[Senate Hearing 106-1088]
[From the U.S. Government Publishing Office]
S. Hrg. 106-1088
REAUTHORIZATION OF THE
FEDERAL TRADE COMMISSION (FTC)
=======================================================================
HEARING
before the
SUBCOMMITTEE ON CONSUMER AFFAIRS, FOREIGN COMMERCE AND TOURISM
OF THE
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
__________
FEBRUARY 9, 2000
__________
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SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
JOHN McCAIN, Arizona, Chairman
TED STEVENS, Alaska ERNEST F. HOLLINGS, South Carolina
CONRAD BURNS, Montana DANIEL K. INOUYE, Hawaii
SLADE GORTON, Washington JOHN D. ROCKEFELLER IV, West
TRENT LOTT, Mississippi Virginia
KAY BAILEY HUTCHISON, Texas JOHN F. KERRY, Massachusetts
OLYMPIA J. SNOWE, Maine JOHN B. BREAUX, Louisiana
JOHN ASHCROFT, Missouri RICHARD H. BRYAN, Nevada
BILL FRIST, Tennessee BYRON L. DORGAN, North Dakota
SPENCER ABRAHAM, Michigan RON WYDEN, Oregon
SAM BROWNBACK, Kansas MAX CLELAND, Georgia
Mark Buse, Republican Staff Director
Martha P. Allbright, Republican General Counsel
Kevin D. Kayes, Democratic Staff Director
Moses Boyd, Democratic Chief Counsel
------
SUBCOMMITTEE ON CONSUMER AFFAIRS, FOREIGN COMMERCE
AND TOURISM
JOHN ASHCROFT, Missouri, Chairman
SLADE GORTON, Washington RICHARD H. BRYAN, Nevada
SPENCER ABRAHAM, Michigan JOHN B. BREAUX, Louisiana
CONRAD BURNS, Montana
SAM BROWNBACK, Kansas
C O N T E N T S
----------
Page
Hearing held on February 9, 2000................................. 1
Statement of Senator Ashcroft.................................... 1
Statement of Senator Brownback................................... 7
Statement of Senator Hollings.................................... 2
Prepared statement........................................... 4
Statement of Senator Stevens..................................... 5
Statement of Senator Wyden....................................... 6
Witnesses
Adler, Jr., Howard, Esq., Baker McKenzie, and Chairman, U.S.
Chamber of Commerce Hart-Scott-Rodino Task Force............... 44
Prepared statement........................................... 46
Anthony, Hon. Sheila F., Commissioner, Federal Trade Commission.. 8
Bolerjack, Stephen, Counsel, Antitrust and Trade Regulations..... 58
Prepared statement........................................... 60
Foer, Albert A. (Bert), President, American Antitrust Institute.. 50
Prepared statement........................................... 52
Jaye, Daniel, Chief Technology Officer, Engage Technologies...... 66
Prepared statement........................................... 69
Leary, Hon. Thomas B., Commissioner, Federal Trade Commission.... 8
Mulligan, Deirdre, Staff Counsel, Center for Democracy and
Technology..................................................... 74
Prepared statement........................................... 76
Pitofsky, Hon. Robert, Chairman, Federal Trade Commission........ 8
Prepared statement........................................... 10
Sorrell, William H., Attorney General, State of Vermont.......... 71
Prepared statement........................................... 72
Swindle, Hon. Orson, Commissioner, Federal Trade Commission...... 8
Thompson, Hon. Mozelle W., Commissioner, Federal Trade Commission 8
Appendix
Adler, Jr., Howard, Esq., Baker McKenzie, and Chairman, U.S.
Chamber of Commerce Hart-Scott-Rodino Task Force, supplemental
prepared statement............................................. 95
Joint Prepared Statement of Janet L. McDavid, Hogan & Hartson
LLP, and John Sipple, Clifford Chance Rogers & Wells........... 100
Response to written questions submitted by Hon. John Ashcroft:
Sheila F. Anthony............................................ 87
Thomas B. Leary.............................................. 87
Robert Pitofsky.............................................. 87
Orson Swindle................................................ 87
Mozelle W. Thompson.......................................... 87
Response to written questions submitted by Hon. Sam Brownback:
Robert Pitofsky.............................................. 91
Response to written questions submitted by Hon. John McCain:
Robert Pitofsky.............................................. 93
REAUTHORIZATION OF THE
FEDERAL TRADE COMMISSION (FTC)
----------
WEDNESDAY, FEBRUARY 9, 2000
U.S. Senate,
Subcommittee on Consumer Affairs,
Foreign Commerce and Tourism,
Committee on Commerce, Science, and Transportation
Washington, DC.
The Subcommittee met, pursuant to notice, at 10:40 a.m., in
room SR-253, Russell Senate Office Building, Hon. John
Ashcroft, Chairman of the Subcommittee, presiding.
Staff members assigned to this hearing: Robert Taylor,
Republican counsel; and Moses Boyd, Democratic chief counsel.
OPENING STATEMENT OF HON. JOHN ASHCROFT,
U.S. SENATOR FROM MISSOURI
Senator Ashcroft. Good morning, and I thank you all for
coming, and I am pleased to call this meeting to order.
Chairman Pitofsky, and Commissioners, thank you very much
for taking your time to discuss the issues surrounding the
reauthorization of the Federal Trade Commission.
It is important to reauthorize the FTC. It is true not only
because we should ensure that all Federal agencies have
Congressional authorization before spending taxpayers funds,
but also because it gives us a forum in which to discuss the
appropriate role of the Federal Government.
It also gives us a chance to look at changes in the
regulated industries. Two recent trends in the way businesses
are operating are the backdrop for today's hearing.
Number one is the Internet. The growth in Internet commerce
and the increase in merger applications are the two main
focuses of this hearing. As we all recognize, the Internet has
sparked unprecedented economic growth in the country.
Entrepreneurship, innovation and market forces, not
government programs, have provided Americans with access to
advanced telecommunication services, unlimited information, and
unlimited opportunities. And I believe these economic forces
should continue to prosper without unnecessary interference
from those in Washington.
In addition, our laws should be technology neutral. The
government should not pick winners or losers, the markets
should do that. Consumers should make that determination by the
kinds of commitments they make.
I also believe that merger review authority should be
conducted promptly, efficiently, and predictably. We must
establish a framework to allow small mergers that will not
create an anti-competitive impact and make sure that they are
not burdened with costly government interference.
The precious resources of Americans should not be
squandered on the feeding of the bureaucracy unnecessarily, and
I believe that we can accomplish this goal and continue to
protect American consumers from anti-competitive mergers,
which, I think, is what our objective should be. In fact, I
believe we can provide even better protection.
Whether mergers are large or small, there should be some
predictability in the process. It is important that merger
applicants be given full opportunity to address anti-
competitive concerns before the applications are denied.
Such a system is necessary to ensure that U.S. companies
can continue to compete in the growing global marketplace.
With those principles in mind, I would like to call on my
colleagues to make opening statements, and it would be my
privilege now to call upon the ranking minority member of the
Subcommittee, Senator Hollings.
STATEMENT OF HON. ERNEST F. HOLLINGS,
U.S. SENATOR FROM SOUTH CAROLINA
Senator Hollings. Thank you, Mr. Chairman. I would ask
permission to include my statement in the record in its
entirety.
Senator Ashcroft. Without objection.
Senator Hollings. We have a concurrent hearing before the
Budget Committee on the President's budget.
Let me say that we are lucky to have a very strong Federal
Trade Commission, and it has been doing an outstanding job.
One, I agree with their request. Our Chairman's bill is
excellent reauthorization proposal.
Although I do not think the amount is sufficient, I am sure
we can compromise and negotiate that out especially given that
the demands upon the Federal Trade Commission are just almost
insurmountable, including with increased requests for mergers.
Along that line, I rather agree with Senator Hatch. We have
got to raise the level of review. We really had in mind large
mergers, but with the volume involved, and the time required,
the reality is that we are going to have to include these
issues with Senator Hatch's bill.
However, I disagree with his ministerial review on that
Second Request, the FTC's current process has been working, and
it is working in a real fine fashion. The distinguished
Chairman just this morning talked about bureaucracy. I did not
know you further bureaucratize with appeals, and appeals, and
appeals as a solution.
I am at the other end of the spectrum about this cutting
the size of government, which I agree with, but we have to meet
every year to increase the size of key agencies, namely at the
law enforcement level in relation to the Department of Justice.
Its budget has increased in ten years from $4 billion to $22
billion. You ought to look at it.
I mean, everything that we can think of relative to running
for public office, we seek to make it a federal law, a felony,
or whatever, and we have got more marshals, more U.S.
attorneys, more judges, more appeals courts, more bankruptcy
courts, more reviews here and there, and everything else of
that kind.
So, I would oppose a ministerial review of the Second
Request, which is the main thing I am concerned about.
With respect to the issue of privacy, the Chairman has
noted that we are going to have a full Committee hearing on the
issue--and I thank Chairman McCain for setting that up.
However, I understand the main thrust this morning is the
reauthorization of the Commission, which is very, very
important. You are going to have to be King Solomon to
determine reauthorization requests, but you are the best entity
when it comes to protecting America's consumers. You have
certainly got the jurisdiction.
You had it with Senator Bryan's bill on children's privacy.
And it is working. And you have made one report to the Congress
in another review, and in an appearance in July of last year,
you noted your preference for allowing market forces to deal
with privacy, as opposed to legislation.
If, however, we would have permitted the market forces to
operate on the economy, we would not have voted 95 to nothing
for Greenspan's reappointment.
So government is necessary, and it is going to be necessary
in this one. I would love for the market forces to operate, but
the Internet folks have gotten together--they put out a policy,
but they only got ten percent adherence to that particular
policy.
So it is going to ultimately fall with us--you have been
doing the right thing of meeting with the business folks and
meeting with the consumer groups. It is going to be tough. It
is not going to be easy, but we can finesse it.
We have got to really come along with it.
One hundred percent of the problem is the Internet. We have
had privacy with respect to doctors, with respect to financial
records, and everything else of that kind, with respect to
lawyers and their clients, but it comes now to the jurisdiction
of this Committee with respect to the Internet privacy.
And the gimmick of appointing these task forces is to bring
in these super-duper folks from Silicon Valley, with pockets
full of money, and ooh, and ahh, and every other thing like
that, say, ``Yes, I did not know that.'' And they muck up the
possibility of really getting good legislation, in my opinion.
I want to make that observation on the record because I saw
it happening last year with the provision of Section 271 of the
Telecommunications Act of 1996. That section was hammered out
by the Bell companies, along with long distance companies.
And they are the ones, the lawyers--we politicians like to
say--wrote the bill--who worked out the 14-point checklist. And
that is why to their satisfaction, and to everyone else's
satisfaction, we could get 95 votes.
Now, they want to extend that monopoly. They can get into
long distance anytime they want--outside of their monopoly--but
they do not want to do that. They merely want to extend that
monopoly.
But finally, thanks to Bell Atlantic, they have now
qualified, showing it is possible that it was not really the
Federal Communications Commission's rewriting the rules or
anything of that kind.
They complied in the most complex and competitive area, New
York, which is now the reason why the other Bell companies can
comply. The fact is that we can do away with the task forces
and allow the Committee to perform its work with respect to
Internet privacy. We will be looking to you folks for
leadership and guidance on that score. I appreciate it very
much.
Thank you, Mr. Chairman.
[The prepared statement of Senator Hollings follows:]
Prepared Statement of Hon. Ernest F. Hollings,
U.S. Senator from South Carolina
Let me take this opportunity to commend the FTC Commissioners,
including my good friend Robert Pitofsky, for the fine work the agency
is doing nowadays. I have been advised that morale has never been
better at the FTC and that you are handling and prosecuting more
consumer protection cases than ever before in the history of the
agency, resulting in tens of billions of dollars of savings to
consumers.
On this basis, I am strongly supporting the Commission's
reauthorization. Senator McCain has introduced a bill to reauthorize
the Commission for the next two fiscal years. That legislation, S.
1687, is pending before the Committee, and will be a focus of today's
hearing. I am aware that the FTC--though obviously supporting the
bill--is requesting a higher level of funding than is provided for in
Senator McCain's bill. Having reviewed the FTC's request, and the
authorization amounts in the Chairman's bill, I am certain we will be
able to come to an agreement on the authorization levels by the time
the legislation is presented for markup.
Of course, the Commission, with all of its capable and
distinguished Commissioners present today, will be able to make its
case on the record why it needs additional authorization amounts. I am
sure their testimony will be well received and given the consideration
it deserves.
I also would like to comment briefly on two other issues that will
be discussed today. First with respect to the matter concerning the
Hart-Scott-Rodino Merger Application Program, it appears that there is
some consensus that some reforms of the program are needed,
particularly regarding the thresholds that are used to trigger the
filing of applications. More complicated is the matter of the FTC's and
DOJ's substantive review of the applications and their ability to pre-
approve certain mergers. Though I am interested in working on a
solution to this matter, I am very hesitant to support any reforms that
will severely hinder the capability of the FTC and DOJ to investigate
and challenge mergers that they feel threaten competition in the
marketplace. In fact, I have been one who has been critical of the
agencies from the other end--believing that they aren't as aggressive
as they should be in their enforcement. Given the enormous
consolidation that is occurring in many significant industries,
including the communications sector, the last thing we need is
legislation that weakens the authority of the FTC and DOJ.
Finally, on the issue of privacy, I have made it clear to my
Democratic and Republican colleagues my concerns about this issue and
my plans to pursue legislative action. As a recent Wall Street Journal
poll has indicated, personal privacy is one of the main concerns of
Americans as we head into the 21st Century. In a survey conducted by
the Federal Trade Commission (FTC), 87% of the respondents expressed
concerns about threats to their privacy when they use the Internet. In
response to a nationwide survey by the National Consumers League, 70%
of the respondents expressed uneasiness about providing personal
information to businesses online.
Initially, we were advised to defer to self-regulation. But studies
show that self-regulation is not working. In fact, in a survey financed
by the industry itself, it was discovered that of the 93% of commercial
websites that collected personal information, only 10% included a
comprehensive privacy policy. It is clear that we are at the point
where legislative action is needed. I believe that a minimum, a
baseline of privacy protection is needed to ensure consumers can
confidently use the Internet. I look forward to working with my
colleagues on both sides of the aisle.
I thank the Chair and welcome the testimony of our witnesses.
Senator Ashcroft. Thank you very much, Senator Hollings.
I now call on Senator Stevens.
STATEMENT OF HON. TED STEVENS,
U.S. SENATOR FROM ALASKA
Senator Stevens. Thank you very much, Mr. Chairman.
I am pleased to be able to be here with you this morning. I
do thank members of the FTC for the conversations that they
permitted me to have with them about the subject I am going to
discuss, but I am extremely disturbed with the decision of the
FTC to litigate rather than negotiate the BP/Arco merger.
We have watched now for a series of months the negotiations
that had been taking place with the Commission. There has been
obviously a substantial delay. And the process that we go
through in Alaska which is a fairly extensive one in order to
be able to expand our reserves and increase the throughput of
the Trans-Alaska pipeline is very difficult.
Satellite fields, those are the step off fields, their
development is down. Exploration is down. Heavy oil development
is down.
