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87–108 2015

THE FTC AT 100: VIEWS FROM THE ACADEMIC 

EXPERTS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON COMMERCE, MANUFACTURING, 

AND TRADE 

OF THE

COMMITTEE ON ENERGY AND 

COMMERCE 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRTEENTH CONGRESS 

SECOND SESSION 

FEBRUARY 28, 2014 

Serial No. 113–122 

( 

Printed for the use of the Committee on Energy and Commerce 

energycommerce.house.gov 

(II) 

COMMITTEE ON ENERGY AND COMMERCE 

FRED UPTON, Michigan 

Chairman 

RALPH M. HALL, Texas 

JOE BARTON, Texas 

Chairman Emeritus 

ED WHITFIELD, Kentucky 

JOHN SHIMKUS, Illinois 

JOSEPH R. PITTS, Pennsylvania 

GREG WALDEN, Oregon 

LEE TERRY, Nebraska 

MIKE ROGERS, Michigan 

TIM MURPHY, Pennsylvania 

MICHAEL C. BURGESS, Texas 

MARSHA BLACKBURN, Tennessee 

Vice Chairman 

PHIL GINGREY, Georgia 

STEVE SCALISE, Louisiana 

ROBERT E. LATTA, Ohio 

CATHY MCMORRIS RODGERS, Washington 

GREGG HARPER, Mississippi 

LEONARD LANCE, New Jersey 

BILL CASSIDY, Louisiana 

BRETT GUTHRIE, Kentucky 

PETE OLSON, Texas 

DAVID B. MCKINLEY, West Virginia 

CORY GARDNER, Colorado 

MIKE POMPEO, Kansas 

ADAM KINZINGER, Illinois 

H. MORGAN GRIFFITH, Virginia 

GUS M. BILIRAKIS, Florida 

BILL JOHNSON, Missouri 

BILLY LONG, Missouri 

RENEE L. ELLMERS, North Carolina 

HENRY A. WAXMAN, California 

Ranking Member 

JOHN D. DINGELL, Michigan 

Chairman Emeritus 

EDWARD J. MARKEY, Massachusetts 

FRANK PALLONE, JR., New Jersey 

BOBBY L. RUSH, Illinois 

ANNA G. ESHOO, California 

ELIOT L. ENGEL, New York 

GENE GREEN, Texas 

DIANA DEGETTE, Colorado 

LOIS CAPPS, California 

MICHAEL F. DOYLE, Pennsylvania 

JANICE D. SCHAKOWSKY, Illinois 

JIM MATHESON, Utah 

G.K. BUTTERFIELD, North Carolina 

JOHN BARROW, Georgia 

DORIS O. MATSUI, California 

DONNA M. CHRISTENSEN, Virgin Islands 

KATHY CASTOR, Florida 

JOHN P. SARBANES, Maryland 

JERRY MCNERNEY, California 

BRUCE L. BRALEY, Iowa 

PETER WELCH, Vermont 

BEN RAY LUJAN, New Mexico 

PAUL TONKO, New York 

(III) 

SUBCOMMITTEE ON COMMERCE, MANUFACTURING, AND TRADE

LEE TERRY, Nebraska 

Chairman 

LEONARD LANCE, New Jersey 

Vice Chairman 

MARSHA BLACKBURN, Tennessee 

GREGG HARPER, Mississippi 

BRETT GUTHRIE, Kentucky 

PETE OLSON, Texas 

DAVE B. MCKINLEY, West Virginia 

MIKE POMPEO, Kansas 

ADAM KINZINGER, Illinois 

GUS M. BILIRAKIS, Florida 

BILL JOHNSON, Missouri 

BILLY LONG, Missouri 

JOE BARTON, Texas 

FRED UPTON, Michigan, ex officio 

JANICE D. SCHAKOWSKY, Illinois 

Ranking Member 

JOHN P. SARBANES, Maryland 

JERRY MCNERNEY, California 

PETER WELCH, Vermont 

JOHN YARMUTH, Kentucky 

JOHN D. DINGELL, Michigan 

BOBBY L. RUSH, Illinois 

JIM MATHESON, Utah 

JOHN BARROW, Georgia 

DONNA M. CHRISTENSEN, Virgin Islands 

HENRY A. WAXMAN, California, ex officio 

(V) 

C O N T E N T S 

Page 

Hon. Lee Terry, a Representative in Congress from the State of Nebraska, 

opening statement ................................................................................................ 1 

Prepared statement .......................................................................................... 2 

Hon. Marsha Blackburn, a Representative in Congress from the State of 

Tennessee, opening statement ............................................................................ 3 

Hon. Janice D. Schakowsky, a Representative in Congress from the State 

of Illinois, prepared statement ............................................................................ 3 

Hon. Henry A. Waxman, a Representative in Congress from the State of 

California, prepared statement ........................................................................... 112 

WITNESSES

Howard Beales, Professor, The George Washington University School of Business ........................................................................................................................ 5 

Prepared statement .......................................................................................... 8 

Answers to submitted questions ...................................................................... 113 

Daniel Crane, Associate Dean for Faculty and Research and the Frederick 

Paul Furth, Sr. Professor of Law, University of Michigan School of Law ...... 27 

Prepared statement .......................................................................................... 29 

Answers to submitted questions ...................................................................... 122 

Geoffrey Manne, Founder and Executive Director, International Center for 

Law and Economics ............................................................................................. 43 

Prepared statement 1 ........................................................................................ 45 

Answers to submitted questions ...................................................................... 128 

Christopher Yoo, John H. Chestnut Professor of Law, Communication, and 

Computer and Information Science, and Director, Center for Technology, 

Innovation and Competition, University of Pennsylvania Law School ........... 65 

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

Answers to submitted questions 2 ................................................................... 142 

Robert Lande, Venable Professor of Law, University of Baltimore School 

of Law .................................................................................................................... 71 

Prepared statement .......................................................................................... 73 

Answers to submitted questions ...................................................................... 143 

Paul Ohm, Associate Professor, University of Colorado Law School .................. 89 

Prepared statement .......................................................................................... 91 

Answers to submitted questions 3 ................................................................... 147 

1 The attachment to Mr. Manne’s statement is available at: 

http://docs.house.gov/meetings/if/if17/20140228/101812/hhrg-113-if17- 

wstate-manneg-20140228-sd002.pdf. 2 Mr. Yoo did not answer submitted questions for the record by the time 

of printing. 3 Mr. Ohm did not answer submitted questions for the record by the time 

of printing. 

(1) 

THE FTC AT 100: VIEWS FROM THE 

ACADEMIC EXPERTS 

FRIDAY, FEBRUARY 28, 2014 

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON COMMERCE, MANUFACTURING, AND

TRADE, COMMITTEE ON ENERGY AND COMMERCE, Washington, DC. 

The subcommittee met, pursuant to call, at 9:34 a.m., in room 

2123 of the Rayburn House Office Building, Hon. Lee Terry (chairman of the subcommittee) presiding. 

Members present: Representatives Terry, Lance, Blackburn, 

Harper, Guthrie, Kinzinger, Bilirakis, Johnson, Long, Schakowsky, 

McNerney, Barrow, and Waxman (ex officio). 

Staff present: Charlotte Baker, Press Secretary; Kirby Howard, 

Legislative Clerk; Nick Magallanes, Policy Coordinator, CMT; 

Brian McCullough, Senior Professional Staff Member, CMT; Gib 

Mullan, Chief Counsel, CMT; Shannon Weinberg Taylor, Counsel, 

CMT; Michelle Ash, Democratic Chief Counsel; and William Wallace, Democratic Professional Staff Member. 

OPENING STATEMENT OF HON. LEE TERRY, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEBRASKA 

Mr. TERRY. Good morning, everybody, and thank you for being 

here to our second installment on our review of the FTC at 100. 

Today’s theme is basically outsiders looking in as opposed to the 

insiders looking out, which was our first hearing. But before we get 

into the details, I want to thank Gib Mullan for his years of service 

on our subcommittee. He is going back to his roots, going back to 

the Consumer Protection Council or Consumer Protection Safety 

Commission and he will be counsel over there. So Gib, I just really 

appreciate the great work you have done for this subcommittee in 

the last 3 years, two different chairmen with two different personalities, and you’ve managed both well, so thank you for your service. Yes, this is his last day, then he goes and gets a real job. And 

starting the clock. Well, so good morning, and the FTC at 100 

years. This was an agency that was built, established in 1914 when 

there was a great deal of consternation in our country about some 

of the larger businesses that seemed to have—well, not seemed, 

were monopolies, and abuses to consumers ensued when there was 

total control over a certain market by one business; whether it was 

Standard Oil or American Tobacco. And that was the reason for the 

FTC’s commission. And today we are looking at whether those missions of 1914 are still relevant today, and I think most consumers, 

2 

citizens, and people on this committee say, yes, those are relevant, 

but is the FTC doing what they need to do. And it is a different 

society in 2014, and today we are an economy not of big manufacturers that become the monopolies, but a country of innovators in 

technology, and data, and privacy, and so many other issues that 

frankly weren’t part of the culture or infrastructure on which the 

FTC was built. 

