The Second Century Of The Federal Trade Commission

from the rethinking-the-ftc dept

You may not know much about the most important agency in Washington when it comes to regulating new technologies. Founded 99 years ago today, the Federal Trade Commission has become, for better or worse, the Federal Technology Commission.

The FTC oversees nearly every company in America. It polices competition by enforcing the antitrust laws. It tries to protect consumers by punishing deception and practices it deems “unfair.” It’s the general enforcer of corporate promises. It's the de facto regulator of the media, from traditional advertising to Internet search and social networks. It handles novel problems of privacy, data security, online child protection, and patent claims, among others. Even Net neutrality may soon wind up in the FTC's jurisdiction if the Federal Communications Commission’s rules are struck down in court.

But how should the FTC regulate technology? What’s the right mix of the certainty businesses need and the flexibility technological progress demands?

There are essentially three models: regulatory, discretionary and evolutionary.

The epitome of traditional regulatory model is the FTC's chief rival: the FCC. The 1996 Telecom Act runs nearly 47,000 words — 65 times longer than the Sherman Act of 1890, the primary antitrust law enforced by the FTC. The FCC writes tech-specific before technology has even developed. Virginia Postrel described the mentality best in The Future and Its Enemies:

Technocrats are “for the future,” but only if someone is in charge of making it turn out according to plan. They greet every new idea with a “yes, but,” followed by legislation, regulation, and litigation.... By design, technocrats pick winners, establish standards, and impose a single set of values on the future.

The less technocratic alternative is the evolutionary model: build flexible law that evolves alongside technology. Learn from, and adapt to, the ever-changing technological and business environments.

On antitrust, that's essentially what the FTC (along with the Department of Justice) does today. Judicial decisions are firmly grounded in economics, and this feeds back into the agencies' enforcement actions. Antitrust law has become nearly synonymous with antitrust economics: both courts and agencies weigh the perils of both under- and over-enforcement in the face of unavoidable uncertainty about the future.

But much of what the FTC does falls into the discretionary model, unmoored from both sound economics and judicial oversight. The discretionary and evolutionary models share a similar legal basis and so are often confused, but they're profoundly different: The discretionary model harms technological progress and undermines the rule of law, while the evolutionary model promotes both.

For the most part, the FTC enforces laws on a case-by-case basis. Those laws are general, short and vague. The FTC Act is about nineteen times shorter than the 1996 Telecom Act and hasn't really changed since 1934. Its key provision would fit in a Tweet: "Unfair methods of competition... and unfair or deceptive acts or practices... are hereby declared unlawful." The antitrust laws are similarly general, prohibiting "restraint of trade" and conduct "the effect of which is to substantially lessen competition."

The FTC has never explained what its "unfair methods of competition" authority covers that antitrust doesn't. Commissioner Joshua Wright recently proposed limiting principles, but FTC Chairman Edith Ramirez appears reluctant to relinquish any discretion. Contrary to popular belief, the FTC does have general rulemaking power but has simply decided it's too hard to use. Instead, the Commission writes formal rules only in narrow areas where Congress has given it streamlined rulemaking power, such as credit reporting and online child protection.

Congress imposed procedural safeguards on the FTC's general rulemaking authority in the mid-1970s after the FTC ran amuck with its unfairness authority. But the agency kept trying to regulate everything from children's advertising to funeral home parlors. The Washington Post dubbed the FTC the "national nanny." An outraged, overwhelmingly Democratic Congress briefly shuttered the agency. The FTC survived only because, in 1980, it offered limiting principles and embraced the evolutionary model:

The present understanding of the unfairness standard is the result of an evolutionary process. The statute was deliberately framed in general terms... [and the] task of identifying unfair trade practices was therefore assigned to the Commission, subject to judicial review, in the expectation that the underlying criteria would evolve and develop over time.

But it hasn't quite worked out that way. Consumer protection law, unlike antitrust law, has increasingly been shaped primarily by the FTC's discretion, not evolution through judicial review or dialogue with economic scholarship. In the last decade, the FTC has begun using its unfairness authority to address cutting-edge issues like data security. The FTC has even begun pushing the legal boundaries of its authority over deception by extending it beyond traditional advertising claims to online FAQs and the like.