Overall exploration is down. In 1999, the exploration
budget was half of what was spent in 1998. And in 1999, more
than half of Arco's added reserves came from improvements and
revised estimates in their activities. They are not expanding.
I have communicated to the FTC my opinion that what affects
consumer prices in California is the supply of oil from Alaska.
And yet, I think the FTC has been more concerned with
California refiners than it has consumers or the State of
Alaska per se. The policy making processes that the FTC is in
the process of changing have had a substantial impact now on
our state.
But we already have had substantial impact from this
administration. We have lost jobs in our four major resource
areas. Fisheries is down. Timber is down. Mining is down. We
now rank last among the states in annual pay growth, although
we led that before this Administration came to office.
Also 20 percent of our 20- to 35-year-old people have left
our state in the last eight years because of the lack of job
opportunities. And our main resources are oil and gas.
My state undertook to negotiate with the companies involved
in a merger, a long negotiation. And the results of that
negotiation have been ignored by the FTC. This is state-owned
property where this oil is. We have a state regulatory system
that is equal to or better than the FTC. And yet, the FTC has
seen fit now to force this into court.
But the interesting thing, Mr. Chairman, what goes into
court is not the position that was negotiated with the FTC
right up to the last minute. It is the original proposal. The
original proposal is now before the courts.
I think that law has to be changed, and I intend to see
that we try to change it on this bill, if it gets to the floor.
The problem I really have is that it does seem to me, Mr.
Pitofsky, that you are trying to change the rules of the game.
As a matter of fact, you have said so, and it is a difficult
proposition. I believe that the FTC, if it has this power to
talk to the people involved in these negotiations, to bring
about a modification, has the responsibility to negotiate.
But, Mr. Pitofsky, you have said at one point, ``I have
made a counteroffer, and it is no.''
There was no negotiable stance on the part of the FTC. It
has delayed this, and now we are going to court on the part of
the original offer as far as the merger is concerned.
But it is sad to me that of all the mergers that have gone
by--this is not the biggest merger in history, but this is the
first one that I have seen the FTC in 31 years here in the
Senate act the way it has acted on this issue.
And I have been here for a long time on this Committee,
longer than any other member except Senator Hollings. It does
seem to me that the whole process needs to be reviewed. If one
man can destroy the economy of a state, then I intend to review
it very deeply.
Thank you, Mr. Chairman.
Senator Ashcroft. Thank you very much.
I now call on Senator Wyden.
STATEMENT OF HON. RON WYDEN,
U.S. SENATOR FROM OREGON
Senator Wyden. Thank you, Mr. Chairman. And having a
difference of opinion with Chairman Stevens is about the least
fun assignment that a fairly new member of this Committee can
have.
I think he knows that this is an extremely important issue
on the West Coast, and I am anxious as this process goes
forward to see if we can find some common ground, but the heart
of the problem is that seven out of every ten barrels of
Alaskan crude oil sold on the West Coast are going to come from
this newly merged entity.
In my state, one company would control what amounts to 90
percent of the gas sold in our state. What we have seen over
the years is a systematic reduction in the number of
competitive forces we have had in our state.
There is a reduced number of gas stations. There is a
reduced number of independents that are a source for
competition.
And our concern is that if the deal goes forward as written
now, in effect this newly merged entity would be able to work
in our state, essentially through the Arco system, and further
freeze out the independent gas stations.
At least what we have had in the past is two big companies
had to fight among themselves and go at it in the kind of free
enterprise system; we would not have that in the future.
Senator Stevens makes a valid point that what will be
before the court is the original proposal. Frankly, I am just
as concerned about some of the changes that were made because I
do not see how the Federal Trade Commission could even monitor
such a complicated sort of arrangement.
Some of these anti-trust deals are starting to have so many
divestments and the like, we are going to have to have whole
new federal agencies to operate them. And certainly, anti-trust
law needs to be kept up with the times, and I want to work with
Chairman Stevens in that regard.
Frankly, on some of these telecommunication deals, the
bigger threat is probably the First Amendment than it is direct
head-to-head competition.
So I just want Chairman Stevens to know that there is a
difference of opinion here, and I intend to work as closely as
we can to see if we can find some common ground.
One last point, if I could, Chairman Ashcroft, on this
privacy matter that we are going to be dealing with on the
third panel: I know that for some, privacy protection is
becoming the third rail of the digital economy. They just do
not want to touch it, and they do not want to get near it.
I think that that is a huge mistake because the fact of the
matter is that capitalism requires confidence. And if we have
an Exxon Valdez of privacy where a tremendous amount of private
data gets out about individuals, their medical records, their
financial records, where people feel, literally, as a result of
this information getting out, that their lives are practically
over, that will do a lot of damage to the work that this
Committee has done in terms of trying to have a climate that
makes e-commerce grow.
This is the Committee from whence the Internet Tax Freedom
bill came, and we teamed up on a bipartisan kind of basis. That
was a bill that encourages the growth of the economy.
You have a tsunami of privacy violations along the lines of
what we are starting to see. That can do a lot of damage to
capitalism. Senator Burns and I have put in a bipartisan bill
on this topic, and I think Senator Hollings made a number of
good points on it.
What I have people coming to me and saying is that maybe
Conrad and I shot too low. Maybe we ought to have more than
disclosure and opt out, and I just hope that we are serious
about dealing with these privacy issues because we cannot
afford a series of calamities that would undermine the most
vibrant part of our economy.
And I thank you for the chance to make this statement, Mr.
Chairman.
Senator Ashcroft. Thank you, Senator Wyden.
Senator Brownback.
STATEMENT OF HON. SAM BROWNBACK,
U.S. SENATOR FROM KANSAS
Senator Brownback. Thank you, Mr. Chairman. I appreciate
you holding the hearing.
Thank you very much, FTC members, for coming here. I look
forward to your testimony. There are a lot of issues to be
discussed. We have heard from several people.
One issue that I want to throw into the mix and I hope you
will address, is you have a study that is going on about
marketing of violence to children.
This Committee had a hearing on this topic less than a year
ago. There were a number of people testifying that violence is
actually used as a marketing tool to children to get them to
buy products.
You are in the middle of a study on that, and I hope that
study is going well. And I also hope you are being aggressive
in pursuing that study, and that you are finding out from these
companies what their marketing efforts and strategies are.
We have not been able to secure this information in the
Senate. I have requested that information and the companies say
it is not available, that they do not know who they are selling
these products to, and they do not know their marketing
strategies, which I find just unbelievable.
This is a very serious issue for the country particularly
when we have so much violence. I trust that the aggressive
pursuit and timely completion of this study is a top priority
of the FTC, particularly given the importance placed on it by
both the U.S. Senate and the White House. I also hope that you
will make a concerted effort to check and verify the
information supplied to you by the entertainment industry,
given the interests they have in the outcome of this report.
There will be more hearings on these topics of violence,
violence being marketed to children. And that is an area that I
hope you all are going to address today so I can hear about
that and some of the other topics that are here.
Mr. Chairman, thanks for holding the hearing, and I look
forward to the testimony and some questions.
Senator Ashcroft. I want to thank the members of this panel
for attending and being a part of this. And it is a tribute to
the Commission that so many Senators would make themselves
available for the hearing.
I understand that Chairman Pitofsky has an opening
statement on behalf of the Commission. However, I want to give
each Commissioner, after his statement, an opportunity to make
brief statements. We would like to hear from all of you, if you
want to say anything.
Since we have a number of witnesses today, I am going to
ask you to try and keep your remarks to five minutes or less.
And obviously, there will be no penalty for the ``or less''
part.
Without objections from other members of the Committee, I
will assure you that your written statements will be made part
of the record.
With that in mind, it is a pleasure to welcome you, Mr.
Chairman, and I thank you for coming, and you may begin your
testimony.
STATEMENT OF HON. ROBERT PITOFSKY, CHAIRMAN,
FEDERAL TRADE COMMISSION; ACCOMPANIED BY HON.
SHEILA F. ANTHONY, COMMISSIONER; HON. MOZELLE W.
THOMPSON, COMMISSIONER; HON. ORSON SWINDLE,
COMMISSIONER; HON. THOMAS B. LEARY, COMMISSIONER
Commissioner Pitofsky. Thank you, Mr. Chairman, and members
of the Committee.
Let me take a moment to introduce my colleagues.
Commissioner Sheila Anthony, Commissioner Mozelle Thompson,
Commissioner Orson Swindle, and our newest Commissioner, Tom
Leary.
Both in our consumer protection and protecting competition
roles, the FTC today is a very busy place. We are encouraged by
the fact that between those two missions, we estimate, along
the lines that GPR sets out for estimating these sort of
things, that we saved consumers $1.6 billion in Fiscal 1999,
$14 for every $1 that we spent on our operations.
On the competition side, as several of you have indicated,
we are most active in merger review. There were three times as
many merger filings in 1999 as 1991. The total value of assets
acquired through acquisition was 11 times as great as just 8
years ago. 29 transactions in Fiscal 1999 exceeded $10 billion
in value.
While the merger wave review takes up two-thirds of our
competition protection resources, we have been active in non-
merger work as well. Perhaps the most notable recent example
was our suit and then settlement with the Intel Corporation in
which Intel agreed to discontinue certain allegedly
monopolizing conduct.
We drafted an order that we intended to provide guidelines
to the high-tech industry for refusals to deal with customers
and competitors. And I am glad to say that the company and we
described the settlement as a win/win situation.
On the consumer protection side, we continue to discharge
our usual responsibilities--challenging deceptive advertising,
credit abuses, and marketing fraud, especially in the
telemarketing area. The great change since we were here in
reauthorization some four years ago is our commitment to
challenge fraud and invasions of privacy with respect to
consumers on the Internet.
We have brought over 100 Internet fraud-related cases in
the last several years, established a database that 220 law
officials use, and a consumer help line where consumers can
register their complaints which then go into our database.
In 1996, we devoted 14 Commission personnel to Internet
review. Today, it is 79 personnel, 23 percent of all the people
we have working on consumer protection issues.
We also deal with new and significant initiatives that we
have been asked to take on, and one that Senator Brownback
mentioned is particularly important, our study of marketing of
violent entertainment materials to children. I hope to have an
opportunity to answer questions about that, Senator.
We have handled these new responsibilities without any
major increase in budget by restructuring the agency for
efficiency. We have very constructive relationships these days
with the states. We have reduced drastically mid-management
review.
We make earlier decisions on cases that we will pursue, and
we have vacated 50 percent of the rules and guides that were on
our books, mostly obsolete rules and guides, that were on our
books just five years ago.
Nevertheless, there is a limit to what we can do with
present resources, and therefore, the Commission has asked for
a budget of $165 million and personnel totaling 1,113 in 2001,
substantially more than this Committee allowed in its
reauthorization proposal.
The vast majority of this increase is to staff enforcement
missions that have grown or have been added in recent years.
Finally, let me say just a word about Hart-Scott reform
since the panel that will follow will discuss the issue. Also,
my newest colleague, Commissioner Tom Leary, will address that
issue briefly.
I agree with the Hatch proposal that would reduce the
number of proposed mergers that need to be filed with the
government, but I believe the fees on very large transactions
should be increased so as to adequately finance FTC anti-trust
enforcement activities.
If we change the filing requirement, as the Hatch bill
proposes, 40 percent of the mergers that we now review would
not have to be filed.
With respect to the proposal to refer objections to our
request for information to the judiciary, I believe that would
lead to unnecessary delay and would put the judiciary in a
position where they would need to make decisions without
adequate information. If there are problems, and perhaps there
are, we can and will address them through internal reforms.
I would, of course, be delighted to answer any questions
from members of the Committee and I look forward to an
opportunity to answer some of the comments by Senator Stevens,
to the extent I can, because the matter is in litigation and I
am limited in what I can say, about our BP/Arco initiative.
Thank you very much.
Senator Ashcroft. Thank you.
[The prepared statement of Commissioner Pitofsky follows:]
Prepared Statement of Hon. Robert Pitofsky, Chairman,
Federal Trade Commission
Mr. Chairman, the Federal Trade Commission (FTC) is pleased to
appear before the Subcommittee to present its views on the agency's
reauthorization. Since our last reauthorization hearing in 1996, the
FTC has continued to protect American consumers in dynamic domestic and
world marketplaces. The FTC is the only federal agency with both
consumer protection and competition jurisdiction over broad sectors of
the economy.\1\ Congress has charged the FTC with maintaining a free
and fair marketplace by, among other things, protecting American
consumers and businesses from unfair methods of competition and unfair
or deceptive acts or practices. Our national experience demonstrates
that competition among producers and accurate information in the hands
of consumers yield the best products at the lowest prices, spur
innovation, and strengthen the economy.
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\1\ The FTC has broad law enforcement responsibilities under the
Federal Trade Commission Act, 15 U.S.C. Sec. Sec. 41 et seq. With
certain exceptions, the statute provides the agency with jurisdiction
over nearly every sector of the economy. Certain entities, such as
depository institutions and common carriers, as well as the business of
insurance, are wholly or partially exempt from FTC jurisdiction. In
addition to the FTC Act, the FTC has enforcement responsibilities under
more than 40 additional statutes and more than 30 rules governing
specific industries and practices.
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As a deliberative body and an independent agency, the FTC is well
situated to study and respond to a changing marketplace, and to
champion consumer interests in this dynamic setting. The FTC has
investigatory power and often serves as a research resource for
Congress. The FTC also has limited regulatory power, which it uses
sparingly to address specific, widespread problems, often in response
to express Congressional mandates. First and foremost, however, the FTC
is a law enforcement agency. It is a small agency, but one with a
record of achievement for American consumers.
Highlights of recent accomplishments include:
Saving consumers an estimated $1.6 billion in fiscal
year 1999 from law enforcement actions brought in our consumer
protection and competition missions, achieving an estimated
consumer savings of $14 for every $1 spent on agency
operations.
Protecting consumers and business from anticompetitive
mergers before they occur by reviewing the increasing number of
proposed merger transactions filed under the Hart-Scott-Rodino
provisions of the Clayton Act. Reported transactions have
tripled from 1,529 in fiscal year 1991 to 4,642 in fiscal year
1999 and have increased eleven-fold in total value during this
period, from $169 billion to $1.9 trillion.
Targeting 78 percent of FTC antitrust resources in
fiscal year 1999 to four sectors of the economy--energy and
natural resources, information and technology, health care and
pharmaceuticals, and consumer goods and services, thus focusing
on industries with major pocketbook benefits for consumers.
Fighting Internet-related fraud since 1994 by bringing
100-plus enforcement actions, which have targeted 300 corporate
and individual defendants on behalf of millions of online
consumers and small business. The FTC's enforcement actions
have collected over $20 million in redress, obtained orders
freezing another $65 million, and stopped Internet schemes with
estimated annual sales of over $250 million.
Offering consumers and business toll-free access to
the FTC through a consumer helpline. Launched in July 1999 with
additional funds appropriated by Congress, 1-877-FTC-HELP
allows people from anywhere in the United States to call with
questions or complaints and speak to trained counselors. The
FTC now receives more than 9,000 consumer inquiries or
complaints per week.