So are their standards appropriate? Are the tests to determine 

if there is consumer harm appropriate? Are they even at a hearing 

from your opinions to those long-standing tests of harm? How do 

they quantify this today? And frankly I think there is another outside competing and adding to the layer of complexity in how they 

do their job with the Consumer Finance Committee that’s been put 

in, and the reality is that those two committees now share jurisdiction, but you have the CFPB that virtually has no tests and no 

standards, and in reality it looked like the FTC is trying to compete to make sure that they have equal status in the sense that 

they don’t have any standards or tests. I want to see if that is your 

collective interpretation of how the FTC is working in the modern 

world. 

[The prepared statement of Mr. Terry follows:] 

PREPARED STATEMENT OF HON. LEE TERRY

Welcome to our second hearing examining the Federal Trade Commission in its 

one-hundredth year. I want to thank all of the witnesses for coming today to share 

the academic perspective on how we can modernize the FTC. 

When the FTC was established in 1914, American voters expected policymakers 

to ‘‘bust the trusts.’’ Stung by the recent abuses of Standard Oil and American Tobacco, Americans wanted a new cop on the beat to take on the behemoths of business. The FTC was therefore established to fill this role. 

Like many other federal agencies, the FTC finds itself in an era that doesn’t necessarily fit its original design. Standard Oil and American Tobacco have been replaced by Apple and Google. Increasingly, the economy the FTC oversees crosses 

international borders—and is defined by a constant and ubiquitous interconnection 

over the Internet. And it’s not just people, but their devices that are connected. Five 

years ago, the number of ‘‘things’’ connected to the Internet surpassed the number 

of people. Some predictions say that by 2015, there will be 25 billion devices connected to the Internet—ranging from sensors in the soil that track growing conditions for farmers to chips in pills that notify a doctor when a patient has taken her 

medicine. This is the ‘‘Internet of Things,’’ and it presents countless economic advantages, but also unique privacy concerns. Innovations like this underscore the difficulty the FTC faces in trying to apply its original principles. 

The spirit of consumer protection was the fundamental driver in the creation of 

the FTC 100 years ago and that continues to be the case even though the activities 

it oversees have changed. The FTC certainly has a role to play in preventing business practices that harm consumers. But something that the subcommittee could explore today is whether the FTC’s design already allows for greater flexibility to better protect consumers than other agencies within the federal government. 

The FTC’s Section 5 authority, for example, prohibits ‘‘unfair and deceptive acts’’ 

as well as ‘‘unfair methods of competition.’’ These broadly defined standards allow 

for a fairly nimble agency to account for business practices as they evolve. 

Nonetheless, there are dangers in this flexible approach. For example, there is little definition as to what constitutes ‘‘unfair methods of competition.’’ The Supreme 

Court affirmed that the provision applies to activity that is not yet deemed illegal 

under antitrust law. As a result, businesses have a hard time figuring out exactly 

what an ‘‘unfair method of competition’’ really is. 

The temptation for ‘‘mission creep’’ is difficult to resist for any federal agency, and 

I believe the FTC is no exception. I believe this could be remedied by having the 

commission focus its efforts on protecting consumers. Otherwise, the commission is 

an arbiter of business models—where it can pick one business model over another 

and I believe that government shouldn’t be picking winners and losers. 

3 

As we start thinking about how to modernize the FTC, I believe there are a few 

important principles to keep in mind. First, we should aim to sharpen the commission’s guidance to provide clearer signals as to what is a prohibited business practice. Second, we should maintain the commission’s flexibility to update this guidance—which means maintaining broad overarching authority. Third, I believe the 

commission should re-commit itself to basing its decisions on consumer welfare effects—and those decisions should be supported by empirical evidence. 

As we continue this series of hearings, I look forward to fleshing these out. 

Mr. TERRY. So at this point, Marsha, do you have an opening 

statement? 

Mrs. BLACKBURN. Yes, I do. 

Mr. TERRY. And I yield to the gentlelady from Tennessee. 

OPENING STATEMENT OF HON. MARSHA BLACKBURN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TENNESSEE 

Mrs. BLACKBURN. And first, I want to thank Gib Mullan for all 

of his service to our committee. The past two Congresses Gib has 

really worked tirelessly with us on a host of issues for consumer 

product safety and working with me on everything from the Reform 

Act to buckyballs to a host of manufacturing issues. And so, Gib, 

we are really going to miss you. We appreciate the leadership that 

you have brought to the committee and the due diligence that you 

have done on behalf of the committee and of our constituents, so 

we thank you for that. 

The FTC is turning 100 in less than a year, and we are pleased 

to have all of you with us and to look at their role and to see how 

they are enforcing their core mission. A few of the questions that 

I am going to touch on today, how can Congress and the FTC work 

better to maximize consumer welfare? Are there regulatory jurisdictions that overlap between the FTC and other agencies? And 

how do we address these duplications and redundancies? How can 

we best harmonize regulations so that the industry does not have 

duplicative costs? And what should the balance be between regulation and enforcement? 

So, Mr. Chairman, I thank you for the hearing, and I yield the 

balance of my time. 

Mr. TERRY. Well, I thank you, and now recognize the Ranking 

Member of the committee from the great state of Illinois. 

OPENING STATEMENT OF HON. JANICE D. SCHAKOWSKY, A 

REPRESENTATIVE IN CONGRESS FROM THE STATE OF ILLINOIS 

Ms. SCHAKOWSKY. Thank you, Mr. Chairman. You know, in 

thanking and congratulating Gib Mullan, I want to say that I think 

too often we don’t thank the staff for the incredible work that they 

do. Most people around here do understand the absolutely critical 

role, the essential role of our staff—and Gib has really shown his 

professionalism and I think has contributed to what has been remarkably bipartisan nature of this committee. So, Gib, I really 

want to wish you well as you go to the Consumer Product Safety 

Commission, and hope to see you in that capacity as well. Thank 

you. 

So to the hearing, this is our second in our series on the Federal 

Trade Commission’s first 100 years and the future of the agency. 

4 

So I am very eager to hear from our witnesses about your perspective on the FTC at 100 and where the commission ought to be 

going. 

The FTC is an important cop on the beat, protecting both public 

and business against unfair, deceptive, fraudulent, or anti-competitive practices through its consumer protection and anti-trust authorities. 

I began my career in public service as a consumer advocate fighting successfully to get expiration dates posted on food packaging. 

And I view the FTC through the lens of how effective it is in making sure consumers are respected, well-informed, and fairly treated. 

The FTC has been effective in many areas of consumer protection. For example, last year, it successfully strengthened the Children’s Online Privacy Protection Act to reflect the rapidly changing 

nature of what is considered personal information. And it also defended consumers from companies that failed to reasonably protect 

consumer data such as the Web-connected camera company 

TransNet, whose poor security allowed hackers to spy on consumers and their kids in their homes. 

As commerce continues to change, as the Chairman so clearly 

talked about, and expand, the FTC has had to adapt to a new economy. As our social network shopping, banking, and other forms of 

communication and business move to the Internet, the FTC has 

changed, bringing more technology experts on board. 

At the same time, its resources are as tight as ever. In our December hearing with the commissioners, they pointed to ‘‘resource 

constraints’’ and the need to leverage those resources through 

‘‘careful case selection.’’ I am concerned that we are asking one of 

the country’s most important consumer agencies to choose which 

criminals it will pursue or on which crimes it will enforce the law. 

I hope we will work together to ensure that the FTC has the resources it needs to maintain consumer protection and a fair marketplace. 

From a regulatory standpoint, I believe it is time to look at ways 

to reduce barriers to FTC consumer protection rule makings. The 

FTC’s ability to move forward with important rule making is much 

more limited than those at other agencies. I also believe the FTC 

should have greater authority to pursue civil penalties in the event 

of a failure to reasonably protect consumers. 

In the rapidly changing climate of commerce today, rule making 

must be efficient, and penalty enforcement must be meaningful. 

The growth of the Internet has presented us with new questions 

about privacy rights and expectations. That is why Chairman Terry 

and I decided to form the Privacy Working Group, which is cochaired by Congresswoman Blackburn and Congressman Welch. 

The group is tasked with exploring the current privacy landscape 

and considering possible solutions to the challenges that we find. 

As I said at the last FTC hearing, I am particularly interested 

in the issue of privacy agreements. The FTC has the power to hold 

companies to the privacy agreements they offer their customers, 

visitors, and users, and it does hold bad actors accountable. But 

tthere is no law requiring that baseline privacy protections are 

promised to consumers. And the FTC can’t enforce what is not 

promised. 

5 

I look forward to hearing from our witnesses as to whether a 

minimum online privacy standard would be beneficial. Again I look 

forward to hearing from our witnesses about what we can do to enable the FTC to continue its progress and increase its effectiveness 

in the future. I yield back. 

Mr. TERRY. Does anyone else on our side, the Republican side, 

have a statement? Well, Billy said no, and the others are ignoring 

us. So I am going to say no. Do you have—Mr. McNerney? All 

right, so we are going to go right to our witnesses. This is a distinguished panel of academics who have great experience with the 

FTC and can provide us that view, the expert view now from the 

outside looking into the FTC. And we appreciate all. I am going to 

introduce all of you now, and then we will just go from my left to 

your right along the panel. Many of you have testified before before 

us, so you know how it works. 

