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How Financial Overhaul Could Put the FTC on Steroids & Transform Internet Regulation Overnight

How Financial Overhaul Could Put the FTC on Steroids & Transform Internet Regulation Overnight

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Published by Berin Szoka

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Published by: Berin Szoka on Mar 17, 2010
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Progress Snapshot 
Volume 6, Issue 7 March 2010
WASHINGTON, D.C. 20005202-289-8928
How Financial Overhaul Could Put the FTC on Steroids &Transform Internet Regulation Overnight
by Berin Szoka* 
This week marks a pivotal point in the history of the Internet. Monday was the 25
anniversaryof the first .COM registration
and in some ways, the beginning of the commercial Internet.Yesterday, the Federal Communications Commission unveiled its long-awaited NationalBroadband Plan, which proposes ambitious subsidies to encourage broadband deployment. Onthe theory that unease about online privacy may discourage broadband adoption, the Plan alsocalls for increased regulation of how websites collect, and use, data from consumers.The debate over how to regulate online data use has gone on for over a decade, leading to
today’s final “Roundtable” in the “
Exploring Privacy
series held by the Federal TradeCommission over the last three months. The stakes in this debate are high: Data is the lifebloodof online content and services, and consumers will ultimately bear the cost of restrictions ondata use in the form of reduced advertising funding for, and innovation in, online content andservices.
That’s why this week’s most important technology policy
event may ultimately prove to be
on Rep. Barney Frank’s “
Wall Street Reform and
Consumer Protection Act of 2009”
 (H.R. 4173), which narrowly passed the House in December without a single hearing and no real debate. Although the sprawling (273,579 word) bill ismostly famous for creating a Consumer Financial Protection Agency, it would also, in just 613words
,” in the words of Jim Miller, FTC Chairman from 1981 to 1
985.With vastly expanded powers, the FTC could impose sweeping new regulation touching virtuallyevery sector of our economy.The current FTC chairman, Jon Leibowitz,has made clear his determination to step up
regulation of online data use, advertising, “blogola,” and child protection, just to name a few of 
the hot topics in Internet policy. While the FTC will no doubt continue to push for increasedstatutory authority, such as the online privacy bill reportedly being drafted by House CommerceInternet Subcommittee Chairman Rick Boucher (mandating opt-in for data collection),Chairman Leibowitz may be able to implement most of his radical Internet regulatory agenda
Berin Szoka(bszoka@pff.org)is a Senior Fellow and Director of the Center for Internet Freedom at The Progress & Freedom Foundation. The views expressed in this report are his own, and are not necessarily theviews of the PFF board, fellows or staff.
Page 2 Progress Snapshot 6.7 
using the new powers conferred on his agency in a bill (H.R, 4173) few realize has anything todo with Internet policy.
Most importantly, Rep. Frank’
s bill would repeal procedural safeguards imposed on the FTC by a heavily Democratic Congress in 1980. The agency, in the 1970s, had so thoroughly abused itsuniquely vast jurisdiction by, among other things, trying to ban advertising to children, that it
was dubbed the
by the Washington Post—
hardly a Thatcherite bastion. Infact, Congress actually briefly shut down the agency to make it clear that it had not dubbed theagency a regulatory knight errant, free to tilt its steely lance at imagined windmills of 
“unfairness” or “deception.” Besides requiring the agency to
better define these vagueconcepts and focus on demonstrable harms, Congress strengthened safeguards it had put inplace with the 1975 Magnuson-Moss Act to ensure that the agency did not rush intopreemptive regulation without carefully weighing the costs and benefits of governmentintervention.FTC Chairman Leibowitz complains that the Magnuson-Moss process takes too long, and Rep.
Frank’s bill would indeed accelerate the rulemaking process—
by eliminating opportunities forpublic input and Congressional
notification, while removing restrictions on Commissioners’
ex  parte
meetings. So much for transparency!These safeguards remain as necessary as they were when Congress passed Magnuson-Moss in
1975 to constrain the FTC’s unique
ombudsman authority over nearly all of the economy. ButH.R. 4173 would go much further than simply removing these restraints. It would alsosignificantly lower both the legal threshold for FTC regulation and the standard for judicialreview of regulation: The FTC would no longer have to prove that an unfair or deceptive
practice is “prevalent” to regulate it or justify regulation with “substantial evidence.”
ChairmanLeibowitz has also complained that the FTC lacks the resources it needs to enforce its existingauthority effec
tively. But instead of simply funding increased enforcement, Rep. Frank’s bill
would fundamentally transform the way FTC enforcement works. Today, the FTC relies onadministrative orders and injunctions to stop bad actors, and imposes civil penalties only if a
company violates a prior order. That’s critical because the FTC’s guiding legal standards—“unfairness” and “deception”—
are so profoundly subjective. For example, in deciding whether
Google’s design of its new Buzz service was “unfair,” the FTC
must now weigh consumer
benefits against consumer injury and ask whether that injury was one “
consumers could notreasonably have avoided
.” Such trade
-offs are particularly thorny when it comes to privacy,
since many privacy “invasions” also offer great benefits to users.
But under Rep. Frank’s bill, the FTC could impose civil penalties on a company before evenputting them on notice that it might consider a particular practice “deceptive” or “unfair”—
orgiving the company a chance to clean up its act. And unlike today, the FTC could sue on its ownwithout working through DOJ. With a maximum penalty of  $16,000 per discrete violation orper day
,the risk of huge penalties would hang like the
over the head of 
industry, forcing them to err on the side of e
xtreme caution. This kind of nightmarish “strictliability” legal regime would give the FTC unprecedented power to regulate by intimidation, by
driving companies to rush to the FTC to ask,
“Mother, May I?”
whenever in doubt. That wouldbe particularly devastating for online innovation
, putting the FTC in the driver’s seat when it
comes to changing business models, technologies, and even user interface design.

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