Operating Consumer Sentinel, a secure database
developed by the FTC and now shared with over 220 law
enforcement agencies in the U.S. and Canada. Currently
containing more than 225,000 entries, the database allows law
enforcement to identify companies and individuals engaging in
fraud and to stop scams as they emerge.
Safeguarding consumer privacy by implementing the
Children's Online Privacy Protection Act and by bolstering
industry self-regulation through educational efforts. The FTC
continues to monitor consumer privacy in cyberspace by, among
other things, conducting surveys to reassess how websites are
implementing fair information practices.
Educating consumers and businesses about their rights
and responsibilities, and alerting them to potential frauds, by
distributing 8.6 million educational publications in print and
online during fiscal year 1999.
Increased Resources to Meet Growing Challenges. To meet the growing
challenges in protecting consumers and keeping the marketplace
competitive, we request that our reauthorization include an increase in
resources. Over the past decade, the FTC has performed its mission in
the face of a rapidly changing marketplace. We have done so primarily
by stretching our resources, re-inventing our processes, and simply
doing more with less. But if we are to keep up with the growing demands
that will be imposed by the 21st Century marketplace, we need
significant additional resources.
Two marketplace developments have greatly increased the demands on
the FTC--the explosive growth of the Internet and the dramatic increase
in corporate mergers. Use of the Internet has grown exponentially since
commercial web browsers first became available in 1994--123 million
Americans now have access to the Internet.\2\ Internet purchasing also
is skyrocketing, forecasted to rise from $20 billion in 1999 to $184
billion in 2004.\3\ Developing Internet-related policies and halting
cyberfraud during just the few years of the Internet's existence
already has taxed the FTC's resources. In 1996, the FTC's Bureau of
Consumer Protection (BCP) devoted 14 FTEs, about 4 percent of BCP total
resources, to Internet-related activities. In 1999, the workload
required 79 FTEs, or about 23 percent of the BCP workforce, which
overall remained at about the same level as 1996.\4\
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\2\ Nielsen Media Research and NetRatings Inc., The Nielsen/
Netratings Reporter (visited Jan. 13, 1999) .
\3\ Forrester Research Inc., Online Retail to Reach $184 Billion by
2004 as Post-Web Retail
Era Unfolds (visited Sept. 28, 1999) .
\4\ See Attachment 1. Internet-related initiatives include anti-
fraud law enforcement, consumer and business education, online privacy
initiatives, and the development of international consumer protection
guidelines for commerce.
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Similarly, the corporate merger wave continues into its tenth
straight year and strains FTC resources. The Washington Post recently
characterized the merger wave as ``a frenzy of merger madness, capping
a dramatic wave of global corporate consolidation that has been gaining
momentum through much of this decade,'' quoting merger experts who note
that a key force driving merger activity is the Internet.\5\ This
restructuring may be necessary for companies to compete in the new
global, high-tech marketplace. At the same time, antitrust review is
necessary to identify and stop those combinations that could diminish
competition in specific markets as this restructuring proceeds.
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\5\ Sandra Sugawara, Merger Wave Accelerated in '99; Economy,
Internet Driving Acquisitions, Wash. Post, Dec. 31, 1999 at E1.
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While the number of Hart-Scott-Rodino mergers has tripled in the
past decade, the dollar value of commerce affected by these mergers is
on an even steeper trajectory, increasing eleven-fold.\6\ Overall,
merger transactions are increasingly larger and significantly more
complex, requiring more exacting analysis when they raise competitive
issues. As a result, merger investigation and litigation are more
resource-intensive than before.\7\
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\6\ See Attachment 2.
\7\ The demands from the merger wave and the requirements and
statutory deadlines under Hart-Scott-Rodino have forced a diversion of
resources from the FTC's nonmerger responsibilities, such as
potentially anticompetitive agreements in health care and other
industries. While in 1991, the FTC spent 56 percent of competition
resources on merger matters and 44 percent on nonmerger matters; in
1999, that ratio changed to 67 percent for mergers and only 33 percent
for nonmergers. The nonmerger cases that have been opened in the past
several years are proceeding more slowly because of the lack of
resources.
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The FTC is working cooperatively with industry and the antitrust
bar to assess what changes can be made in Hart-Scott-Rodino merger
investigations to minimize burden and make the process work as
efficiently as possible. The FTC already has undertaken a number of
internal reforms to expedite merger investigations and to provide
parties with more complete information on the issues that give rise to
an investigation.
Finally, several other significant initiatives are straining FTC
resources. Two current examples are studying the marketing of violent
entertainment materials to children and creating an identity theft
database. Late in fiscal year 1999, several Senators and the White
House both asked the FTC to study the marketing of violent
entertainment materials to children in the aftermath of school
shootings in Littleton, Conyers, Jonesboro, West Paducah, and Pearl.\8\
The entertainment industry is large (over $40 billion a year in sales
and rentals of movies, video games, and music recordings), and this
undertaking is substantial: FTC staff is seeking relevant information
from industry members, parents' and children's advocacy groups, other
consumer groups, academics, and parents and children themselves, and
the Commission will issue a report.
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\8\ S. 254, 106th Cong. (1999). The specific provision of the
proposed legislation, Amendment No. 329, passed by a vote of 98-0.
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The FTC also has devoted resources to issues involving identity
theft--using someone else's personal identifying information to commit
fraud, such as opening a credit card account using the stolen name.
Congress passed the Identity Theft and Assumption Act of 1998,\9\ which
directs the FTC to establish a ``centralized complaint and consumer
education service'' for victims of identity theft. The FTC has
implemented three parts of the program: establishment of a toll-free
number (877-ID THEFT) for reporting and seeking information on identity
theft; a database
to track these complaints; and a consumer education program, including
a soon-
to-be-published booklet and a website devoted to identity theft
issues--www.consumer.gov/idtheft.
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\9\ 18 U.S.C.Sec. 1028.
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The FTC has been both innovative and aggressive in meeting its
expanding responsibilities. We reorganized and streamlined our
workforce by hiring cost-efficient paralegals to perform tasks
previously performed by attorneys, and by moving positions, wherever
possible, out of administrative offices and into front-line law
enforcement. We have prioritized our cases, shifting resources, to the
extent possible, to areas of highest need and with greatest consumer
impact. We have leveraged our efforts through cooperative arrangements
with the states and the private sector to obtain the greatest benefit
for each dollar spent.
Nonetheless, the growing demands of the marketplace are exceeding
the FTC's ability at current resource levels to maintain its missions
adequately. We need additional staff and funds to do the work
effectively. An increase to the FTC's resources would be a sound
investment, reaping abundant dividends for American consumers and
business.
Forward-Looking Law Enforcement for American Consumers and
Business. At the brink of a new century, the FTC's law enforcement is
forward-looking and innovative. We are pleased to describe our
accomplishments in (1) keeping pace with the dynamic growth of
electronic commerce, (2) anticipating and responding to the changing
marketplace to promote consumer and business welfare, and (3) promoting
efficient law enforcement.
1. Keeping Pace with the Dynamic Growth of Electronic Commerce. The FTC
is working to keep pace with rapidly expanding Internet activity
through a multitude of programs and law enforcement efforts.
Fighting Electronic Fraud. The FTC is fighting to protect consumers
and business against new high-tech frauds, ingenious scams that exploit
the design and architecture of the Internet to defraud consumers. FTC
staff identified two tricks, ``pagejacking'' and ``mousetrapping,'' in
FTC v. Carlos Pereira,\10\ in which defendants in Portugal and
Australia allegedly captured unauthorized copies of U.S.-based
websites, including those of Paine Webber and The Harvard Law Review,
and produced look-alike versions that were indexed by major search
engines. The defendants then diverted unsuspecting consumers to a
sequence of pornography sites from which they could not exit,
essentially trapping them at the site. The FTC obtained a court order
stopping the scheme and suspending the defendants' website
registrations.
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\10\ FTC v. Carlos Periera d/b/a atariz.com, No. 99-1367-A (E.D.
Va., Sept. 14, 1999).
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The FTC also protects consumers from more traditional scams that
have found new life on the Internet. In fact, most of the FTC's 100-
plus cases challenging Internet fraud concern old frauds on a new
medium--28 cases challenge credit repair schemes, 13 cases challenge
deceptive business opportunities, and 11 cases challenge pyramid
schemes. The Internet can give these old scams a sleek new veneer as
well as provide access to vastly more victims at little cost.
Among the most pernicious of old frauds finding a new home on the
Internet are health-related frauds. The Internet offers consumers
immediate, free access to health information and a convenient and
(sometimes) less expensive source for health products. Not
surprisingly, consumers are turning to the Internet more and more for
their health needs.\11\ Yet, there are potential risks: the quality of
Internet information varies widely, and it can be difficult to
distinguish reliable sites from inaccurate or even fraudulent ones. To
address the proliferation of health claims on the Internet, the FTC
implemented Operation Cure.All, which began with two comprehensive
``surfs'' of the Internet for suspicious health products and ended with
cease-and-desist actions--four to date.\12\ To educate consumers, the
FTC publishes online brochures on how to spot health scams, linked the
FTC website to reliable Internet health sites, and posted several
``teaser'' Internet sites that mimic health scams and alert consumers
to potential online health fraud.
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\11\ One recent poll reveals that 80 million American adults went
online for health information during the previous 12 months. Harris
Poll (Aug. 1999).
\12\ Magnetic Therapeutic Technologies, Inc., C-3897 (FTC Sept. 7,
1999); Pain Stops Here!, Inc., C-3898 (FTC Sept. 7, 1999); Melinda R.
Sneed and John L. Sneed d/b/a Arthritis Pain Care Center, C-3896 (FTC
Sept. 7, 1999); Body Systems Technology, Inc., C-3895 (FTC Sept. 7,
1999).
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Maintaining the Competitive Promise of the Internet. Just as the
work of the FTC's consumer protection mission strives to keep the
Internet free from fraud, the work of its competition mission strives
to secure the competitive promise of the Internet. In just a few years,
the Internet has changed traditional sales and distribution patterns
for products of all types, promising faster, cheaper, and more
efficient ways to deliver goods and services. Antitrust scrutiny is
necessary to ensure that anticompetitive practices do not stunt
development of these innovations. In 1998, for example, the FTC charged
25 Chrysler dealers with an illegal boycott designed to limit sales by
car dealers that marketed on the Internet. The dealers allegedly had
planned to boycott Chrysler if it did not change its distribution
methods to disadvantage Internet sellers.\13\ A successful boycott
could have limited the use of the Internet to promote price competition
and could have reduced consumers' ability to shop from dealers serving
a wider geographic area via the Internet.
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\13\ Fair Allocation System, Inc., C-3832 (FTC Oct. 30, 1998).
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Using Electronic Tools to Detect, Deter, and Educate about Fraud.
To stay on top of Internet developments, and to stop cyberfraud in its
incipiency, the FTC has developed innovative tools. Two of the most
effective tools are Consumer Sentinel, the comprehensive fraud
database,\14\ and 1-877-FTC-HELP, the toll-free consumer helpline.
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\14\ In 1998, Consumer Sentinel received the Interagency Resources
Management Conference Award as an exceptional initiative to improve
government service.
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The FTC also holds ``Surf Days'' to use new technology to detect
and analyze emerging problems in the online marketplace. Through
organized Internet surfing, FTC staff and its law enforcement partners
learn about online practices and identify possible targets for law
enforcement. To date, the FTC and 250 partners have conducted 20 Surf
Days on topics ranging from pyramid schemes to health claims to
environmental marketing claims, and have identified over 4,000 sites
making dubious claims. One way that FTC staff responds when it
discovers questionable claims is to use e-mail simply to warn website
operators that their sites appear to violate the law--some operators
are new entrepreneurs unaware of existing laws. Although the results
vary, the warnings appear generally effective in prompting operators to
correct or remove their websites without any formal FTC enforcement
action.
Second, the FTC has created ``teaser sites'' to educate consumers
about exercising caution in dealing with website enterprises. Now
numbering over a dozen, these sites mimic common Internet scams, such
as pyramid schemes and business opportunities, and contain the
customary glowing testimonials and false promises. After a few
``clicks'' from the home page, the FTC teaser sites warn consumers that
they could be defrauded by participating in similar schemes and provide
tips on how to distinguish fraudulent pitches from legitimate ones.
Finally, the FTC organized the development of www.consumer.gov to
educate consumers. With more than 100 federal agencies contributing
information, the website is a one-stop shop for consumers turning to
the federal government seeking information, from health to money to
technology.\15\
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\15\ In 1999, www.consumer.gov received the Vice President's Hammer
Award, which recognized the site's innovative approach to providing
online links to the websites of federal agencies.
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Protecting Privacy Online. Since 1995, the FTC has been at the
forefront of issues involving online privacy. Among other activities,
the FTC has held public workshops; examined website practices on the
collection, use, and transfer of personal information; and commented on
self-regulatory efforts and technological developments intended to
enhance consumer privacy. The FTC has issued three reports to Congress
based on its initiatives in the privacy area.\16\ The most recent,
Self-Regulation and Privacy Online,\17\ issued in July 1999, examined
website collection of consumer information, consumer concerns about
online privacy, and the state of self-regulation. The report
recommended effective self-regulation at that time instead of
legislation, but called for further efforts to implement ``fair
information principles'' and continued FTC monitoring.
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\16\ Self-Regulation and Privacy Online: A Report to Congress (FTC
July 1999) ; Privacy
Online: A Report to Congress (FTC June 1998) ; Individual Reference Services: A Report to
Congress (FTC Dec. 1997) .
\17\ Id. The Commission vote to authorize release of the report was
3-1, with Commissioner Anthony concurring in part and dissenting in
part.
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The FTC is particularly concerned about issues involving the online
collection of personal information from children. In its 1998 privacy
report, the FTC documented the widespread collection of children's
information, and recommended that Congress adopt legislation setting
forth standards on online collection. Four months after the report was
issued, Congress enacted the Children's Online Privacy Protection Act
of 1998.\18\ As required by the Act, the FTC issued a rule to implement
the Act's fair information standards for commercial websites collecting
information from children under 13.\19\ The rule, which takes effect in
April 2000, describes what constitutes ``verifiable parental consent''
in the collection of information from children.
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\18\ 15 U.S.C. Sec. 6501. The Final Rule is available at .
\19\ 16 C.F.R. Part 312.
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The FTC also has brought law enforcement actions to protect privacy
online. One action challenged the allegedly false representations by
the operator of a ``Young Investors'' website that information
collected from children in an online survey would be maintained
anonymously,\20\ and another challenged the practices of an online
auction site that allegedly obtained consumers' personal identifying
information from a competitor site (eBay.com) and then sent deceptive,
unsolicited e-mail messages to those consumers seeking their
business.\21\
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\20\ Liberty Financial Companies, Inc., No. C-3891 (FTC Aug. 12,
1999).
\21\ FTC v. Reverse Auction.com, Inc., No. 00-0032 (D.D.C. Jan. 6,
2000).