So our first witness, Mr. Howard Beales, Professor of the George 

Washington University School of Business. Daniel Crane, Associate 

Dean for Faculty and Research at the Frederick Paul Furth, Senior 

Professor of Law, University of Michigan School of Law. Thank you 

for being here. Geoffrey Manne, Founder and Executive Director, 

International Center for Law and Economics. Christopher Yoo, 

John H. Chestnut Professor of Law, Communication and Computer 

and Information Science, Director, Center for Technology, Innovation and Competition, University of Pennsylvania Law School. I 

certainly like the Big 10 theme occurring here. Robert Lande, venerable Professor of Law, University of Baltimore School of Law. 

Thank you. Paul Ohm, Associate Professor of University of Colorado Law School, and I will make no comments, sarcastic comments about the University of Colorado. 

We do appreciate you being here, and we will start with Mr. 

Beales. As you know, you have 5 minutes. If you go over 5 minutes, 

I will start lightly tapping just to remind you to jump to the conclusion. If you get to 6 minutes, I will start pounding really hard. So 

with that, Mr. Beales, you are recognized for your 5 minutes. And 

once again to all of you, thank you for being here. 

STATEMENTS OF HOWARD BEALES, PROFESSOR, THE GEORGE 

WASHINGTON UNIVERSITY SCHOOL OF BUSINESS; DANIEL 

CRANE, ASSOCIATE DEAN FOR FACULTY AND RESEARCH 

AND THE FREDERICK PAUL FURTH, SR. PROFESSOR OF 

LAW, UNIVERSITY OF MICHIGAN SCHOOL OF LAW; GEOFFREY MANNE, FOUNDER AND EXECUTIVE DIRECTOR, INTERNATIONAL CENTER FOR LAW AND ECONOMICS; CHRISTOPHER YOO, JOHN H. CHESTNUT PROFESSOR OF LAW, 

COMMUNICATION, AND COMPUTER AND INFORMATION 

SCIENCE, AND DIRECTOR, CENTER FOR TECHNOLOGY, INNOVATION AND COMPETITION, UNIVERSITY OF PENNSYLVANIA LAW SCHOOL; ROBERT LANDE, VENABLE PROFESSOR 

OF LAW, UNIVERSITY OF BALTIMORE SCHOOL OF LAW; AND 

PAUL OHM, ASSOCIATE PROFESSOR, UNIVERSITY OF COLORADO LAW SCHOOL 

STATEMENT OF HOWARD BEALES 

Mr. BEALES. Chairman Terry, Ranking Member Schakowsky, 

and members of the committee, thank you for the opportunity to 

6 

testify today. I am Howard Beales, Professor of Strategic Management and Public Policy at the George Washington School of Business. In addition to publishing a number of academic articles on 

the FTC, I have held a variety of positions at the agency, most recently as Director of the Bureau of Consumer Protection from 2001 

to 2004. 

In my testimony today, I will focus on the FTC’s consumer protection mission, recognizing that it is closely related to the commission’s role in protecting competitive markets because markets organize and drive our economy. 

Consumer protection policy can profoundly enhance the economic 

benefits of competition by strengthening the market or it can reduce these benefits by unduly hampering the competitive process. 

By and large, the FTC has done an excellent job in its consumer 

protection mission. Recognizing that generally strong performance, 

I want to highlight today some areas where it is harming consumer 

welfare. 

First and most importantly, the commission has lost its way in 

its approach to advertising regulation. Virtually any communication is subject to misinterpretation, and advertising is no exception. 

However straightforward the message and however careful the execution, some consumers are likely to misinterpret it. In fact, academic studies of communications find 20 to 30 percent of the audience misunderstand some aspect of whether it is advertising or editorial content. 

To address this problem, the 1983 Deception Policy Statement focused on the meaning of an advertisement to the average listener 

or the general populous or the typical buyer. A footnote acknowledged that an interpretation may be reasonable if it is only shared 

by a significant minority of consumers. The commission’s recent 

POM opinion, the footnote swallows the standard. The most commission claims is the advertisement convey challenges claims to at 

least a significant minority of reasonable consumers. 

The commission relied entirely on its own reading of the advertising. When balancing the protection of a minority of consumers 

against the interests of others who would like to learn about 

emerging science, however, the need for extrinsic evidence is acute. 

There is no reasonable way to strike the balance without some 

sense of roughly how many consumers fall into each group. 

Moreover, it is essential to determine whether that significant 

minority is greater than the 20 or 30 percent who are likely to misunderstand any message. Good survey evidence can address precisely that question. What is needed is a deeper appreciation of the 

fact that consumers who correctly interpret a message are harmed 

when the commission prohibits claims that some misunderstand. 

The commission’s approach to ‘‘up to’’ claims is a case in point. 

Although most reasonable consumers surely understand that saving up to a certain amount is different from saving at least that 

amount. The FTC issued warning letters asserting that the two 

claims are exactly the same. An ‘‘up to’’ claim is only allowed if all 

or almost all consumers experience that result. That is a standard 

that suppresses valuable information. 

Second, the commission is requiring excessive amounts of evidence to substantiate advertising claims. The core principle of subVerDate Nov 24 2008 14:38 Jul 28, 2015 Jkt 037690 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 F:\MY DOCS\HEARINGS 113\113-122 CHRIS
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stantiation has always recognized the uncertainty surrounding 

many claims and balanced the benefits of truthful claims against 

the cost of false ones. Consider, for example, the Kellogg’s claim 

about the relationship between diets high in fiber and the risk of 

cancer. If the claim is true, waiting for the results of clinical trials 

would impose substantial costs on consumers who would lose important information about the likely relationship between fiber consumption and cancer risk. 

On the other hand, if the claim is false, the consequence of consumers are only giving up a better tasting cereal or paying a little 

bit more for a higher fiber product. The far more serious mistake 

is to prohibit truthful claims. 

The commission’s recent cases reflect a move toward a more rigid 

standard modeled on the drug approval process, requiring two randomized clinical trials for claims about the relationship between 

nutrients and disease. This standard is excessive in most cases and 

likely to deprive consumers of valuable, truthful information. 

There are ways of learning about the world other than clinical 

trials. There are, for example, no randomized trials of parachutes, 

but few would jump out of an airplane without one. Nor are there 

randomized trials about the adverse effects of tobacco consumption. 

Indeed, much of what we know about the relationship between 

diet and disease is based on epidemiology, not randomized trials. 

The commission says nothing has changed because the requirement for two clinicals is just fencing in really. However, the reason 

the commission offers for this second test is universally true. The 

second test might yield a different result. As former Chairman 

Potofsky has written, advertising regulations should seek reliable 

data, not abstract truth. Knowing that precisely one clinical trial 

supports an important health-related claim is valuable to consumers. The commission should return to its traditional balancing 

test. 

Second, the commission should restrict its privacy enforcement 

actions to practices that cause real harm. There may be subjective 

preferences that some consumers have to stop practices that they 

think of as creepy. And those preferences should be protected when 

they are expressed in the marketplace. I think it is analogous to 

kosher where some people have a preference that is very real and 

should be protected. But the people who have that preference are 

the people who need to make the choice. It shouldn’t be the commission making the choice for them or requiring all sellers to cater 

to the preferences of a few consumers when others don’t share that 

preference. 

Anchoring privacy enforcement and harm is a way to do that, 

and I think it is something the commission should retain. 

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

[The prepared statement of Mr. Beales follows:] 

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Mr. TERRY. Thank you very much. Mr. Crane, now you are recognized for your 5 minutes. 

STATEMENT OF DANIEL CRANE 

Mr. CRANE. Chairman Terry, Ranking Member Schakowsky, and 

members of the subcommittee, thank you for this opportunity to 

appear before you today. I am Daniel Crane of the University of 

Michigan. My comments will concern the FTC’s continuing and 

original mandate to guard against unfair methods of competition. 

I wish to make three broad points. First, over the course of its 

first 100 years, the FTC has not followed the original congressional 

design, which contemplated that the commission would be an expert, politically independent agency exercising quasi-legislative and 

quasi-judicial functions. 

Second, the FTC has nonetheless emerged as a successful law enforcement agency. Third, the FTC’s 100 birthday is an opportune 

moment to consider options for modernizing the agency in light of 

its actual functioning. 

The FTC was a product of progressive era belief in regulation by 

technocratic experts. In 1935, in upholding the FTC’s independence 

and the president’s removal power, the Supreme Court articulated 

the statutory features that justified the commission’s independence. 

The FTC was to be nonpartisan and politically independent from 

other branches of government. Its responsibilities were not executive but rather quasi-judicial and quasi-legislative. The FTC was to 

be a uniquely expert body. The original statutory design also contemplated that the commission would collaborate with the Justice 

Department in enforcing the anti-trust laws, for example, by sitting 

as a chancellor in equity. 

As a historical matter, almost none of this has worked out. 

Though the commission may be politically independent from the executive branch, social science research shows that it is highly inclined to the will of Congress. This may create a desirable separation of powers, but it does not create the kind of pure political neutrality envisioned during the progressive era. As competition capacity, the commission has not been a rule-making authority almost 

at all. Indeed a 1989 study by the American Bar Association suggested that it would be inappropriate for the commission to have 

such a role. 

