshold or the 
        value of the highest number of shares that can be acquired if 
        the threshold is met (15% versus 24.99%). If a person files to 
        met or exceed the 50% threshold, should the fee be based on the 
        number of shares that can be acquired of the 50% threshold is 
        met, the actual percentage of shares that the person intends or 
        has contracted to acquire or 100%.

         Given the complexities of the HSR Rules and the 
        interpretations that have developed over the life of the 
        program, drafting modifications to the HSR Rules is a very 
        arduous, and time consuming process. It is important that any 
        modifications that are adopted must be consistent with 
        regulatory scheme that is in place.
S. 1854 establishes substantive standards for agency requests for 
        information in a merger review. Under the Bill, Agency requests 
        must not be unreasonably cumulative and may not impose undue 
        burden or expense on the parties that outweighs the benefits to 
        the Agency of receiving that information. If information is not 
        supplied, the Agency may raise deficiencies only if its ability 
        to review the transaction has been materially impaired.
Pros:
         There is no doubt that many Agency requests today are 
        over-broad and unduly burdensome. The Bill would impose some 
        discipline on the Agencies and result in more narrow, focused 
        requests.
Cons:
         These are very uncertain standards, and neither the 
        Agencies nor the bar has any idea what they mean or how to 
        interpret them.

         It is very hard for the Agencies to conduct a cost 
        benefit analysis at an early stage in the investigation--
        especially before the Agency has had access to some of the data 
        it seeks. It is impossible to do so if private counsel fail to 
        produce relevant information prior to the issuance of the 
        Second Request, which is a tactic used by some lawyers.
The Bill requires that the Agencies identify their competitive concerns 
        at the time a Second Request is issued.
Pros:
         This will force the Agencies to focus their requests 
        on the real concerns.

         Because staff must justify Second Requests to their 
        management, this is already done internally so it imposes 
        little additional burden on the Agencies.

         Indeed, Chairman Pitofsky has already committed that 
        the FTC will do this orally on a non-binding basis. I welcome 
        that commitment, and hope that Antitrust Division will follow 
        his lead.
Cons:
         The Agency may not know all the issues early in the 
        process, so this statement could foreclose inquiry into issues 
        that arise later in the investigation.

         The Agencies may provide broad, largely meaningless 
        requests to minimize that risk, and thereby undermine this 
        requirement.
The Bill provides that the parties to the merger may petition a 
        designated Magistrate Judge in the U.S. District Court in the 
        District of Columbia to review the issuance and scope of a 
        Second Request and the parties' compliance with the request.
Pros:
         This ``levels the playing field'' by interposing a 
        disinterested third party review so the Agencies no longer hold 
        all the cards.

         This review could provide the parties with some 
        recourse for burdensome requests.

         The only appeal now available is internal review by 
        Agency management. Most parties hesitate to seek review because 
        they believe that management will back the staff and that they 
        will alienate the staff by ``going over their heads.''
Cons:
         This is likely to result in both the parties and the 
        Agencies becoming ``dug in'' and intransigent at an early stage 
        in the process, which is not conducive to a negotiated 
        resolution. This could increase the burdens on both the parties 
        and the Agencies.

         Magistrates are unfamiliar with the merger review 
        process and the legal issues involved in mergers, so they are 
        not well equipped for this task. These disputes are not like 
        the typical civil discovery disputes that Magistrates regularly 
        review, where the presumptions typically favor the party 
        seeking discovery. There could be uncertain or confused 
        precedents as a result.

         The review process could result in significant delays 
        for all involved. No time limits or deadlines are proposed in 
        the Bill, although it appears that review should be 
        expeditious. The risk of delay alone could discourage parties 
        from seeking review.

         Unlike typical civil discovery rules (e.g. Fed. R. 
        Civ. P. 37), there is no requirement that the parties and the 
        Agency attempt to resolve their dispute prior to invoking 
        review by a Magistrate.

         We in the private bar are working with the Agencies to 
        improve the merger review process--with or without legislation. 
        We are hopeful that our efforts will yield improvements. After 
        the Antitrust Section has completed it detailed analysis of S. 
        1854 and secured ABA approval to convey its position to 
        Congress, we will be happy to work with Congress on addressing 
        the important issues raised by the Bill.

                                
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