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Since the 1999 privacy report, the FTC, together with the
Department of Commerce, held a public workshop on ``online profiling''
\22\ to educate the public about this practice and its privacy
implications, and to examine current industry efforts to implement fair
information practices. The FTC also has convened an advisory committee
of e-commerce experts, industry representatives, security specialists,
and consumer and privacy advocates to examine the costs and benefits of
implementing online the fair information practices of ``access'' and
``security.'' \23\ This advisory committee, convened pursuant to the
Federal Advisory Committee Act,\24\ will provide a written report to
the FTC in May 2000. Later this month, the FTC will conduct another
survey on commercial website practices of personal information
collection and their use of fair information practices of notice,
choice, access, and security.
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\22\ Online profiling is the practice of aggregating information
about consumers' interests, gathered primarily by tracking their
movements online, and using the resulting consumer profiles to create
targeted advertising on websites.
\23\ ``Access'' refers to an individual's ability to review data
maintained about him or herself and the ability to correct inaccuracies
in that data. ``Security'' refers to a data collector's obligation to
protect against loss and the unauthorized access, destruction, use, or
disclosure of the data.
\24\ 5 U.S.C. App. Sec. 9(c).
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Working to Protect Consumers and Businesses in International E-
Commerce Markets. The FTC participates in international forums on e-
commerce with two major goals: tackling cross-border fraud, and
developing e-commerce policies that facilitate a safe and predictable
commercial environment for businesses and consumers. To stop
international fraud, the FTC works with both domestic and foreign law
enforcement partners to shut down offshore scam artists who target U.S.
consumers, to repatriate ill-gotten gains moved offshore, and to combat
cross-border fraud. We enhance international cooperative efforts
through our involvement in international organizations, such as the 29-
nation International Marketing Supervision Network; and task forces,
such as the U.S.-Canada Telemarketing Task Force and the Mexico-U.S.-
Canada Health Fraud Task Force. We also participate in information
sharing arrangements, such as through Consumer Sentinel.
To develop e-commerce policies, the FTC is active in the public
policy debate on international consumer protection principles that
should govern the global electronic marketplace.\25\ The FTC sponsored
a June 1999 international workshop addressing these issues.
Additionally, the FTC just announced that it will host, together with
the Department of Commerce, a workshop this spring on the use of
alternative dispute resolution mechanisms for consumer transactions in
the borderless online marketplace.
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\25\ Attachment 3 lists the international working groups on
electronic commerce to which the FTC belongs.
2. Anticipating and Responding to the Changing Marketplace to Promote
Consumer and Business Welfare. Electronic commerce, deregulation, and
globalization are transforming the American economy. The FTC is
responding to these changes by shifting resources to those areas where
consumers and business are at increasing risk from fraud, deception, or
anticompetitive practices.
Responding to the Retail Revolution. The United States, indeed the
world, is undergoing a ``retail revolution.'' To remain competitive,
retailers--whether brick and mortar or online--are restructuring and
merging, and seeking new ways to market both new and old products to a
growing consumer market. Food retailing is experiencing just such a
period of consolidation. The number of supermarket mergers increased
from 20 in 1996, to 25 in 1997, to 35 in 1998.\26\ While most
supermarket mergers do not raise competitive concerns, some do appear
to threaten consumers' food bills, and the FTC has responded. Five
supermarket mergers reviewed by the FTC in the past 12 months have
involved firms with total annual sales of over $110 billion, including
Albertson's acquisition of American Stores (the second and fourth
largest chains in the U.S.) and Kroger's acquisition of Fred Meyer,
which created the largest U.S. supermarket chain. In the last four
years, the FTC has brought more than 10 enforcement actions involving
supermarket mergers, requiring divestitures of nearly 300 stores, in
order to maintain competition in local markets spread across the
U.S.\27\
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\26\ ``How Big is Too Big? The Role of the FTC in Supermarket
Industry Mergers,'' 2 Grocery Headquarters 24 (Feb. 1, 1999).
\27\ Red Apple/Sloan, C-9266 (FTC Mar. 29, 1995); Schnucks/
National, C-3584 (FTC June 8, 1995); Schwegman/National 119FTC 783
(July 5, 1995); Stop & Shop/Purity Supreme, C-3649 (FTC April 2, 1996)
; Ahold/Stop & Shop, C-3687 (FTC July 7, 1996); Jitney Jungle/Delchamps
C-3784 (FTC Sept. 23, 1998); Albertson's/Buttrey, C-3838 (FTC Dec. 8,
1998); Ahold/Giant, C-3861 (FTC Oct. 20, 1998); Kroger/Fred Meyer, C-
3917 (FTC June 7, 1999); Albertson's/American Stores, No. 981-0339
(June 30, 1999); Shaw's/Star, No. 991-0075 (FTC July 6, 1999); Kroger/
John C. Groub, C-3905 (Nov. 8, 1999).
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The FTC is addressing not only anticompetitive mergers, but also
anticompetitive practices that could hinder consumers from reaping the
full benefits of retail restructuring. For example, the Commission sued
Toys ``R'' Us, the nation's largest toy retailer, alleging abuse of
market power by trying to stop warehouse clubs from selling popular
toys, such as Barbie dolls. Although new to selling toys, warehouse
clubs, such as Costco, were selling them at lower prices and beginning
to take market share from more traditional retailers, including Toys
``R'' Us. In response, Toys ``R'' Us allegedly pressured toy
manufacturers to deny popular toys to warehouse clubs or to sell to
them only on less favorable terms. The FTC issued an administrative
order to stop these practices, and the matter is now on appeal in the
U.S. Court of Appeals for the Seventh Circuit.\28\
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\28\ Toys ``R'' Us, Inc., No. 9278 (FTC 1998) appeal docketed, No.
98-4107 (7th Cir. Apr. 16, 1999).
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Protecting Competition and Consumers in Electric Power
Deregulation. Deregulation is transforming the huge electric power
industry, which has annual sales of over $200 billion. The FTC is
working to ensure that consumers receive the benefits of deregulation
and that formerly regulated monopolists do not use their market power
to impede competition. The FTC has provided testimony and other
comments to Congress on issues of electric power deregulation. FTC
staff has participated in various industry forums and has provided
comments to the Federal Energy Regulatory Commission and 13 state
governments to assist in the transition to a competitive market. The
FTC also conducted a workshop for state utility regulators and
Attorneys General on market power and consumer protection issues that
states are likely to face as they deregulate and restructure the
electricity industry. The FTC continues to emphasize the need to (1)
adopt policies that lessen the market power held by the formerly
regulated monopolies to promote competition, (2) ensure that consumers
receive accurate and non-deceptive information to make informed
decisions among the choices that the competitive market should offer;
and (3) ensure fair and non-deceptive billing practices.\29\
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\29\ The FTC also has reviewed mergers that affect the delivery of
electricity to consumers and has taken action when concerned about the
merger's impact on competition and prices. See PacifiCorp, No. 9710091
(FTC consent agreement, Feb. 18, 1998) (transaction subsequently
abandoned); Dominion/Consolidated Natural Gas Co. C-3901 (FTC Dec. 9,
1999).
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Protecting Consumers from Deceptive Telecommunications Practices.
The FTC is addressing consumer protection issues in another
deregulating industry--telecommunications. While deregulation can bring
consumers substantial benefits in the form of greater choice in
products, services, and prices, it also has brought new opportunities
for fraud and deception. Among the most serious fraudulent practice is
``cramming''--placing charges for unauthorized purchases of goods and
services on consumers' telephone bills. In 1998, cramming ranked second
among complaints received by the FTC's Consumer Response Center, with
almost 10,000 complaints.\30\ Along with State Attorneys General, the
FTC has filed law enforcement actions against crammers, seeking
injunctions and restitution for injured consumers.\31\ The FTC also
amended its Pay-Per-Call Rule \32\ to require, among other things,
express verifiable authorization for charges placed on consumer
telephone bills.\33\ Finally, the FTC commented on the Federal
Communications Commission's ``Truth-in-Billing'' initiative, designed
to make it difficult to cram unauthorized charges on to consumers'
phone bills by making the bills easier to read and understand.\34\
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\30\ Telecommunications--State and Federal Actions to Curb Slamming
and Cramming, (GAO/RCED-99-193, July 1999) .
\31\ FTC v. Interactive Audiotext Services, Inc., No. 98-3049 CBM
(C.D. Cal., Apr. 22, 1999); FTC v. International Telemedia Associates,
Inc. No. 1-98-CV-1935 (N.D. Ga., July 10, 1998); FTC v. Hold Billing
Services, Ltd., No. SA-98-CA-0629-FB (W.D. Tex., July 15, 1998). See
also FTC v. American TelNet No. 99-1597-CIV-King (S.D. Fla. June 14,
1999); FTC v. Communication Concepts & Investments, Inc., No. 98-7450
(S.D. Fla., Dec. 22, 1998).
\32\ 16 C.F.R. Part 30 (1999).
\33\ 63 Fed. Reg. 58,524 (Oct. 30, 1998).
\34\ Truth-in-Billing and Billing Format First Report and Order and
Further Notice of Proposed Rulemaking, 63 Fed. Reg. 55,077 (Oct. 14,
1998).
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The FTC also has worked closely with the FCC on ``dial-around''
long distance telephone services, another innovation of the deregulated
environment. Dial-around allows consumers to bypass their pre-
subscribed long-distance provider by using access codes--a ``10-10-
XXX'' number.\35\ Through national advertising, long-distance carriers,
both large and small, heavily promote dial-around services, which now
gross approximately $3 billion per year.\36\ Nearly all of this
advertising focuses on price claims, and, unfortunately, much of it
appears deceptive. Early in fiscal year 2000, the FTC and the FCC
jointly sponsored a public workshop to focus attention on deceptive
advertising and to examine how both agencies might provide additional
guidance to industry on advertising these services non-deceptively.
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\35\ Every long-distance carrier has an access or ``10-10'' code
that allows callers to access that carrier's network, even if callers
have previously chosen a different carrier to be their regular long-
distance company.
\36\ 10-10 Long Distance Calling, Consumer Reports, May 1999, at
64.
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Safeguarding Consumer Privacy as Financial Markets Restructure.
Financial markets also will be restructuring in the wake of the Gramm-
Leach-Bliley Act,\37\ which dismantled Depression-era legal walls
between the banking, insurance, and securities industries. Despite the
promise of more efficient financial markets, the new law raises
concerns about the privacy of personal financial information, given the
technology available to collect and distribute this information. The
Act directs the FTC and the bank regulatory agencies to develop rules
to implement privacy protections, including requiring notice of an
entity's privacy policies and providing an opportunity, in certain
circumstances, to restrict the sharing of non-public personal
information. Release of the FTC's rule is scheduled for May 2000, just
six months after the President signed the Act.
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\37\ Pub. L. No. 106-102, 113 Stat. 1338 (1999)
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Providing Expertise on the Evolving Pharmaceutical Market. As part
of its program to study evolving industries, the FTC's Bureau of
Economics completed a detailed report on the rapidly changing
pharmaceutical industry,\38\ an industry of increasing importance to
the nation's aging consumers. Developments in information technology,
new state drug substitution laws, federal legislation, and the
emergence of market institutions such as health maintenance
organizations and pharmacy benefit management firms all have
contributed to a rapid pace of change in this market. The industry also
has undergone significant structural changes that include growth of the
generic drug segment and substantial horizontal and vertical
consolidation. The report attempts to provide a more complete
understanding of the competitive dynamics of this market and discusses
possible anticompetitive concerns and procompetitive explanations for
new pricing strategies and other evolving industry practices.
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\38\ Roy Levy, FTC Bureau of Economics Staff Report, The
Pharmaceutical Industry: A Discussion of Competitive and Antitrust
Issues in an Environment of Change (March 1999).
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In preparing the report, FTC staff drew upon its experience in
reviewing mergers in the pharmaceutical and health care industries.
These industries have been in the midst of a merger wave in the last
several years, and during that time, the FTC has brought 11 enforcement
actions challenging several of these mergers.\39\ Antitrust scrutiny is
vital because these transactions could have a substantial and immediate
impact on large numbers of consumers, possibly threatening higher
prices and slowing innovation of new life-enhancing products.
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\39\ Hoechst AG, 120 F.T.C. 1010 (Dec. 5, 1995); Glaxo PLC, 119
F.T.C. 815 (June 14, 1995); Upjohn Co., 121 F.T.C. 44 (Feb. 8, 1996);
Johnson & Johnson, 121 F.T.C. 149 (Mar. 16, 1996); Ciba-Geigy Ltd., 123
F.T.C. 842 (Mar. 24, 1997); Baxter Int'l, Inc., 123 F.T.C. 904 (Mar.
24, 1997); American Home Products Corporation, 123 F.T.C. 1279 (May 16,
1997); Roche Holding Ltd., C-3809 (May 22, 1998); Zeneca Group PLC, C-
3880 (June 7, 1999); Medtronic, Inc., C-3879 (June 10, 1999).
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Investigating Mergers in a Globalized Economy. Globalization means
that increasing numbers of the FTC's merger investigations involve
companies with international ties and require cooperation with foreign
competition authorities to resolve concerns. For example, in the $80
billion oil mega-merger of Exxon Corporation and Mobil Corporation, the
FTC closely coordinated its investigation, not only with the Attorneys
General of several states, but also with the European Commission.
Actions brought by United Kingdom and German authorities closely track
the proposed FTC order. Upon completion of its review, the FTC's order
would require the largest retail divestiture in FTC history--the sale
or assignment of 2,431 Exxon and Mobil gas stations in the Northeast
and Mid-Atlantic, as well as in California, Texas and Guam. In
addition, certain assets would be sold, including an Exxon refinery in
California, terminals, and a pipeline.\40\
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\40\ Exxon Corporation, No. 9910077 (proposed consent order, Nov.
30, 1999).
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Similarly, the FTC coordinated with foreign authorities in the
investigation and eventual settlement of an international
pharmaceutical merger, of Zeneca Group PLC, based in the United
Kingdom, and Astra AB, based in Sweden. The parties agreed to divest
rights to a long-acting local anesthetic to a third party to ensure
continued competition in this important drug market. The European
Commission and FTC staff shared their respective analyses of the case,
and the parties facilitated the process by waiving confidentiality
rights to permit full communication among FTC and EC staff and the
parties.\41\
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\41\ Zeneca Group PLC, C-3880 (FTC June 7, 1999).
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Formulating Guidelines on Competitor Collaborations. Globalization
and new technologies are driving companies toward a variety of complex
collaborations enabling them to expand into foreign markets, fund
innovation, or lower costs. The increasing use and variety of these
collaborations among competitors have led to requests for greater
clarity regarding their treatment under the antitrust laws. In
response, the FTC and the Department of Justice have issued, in draft,
the first set of joint guidelines that comprehensively address
horizontal agreements among competitors.\42\ The draft guidelines seek
to enhance understanding of the possible antitrust implications of a
wide range of joint ventures, strategic alliances, and other
collaborations among competitors, thus encouraging procompetitive
collaboration and deterring collaboration likely to harm competition
and consumers.
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\42\ 64 Fed. Reg. 54,483 (1999).
3. Promoting Efficient Enforcement. The FTC attempts to leverage
resources to obtain the greatest efficiency by, among other things,
working cooperatively with other law enforcement agencies, at both the
state and federal levels. The FTC also attempts to promote direct and
immediate benefits for consumers by seeking disgorgement or restitution
remedies in appropriate cases to put money back in their pockets.
Finally, the FTC seeks to minimize burden on business throughout its
enforcement and compliance programs.