The commission may in theory exercise an adjudicatory function, 

but that too is largely illusory. First, the commission more frequently brings anti-trust actions in court than through internal adjudication. Second, when it does adjudicate internally, it is questionable whether there is an impartial adversarial contest. 

Between 1983 and 2008, for example, the FTC staff won all 16 

cases adjudicated by the commission, leaving the real contest to 

happen in the court of appeals. 

What about expertise? Yes, the FTC has considerable expertise 

on economics and particular industries, but not greater expertise in 

the justice department. The FTC is thus expert but not uniquely 

expert compared to other governmental bodies. 

Finally the statutory provisions designed to encourage collaboration between the FTC and Justice Department have been almost 

entirely neglected. Instead of collaborating on enforcements, the 

28 

two agencies essentially allocate cases depending on their experience with particular industries or political factors. 

In sum, the FTC’s action behavior as an institution bears little 

resemblance to the design that ostensibly justifies its independence 

as an agency. This does not mean, however, that the FTC is a 

failed institution. To the contrary, the FTC today is largely an effective law enforcement agency, an agency that enforces the antitrust laws on essentially equal terms with the anti-trust division. 

Although there would be considerable sense in consolidating antitrust enforcement in a single agency, the political will for such a 

move is probably lacking. 

It is therefore appropriate to focus on more modest reforms that 

could improve the functioning of the agency in light of what it actually is and does. Let me briefly propose four such reforms. 

First, as several commissioners have recently proposed, the FTC 

should adopt guidelines to limit its powers to prosecute unfair 

methods of competition that would not be already covered by the 

Sherman or Clayton Acts. This is important to prevent the FTC 

from having excessive discretion to make up competition rules on 

the fly while serving an essentially prosecutorial function. 

Second, under existing case law, the FTC can obtain a preliminary injunction against mergers in order to pursue administrative 

action on a lower standard of proof than a substantial likelihood of 

success on a merits criterion applicable to the Justice Department. 

Given that both agencies exercise essentially the same law enforcement function, there is no reason for the FTC to enjoy an advantage that the Justice Department does not. 

Third, the two agencies should be encouraged to enter into a formal public agreement allocating anti-trust enforcement authority, 

which would enhance clarity and transparency in case allocation. 

The agencies entered into such an agreement in 2002 but then rescinded it under pressure from Congress. 

Fourth and finally, under the unique appellate review statute in 

place since 1914, a large corporate defendant may appeal a commission order to essentially any of the 12 appellate circuits that it 

chooses. This creates a serious disadvantage for the FTC insofar as 

defendants routinely pick the court of appeals with the most favorable law on the relevant issue which the Supreme Court rarely reviews. The statute could be amended to reduce this appellate forum 

shopping. Thank you very much. I look forward to your questions. 

[The prepared statement of Mr. Crane follows:] 

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Mr. TERRY. Well timed. Mr. Manne, you are now recognized for 

your 5 minutes. 

STATEMENT OF GEOFFREY MANNE 

Mr. MANNE. Thank you, Chairman Terry, Ranking Member 

Schakowsky, and members of the committee. Thanks for the opportunity to testify today. The FTC does much very well. Compared 

to other regulatory agencies, it is frankly a paragon of restraint 

and economic analysis. And this has long been true especially of its 

anti-trust enforcement disciplined by the courts and internal practice. 

Not so much so for the commission’s ambiguous and somewhat 

cavalier use of Section 5. The FTC’s essential dilemma is clear. 

Very often, the challenged practice could either harm or help consumers or both. Everyone agrees that wrongly deterring the helpful 

can be just as bad as failing to deter the harmful. Indeed, sometimes it may be much worse. 

So, principled restraint is key to ensuring the FTC actually protects consumers. Restraint requires two things; objective economic 

analysis and transparent decisions reviewable by the courts. Both 

are increasingly lacking at the FTC. Consider the recent NielsenArbitron merger. The FTC imposed structural conditions claiming 

the merger would lessen competition in the market for national 

syndicated cross-platform audience measurement services. You will 

be forgiven for not knowing that market existed because it doesn’t 

exist. The majority presumed to predict the future business models 

and technologies of these companies. They assumed the merger 

would also reduce competition in this hypothetical future market. 

That is an economic question. 

As Commissioner Wright noted in his dissent, without rigorous 

economics, non-economic considerations, intuition, and policy preferences may guide enforcement. That will hardly benefit consumers. Economics’ fundamental lesson is humility, how little we 

know about the future, indeed how little we understand about markets at the present. Economics is a powerful tool for understanding 

that, but it isn’t perfect. 

But increasingly, major policy decisions increasingly rest on theoretical ideas or non-economic evidence about what companies intended to do, not actual effects, or the economics is missing entirely. 

Perhaps Nielsen is in outlier. In its Sherman and Clayton Act 

cases, the FTC and the staff usually do apply economic reasoning 

and are appropriately humble. Interestingly, of course, those cases 

often come or almost always come before courts. Not so in pure 

Section 5 cases. 

The term ‘‘unfair methods of competition’’ is, as Commissioner 

Wright has put it, as broad or as narrow as the majority of the 

commissioners believes it is. The commission has issued no limiting 

principles unlike its two policy statements on consumer protection. 

There is broad agreement that such guidelines would be helpful, an 

overwhelming agreement that the UMC, the Unfair Methods Competition, should be limited at minimum to cases where there is consumer harm. 

44 

The chairman even seems to agree, and yet with two proposals 

from sitting commissioners, the chairman continues to resist. Her 

argument boil down to maximizing the FTC’s discretion. Excess 

discretion is the problem at the FTC. The FTC has pushed the 

boundaries of the law through consent agreements with essentially 

no judicial oversight. And the problem is most acute in consumer 

protection. 

First let me say that in consumer protection cases, the large majority of them are uncontroversial and require no methodological 

overhaul. Deception cases like fraud or placing unauthorized 

charges are bills are usually straightforward, but the FTC is increasingly dealing with more difficult cases and increasingly it is 

using its unfairness authority and stretching its deception authority in exercises of unchecked and opaque discretion to determine 

when ambiguous conduct harms consumers. 

The recent Apple case highlights the problem. The FTC concluded that Apple’s design of its billing interface insufficiently disclosed to iTunes users when their kids, not Apple, might make 

charges. Apple left parents’ accounts open to make more purchases 

for a brief window to balance convenience for all users with unauthorized charges by children. 

The economic framework to decide the case correctly was built 

right into the statute, but still it didn’t make it into the majority’s 

decision. Section 5N says nothing is unfair under the act if the 

harm it causes is outweighed by countervailing benefits to consumers or to competition. So you would expect an unfairness case 

against Apple to balance harms and benefits. Instead the majority 

treats Apple’s design decisions like cramming and assumes there is 

no redeeming benefit through its design. 

But as any user of Apple products can attest, design is everything. Apple faces real tradeoffs here about exactly how and when 

to notify customers that they may be charging themselves. The 

FTC simply dismissed the countervailing benefits that the statute 

clearly requires it to weigh. 

The same is true of the agency’s privacy and data security cases. 

It is not clear what is really best for consumers. Of course, stolen 

data can harm consumers but so can spending too much protecting 

against it or limiting otherwise desirable product features. 

The outcome of the Apple case was possible only because it never 

went before a judge. It was just a settlement. The only balancing 

the commission had to do was to convince Apple to settle instead 

of litigate. That does not fulfill the commission’s statutory balancing obligation. The majority pushed the law as far as it could 

without Apple baulking. Apple just wanted the case to go away. Beyond a certain point, it didn’t care anymore how or whether the 

FTC justified its decision. It is refreshing that Commissioner 

Wright dissented in this case. It forced the majority to at least 

mount a defense that was not embarrassing. But this is a much 

lower bar than what the court would require. 

Is there was any question at all that if more of these cases were 

coming before a court, dissents like Commissioner Wright’s could 

become the blueprint for a court to potentially overrule the majority. We would have better cases, better dissents, and better argued 

majority opinions. I would stop there. Thank you very much. 

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[The prepared statement of Mr. Manne follows:] 


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[The attachment to Mr. Manne’s testimony has been retained in 

committee files and can be found athttp://docs.house.gov/meetings/if/if17/20140228/101812/hhrg-113-if17-wstate-manneg20140228-sd002.pdf.] 

Mr. TERRY. Thank you very much. Mr. Yoo, you are recognized 

for your 5 minutes. 

STATEMENT OF CHRISTOPHER YOO 

Mr. YOO. I am grateful for the opportunity to testify at this hearing, exploring the new challenges confronting the Federal Trade 

Commission as it enters its second century. The FTC now operates 

in a context that bears little resemblance to the world that existed 

when it was first created. I would like to focus my remarks on two 

of the most significant changes: globalization and the growing importance of technology. 

Focusing first on globalization, when Congress created the FTC 

in 1914, the vast majority of the economy consisted of local markets. Goods traveled only a short distance and rarely crossed state 

lines. Since that time, commerce has become increasingly national 

and international in focus. U.S. companies routinely operate in a 

wide range of countries, and business practices that once affected 

only domestic economies now have ramifications that are felt 

around the globe. 