At the heart of the discretionary model is the FTC's ability to operate without any real constraints. The Commission hasn't develop a predictable set of legal doctrines because that's what courts do — and the FTC has managed to strong-arm dozens of companies into settling out of court. What the FTC calls its "common law of consent decrees" is really just a series of unadjudicated assertions. That approach is just as top-down and technocratic as the FCC's regulatory model, but with little due process and none of the constraints of detailed authorizing legislation, as Commissioner Wright recently warned. That's the kind of "flexibility" prosecutors love but that businesses hate, especially those trying to innovate.

How did this happen? For much the same reason companies routinely settle questionable patent claims: settling is cheaper than litigating. Normal plaintiffs have to make a threshold legal showing before courts will compel discovery. But there's no check on the FTC's investigative process, which can cost a company millions — until it agrees to settle. And once it does... the FTC takes a Roman approach to deterrence. As an EPA official put it on candid camera last year: "They'd go into a little Turkish town somewhere, they'd find the first five guys they saw, and they would crucify them." Bad PR can be far more damaging to a company than litigation.

The FTC might be right in any particular case, but overall, what evolves isn't "law." It's merely a list of assertions as to what the Commission thinks companies should and shouldn't do — crucifixes along the road to wherever the FTC wants technology to go.

We've asked the courts to curtail the FTC's discretion, but modern administrative law and civil procedure make legal challenges difficult. And unfortunately current and recent FTC leadership has shown little interest in limiting the agency's discretion. Last year, for example, the current and former chairman voted to revoke the agency's 2003 Policy Statement on disgorgement of wrongful gains in competition cases. And despite unusually broad academic agreement on its basic principles, Commissioner Wright's proposed Policy Statement on Unfair Methods of Competition has stalled.

So it seems only Congress can force reform. Small legislative reforms could help, like setting minimum pleading requirements or subjecting FTC settlements to judicial review. But a grand rewrite of the FTC Act is politically unlikely and probably unwise. Instead, Congress should insist, as it did in 1980, that the FTC return to an evolutionary model — this time, for real. With enough pressure, the agency itself just might evolve.

What would a more evolutionary-minded FTC look like? Most importantly, it would litigate more and cajole less. Where the courts don't develop law, the FTC would try to fill the void. Internal administrative adjudication won't help, since the FTC always — literally always — wins. (That's what happens when the same entity is both prosecutor and judge.) Nor will it help to produce more of the kinds of reports the FTC has issued in recent years. Instead of asserting what companies should do, the FTC needs to offer more guidance on what it thinks its legal authority means. And the Commission can't just ignore or revoke those limiting principles when they become inconvenient.

More economic analysis would certainly help, as it has in antitrust cases. While the Commission is free to disregard staff recommendations, it tends not to. So a more significant and better-defined role for economics, and thus the agency's Bureau of Economics, could provide some degree of internal constraint. That's a second-best to the external constraint the courts are supposed to provide. But it could at least raise of undertaking enforcement actions simply because three Commissioners — or a few staff lawyers — think they're helping consumers by crucifying a particular company.

One easy place to start would be holding a comprehensive workshop on data security and then issuing guidelines. The FTC has settled nearly fifty data security cases but has provided scant guidance, even though data breaches and the identity thefts they cause are far and away the top subject of consumer complaints. The goal wouldn't be to prescribe what, specifically, companies should do but how they should understand their evolving legal duty. For example, at what point does an industry practice become sufficiently widespread to constitute "reasonable" data security?

More ambitiously, the FTC could use its unique power to enforce voluntary commitments to kickstart new paradigms of regulation. That could include codes of conduct developed by industry or multistakeholder groups as well as novel, data-driven alternative models of self-regulation. For example, Uber, Lyft and other app-based personal transportation services could create a self-regulatory program based on actual, real-time data about safety and customer satisfaction. The FTC could enforce such a model — if Congress finally makes common carriers subject to the FTC Act. The same could work for online education, AirBnB and countless other disruptive alternatives to traditional industries and the regulators they've captured.

Finally, the FTC could do more of what it does best: competition advocacy — like trying to remove anticompetitive local government obstacles to broadband deployment. The FTC has earned praise for defending Uber from regulatory barriers taxicab commissions want to protect incumbents. That's the kind of thing a Federal Technology Commission ought to do: stand up for new technology, instead of trying to make "it turn out according to plan."

Berin Szoka (@BerinSzoka) is President of TechFreedom. Geoffrey A. Manne (@GeoffManne) is Executive Director of the International Center for Law & Economics and Lecturer in Law at Lewis & Clark Law School.

Filed Under: ftc, innovation, regulation