Coordinating ``Sweeps'' to Fight Consumer Fraud. An important
innovation in the fight against consumer fraud is the ``sweep''--a
cooperative and concentrated fraud crackdown by federal, state, and
private groups. These efforts have led to multiple law enforcement
actions targeting a certain type of fraud, often with extensive press
coverage, and are more likely to reduce fraud than isolated actions by
the various state and federal groups. Since 1995, the FTC has partnered
with state and federal agencies and formed alliances to lead 49 sweeps
culminating in 1,321 law enforcement actions on a variety of scams.
These actions include 306 brought by the FTC itself, which have
prevented an estimated $500 million in consumer injury.\43\ The FTC
also partners with private sector organizations in education campaigns
on how consumers can avoid being defrauded.
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\43\ Attachment 4 provides the list of sweeps the FTC has
participated in since 1995.
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Redressing Anticompetitive Price Increases. The FTC won a
preliminary motion in its effort to give money back to millions of
American consumers who were faced with sudden and huge price increases
when they filled prescriptions for two generic drugs for treating
anxiety. In late 1998, the FTC, along with 10 State Attorneys General,
filed charges against Mylan Laboratories, Inc., the nation's second
largest generic drug manufacturer, and others, alleging that the
company had anticompetitively eliminated much of its competition by
tying up the key active ingredients for the two drugs.\44\ The
complaint charges that Mylan's actions allowed it to raise prices of
two drugs: for one drug, the price increase was 25 times the initial
level; for the other, more than 30 times. In total, the price increases
allegedly cost American consumers over $120 million. Trial is set for
fall 2000.
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\44\ FTC v. Mylan Laboratories, Inc., CV-98-3115 (D.D.C. 1999)
(mem).
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Saving Homes and Stopping Abusive Lending Practices. The dramatic
growth of subprime lending--lending to higher-risk borrowers--has been
accompanied by reports of abusive lending practices. The abusive
practices often involve lower-income elderly and minority borrowers and
threaten their biggest assets--their homes. The FTC has made abusive
lending practices an enforcement priority, and last July announced
settlements \45\ with seven subprime mortgage lenders from across the
country charged with violating the Home Ownership and Equity Protection
Act (HOEPA).\46\ The FTC alleged these lenders made loans without
regard to the consumers' ability to repay the loans, included
prohibited terms in the loan agreements, increased interest rates after
default, or imposed illegal prepayment penalties or balloon payments.
The settlements included injunctive and other relief and consumer
redress totaling $572,500 with injured consumers receiving an average
of $2,100 each.
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\45\ FTC v. Barry Cooper Properties, No. 99-07782 WDK (Ex) (C.D.
Cal. July 30, 1999); FTC v. Capitol Mortgage Corp., No. 2-99-CV-580G
(D. Utah July 28, 1999); FTC v. CLS Financial Services, Inc., No. C-99-
1215 (W.D. Wash. July 30, 1999); FTC v. Granite Mortgage LLC, No. 99-
289 (E.D. Ky. July 28, 1999); FTC v. Interstate Resource Corp., No. 99-
CIV-5988 (S.D.N.Y. July 30, 1999); FTC v. LAP Financial Services, Inc.,
No. 3:99-CV-496-H (W.D. Ky. July 28, 1999); FTC v. Wasatch Credit
Corp., No. 2-99-CV-579 (D. Utah July 28, 1999).
\46\ 15 U.S.C. Sec. 1639.
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The FTC also is prosecuting an action against Capital City Mortgage
Corporation,\47\ a Washington D.C. area mortgage lender. Filed in 1998,
the complaint alleges that the defendants made high-interest loans (up
to 24%), many to elderly and minority home owners living on fixed or
low incomes, without fully disclosing their terms. The loans were often
interest-only balloon loans, with the full principal amount due at the
end, allegedly leading to foreclosure and loss of homes when poor
borrowers could not raise tens of thousands of dollars quickly to make
these unexpected payments. The action seeks to obtain redress for
hundreds of victimized homeowners.
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\47\ FTC v. Capital City Mortgage, Inc., No. 1:98 CV 00237 (D.D.C.,
Jan. 29, 1998).
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Reducing Burden on Business. While protecting consumer interests,
the FTC has taken steps to minimize burden on business in the following
ways:
Maintained a comprehensive regulatory review program that
covers all FTC rules and industry guides since 1992. The program
provides for review of every rule and guide at least every ten years.
To date, the FTC has repealed roughly half of the guides
and discretionary trade regulation rules in effect in 1992 (21 of 40
guides and 12 of 25 rules).
The FTC has revised other rules to simplify disclosure
requirements, provide more flexible compliance options, or promote
international harmonization to facilitate trade. For example, the FTC
revised its Rule on Care Labeling of Textile Wearing Apparel to permit
the use of symbols in place of words, relieving manufacturers and
distributors of the need to translate care instructions into multiple
languages for trade purposes among NAFTA counties.
Rules currently under review include those concerning the
funeral industry,\48\ franchise and business opportunity ventures, pay-
per-call services,\49\ amplifiers used in home entertainment
products,\50\ home insulation products,\51\ and textile wearing
apparel.\52\
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\48\ See Funeral Industry Practices Rule, 16 C.F.R. Part 453
(1999), Request for Comments, 64 Fed. Reg. 24,250 (May 5, 1999).
\49\ See Trade Regulation Rule Pursuant to the Telephone Disclosure
and Dispute Resolution Act of 1992, 16 C.F.R. Part 308 (1999), Notice
of Proposed Rulemaking, 63 Fed. Reg. 58,524 (Oct. 30, 1998).
\50\ See Power Output Claims for Amplifiers Utilized in Home
Entertainment Products, 16 C.F.R. Part 432 (1999), Advance Notice of
Proposed Rulemaking, 63 Fed. Reg. 37,237; see also Notice of Proposed
Rulemaking, 64 Fed. Reg. 38,610 (July 19, 1999).
\51\ See Labeling and Advertising of Home Insulation, 16 C.F.R.
Part 460 (1999), Advance Notice of Proposed Rulemaking, 64 Fed. Reg.
48,025 (Sept. 1, 1999).
\52\ See Care Labeling of Textile Wearing Apparel and Certain Piece
Goods As Amended, 16 C.F.R. Part 423 (1999), Advance Notice of Proposed
Rulemaking, 60 Fed. Reg. 67,102 (Dec. 28, 1995); see also Notice of
Proposed Rulemaking, 64 Fed. Reg. 38,610 (July 19, 1999).
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Maintained an extensive program of business education and
outreach to achieve compliance without the burden of formal legal
action. The efforts have included public workshops, online and hard
copy business guides, general and individual compliance advice, ``Surf
Day'' follow-up alerts, trade association and trade press contacts,
speeches and other presentations.
Streamlined its administrative trial procedures,
establishing a one-year start-to-finish procedure for certain
matters.\53\
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\53\ 16 C.F.R. Sec. 3.11A (1999).
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Sunsetted over 10,000 administrative orders, with
automatic sunsetting of all such orders more than 20 years old.
Reduced the average time to grant ``early termination'' on
H-S-R mergers to less than 20 days, even though the statute allows a
30-day review period.
Mr. Chairman, we appreciate the opportunity to provide our views on
the Commission's reauthorization and to report on our accomplishments
on behalf of American businesses and consumers. We would be pleased to
respond to any questions you or the other Members may have.
Attachment 3
The Federal Trade Commission's International Organization Participation
The Organization of Economic Cooperation and Development
(OECD) Consumer Policy Committee is comprised of the consumer
protection and related agencies of 29 countries, the Business and
Industry Advisory Committee, and Consumers International. The Committee
recently issued international guidelines on consumer protection in e-
commerce, and will continue to focus on related issues. The FTC heads
the U.S. delegation to this committee.
Trans-Atlantic Business Dialogue (TABD) is a framework for
cooperation between the trans-Atlantic business community and the
governments of the E.U. and U.S, whereby European and American
companies and business associations develop joint EU-US trade policy
recommendations. E-commerce continues to be one area of focus for these
recommendations.
Trans-Atlantic Consumer Dialogue (TACD) is a framework for
cooperation between the trans-Atlantic consumer community and the
governments of the E.U. and U.S, whereby European and American consumer
associations develop joint EU-US policy recommendations. This group
also has focused on e-commerce issues.
Asia-Pacific Economic Cooperation (APEC) Electronic Commerce
Steering Group involves government and private sector representatives
from APEC countries. The group is addressing Internet jurisdiction and
consumer protection in e-commerce.
Free Trade Area of the Americas (FTAA) Joint Government-
Private Sector Committee of Experts on Electronic Commerce, a
representative subset of the 34 countries in the Western Hemisphere
which comprise the FTAA, makes recommendations on how to increase the
benefits of electronic commerce. Its focus includes consumer
protection.
The Global Business Dialogue on Electronic Commerce (GBDe), a
coalition of international business representatives from the Internet
industry, has launched a coordinated dialogue at the global level with
governments and international organizations to address conflicting
rules and regulations that could create obstacles to global electronic
commerce.
The American Bar Association Internet Jurisdiction Project is
comprised of business representatives, academics and government
agencies from around. This group plans to issue recommendations on
Internet jurisdiction for consumer protection as well as other areas at
an international meeting in London this summer.
The Internet Law and Policy Forum (ILPF) is a global
organization of Internet-centric companies that seeks to provide a
comparative identification and evaluation of legal issues. It is
currently examining the potential contribution of technology,
alternative dispute resolution, self-regulation, governmental
cooperation, and harmonization of laws.
The International Marketing Supervision Network (IMSN) is a
membership organization composed of law enforcement and consumer
protection agencies in OECD countries. The IMSN is a vehicle for
information exchange and a forum for international law enforcement
cooperation in the area of consumer protection.
Attachment 4
CONSUMER PROTECTION MISSION ANTI-FRAUD LAW ENFORCEMENT SWEEPS
Since 1995, the Federal Trade Commission has joined with its
partners in federal, state, and local government to bring 1,323 law
enforcement actions in 49 sweeps against fraudulent operators. This
includes 306 actions by the FTC that have prevented over $500 million
in consumer injury. Each sweep is supported by an active and creative
education program aimed at preventing future losses by the public.
FISCAL YEAR 2000
Operation S.O.S.
Target: Fraudulent business opportunities
Partners: DOJ, COBRA Task Force (Search Warrant), 8 Attorneys
General (23 actions)
FTC cases: 12 Section 13(b) cases; 22 civil penalty cases
referred to DOJ; to be filed beginning 2/2/00
Operation Misprint
Target: Bogus office and maintenance supply telemarketing
schemes targeting large and small businesses and nonprofit
organizations.
Partners: Illinois Attorney General's Office (2 actions)
FTC cases: 13 cases; court orders ending these allegedly
fraudulent operations were issued in 10 cases; 3 cases are not yet
final
FISCAL YEAR 1999
Operation Auction Guides
Target: Deceptive marketing of ``how to'' guides which made
misrepresentations to induce consumers to pay for auction or business
opportunity information
Partners: U.S. Postal Inspection Service, California Attorney
General, Tulare County, California District Attorney's Office (2
actions)
FTC cases: 4 cases resulted in orders for over $18 million in
consumer redress
Operation Missed Giving
Target: Fraudulent solicitations for charitable donations
Partners: 40 state charities enforcement agencies (34 actions)
FTC cases: 5 cases resulted in orders for over $1.4 million in
consumer redress
Operation Clean Sweep
Target: Bogus business operators who ship unwanted and
unordered cleaning and janitorial supplies to small organizations
Partners: 2 Attorneys General and U.S. Postal Inspection
Service (3 actions)
FTC cases: 1 case resulted in a settlement requiring $110,000
in consumer redress
Operation New ID--Bad Idea I
Target: Credit identity scams
Partners: National Association of Attorneys General, State
Attorneys General, Treasury Inspector General for Tax Administration,
and other federal, state, and local law enforcement agencies (14
actions)
FTC cases: 22 cases; 16 settlements obtained full consumer
redress; remaining cases pending final disposition
Operation Advance Fee Loan
Target: Advance fee loan scams
Partners: 6 State Attorneys General, state banking officials
(10 actions); Canadian law enforcement authorities brought several
criminal actions against Canadian telemarketers
FTC cases: 8 cases resulted in orders for close to $3.9
million in consumer redress
Internet Pyramid Schemes
Target: Internet pyramid schemes; effort included a two-day
Internet surf to identify sites that may be hosting illegal pyramid
schemes
Partners: North American Securities Administrators
Association, U.S. Postal Inspection Service, Securities and Exchange
Commission, 27 State Attorneys General, other state and local law
enforcers (32 actions)
FTC cases: Filed 1 complaint; court issued an order halting
the scam and freezing the defendant's assets; the case is in litigation
Operation New ID--Bad Idea II
Target: Credit identity scams
Partners: DOJ, U.S. Postal Inspection Service, Attorneys
General, other state and local law enforcers from 8 states (8 actions)
FTC cases: Filed 8 complaints for consumer redress or civil
penalties; cases are pending final disposition
Operation Cure.All
Target: Deceptive health claims for products advertised on the
Internet; identified targets in two Internet health claims surf days
Partners: Food and Drug Administration, U.S. Postal Inspection
Service, Canadian and Mexican organizations, other federal, state and
local officials (50 actions)
FTC cases: 4 cases resulted in settlements with companies
identified in Internet surf
Small Business Sweep
Target: Companies that cram purported web design charges onto
the telephone bills of small businesses
Partners: State Attorney General (1 action)
FTC cases: Filed 5 complaints; negotiating settlements
Operation Trip Trap
Target: Companies that misrepresented the vacation packages
they sell through fraudulent telemarketing and other deceptive
practices
Partners: 21 state law enforcement authorities (47 actions)
FTC cases: Filed 5 complaints seeking consumer redress; cases
are pending final disposition
Operation Home Inequity
Target: Subprime mortgage lenders using lending practices that
violated various federal laws
FTC cases: 7 cases resulted in settlements requiring payment
of $572,500 in consumer redress or a ban from making certain loans
Credit Card Protection Sweep
Target: Fraudulent telemarketers of credit card protection
services
Partners: 6 Attorneys General (3 actions); FTC initiated a
major consumer education campaign designed to alert consumers of their
credit card rights, including working with its public and private
sector partners to distribute over one million educational bookmarks to
college students
FTC cases: Filed 2 complaints, not yet finally disposed of,
and a settlement that includes payment of $100,000 in consumer redress
FISCAL YEAR 1998
Operation Loan Shark II
Target: Telemarketers of advance fee loans; victims were U.S.
military personnel and their families
Partners: 2 Attorneys General, other state officials, Canadian
law enforcement (3 actions)
FTC cases: 9 cases resulted in orders for over $215,000 in
consumer redress
Foreign Lottery Tickets
Target: Canadian firms targeting U.S. residents in foreign
lottery schemes
Partners: Attorney General (1 action)
FTC cases: 4 cases resulted in orders for close to $1.4
million in consumer redress
Postal Job Fraud
Target: private companies that falsely promise postal service
jobs
Partners: U.S. Postal Service (8 actions)
FTC cases: 3 cases resulted in orders for over $245,000 in
consumer redress
Operation Money Pit
Target: Fraudulent business opportunities promising returns of
many times the cost of investments
Partners: Attorneys General and law enforcement officials in 4
states (7 actions)
FTC cases: 3 cases resulted in orders for $4.5 million in
consumer redress
Operation Show Time
Target: Seminar operators selling a variety of business and
investment schemes
Partners: Attorneys General, securities officials, and other
law enforcement officials from 11 states (18 actions)
Campana Alerta II
Target: false and unsubstantiated health claims directed to
Spanish-speaking consumers
Partners: Officials from the Mexican government and the FTC
jointly produced a Public Service Announcement that was broadcast on
major Spanish-language network affiliates across the United States and
Mexico
FTC cases: 3 cases resulted in settlements prohibiting
unsubstantiated health claims
Operation Net Op
Target: Get-rich-quick schemes using the Internet and hi-tech
products to peddle fraudulent business opportunity and pyramid scams
FTC cases: 6 cases resulted in orders for $4.9 million in
consumer redress
Operation Eraser
Target: Fraudulent credit repair companies that promise
consumers that they can restore their creditworthiness for a fee
Partners: State Attorneys General, DOJ (11 actions)
FTC cases: 21 cases resulted in orders for close to $1.5
million in consumer redress
Project House Call
Target: Sellers of medical billing business opportunities
Partners: Florida state officials (1 action)
FTC cases: 3 cases resulted in orders for $90,000 in consumer
redress
Risky Business
Target: Bogus entertainment and media-related investment
opportunity scams
Partners: Securities and Exchange Commission and 20 members of
the North American Securities Administrators Association (55 actions)
FTC cases: 4 cases resulted in orders for over $36 million in
consumer redress
Operation vEnd Up Broke
Target: Vending machine fraud
Partners: Attorneys General and other state officials from 10
states (36 actions)
FTC cases: 4 cases resulted in orders for $565,000 in consumer
redress and payment of an $11,000 civil penalty
FISCAL YEAR 1997
Operation Missed Fortune
Target: Get-rich-quick self-employment schemes
Partners: State security regulators, state Attorneys General,
other consumer protection officials (64 actions)
FTC cases: 11 cases resulted in orders for close to $2 million
in consumer redress.