The increasing globalization of the economy places new demands 

on agencies charged with enforcing anti-trust laws and consumer 

protection. Not only must they investigate conduct that spans multiple jurisdictions, the fact that multiple regulatory authorities 

have jurisdiction over the same matter can force companies to 

incur duplicative compliance costs. To the extent that substantive 

standards differ, companies faced with inconsistent mandates may 

be forced to reduce their practices to the least common denominator or forsake doing business in a country altogether. As a result, 

regulatory and harmonization has now emerged as a key element 

of trade policy. 

Toward these ends, the FTC has developed increasingly close relationships with other competition authorities both through bilateral cooperation and through a global organization of competition 

policy authorities known as the International Competition Network. Such efforts help coordinate and standardize the work in 

competition authorities and will continue to grow in importance in 

the future. 

The other big change is the increasingly central role that technology plays in the modern economy. Innovation has emerged as a 

key driver of economic growth. Products and services have become 

increasingly sophisticated in their own right and have become part 

of a larger and more tightly integrated economic system. Technological change can also be very disruptive, altering old patterns of 

doing business and creating new business models and market-leading companies in the process. Companies who find themselves disadvantaged by technological change may be tempted to look to the 

government for relief. 

The growing importance of technology will require the FTC to expand its institutional capabilities. One key step in that direction 

has been the creation of the office of Chief Technologist. This posiVerDate Nov 24 2008 14:38 Jul 28, 2015 Jkt 037690 PO 00000 Frm 00071 Fmt 6633 Sfmt 6633 F:\MY DOCS\HEARINGS 113\113-122 CHRIS
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tion is only 4 years old, and the agency is still exploring how it can 

best contribute to the FTC’s mission. In addition, the FTC’s usual 

practice is to require that every major decision be accompanied by 

an analysis by the Bureau of Economics. The agency has not always adhered to this practice in recent years and would be well advised to make sure to follow this important procedural guideline in 

the future in every major case. 

The FTC will also have to determine what substantive legal principles it will apply to high tech industries. The problem is that our 

current understanding of innovation remains nascent and largely 

unsettled. This creates the risk that enforcement authorities will 

apply anti-trust law without a clear goal or with a multitude of 

goals in mind. And the past has taught us that unless anti-trust 

laws are applied with a clear focus on consumer welfare, they may 

be abused to protect specific competitors instead of consumers. 

Under these circumstances, the FTC must adhere to the principles that have emerged to guide its conduct since its founding in 

1914. These principles require that all decisions be based on a solid 

empirical foundation, not speculation, and must protect consumers, 

not competitors. In particular, the agency should make sure that 

it does not embroil itself in routine disagreements over price that 

are everyday occurrences in any market-based economy. Indeed, 

both the Supreme Court and enforcement authorities have long recognized that anti-trust agencies are institutionally ill-suited to 

overseeing prices to make sure they remain reasonable. 

Consider, for example the FTC’s growing interest in standard essential patents. The debate presumes that patents are being asserted in ways that harm consumers without a clear understanding 

of how government intervention could also harm consumers by discouraging innovation. Moreover the typical remedy mandates uniform rates despite the fact that economic theory shows that innovation is best promoted when innovators are allowed flexibility in the 

business models they pursue. Instead of directly overseeing the outcomes of negotiations, the FTC already has ample authority to preserve the integrity of standard-setting processes that are being 

abused in ways that harm consumers. 

Finally, some are calling for the FTC to exercise the authority 

granted by Section 5 of the FTC Act to police unfair methods of 

competition in ways that go beyond consumer welfare. The past has 

taught us that attempting to use the anti-trust laws to promote 

goals other than consumer welfare opens the door to a wide range 

of intrusive government intervention that often harm consumers. 

In short, the lesson of the past 100 years is that the FTC would 

be well served to continue to look to consumer welfare as its guide. 

Any other approach opens the door to governmental overreach and 

to allowing the law to be abused to benefit individual competitors 

instead of consumers. 

[The prepared statement Mr. Yoo follows:] 

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Mr. TERRY. Thank you very much. Mr. Lande, you are now recognized for 5 minutes. 

STATEMENT OF ROBERT LANDE 

Mr. LANDE. Chairman Terry, Ranking Member Schakowsky, and 

members of the subcommittee—— 

Mr. TERRY. Is your microphone on? 

Mr. LANDE. No. 

Mr. TERRY. And why don’t you pull it a little closer too? Yes, perfect. 

Mr. LANDE. Sorry about that. Chairman Terry, Ranking Member 

Schakowsky, and members of the subcommittee, I am truly honored to appear here today. The subject of my remarks will be the 

overall scope of Section 5 of the FTC Act. I will discuss how Congress intended this law to be interpreted in a broad and flexible 

way. I will also discuss why any Section 5 anti-trust guidelines 

should center around the goal of protecting consumer choice rather 

than increasing economic efficiency. 

As all the commissioners agree, Congress intended the FTC Act 

to include more than just Sherman Act violations. The legislative 

history makes it clear Section 5 was also intended to prohibit incipient violations of the Sherman Act and conduct violating the policies behind the Sherman Act. The Supreme Court has accepted this 

interpretation. 

There are a number of specific ways the commission could carry 

out this congressional mandate that would be in the public interest. I will briefly discuss one example, and there are others in my 

written testimony. 

Tying exclusive dealing violations that violate the Sherman Act 

require a minimum amount of market power. I believe the market 

power requirements should be relaxed whenever the case involves 

a defendant with a significantly larger market share than that of 

its victims. In these incipient tying or exclusive dealing situations, 

incumbents may be able to significantly disadvantage smaller competitors and potential entrants because of their relatively larger 

market power. 

Suppose, for example, a company wants to introduce a new brand 

of super premium ice cream. Suppose an existing seller of super 

premium ice cream has 30 percent of this market and also 30 percent of the other types of ice cream markets. Suppose the incumbent firm tells stores that they have to choose between the established firm’s products and the newcomer’s products. Suppose the 

store agrees to exclude the newcomer’s products. These facts would 

be very unlikely to constitute a Sherman Act violation. However if 

the incumbent’s exclusionary strategy succeeds, consumer choice in 

terms of varieties of ice cream on the market could decrease substantially, and consumer prices could increase substantially. If so, 

this conduct should violate Section 5 as an incipient exclusive dealing or tying arrangement. 

Now, last year Commissioner Wright proposed that the commission adopt Section 5 anti-trust guidelines. Unfortunately this proposal contains a fatal flaw. It directly contradicts congressional intent. This is because Section 5 prohibits unfair methods of competition, a prohibition that, as I noted earlier, Congress intended to be 

72 

quite broad. The proposed guidelines, however, would effectively 

eliminate the term ‘‘unfair method of competition’’ and substitute 

for it a very different narrow term ‘‘inefficient methods of competition.’’ 

Contrary to what Congress intended, these guidelines would 

reach less anti-competitive conduct than the Sherman Act. Its proposed test of illegality is whether a practice ‘‘generates harm to 

competition as understood by the traditional anti-trust laws and 

generates no cognizable efficiencies.’’ Now, this test is contrary to 

current law and narrower than current law. 

The prevailing test balances of practices efficiency and market 

power effects under a rule of reason. The current law does not immunize conduct at least to a significant amount of monopoly power 

simple because it results in cognizable efficiency. Thus the proposed guideline would not apply to conduct that currently violates 

the Sherman Act, the opposite of the expansive law that Congress 

intended. 

Now, Commissioner Wright certainly is correct that it would be 

desirable if the FTC issues Section 5 anti-trust guidelines. However 

bad guidelines would be worse than no guidelines. By analogy, 

years ago, the United States wanted to negotiate arms control 

agreements with the Soviet Union. A good arms control agreement 

would have had many benefits. However, an agreement that would 

have forced us unilaterally to disarm would have been much worse 

than no agreement at all. 

Similarly the suggested guidelines effectively would disarm the 

Federal Trade Commission. Now, the commission instead should 

formulate sound Section 5 guidelines that properly reflect congressional intent. Now, I believe this can be accomplished if the guidelines were written to protect consumer choice, not economic efficiency. My written testimony explains how anti-trust guidelines 

built in terms of the consumer choice framework would be both 

faithful to congressional intent and would enhance predictability 

for business. I welcome your questions. 

[The prepared statement of Mr. Lande follows:] 

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Mr. TERRY. Thank you, and, Mr. Ohm, you are now recognized 

for your 5 minutes. 

STATEMENT OF PAUL OHM 

Mr. OHM. Thank you, Chairman Terry, Ranking Member 

Schakowsky, and members of the subcommittee. I am here to talk 

today about consumer protection and in particular online privacy 

and data security. My comments reflect not only my scholarship 

but also the 10 months I spent as senior policy advisor in the office 

of policy planning at the Federal Trade Commission from 2012 to 

2013. 

I have three broad points I would like to make in my short 

amount of time. Number one, we should understand that there is 

a tendency within debates about the FTC to focus on a hypothetical 

FTC, one that does not reflect the FTC as it actually exists and operates. The FTC that really exists is one that is informed, and recent scholarship really exposes this, through a theory known as 

privacy on the ground as opposed to privacy on the books. 

The idea is privacy is a very complex, nuanced, textured, contextual thing. We shouldn’t want an agency that once and for all declares the rules of the game. Instead we should want something 

that is more tenable to technological innovation and dynamism. 

And that is exactly what we have through this structure set up by 

Congress and the way it has been executed by the FTC. 

An important component of this is documented in the scholarship 

as a large cadre of privacy professionals, lawyers here in D.C. and 

around the country, who read the FTC’s pronouncements as a kind 

of common law of privacy law. This belies the notion that this is 

this opaque, progressive, envelope-pushing agency that never reveals the rules of the road for privacy. Quite the contrary, the privacy rules are something that are studied, understood, and companies are made to order their activities accordingly. 

Number two, and I am sorry to use a very technical, legal scholarship term, if it ain’t broke, don’t fix it. The Federal Trade Commission, I left my year very, very impressed by the efficiency and 

the way that this agency executes its privacy mission. And I would 

urge Congress to help the commission maintain the status quo, the 

tools and the resources it needs to do the job well. By I can’t resist 

giving you a few recommendations for small fixes that you could 

make to Section 5 and other parts of the FTC authorization to help 

them do their job better. 

Number one, as I am sure you are all aware, there is ongoing 

litigation against Windom in data security, and as I say in my 

written testimony, there isn’t a defender of Windom out there that 

tries to defend the reasonableness of the data security practices in 

that case. Quite the contrary, there are some very, very creative jurisdictional arguments, to my mind, far too creative jurisdictional 

arguments, that I certainly hope the federal courts will decline. 

But in the meantime, all of this activity and all of this aggressive 

defense, which of course is the defendant’s right, has cast something of a cloud over the FTC’s ongoing ability to bring data security cases under Section 5. And I don’t think I need to tell the 

members of the subcommittee, this is a very bad time to be taking 

away one of the few tools we have to incentivize good data security. 

90 

I think every American citizen was impacted by some of the data 

breaches that occurred over the holidays. 

Companies are not living up to the standards and expectations 

we have of them in securing our personal and sensitive data. And 

they are not living up to these expectations even though the FTC 

is on the beat. How much worse will it be if the FTC’s jurisdiction 

over data security is called into question? And I would ask Congress to clarify what is already in the statute, that data security 

falls within Section 5. 

And last but not least, number three, I would argue that the definition of harm as it is currently defined in the word unfairness in 

Section 5, could use a refresh. It was last defined by the FTC in 

1980. Congress memorialized this understanding in the statute in 

1994. And at that time, two statements were made about harm 

that I think do not reflect the way the Internet has changed the 

nature of privacy harm. 

Number one, the statement says—and it is laudable that the 

statement is still so relevant 23 years later. It says harm is almost 

always monetary, and yet we have case after case demonstrating 

nonmonetary yet significant harms from privacy violations on the 

Internet. I would be happy to elaborate during questions. And two, 

the statement says that harm under unfairness in Section 5 is 

rarely merely emotional, injurious primarily to emotional standards. 

Again we have seen in many cases, for example, the FTC’s case 

in Designerware that harms to emotion may be quite concrete, 

quite substantial, and the kind of thing that an effective law enforcement agency like the FTC should have the jurisdiction to bring 

cases against. Thank you very much for having me. 

[The prepared statement of Mr. Ohm follows:] 

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Mr. TERRY. Thank you. All well done. Thank you very much. 

Very informative. Now it is our opportunity on this panel to ask 

you questions, and I think one of the areas of great discussion 

among those of us here who have never been on the inside of the 

FTC but we look at the unfairness issue and whether it appears 

so nebulous to us that it can morph into anything you want it to 

be, and that seems to be what is occurring now. 

So I want to ask each and every one of you what is your view 

and I know this is an unfair question in the sense that you get 

about a minute to answer it. But what is your view? Is the FTC 

expanding the use of the term unfairness? Are they changing it? 

Do you have any specific recommendations to us on a way to make 

it more consistent? Mr. Beales, we will start with you. 

Mr. BEALES. I think that the definition that Congress wrote into 

the law is a good one. It focuses on essentially a cost/benefit test. 

And the issue is how good a job does the commission do in conducting that kind of cost/benefit analysis that is what the statute 

requires. But that is a conduct issue. That is how do you go about 

using the standard as opposed to what is the standard. 

I think there is no question that the FTC has expanded its use 

of unfairness. There was a long period, shortly after the unfairness 

policy statement, where the commission was extremely reluctant to 

use unfairness for anything, but I think it is a useful legal theory. 

It is one that in many cases focuses much more clearly on the right 

questions, and I think probably data security is one of those where 

the issue is really what are the costs, what are the benefits. 

Mr. CRANE. So, Chairman Terry, you are quite right that the 

word unfair is quite nebulous and open-ended, and the question is 

unfair as to whom. And I would suggest that the right answer to 

that question is unfair as to consumers. And as Professor Yoo suggested, one of the problems is that unfairness could be turned into 

a protection for less efficient competitors who simply cannot keep 

up because they are not as efficient. So I would suggest that any 

guidelines that the commission would issue on the meaning of Section 5 would make clear that a minimum requirement for enforcement of Section 5 would be unfairness to the welfare of consumers. 

Mr. TERRY. Thank you. Mr. Manne. 

Mr. MANNE. I think the statutory language is good, as I suggested. And I think the balancing test that it contemplates is appropriate. The problem, as I think Howard suggested, is in its application. And there is at least two problems here. One is we don’t 

actually know for sure what the FTC is doing because the vast majority if not the entirety with two minor exceptions frankly of the 

cases where they have interpreted Section 5, in particular in privacy and data security cases, arise in dissent decrees with very little analysis by the commission. 

To call this common law is a little bit crazy. There is no way you 

could discern clear principles, and let alone clear principles that 

might have evolved over time from what the commission gives us 

in its dissent decrees. So if they are actually applying the statute 

correctly, we don’t know. 

But I think there is evidence, as the Apple case suggests, that 

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ness test the entirety of the language in the statute. And that may 

indeed in the background be analogous to what the statute requires, but I am skeptical. 

There is very little clear application of the specific facts of any 

specific case to, sorry, the language of the statute to the specific 

facts of each specific case. The dissent decrees look the same. The 

remedies are the same, and that can’t be right. It can’t be that 

every company that is addressed by the FTC, no how big they are 

or what the problems are, deserves exactly the same remedy and 

exactly the same 20-year dissent decree. 

Mr. TERRY. Right, Mr. Yoo. 

Mr. YOO. We actually have a lot of studies of other agencies who 

have applied similarly nebulous mandates, and what they find is 

that even an attempt to distill common law principles from them 

have revealed that the agency behaves in an extremely unpredictable way, particularly under mandates such as public interest mandates and unfairness mandates. Attempts to distill from them a 

consistent point of view has failed. 

And what is interesting is when you have multi-factor balancing 

tests where you are doing multiple things, the agency can justify 

almost any decision it wants to make. Now, the FTC actually historically solved this by focusing on consumer welfare. By disciplining itself under the influence of the courts to actually focus 

in a clear sort of way. 

The problem is we don’t always know what exactly benefits consumers. I will give you a couple easy examples. We are often suspicious of privacy and Internet companies who take personal information. There is research by Catherine Tarkenton at MIT that suggests that the ability to target ads allows Internet companies to 

generate 65 percent more revenue. So the reality is you are giving 

up a certain amount of privacy, but because the companies get 

more revenue, they are able to provide services that actually may 

be creating benefits that have to be taken into account at any balance. 

And what you will discover is you will see fights right now in different spaces about patents about who should be paying how much. 

The result is there is we are seeing that in fact consumers benefit 

tremendously by devices versus services, and that in fact there is 

an allocation that is very ambiguous about how those go. 

The last point I would like to make is to reinforce a point that 

Geoff Manne made about use and consent decrees. Technically 

those aren’t law, and even worse they are often done by the FTC 

in merger contexts where the issue is not the particular privacy or 

competitive practices at hand, but do you want the merger and are 

you willing to give up other things for it. And the agency can use 

its authority, the fact that they have the merging parties over a 

barrel to make them address issues that aren’t actually germane 

to the merger. 

Mr. TERRY. That is a concern. Mr. Lande? 

Mr. LANDE. I agree with Professor Crane that the unfairness jurisdiction should not be used to protect competitors. I certainly 

agree it should protect consumer welfare. The problem is that is an 

ambiguous term. People define that differently. Many people define 

that to me as nothing more than economic efficiency, whereas I 

106 

think consumer welfare should mean consumer choice, that is, worrying about the significant choices on the market. 

That would actually have three components. In addition to an efficiency component, it would have a concern with any wealth transferred from consumers to firms with market power or transferred 

from purchasers to a fraudulent firm, and it would also have a tremendous concern with non-price competition as Professor Ohm 

talked about earlier. 

Mr. OHM. So the answer is yes, I think the FTC is using its unfairness capabilities and authorizations in slightly different ways. 

But I think that is not because the FTC is pushing the boundaries 

on what it does. I think it is a testament to the changing nature 

of harm on the Internet. And so with all of the wonderful innovations that the Internet brings, it gives those innovations to people 

who would do harmful things. You know, the news headlines are 

replete with examples of this. As you all know, a few months ago, 

a father received in the mail a flier addressed to daughter killed 

in car crash, right. 