Operation Trip-Up
Target: Vacation scams
Partners: 12 state Attorneys General (31 actions)
FTC cases: 5 cases resulted in orders for close to $10.7
million in consumer redress
Operation Waistline
Target: Misleading weight loss claims
Partners: Weight-Control Information Network on educational
issues
FTC cases: 7 settlements requiring payment of $787,500 in
consumer redress; letters and a media screening tip sheet sent to 80
publications that disseminated weight loss advertisements urging them
to improve their screening
Operation False Alarm
Target: Fraudulent fund raising done in the name of police,
fire, and public safety groups
Partners: 50 state Attorneys General, Secretaries of State,
and other state charities regulators (54 actions); FTC launched
nationwide public education campaign with the National Association of
Attorneys General
FTC cases: 3 cases resulted in court orders requiring $240,000
in consumer redress
Operation MagaScheme
Target: Fraudulent telemarketers of magazine subscriptions who
conned consumers with phony prize offers and ``free'' subscription
promises
FTC cases: 3 cases resulted in orders for over $1 million in
consumer redress
Project Mousetrap
Target: Invention promotion industry
Partners: 2 state Attorneys General (2 actions)
FTC cases: 5 cases resulted in orders for over $1.2 million in
consumer redress
Field of Schemes
Target: Investment-related telemarketing fraud
Partners: Securities regulators from 21 states and 2 Canadian
provinces, North American Securities Administrators Association,
Securities and Exchange Commission, Commodity Futures Trading
Commission, FBI, and other law enforcement authorities (62 actions)
FTC cases: 9 cases resulted in court orders for close to $72.5
million in consumer redress
Project Workout
Target: Second phase of Operation Waistline targeting
exaggerated advertising claims made by exercise equipment manufacturers
Partners: Educational materials issued nationwide in
conjunction with the American College of Sports Medicine, the American
Council on Exercise, the American Orthopaedic Society for Sports
Medicine, and Shape Up America!
FTC cases: 4 cases resulted in settlements prohibiting future
misrepresentations
Campana Alerta
Target: Deceptive advertisements directed at Spanish-speaking
consumers
Partners: Officials from the Mexican government, the Food and
Drug Administration, and 7 state Attorneys General (10 actions)
FTC cases: 4 cases resulted in settlements prohibiting
unsubstantiated health claims
Peach Sweep
Target: Georgia-based telemarketers
Partners: 8 Attorneys General, U.S. Postal Inspection Service,
FBI, U.S. Attorney's Office in Atlanta, local law enforcers, and
consumer and civic organizations (23 actions)
FTC cases: 3 cases resulted in orders for $1 million in
consumer redress
Project Trade Name Games
Target: Business opportunities to own and service in-store
carousel racks that display products licensed by well known companies
Partners: Attorneys General and other officials from 8 states
(12 actions); educational component launched in coordination with
industry members, including Disney and Warner Brothers, whose trade
names were used by scam artists to sell the bogus business
opportunities
FTC cases: 6 cases resulted in orders for $29.4 million in
consumer redress
Operation Yankee Trader
Target: Fraudulent vending machine business opportunity firms
Partners: Officials from 3 New England states (7 actions)
FTC cases: Filed one complaint; preliminary injunction
obtained
Project Mailbox
Target: Direct mail scams that prey on senior citizens
Partners: National Association of Attorneys General, U.S.
Postal Inspection Service, state Attorneys General, local law
enforcement officials, AARP (188 actions)
FTC cases: 2 cases resulted in orders for $565,000 in consumer
redress
FISCAL YEAR 1996
Operation Roadblock
Target: Sellers of fraudulent high-tech investments
Partners: 20 state securities regulators (77 actions)
FTC cases: 8 cases resulted in orders for more than $12.6
million in consumer redress
Project Senior Sentinel
Target: Sweepstakes, recovery rooms, and similar frauds that
target senior citizens
Partners: FTC participated in this sweep coordinated by DOJ
the FBI
FTC cases: 5 cases resulted in orders for close to $8.5
million in consumer redress
Operation Loan Shark I
Target: U.S. and Canadian firms offering advance-fee loans
Partners: 15 state Attorneys General, British Columbia law
enforcers (8 actions)
FTC cases: 5 cases resulted in orders for $2.5 million in
consumer redress
Operation CopyCat
Target: Office and cleaning supply fraud operations that
targeted small businesses and not-for-profit organizations
Partners: U.S. Postal Inspection Service, state Attorneys
General, other state and local officials (12 actions)
FTC cases: 5 cases resulted in orders for $13.7 million in
consumer redress
Operation Payback
Target: Fraudulent credit repair telemarketers
Partners: 10 state Attorneys General (11 actions)
FTC cases: 4 cases resulted in orders for close to $300,000 in
consumer redress
Project Jackpot
Target: Prize promotion schemes
Partners: State Attorneys General; U.S. Postal Service (48
actions)
FTC cases: 8 cases resulted in orders for $1.65 million in
consumer redress
Project Career Sweep
Target: Scam artists who falsely promised to obtain jobs for
consumers in exchange for up-front fees
FTC cases: 7 cases resulted in orders for over $3.2 million in
consumer redress
Project $cholar$cam
Target: Scams aimed at high school and college students
seeking financial aid
Partners: State Attorney General (1 action); massive education
campaign in which the FTC, Sallie Mae, National Association of College
Stores, and others distributed 2.9 million bookmarks, posters, and
flyers, and posted warnings at several popular Web sites
FTC cases: 7 cases resulted in court orders for close to $8.9
million in consumer redress
Project Net Scam
Target: Traditional scams marketed on the Internet
FTC cases: 9 cases resulted in 8 consent agreements and 1
settlement for $55,000 in consumer redress
Project BuyLines
Target: 900-number business opportunity frauds
FTC cases: 7 cases resulted in orders for approximately $15.5
million in consumer redress
FISCAL YEAR 1995
Project Telesweep
Target: Business opportunity scams
Partners: DOJ, state securities regulators, state Attorneys
General (58 actions)
FTC cases: 34 cases resulted in orders requiring payment of
more than $11.2 million in consumer redress and more than $200,000 in
civil penalties
Recovery Room Sweep
Target: Telemarketers who misrepresent that they will recover
all or a substantial portion of the money lost by consumers in previous
scams
FTC cases: 6 cases resulted in orders for over $540,000 in
consumer redress
Commissioner Anthony. Senator, in the interest of time, I
have not prepared a statement this morning. And I will defer to
my colleagues.
Senator Ashcroft. Well, that is not only interest of time,
but that is a much appreciated wisdom.
Commissioner Thompson.
Commissioner Thompson. Following a wise lead, I agree.
Commissioner Swindle. Same here.
Senator Ashcroft. Thank you very much, Commissioner,
Commissioner, and Commissioner.
And it looks as if you have almost been set up, but I
understand that you have----
Commissioner Leary. Mr. Chairman, members of the
Committee----
Senator Ashcroft. You have already been introduced by the
Chairman as having remarks, and so we are pleased to receive
them.
Commissioner Leary. I would like to say something because
at my confirmation hearing last fall, I assured you and other
members of the Committee that reform of the Hart-Scott-Rodino
process was a top priority for me. It still is.
Some of these reforms require action by Congress; some can
be implemented by the agencies themselves; and some require
cooperative efforts among the agencies and the private sector.
I am speaking now from the standpoint of someone new to
government service who previously spent over 40 years
representing business clients on general anti-trust matters,
and over 20 years specifically on Hart-Scott issues. I
obviously have different responsibilities today, but I want to
assure you that my basic philosophy has not changed.
With the Chairman here, I support Congressional action to
raise the jurisdictional threshold for pre-merger filings, and
I also believe it makes sense to have a different fee structure
for large and small transactions. Like our Chairman, I am not
wedded to any particular structure.
I personally would prefer more categories on a scale more
directly keyed to the size of the transaction. But, however
they are done, I believe these modifications should be
justified by considerations of good government and general
equity rather than as a vehicle either to increase or decrease
agency funding.
Ideally, agency funding would be decoupled from filing fees
entirely. But I recognize that this may not be realistic at the
present time. I also believe, and I have believed for many
years, and said so, that it would be a mistake for Congress to
provide for active participation by the federal judiciary in
the so-called Second Request process.
The process really does work well most of the time. I also
recognize that the process has sometimes failed, and the
failures are serious. Lawyers in the private bar and lawyers in
government both have horror stories to tell about massive
inefficiencies that have resulted from the failure of their
counterparts to be reasonable, realistic, or considerate.
As the Chairman has testified, we are committed to visible
and durable institutional reforms that promptly address
significant elements of the problem on our side.
And we are working now with the private bar, hopefully, to
develop various best practice recommendations applicable both
to the public and private sectors that are both balanced and
practical. However, I do not believe that any involvement of
federal magistrates or the imposition of mandatory cost benefit
calculations would be a constructive step at this time. They
would add further cost and delay to a process that can already
be too burdensome.
The principal flaw in the Second Request process today is
that parties on both sides sometimes regard it as a purely
adversarial proceeding in which they stake out positions, keep
their cards close to their chests, and jockey for tactical
advantage.
Formalistic processes would tend to reinforce these
unproductive attitudes and lead to more adversarial posturing,
not less.
A very small percentage of matters notified under HSR wind
up in litigation. And it is a mistake to treat the HSR process
like litigation. I would say here what I have said as a private
lawyer for many years: The HSR process works best when both
sides regard it as a mutual educational process rather than an
adversarial one.
I am optimistic that the present efforts with the private
bar will lead to concrete progress in that direction.
Thank you, Mr. Chairman.
Senator Ashcroft. I want to thank you very much.
Let me begin the questioning, I think, since you have all
made whatever remarks you are going to make.
I want to pursue this idea that was raised, I think, in the
remarks of Senator Stevens. In years past, the FTC engaged in,
and a long time ago, in a fix-it-first policy with respect to
mergers, and then I think the Reagan Administration and
succeeding administrations changed that, began to be involved
in more negotiation.
And that seems to be in line with what Mr. Leary says is
necessary, less of a legal battle and more of a cooperative
approach to developing things.
And it seems to me that the Senator from Alaska has
mentioned, and I would inquire: Is the FTC changing its
position back to--what factors have caused the FTC to just to
say, ``Well, our negotiating posture is no,'' and go to court?
Commissioner Pitofsky. Let me start, Mr. Chairman. We have
not changed our posture. We have surely settled our fair share
of cases. Most of the cases in which we have a concern, result
not in litigation, but in some form of settlement.
Now, the suggestion has been made that we refused to
negotiate on this matter involving a proposed merger of BP and
Arco, and let me just take a minute to explain what happened
here.
I do not believe that I personally--and I think this is
perhaps true for my colleagues as well--have ever spent more
time with the lawyers, and the economists, and the business
people from two firms seeking to merge than I personally did on
this matter. I met with them time, and time, and time again.
And I do not think that I ever laid out in greater detail
what my concerns were with respect to the impact of this merger
in Alaska and on the West Coast.
They are smart people. They realize if those are your
concerns, this is the way to fix it. They chose in the end, as
is their right to do, not to give the Commission what the
majority of the Commission thought was necessary to remedy
anti-trust problems here, but to take the case to court.
But we never hid the ball. We never said no. We were
available to negotiate. They knew exactly where the line was
and they decided to offer something that fell short of that
line. I do not think that is a failure to negotiate.
My other colleagues may want to address that question.
Senator Ashcroft. I would be happy to hear them on this
issue. Any of you care to make remarks regarding this question?
Commissioner Thompson. This is one area where I have to
agree with the Chairman. I spent a lot of time with the parties
in this case, and I guess one of my big disappointments was not
to see any real interest in addressing our substantive concerns
until not just the eleventh hour, but 11:59.
That, and to date, there are still areas of concerns which
they have not addressed, at least in talking to me, at all.
Now, I think the end result that I am concerned about is
timing. I am very concerned about all people of the United
States, including the consumers, and the producers in Alaska.
But in the end result, I think one of the challenges for us,
too, is to ensure that in the long run, that there is a
situation that is better off for all of us.
I was disappointed in some ways on how the parties chose to
proceed, but in the end result, I think that we are a market
responder, that we are left with what they provide us. We
respond to the transaction that they propose to us, and I think
that that is the choice that we had.
Commissioner Leary. Mr. Chairman, I just want to add, as
one of the two Commissioners who dissented from the decision to
go forward with the litigation, that people can view specific
facts on these issues differently but I, at least for my part,
I do not see this decision as reflecting an institutional shift
in the agency's basic approach.
I had, like the other dissenting Commissioner, maybe a
different view of some factual issues than the majority had,
but I do not see the decision as an underlying sea change.
Senator Ashcroft. Any other Commissioner care to make a
comment to that?
Commissioner Swindle.
Commissioner Swindle. Thank you, Mr. Chairman. I was one of
the other dissenting Commissioners, or the other dissenting
Commissioner.
I would disagree with Senator Stevens in the sense that I
do not think that the Commission was overbearing in any delays.
I, in fact, made the comment to Mr. Brown, the Chairman and CEO
of BP, that I thought that there had been delays on the part of
not only perhaps the FTC, but certainly BP. They were slow to
come to the table with an offer directly to us.
As we all know, they were working their deal with the
state, which is fine. In my mind, personally, it complicated
matters extremely.
I agree with Commissioner Leary, I do not see any great
institutional shift in direction here. This is a very complex
case as Senator Stevens certainly knows, and those who have
looked at it certainly know. I just think we were premature in
our action.
And that was my statement, or actually a joint statement,
from Commissioner Leary and myself. Thank you, sir.
Senator Ashcroft. Senator Wyden.
Senator Wyden. Thank you, Mr. Chairman.
I very much appreciate the point that has been made because
clearly there was a difference of opinion there and a pretty
vigorous debate. And to know that there were not any major
policy changes in how the FTC approaches these issues is
helpful.
My question I would like to begin with, Mr. Pitofsky, deals
with what you and I talked about the last time you were here
when Chairman McCain looked into some of the anti-trust issues
and I asked you about copycat mergers, which you said at that
time, was one of the great policy challenges in this field.
In the oil business, we had first in recent days, British
Petroleum acquire Amoco in 1998. The FTC approved that, subject
to certain conditions. Then Exxon and Mobil followed with their
mega merger which was, again, approved with conditions late
last year.
Now we have got BP and Arco going through with their
proposal. And I think what concerns me is when you have two
major competitors in one industry merging together in a deal,
this often prompts the others to come forward and to copy that.
Now the first merger may make sense, might be sensible, and
efficient, and the like, but it seems to me where we are
heading in the oil business is, in effect, you have got
copycats trying to copy the copycat. And as a result, we are
going to end up with less and less competition.
And my question to you is: What are the key factors--I know
you cannot comment on a particular case that is now pending.
But what are the key factors in your view which we ought to be
looking at to determine whether this series of copycat mergers
crosses the line and brings about too much concentration in a
vital industry like the oil business?
Commissioner Pitofsky. Let me start. I do not want to ever
imply that any decision about a particular merger is not made
on the basis of the facts with respect to that merger. Not the
last one, not the one before that, not the one that people
rumor might happen afterwards. There was a suggestion that we
have changed the rules of the game.
But I would just point to the legislative history of
Section 7 of the Clayton Act which is what this case is all
about. Congress said to us, in the clearest terms, that we must
take a rising tide of concentration and a trend toward
concentration into account. The courts have supported that. The
Supreme Court has emphasized trend toward concentration in
case, after case, after case.
So when you see a series of mergers like BP/Amoco which we
approved, Texaco/Shell, a joint venture which we also approved,
Exxon/Mobil which we have conditionally approved, then the
fourth one comes along, and the fourth one is not guilty by
association because of what happened before, but you must take
into account the level of concentration nationally and locally
with respect to each and every merger. And, of course, that is
what we would do, and that is what we have done, industry after
industry, and case after case, over the last 30 years. There is
nothing about this that is a departure.
Senator Wyden. Besides the concern about copycat mergers in
the oil business--and I was concerned about three of them and
you mentioned essentially four--I think it is important that we
have on the record your concern about what this means for folks
on the West Coast.
We have the dubious honor in the State of Oregon of paying
just about the highest gasoline prices in the country. And we
are very troubled by the trends, you know, fewer stations,
fewer independents, fewer suppliers.
I mean, shoot, the day there was the refinery problem in
California, they raised gasoline prices on my constituents in
Oregon, and we were getting our gas from a refinery in
Washington State. So everywhere we look, these arguments do not
add up to anything other than more bad news for West Coast
gasoline consumers.
And I think it would be helpful if you could just lay out
what the Commission's concerns were about how the BP/Arco
proposal would reduce competition and ultimately raise prices
on folks in Oregon, Washington, and California.
Commissioner Pitofsky. Senator, as appropriate as that
question is, it would be unwise for me or any of us to answer
that question because depending on how this plays out, this
matter may be back at the Commission, and we will then be
acting in our judicial role.
We did file a complaint which is public, and we did--joined
by the AGs of California, Oregon, and Washington, we filed a
memorandum in support of our complaint. I thought I could make
that available to people who are concerned about it, but it was
filed under seal, and it is going to take a little while to
expurgate some of the information we obtained under commitments
of confidentiality.
I think it might be available today, certainly tomorrow.
And I would like to make that available to you, rather than for
me to deal with the details of what could very well be a case
back at the Commission.
Senator Wyden. That will be fine. It will be helpful to
have further details certainly. What we want for the record is
to have what you already found previously, which of course, you
know, was a matter of public interest and was made available to
the press. And if you could, update it because this is of
enormous concern to folks on the West Coast.
Commissioner Pitofsky. My general counsel tells me that the
memorandum is on the web now. So, it is available.
Senator Wyden. Could you then just summarize, you know, for
us then, what is public information in terms of your big
concerns?
Commissioner Pitofsky. I do not think I should do it.
Senator Wyden. All right. We will just refer everybody to
the web.
My time is expired and I hope I will have a chance to ask a
couple of more, if we could, after my colleagues.
Senator Ashcroft. I think we might be willing to go in for
a second round here. There appears to be an interest.
Senator Stevens.
Senator Stevens. Thank you very much.
Mr. Pitofsky, the thing that disturbed me most about this
situation was that I heard, and I want you to correct me if
this is not correct, but as these meetings went on with the
Petitioner, BP, the Commission asked BP to divest itself of the
Arco production, and it did make the concession that it would
divest itself of 380,000 barrels a day, roughly.
The throughput of the pipeline is about 2.1 million
barrels--was about 2.1 million barrels. It is about 1.2 to 1.4
now. The combined company would have about 70 percent of that.
We are dealing with something like 900,000.
If they divest themselves of 280,000, they are dealing
with, at the most, 520,000 barrels a day left in BP. BP, when
it was 1.2 million barrels a day, controlled 1 million barrels
a day.
The demand structure in California was roughly 25 million
barrels, and now it is up. It is up considerably. I do not know
how high it is now, 30-some-odd, but BP would control then
520,000 out of this elevated demand.
And yet you say--as I understand it, you said at that
point, ``But all right, but you have got to''--but the
Petitioner had to agree that you would be allowed to approve
the purchaser of that production, you.
Now I do not see anything in the Sherman Act or the Clayton
Act that gives you the authority to approve a purchaser which
ought to be a competitive sale. Did you request the authority
to approve the purchaser of the 380,000 barrels a day?
Commissioner Pitofsky. We asserted that that was part of
our responsibilities, sir.
Senator Stevens. On what basis did you have that authority?
Commissioner Pitofsky. Our role in settling a case on a
restructuring proposal is to ensure, and the Courts direct
this, to ensure that the situation after the merger is
equivalent in competitive terms to before the merger. That
requires----
Senator Stevens. Excuse me. In Alaska or in California?
Commissioner Pitofsky. Oh, I think in both, Senator.
Senator Stevens. In both.
Commissioner Pitofsky. Yes. And therefore, we--the
purchaser of the asset must be sufficient in competence,
experience, financial resources, and so forth to replace the
divested company in such a way as to be an effective
competitor.
I think several people mentioned the fact that we have
approved Exxon/Mobil fairly recently, or conditionally approved
it, but we did the same thing in Exxon/Mobil as we did here. We
have done the same thing----
Senator Stevens. Oh, you did not demand the right to
approve the purchaser. You did not.
Commissioner Pitofsky. Senator----
Senator Stevens. You did not demand the right to approve
the purchaser of the assets divested by Exxon.
Commissioner Pitofsky. Senator, let me submit a memorandum.
I do not think that is right. We definitely did. We interviewed
prospective purchasers. We made it clear to Exxon and Mobil
that we were not going to allow them----
Senator Stevens. You interviewed them, but you are saying
something that should go out competitively that affects--you
know, my state owns that oil. They own the land and they own
the oil. They worked out a deal with them. I do not know any
state in the union that has a relationship between a producer
that Alaska does because of the fact that we own the land, we
own the oil. We have the right. They negotiated a position,
which you ignored.
Commissioner Pitofsky. Senator, we did not----
Senator Stevens. Now that you--you did ignore it because
you did not approve it. If you would have approved it, we would
not be here today. I would not be here today. You would be, but
I would not be. And I can assure you that you are going to be
before more hearings than this before this is over.
Commissioner Pitofsky. I would like the opportunity to
explain what----
Senator Stevens. On what basis did you demand the authority
to approve the purchaser of that oil?
Commissioner Pitofsky. Let me say again----
Senator Stevens. What authority, legal authority now?
Commissioner Pitofsky. All right. Well, our
responsibility----
Senator Stevens. And authority. And authority, sir. This is
this inherent executive authority, again. Do all Commissioners
agree with this?
You have the power to approve the purchaser of oil after
the proponent agrees to divest itself of production, that you
have the authority to demand the right to approve who is going
to purchase that before you approve the merger? Did you all
agree to that position?
Commissioner Thompson. Senator, I--leaving aside the
particular facts of this particular case----
Senator Stevens. I only have 5 minutes.
Commissioner Thompson. As a general proposition of law, I
agree completely with what the Chairman said.
Senator Stevens. You have the inherent authority to demand
the right to approve the purchaser of assets that are to be
divested?
Commissioner Thompson. The Commission has the authority to
insist that the competitive problem be fixed, and that may
include----
Senator Stevens. I am going to get to that, Mr.
Commissioner. That is a condition that was not on his proposal.
Commissioner Thompson. I understand, sir.
Senator Stevens. If you want to fix the competitive problem
in Alaska, you would have to reconstruct Arco. Arco is going
out of existence. Mobil has gone out of existence. Amoco has
gone out of existence.
We used to have an enormous number of players out there.
Now that number is decreasing because of higher costs in the
future.
But as a practical matter, the Chairman said he wanted to
restore the competitive condition in Alaska, too. How are you
going to do that, Mr. Chairman? How are you going to restore
the competitive position in Alaska under your approach?
Commissioner Pitofsky. As we have in scores of other cases,
we required that the assets be sold to another company, the
offending asset be sold to another company, that is capable of
competing effectively with that asset. And unless we know who
the purchaser is, we cannot--we cannot do that.
Senator, I would like our staff to submit a memorandum to
you. I understand how concerned you are about this----
Senator Stevens. Concerned.
Commissioner Pitofsky. --as a matter of law----
Senator Stevens. My state faces bankruptcy if you have this
delayed for three or 4 years. You have refused to negotiate.
You sat down, but what offer did you ever make them to settle
it, now?
Tell me that, on the record. You said ``what the majority
believed necessary.'' What was it that you told BP was
necessary to secure approval?
Commissioner Pitofsky. Senator, we told them in the
clearest terms what it would take to settle this case.
Senator Stevens. No. I was on the phone. You would not tell
me either. You just said, ``I am going to wait and see what
they offer.''
Commissioner Pitofsky. Senator, I do not think this is
appropriate for me to be discussing confidential negotiations
in front of the press or outsiders. But the fact of the matter
is--and I will submit this in a memo as well, exactly what we
told them was necessary to negotiate a settlement of this case.
And I will have that in writing to you.
Senator Stevens. I would like to see it.
Commissioner Pitofsky. You were misinformed by some people
about this matter.
Senator Stevens. I am sorry about the timeframe here. This
is a matter of survival for my state. If you all do not
understand that, I wish you would come up and talk to our
Governor, talk to those of us who are involved in this.
We have lost our four basic major industries now. And we
are a state that has a substantial cost of doing business. None
of us really want to see Arco go away. Do not misunderstand me.
If I had my way--we would have higher oil prices, and Arco
would survive forever. But this is a practical matter.
Now the question is: What happens in the future? How long
is this going to take? And what was the role of the FTC in
bringing it about? Now, I believe you stalled this. I believe
you stalled it because you want to set a new milepost, and you
hope to get there one of these days.
And I think you are right. I think there is a new milepost
being set here. The Commission let a lot of other things go
through, and now it wants to set up a new standard.
Commissioner Pitofsky. Senator, if I may, I would like to
send you a chronology of the negotiations to see who it was
that delayed bringing this to a conclusion. I will submit that
to you as well.
Senator Stevens. All right. But as you do that, tell me
what you told them each time. Tell me what you told them
because I checked with you twice, and you said, ``Well, I am
going to wait and see what they say.'' You never said, ``This
is what the Commission believes you must do.''
You did that--I checked with Exxon. You did that with
Exxon. You told Exxon what you believed that they should do,
and they said, ``Okay.'' And that went through. You never did
that with this company. And if you did, then I will stand
corrected, but I do not believe you did. I have been told you
did not.
And I think you did handle this differently than you did
Exxon. I do not know why, but I am going to find out why.
Commissioner Pitofsky. That is fair enough, Senator, and I
would be glad to address all your concerns.
Senator Stevens. Thank you.
Senator Ashcroft. Senator Brownback.
Senator Brownback. Mr. Chairman, I have a whole different
line of questioning. If the Chairman or Senator Wyden wants to
continue this line----
Senator Ashcroft. It is very generous to suggest that we go
back to Senator Wyden. He may want to----
Senator Brownback. Or Chairman Stevens, if Ted wants to go
ahead, I will wait for a little bit.
Senator Wyden. And I will wait for----
Senator Brownback. So that you can go ahead and ask----
Senator Stevens. I do not think we have any problem with
Oregon or California. We are not in this on the basis of trying
to have some differences in that regard.
But I do believe the basic difference with Congress and FTC
ought to be, have you altered the supply coming from Alaska in
the years to come? You have. You have delayed it. They are not
going to be making investments this year they should be making.
They did not make them last year either.
And you are going to pay the price in California and Oregon
when that supply comes down even further. Supply ought to be
the consideration of Congress in terms of world oil prices
today, and I do not believe the FTC had its eyes on the supply
at all.
Thank you.
Senator Brownback. I have just one question.
Senator Wyden. And I thank my friend from Kansas. And
again, it is obvious feelings run strongly on this Committee.
And I want to ask just another policy kind of question as it
relates to the BP/Arco issue so we do not pull you into
litigation. It is along the lines of the copycat kind of
question.
I would like to just ask the question about the impact of
globalization on anti-trust enforcement. What we have had in
the past is a lot of these, you know mega-mergers, when
somebody raises the concern that it violates anti-trust, they
come back and say it is a global market.
And they argue that even though a merger is going to create
a company with a big share of the U.S. market, the company's
share of the worldwide market is going to be small. That was an
argument that we saw again in the BP/Arco deal.
It seems to me that if that now becomes a dominant factor
in this debate about anti-trust laws, we are headed toward
toothless U.S. anti-trust laws because then--even a deal that
results in a gigantic monopoly in the United States that
clobbers, for example, my constituents in a small state 3,000
miles from Washington, D.C., a deal that, you know, does have
huge monopolistic ramifications in the United States. Everybody
would say, ``It is a small share of the worldwide situation and
so it ought to go forward.''
Again, from a policy standpoint, not getting into the
litigation, my question to you, Chairman Pitofsky, is: How does
the FTC try to deal with the ramifications of the global
economy as it relates to trying to enforce the anti-trust laws
domestically to protect our consumers?
Commissioner Pitofsky. Let me be brief because my
colleagues will probably want to address that as well. The
question of whether a market is local, regional, national,
hemispheric, or global is a question of fact.