These are things that were not possible before the rise of the 

data collection, the big data techniques that are now present, and 

we should expect that as harm begins to proliferate, expand, and 

change the nature, that authorization such as unfairness which 

after all reside on theories of harm would expand as well. 

Mr. TERRY. All right, thank you very much. Mr. McNerney, you 

are recognized for—Ms. Schakowsky is recognized for 5 minutes. 

Ms. SCHAKOWSKY. Thank you, Mr. Chairman. I wanted to ask 

Professor Ohm a couple of questions first. Currently the FTC 

brings legal actions against companies that fail to employ reasonable data security under Section 5, Unfair and Deceptive Practice 

Authority. However, there is no comprehensive federal law governing the collection or protection of consumer information. So in 

your testimony, you recommended that Congress consider making 

explicit the FTC’s data security enforcement authority which you 

state is ‘‘already clearly within the broad strictures of Section 5.’’ 

So could you explain that recommendation about clarifying—— 

Mr. OHM. Again this a commentary on the cloud that has been 

cast by litigation like Windham and Labbe MD where the FTC has 

to devote some of its scarce resources to defending theories that 

frankly I find a little too creative. And the federal courts, as is 

their right, is taking a very, very careful look at this. Congress 

could help us have a clearer data security mandate by just clarifying—— 

Ms. SCHAKOWSKY. So maybe we could talk to you more clearly 

about what language might be—— 

Mr. OHM. Yes, I would appreciate it. 

Ms. SCHAKOWSKY. OK, in order to implement the Children’s Online Privacy Protection Act, Congress explicitly granted the FTC 

authority to promulgate regulations using the Administrative Procedures Act. Outside of such authority specifically granted by statute in this case, the FTC’s authority to promulgate rules regarding 

privacy and data security is severely limited by what I believe to 

be the unduly burdensome Magnus and Moss rule-making procedure. 

107 

So, Professor Ohm, are there tools that the FTC currently does 

not have that would improve its data security enforcement or deterrent capabilities such as APA rule making authority, 

enhanceable penalties authority, or jurisdiction over nonprofit entities like universities and hospital? 

Mr. OHM. Absolutely. I want to be clear. I think that in data security in particular, we are better off with an evolving standard 

like we have right now. I don’t think any of us should want the 

FTC to spend a lot of time promulgating data security rules that 

will no longer be accurate the day that they are enacted. It is such 

a rapidly moving target. 

But on the other hand, enhanced APA authorities absolutely 

would be greatly appreciated and bring a lot more certainly to all 

as well as a higher ability to bring civil penalties. Clearly the deterrent effect message is not getting across to some companies. Providing the FTC with a larger stick in some of these cases would be 

a good idea. 

Ms. SCHAKOWSKY. And it seems to me and then having to do it 

case-by-case like congressional authority, I think, is really cumbersome. 

Mr. OHM. Absolutely yes. A broader set of authorities would be 

very useful for the mission of the FTC. 

Ms. SCHAKOWSKY. And finally would a federal breach notification 

law that gives FTC explicit authority to bring actions against companies for failing to timely notify consumers and law enforcement 

officials of a breach improve the FTC’s ability to protect consumers? And what do you believe would be the utility of such a 

measure alone compared to a comprehensive bill that also included 

baseline data security standards? 

Mr. OHM. I think we need both. We should celebrate the laboratory of federalism that created the breach notification in the beginning. But now with 48 conflicting standards, it is probably time to 

federalize and pre-empt those laws and have one uniform standard 

with the FTC playing a role. Baseline data privacy legislation is an 

excellent idea, and I think the White House’s White Paper that laid 

out some of the principles, I might go into that, is a great place 

to start. 

Ms. SCHAKOWSKY. Thank you. And I missed the answers to all 

the questions. I think I left. Mr. Lande, the question about the 

anti-competitive conduct and Section 5, I wonder if you could 

maybe repeat or expand on what you said while I wasn’t here. 

Mr. LANDE. Sure. The question was what is unfairness authority, 

what I think unfairness authority is. And I started by agreeing 

with Professor Crane that it is not to protect competitors. We are 

all in favor of consumer welfare. The problem is we often disagree 

about what consumer welfare is, and many people when they say 

they want to help consumer welfare, all they mean is they want to 

enhance economic efficiency, which often has very little to do with 

the welfare of real consumers, at least in the short run. 

For me, I believe that unfairness really translates to the consumer choice framework. That is ensuring that the choices that 

consumers want are, in fact, on the marketplace, and nothing artificial is done to remove those choices from the marketplace. And if 

you unbundle that, it really has three components. First, a concern 

108 

with economic efficiency, second, a concern with wealth that might 

be transferred from consumers to firms with market power or from 

consumers to firms engaging in fraud, a concern with that transfer 

or distributive effect, and then finally a heightened concern with 

non-price competition which Professor Ohm had talked about earlier. 

Ms. SCHAKOWSKY. And I yield back. 

Mr. TERRY. Thank you. You may have heard the bells go off or 

buzzer and we have time, I think, to get through everybody. But 

if we don’t, don’t worry. We are going to adjourn, not recess. So, 

Mrs. Blackburn, you are recognized for 5 minutes. 

Mrs. BLACKBURN. Thank you, Mr. Chairman, and what I am 

going to do is submit most of my questions to you. But I am going 

to condense this a little bit. As you have heard from the Chairman 

and from Ms. Schakowsky, we are all involved and concerned about 

privacy and data security. And we have had the working group. We 

have put a good bit of attention into this. As we look at privacy 

legislation and data security legislation, Mr. Beales, I am going to 

start with you and go down the line. Number one, these are the 

questions I want you all to answer for me. Is it appropriate that 

the FTC retain privacy jurisdiction? Because we have the what 

takes place in the physical world and the online world. Number 

two, are they effective in their approach? Number three, should 

more of their attention be placed on enforcement and education 

and less on regulation? And the fourth piece I want to come from 

you all is what would you like to see in a light-touch data security 

and privacy bill? Mr. Beales. 

Mr. BEALES. Well, to try to address your specific questions, I 

think it is appropriate that the FTC retains privacy jurisdiction. I 

think they have been mostly effective in that area. They have been 

more effective when they have been focused on things that really 

are harms. It was the consequences-based approach that led, for 

example, to the do-not-call list that I think was a very successful 

answer, intervention to address something that really was a privacy problem and not an isolate example or a speculative case. 

I think it should be enforcement-based, not rule-based. That is 

a more sensible way to respond to the wide variety and rapidly 

changing circumstances that we see in the privacy environment. I 

am not sure beyond data security, and I think the notion of civil 

penalties for data security breaches or inadequate security procedures is one that has merit. Beyond that, I am not convinced that 

a privacy law would make things better, and there would be considerable risk of chilling really useful, innovative ideas that nobody 

has even thought of yet. 

I think 15 years ago when Congress started talking about this, 

no one would have imagined that billions of people want to post the 

details of their personal life for everybody to see. But that is what 

Facebook is. 

Mrs. BLACKBURN. OK. 

Mr. BEALES. And it has created huge value. If we tried to regulate at the beginning, we may well have precluded it by mistake. 

Mrs. BLACKBURN. Thank you. Mr. Crane? 

Mr. CRANE. So my expertise is on the competition side, so I think 

I should defer to other members of the panel. 

109 

Mrs. BLACKBURN. Sounds good. Mr. Manne? 

Mr. MANNE. I will use his time. So I think the core problem here 

is, as I have been suggesting, when it comes to things like privacy, 

when it comes to data security, contrary to what Paul said, you 

know, maximum privacy or maximum data security are not optimal 

for anyone. These are things, unlike say low prices, that have both 

costs and benefits. And what is really crucial is getting the appropriate balance, is understanding how not to deter valuable things 

while yet still deterring harmful abuses of information. 

And I don’t think that the FTC is doing a very good of this yet, 

or if they are, they are not telling us how they are getting there. 

And it is essential that we know so companies can know how to 

respond, how to anticipate what may or may not be a problem and 

so that Congress and the courts can ensure that the FTC is doing 

its job. 

I am wary of more enforcement particularly in the privacy realm 

where honestly no one has really demonstrated that there is a significant problem. You know, data security is something else, right. 

Breaches where information is stolen, I get it. Recently while the 

FTC was holding a hearing on privacy issues and the Internet of 

things doesn’t even exist yet, right. It is not even really a problem. 

$27 million of bitcoin is being stolen because of a data breach. 

Mrs. BLACKBURN. My time has expired. 

Mr. TERRY. So we will just assume that will be a question submitted to the three left. Mr. McNerney, you are recognized for your 

5 minutes. Mr. Bilirakis, do you have questions? You will be after 

Mr. McNerney. 

Mr. MCNERNEY. Thank you, Mr. Chairman. Mr. Ohm, I would 

like to know if you think it is possible to develop security, data security standards either in the FTC or through the private standards development process that would be applicable to sectors of the 

industry or uniformly throughout the industry. 

Mr. OHM. I am skeptical that you can have any meaningfully detailed data security standard that applies to all industries. However, if you tackle this on a sector-by-sector basis, I think you absolutely could. I think the key is that you need to focus on true compliance. You need to focus on things like industry standards and 

reasonableness as opposed to a kind of check-the-box mentality. 

But I have also witnessed how efforts of Congress to bring about 

cyber-security legislation have not gone so well. I absolutely think 

that trying to find some sort of forcing mechanism to bring companies together to talk about data security standards is a wonderful 

idea. 

Mr. MCNERNEY. Thank you. Mr. Yoo, you stressed that the FTC 

should ensure it focuses on protecting consumers at all times. Do 

you think the agency has the safeguards in place to ensure that 

consumer protection comes first? 

Mr. YOO. They have the safeguards in place should they choose 

to use them, and the things that the agency has developed over the 

last century, a lot of internal processes and substantive guidelines, 

makes sure that they place consumers at the forefront. 

But there are, I would put a couple cautionary notes. So there 

is a tendency, for example, in data security. People are talking 

about comprehensive legislation. That tends to lead to inflexible 

110 

rules, and so you see there is a tension in what people are saying 

or the flexibility that people need at the same time, but the need 

for umbrella legislation—— 

Mr. MCNERNEY. So the flexibility should be with the commission? 

Mr. YOO. Well, to an extent, but the problem that they should 

have is what I would say is two things. One is if you end up with 

that world, you have what we have in Europe which is inflexible 

rules and no enforcement action whatsoever, which is sort of the 

worst of all possible worlds. 

The model that I would think is what the FTC did with privacy 

policies is they brought people together and instead of issuing 

rules, they allowed industries to get into a discussion and actually 

formulate new policies, which I think were much more beneficial. 

Another problem with it, if you just go about it through enforcement, there is a hindsight problem, which if there is always more 

you can do. But after a problem has happened, you will say well 

of course you didn’t do enough. And in fact, companies have to 

make the decisions before hand, not afterwards. And so I think by 

bringing companies together to talk about best practices, creating 

a forum, will be a much more effective than even through enforcement action. 

Mr. MCNERNEY. Thank you. I have other questions, but I think 

I am going to yield so that Mr. Bilirakis can—— 

Mr. TERRY. All right, thank you since there are two minutes left 

in the vote. Mr. Bilirakis. 

Mr. BILIRAKIS. Thank you so very much. I appreciate it, and I 

will go as quick as I possibly can. And I will submit the other questions as well, but I have a couple here. The FTC—and this is for 

the panel. The FTC has a responsibility to help provide consumer 

protections by ensuring that up-to-date information regarding 

scams and complaints are available to consumers. 

However the GAO has identified a number of instances in which 

states felt frustrated with a lack of support from federal officials 

in helping to combat fraud against the senior populations. And the 

question is do you believe the FTC currently has the ability to help 

facilitate this effort? Can you discuss what impediments prevent 

greater support from federal officials to increase cooperation with 

state authorities in order to protect seniors from scams and 

abuses? And how can the FTC help better protect seniors within 

its current budget? And for the panel, whoever would like to start. 

Mr. OHM. I am happy to chime in. I don’t know the details, I 

apologize, of the GAO report specifically, but I do know from my 

time at the FTC that focus on both state cooperation and vulnerable populations including senior populations are at the highest 

levels of priority per the current chairwoman, her predecessor, the 

chairman. I have no doubt that they will work within their resources to do exactly what you are talking about and to enhance 

exactly what you are talking about. More resources, of course, 

would probably be appreciated in this vein as well. 

Mr. YOO. The problem is related to the globalization problem I 

talked about before. State authorities have trouble reaching conduct that spans multiple states. They face enterprises that have 

much broader horizons, and that in fact they are in a very difficult 

111 

position. The FTC is absolutely, just as they are cooperating with 

other authorities, can bring people together in ways I think are extremely constructive. 

The interesting thing, there is an ambivalence about federal involvement personified by the do not call initiative. That was initiated by state PUCs. It was the best headline states PUCs had seen 

in decades, and then they federalized it. And they were in fact, 

state, it is a very delicate relationship you have that state authorities want help in an era of declining state revenue. That is very, 

very important. 

On the other hand, they want to make sure that the federal 

doesn’t actually displace the enforcement authority of the states. 

Otherwise, the political benefit doesn’t go to them. And so there is 

a very strange dance organizations like the FTC have to play. 

Mr. BEALES. I think the FTC has, I mean certainly in the time 

that I was there, there was a very structured attempt to share 

complaint information in particular with state enforcement authorities. There is-the commission’s complaint database is accessible to other law enforcement agencies who can join and get the 

same access that the commission staff has to those complaints essentially. And I am also not familiar with the GAO report as to, 

you know, as to what the particular issue, but whether they are 

complaints about problems for the elderly or anybody else, I mean 

there is or was a complaint sharing mechanism that worked quite 

well and led to a great deal of cooperation. 

Mr. YOO. I would just say quickly as I was starting to answer 

Mrs. Blackburn’s question, resource allocation is important and 

something that I think, you know, Congress and everyone else 

should be looking at, ensuring that indeed the FTC is putting its 

resources where the low-hanging fruit is, where there are obvious 

problems. 

I don’t know for sure. Again, I am not familiar with the GAO report, I don’t know that this is one of them. But if it is, then I would 

like to see more resources there instead of things like, as I was 

suggesting, you know, an Internet of things, workshop to discuss 

potential possible privacy harms that haven’t really materialized 

and may not ever. You are talking about very concrete sort of 

harms, and that is where they should be directing their attention. 

Mr. BILIRAKIS. Thank you very much, Mr. Chairman, and I 

would like to follow up with you specifically on the GAO report and 

give you some specific examples. Appreciate it very much. I yield 

back, Mr. Chairman. 

Mr. TERRY. Thank you, and I want to thank all of our witnesses 

for participating today. We anticipated at least a good, solid two 

hours, but sometimes on Fridays, things speed up for some reason. 

I just don’t get it, and today was one of those days. But I think 

we did a good job of getting your insights on the record, and it is 

really appreciated. As mentioned, we have the opportunity to submit questions, written questions to you. We usually leave that open 

for a couple of weeks for our staff to be able to help us with that 

and submit those. And we give you a couple of weeks to reply. 

Would really appreciate it. Again thank you for your time and your 

testimony, and we are adjourned. 

[Whereupon, at 10:47 a.m., the subcommittee was adjourned.] 

112 

[Material submitted for inclusion in the record follows:] 

THE PREPARED STATEMENT OF HON. HENRY A. WAXMAN

Today’s hearing continues this Subcommittee’s discussion on the important work 

of the Federal Trade Commission. 

The FTC is required to prevent business practices that are anticompetitive and 

those that are deceptive or unfair to consumers. The responsibilities given to the 

FTC are broad-and rightly so, because our country needs an agency that can address, with flexibility, a wide variety of commercial conduct in order to safeguard 

consumers in the marketplace. 

For the last 100 years, the FTC has been utilizing the FTC Act and other federal 

antitrust and consumer protection laws to conduct investigations, administrative 

proceedings, and judicial enforcement of commercial behavior that may violate the 

law. 

The Bureau of Competition promotes vigorous competition and ample consumer 

choice by preventing anticompetitive mergers and other anticompetitive business 

practices in the marketplace. I am particularly glad to see the FTC closely scrutinizing potentially anticompetitive conduct in health care markets - involving hospitals, pharmacies, medical device and pharmaceutical manufacturers, and others. 

The Bureau of Consumer Protection promotes fair and transparent business practices by preventing scams, frauds, and other unfair or deceptive practices. While 

such practices can occur in any industry, the FTC is perhaps best known for its 

work with Do Not Call, which our constituents benefit from every day. 

Today I would like to highlight the FTC’s work on privacy and data security. No 

comprehensive federal law governs the collection, use, dissemination, or security of 

consumer data. This makes the FTC is the principal ally of consumers in ensuring 

that companies employ reasonable data security measures for personal information 

and uphold their privacy promises. 

In looking forward to the Federal Trade Commission’s next chapter, our message 

should be more than: ′′Keep up the good work.′′ As it enters its second century, the 

Commission must not be reluctant to adapt to changing markets, technologies, and 

consumer threats. It must apply its existing authorities in new ways and assume 

new roles, if necessary to preserve competitive markets, consumer choice, and fair 

and transparent business practices. 

Congress must be an active partner with the FTC. We can start by encouraging 

the Commission to assert its Section 5 authority to challenge anticompetitive conduct, in whatever form it may take, and allow the FTC oversight over insurance, 

or, at a minimum, the ability to study insurance. 

In addition, we should enact comprehensive privacy and data security laws that 

establish baseline standards of protection for consumer data and strengthen the 

FTC’s enforcement authority. Furthermore, we should provide the agency with the 

tools it needs to operate in the 21st century, in the form of additional resources, 

general APA rulemaking authority, greater authority to assess civil penalties, and 

enhanced jurisdiction over non-profits and common carriers. 

I am pleased to welcome the distinguished panel of professors testifying before us 

today. I encourage my colleagues to support those recommendations that will enhance, not diminish, the ability of the FTC to protect consumers from anticompetitive, unfair, or deceptive conduct. 

Thank you. 

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