The FTC held hearings four years ago, extensive hearings,
in which the widest range of business people, consumer people,
academics came in and said that as we address that fact
question, we pretty much got it right.
My own view is that there are more and more products that
compete in broader and broader markets, world markets,
hemispheric markets. And we try to take that into account.
But, you know, just saying it is a world market, that is so
common now. That turns on whether or not, you know, in the
local area--some part of the country, the players after the
merger can raise price without losing so much business that it
will make the price rise unprofitable. That is the standard
that the courts and our guidelines apply. And we do it case by
case, item by item.
We cleared Chrysler/Daimler-Benz, at least in part, because
we believed the local dealers largely compete in a world
market. There are other--there are other similar product areas.
There are some areas that most of what they do is a world
market, but there are pockets of localized competition, so it
is a fact-intensive inquiry. We have a chapter in our report
which deals with it.
Virtually everybody who participated in our hearings said,
not just us, but the Department of Justice and the Courts have
got it right. My colleagues may want to address this same
question.
Commissioner Thompson. I agree with the Chairman here. Your
concern about the impact of globalization is one that I think
concerns all of us. It certainly concerns me.
But in the end result, you really have to look at the
application of anti-trust principles to the particular case
that is in front of you. And whether it is BP, or Exxon, or any
other case in pharmaceuticals or whatever, you really have to
look at what the impact is going to be on consumers in the
United States. And I think that we spend a lot of time trying
to look at that very, very carefully. There is not a one-size-
fits-all approach.
Senator Wyden. I am going to give this time back to Senator
Brownback who has been so gracious.
I think that what you have said is that you are going to be
very vigilant in looking at the global kind of issues. And just
know that I, and I think some others, are troubled by if we
just say ``The global economy ought to govern here,'' we could
literally render toothless U.S. anti-trust laws. You all have
satisfied me that you are going to look at these factors.
And again, thank you, Sam, for letting me have this extra
time.
Senator Brownback. Sure. Thanks.
And I want to switch to an ``easier'' issue: marketing
violence.
[Laughter.]
In regards to the study you are conducting on marketing
violence to children, the White House requested and made a top
priority of this study. The Senate passed a bill 98 to 0 to
authorize this study. The results are important to us. We are
hopeful on holding hearings on a final version of this report
on marketing violence to youth in either May or June. Will the
report be ready by then?
Commissioner Pitofsky. May or June? I do not think so. I
think it will be well into the summer before the report is
available.
Senator Brownback. That is going to make it awfully
difficult for us to give proper oversight to in this year. Will
you have a preliminary report by then?
Commissioner Pitofsky. Let me take a little step back
because I know how interested you are and informed you are
about this particular issue.
Actually, our study is going well. The companies who said
at the outset that they would cooperate on a voluntary basis
have been as good as their word. They are cooperating on a
voluntary basis. But there are a lot of aspects to this, the
rating system, marketing, advertising. There are three
industries: Music, video games, movies. So it is a major
project on our part.
Senator Brownback. Are they providing you with demographic
purchasing of adult-labeled materials by children?
Commissioner Pitofsky. We have asked for it, and they have
indicated that they will provide it. And the----
Senator Brownback. They indicated that it is available.
Commissioner Pitofsky. Yes, I think so. Yes, they have, and
it is available.
Senator Brownback. And they will be providing that to you?
Commissioner Pitofsky. Yes.
Senator Brownback. Will you be verifying the information
that the industry is providing to you with other objective
sources?
Commissioner Pitofsky. We have in mind of doing several
surveys. One involves parents and children, concerning the way
in which they understand these rating systems. Another has to
do with whether or not the retailers are paying attention to
the rating system.
I mean, it is not going to do any of us any good if the
originators say ``for a mature audience'' or ``for adults
only,'' and then nobody pays attention to that at the retail
level. So we will do an independent survey of that.
Senator Brownback. Well, a lot of people suspect that
adult-labeled entertainment products are actually being geared
to kids, with the companies knowing that children will purchase
it. There is often a kind of a forbidden-fruit type of scenario
where because of ``Well, because I cannot have it, therefore I
want it more and get it for me.''
Industry officials know this, and may even plan on it in
their decisions on how to place and market the product, even
where it is positioned on the shelves. Sometimes a lot of the
mature-rated videos are put right next to others that are
labeled for children.
Everybody knows that few children are going to be carded
going into movies. You wonder whether executives just put these
ratings because kids want to go to these, knowing that they
will be allowed.
So I really do hope you look at these issues, and I would
like to have these hearings. And I hope you pursue that study
more aggressively and more expeditiously, Mr. Chairman, so that
we could have a hearing on that information.
I am going to ask you another line of questions that I have
been asked about back home, and that is on the Internet
marketing of pharmaceutical products. And you mentioned that in
your statement.
Are you seeing a great deal of fraud happening at some of
the Internet sites on pharmaceuticals? I notice you have a
particular program targeted to that on Operation Cure. You have
had, if I am reading your report right, four cases of cease-
and-desist orders to date.
Tell me about the nature of that problem. And are you
anticipating any need for Congressional action in dealing with
that?
Commissioner Pitofsky. At this point, I do not see any need
for Congressional action. We have broad authority to challenge
deception, unfairness, and so forth. To directly answer your
question, some of the worst frauds I have seen are now on the
Internet involving claims about health care. So we are looking
at it.
I know that the FDA is looking at the pharmaceutical issue
as well. These health care claims are a high priority for us.
We have consumers being told that shark cartilage extract is
going to cure arthritis, cancer, and AIDS.
Senator Brownback. All three?
Commissioner Pitofsky. What?
Senator Brownback. All three at the same time?
Commissioner Pitofsky. I do not know. I would be glad to
give you some examples of some cases that we brought--I have
been doing this sort of thing for a long time, and I have to
tell you that the snake oil sales programs that we see on the
Internet are worse than anything that I have seen in terms of
taking advantage of a vulnerable audience, worse than anything
I have seen in other media.
I do not know why it happens. I think it is probably
because they feel that nobody is watching, or we cannot find
them, we cannot detect it, they can change their address. But
this is raw, fraudulent stuff.
Senator Brownback. And you are bringing cases aggressively
against the proponents or the authors of these sort of health
cures?
Commissioner Pitofsky. We have.
Senator Brownback. Now I understand that as well there is a
lot of marketing of lifestyle type of pharmaceuticals on the
Internet, some that my Attorney General of the state is saying,
in a fraudulent manner as well as without prescriptions,
without a number of things. Is that taking place, too?
Commissioner Pitofsky. I am not as familiar with that,
Senator.
Senator Brownback. Are any of the Commissioners?
Commissioner Thompson. Just to the extent that I know that
the Bureau Director, Jody Bernstein, testified last year about
some of the concerns that we had about some websites marketing
products generally, without adequate supervision or a
prescription where one is required. And we are working closely
with the FDA in trying to get a handle on that.
Senator Brownback. I would like for you if you could, Mr.
Chairman, to provide to me some of the examples of the
fraudulent cases on the marketing of pharmaceutical products
because I can see the point that you are making about preying
upon a vulnerable population and now here is a ways and a means
of being able to do that, and what you are doing in addressing
these topics. I would appreciate that.
Thank you for being here; and thank you, Mr. Chairman.
Senator Ashcroft. Thank you, Senator Brownback.
Senator Wyden had a sort of followup question or maybe you
wanted to open a new topic, but please limit this. We have six
more witnesses, and I think I will be the Senator that
entertains these witnesses and maybe the Senator----
Senator Wyden. You have been incredibly kind, and I am
going to sit with you because I know that you have gone out of
your way to make time. And I will be brief.
I wanted to ask one question about privacy. And the
question is for you, Mr. Pitofsky, if I might. It seems to me
that there is a giant wave of consumer fear about privacy that
is headed toward Washington, D.C. This issue has just gone off
the charts in terms of the polling and the like.
And I guess my question to you is: On privacy, what steps
do you think ought to be taken to beat the tsunami before it
hits the shore, because where we are now, you have got an FTC
task force working on this. You have legislation in the works.
The big problem seems to be enforcement. We have a lot of
sites out there, and they are pretty good, but the question is:
How do you enforce them? And my question to you is: What do you
think ought to be done before this tidal wave just engulfs you
and the Congress and everybody's phone just rings off the hook?
Commissioner Pitofsky. Well, let me start by saying that
this is an issue in which, like any good group of
Commissioners, there are slightly different points of view as
to what ought to happen.
But the first thing that ought to happen, we should make
good on our commitment to Congress to conduct a surf very soon,
and analyzing the level of privacy protection through self
regulation. That is going on right now, and we will have that
report.
We are going to surf the Net in the next 30 days, and we
will have the report along with our analysis of it, in a few
months.
Secondly, I am increasingly coming around to the view that
there is no single answer to these privacy questions. Self-
regulation has a role. Legislation has a role. We supported
legislation with respect to financial records, children, and in
other areas.
On the other hand, there is going to be a role for self-
regulation; that is for sure. And what we need, I think, what
Congress should have from us, is a series of recommendations as
to the right mix in that area. And we will have that on the
basis of data very shortly.
Senator Ashcroft. Let me just--go ahead, Commissioner
Swindle.
Commissioner Swindle. Just a comment. I think the Senator
described the phenomenon of the giant wave of consumer fear
regarding privacy. I think that may be an excessive
description.
I think there is a lot more awareness of what personal
privacy--how it can be under attack by new technology, but we
always had privacy concerns. And it goes back to Senator
Brownback talking about these cure-alls and everything. Those
things have been around.
If you ever read Argosy when you were a kid, you know, the
men's magazine, it always had these miracle cures and all these
wonderful things. This stuff is not new, but it is just that it
moves at the speed of light now. It covers so much, so quickly.
I think as more people become aware, I think we will see
consumers be more accountable for their own actions. I mean,
they have a responsibility, too, not to be duped by this stuff,
but by the same token, the Senator mentioned there are a lot of
sites out there.
The last figures I saw about a month or so ago, there are
roughly 5 million commercial websites in existence. They are
increasing at about a half a million a month. And I think it
was Senator Wyden who mentioned in the BP/Arco matter, the
proposed settlement was so complex we could not monitor it.
I think the same analogy would hold true in the case of
websites. It would be impossible for a government agency to
monitor this.
Industry has the motive to do it right, satisfied
customers. As more customers become aware of their personal
privacy and what might happen, good or bad, I think they will
demand of the people that they deal with on the Net, that those
commercial sites--and it does not necessarily have to be
commercial sites; it can be entertainment or whatever, as we
have seen in some of the cases here recently--they will demand
to be satisfied.
If their demand is commensurate with the growth, I think we
will see industry come along. I think that ultimately will be
the best solution of all.
We are looking, as the Chairman mentioned, at a survey,
which is our third annual survey I believe now, and it should
be out in the spring.
We also have an advisory committee. I think this may be
what the Senator was referring to on the matter of access and
security. We have fair information practices, notice, choice,
access, and security. And when you--the first two, you can
comprehend those.
When you start talking about a privacy policy that would
allow access and gets into the security matter, this is a whole
new kettle of fish. It is a very complex process, and we are
having a very distinguished group of people representing all
aspects of this issue, from technology to advocacy, looking and
trying to see how we can cost effectively provide reasonable
access and security.
I think we need to look at their findings and
recommendations along with our study. In fact, I think one
should not precede the other. I think they should sort of join
hands and march out the door together. So, we are working on
this, and it is going to be a tough thing to solve.
Senator Wyden. Just know that when Conrad Burns and I put
in a bill, that was considered a very moderate centrist bill.
And a lot of people, including business folks, are hoping that
becomes public policy because they think we are headed, given
the Wall Street Journal new poll that says this is one of the
top concerns in the 21st Century, that we are heading for
something much more extreme.
Commissioner Swindle. I think people are more aware of it.
The more they are aware of it, the more we will hear about it.
And then it takes on proportions that I think industry will
have to respond to; otherwise, they lose customers. It only
takes one little click and you just lost a customer.
I know one company has been somewhat adamant about saying
``We want regulations,'' and that is Hewlett-Packard. But I
have not heard a lot of enthusiasm from others, although there
is some concern about the states going out and having 50
different forms of it. But I think that if we move too fast in
regulation, we will do some severe damage to an industry.
Senator Ashcroft. You may have just posed a final question
on this. There are places where I buy my shirts and suits. They
know that I do not buy button-downs. I buy pointed collars. Do
you have a plan to ask them not to divulge that, or are you
only focused on Internet here?
Commissioner Pitofsky. Oh, that is not an issue that we
have addressed up to this point. But I am increasingly
concerned, Senator, that the arguments as to why privacy needs
to be protected on-line, apply equally to off-line. I take no
position. I just think that all of us who are concerned about
privacy have to begin to address that question.
Senator Ashcroft. But when you request information from the
entertainment industry, you are asking for information about
public consumption yourself in some ways. Without being client
specific, you are violating the privacy of the people who
consume it.
Commissioner Pitofsky. I hope not. I hope not.
Senator Ashcroft. Well, you are finding out something about
the public that they may not have wanted to tell you.
Commissioner Pitofsky. Yes, but when we ask----
Senator Ashcroft. Yes, but----
Commissioner Pitofsky. --for information from the
companies, that is not personally identifiable information.
Senator Ashcroft. That is correct. It is not identifiable
to an individual. But I think this is a very sensitive
question. If the lady at the diner knows that I normally say
``Hold the onions on the burger,'' she should not have to be
worried about whether she makes a violation in telling somebody
that.
It is my understanding that you are conducting--you have a
committee on on-line access and security made up of consumer
and business experts.
Commissioner Pitofsky. We do.
Senator Ashcroft. When will that report be ready?
Commissioner Pitofsky. Well, they held their first meeting
last week. There will be four meetings in total. They will
advise us specifically on questions that Senator Wyden raised.
Not about privacy policies----
Senator Ashcroft. My question was: When will that report be
ready?
Commissioner Pitofsky. I hope by June.
Senator Ashcroft. It seems to me to be a good idea not to
conduct the privacy sweep until we have the recommendation of
the advisory group so that we would know what to look for in
the review.
Commissioner Pitofsky. I think that they can--excuse me.
Senator Ashcroft. I just think that if they had some
special wisdom to impart for some value in this committee--it
seems to me that it might be a good idea to wait until the
committee is done before conducting the sweep.
Commissioner Pitofsky. We are planning to proceed on
parallel tracks. The first exercise is really data gathering,
and we are gathering pretty much the same data we gathered
before, but we are----
Senator Ashcroft. That is my point. You are gathering data
which is the same as what you gathered before, but the
committee might be able to tell us that we need to look for
different kinds of data or different kinds of practices. That
is my point there.
It is my understanding that you are considering internal
reforms of the merger review process. I want to go back to
merger review for a moment. And Commissioner Leary sort of
indicated that there are a lot of things that he thought needed
to be done, but should be done internally.
It is a big problem for Congress to decide what we have to
mandate in the law and what we can count on to be done
internally. If it should have been done internally, why had it
not been done?
And what is the Congress for, if we just ought to rely on
the good will, or if every time there is a need for reform, we
come up against it, and the Commission says, ``Well, we were
about to do something about that, so we are people of good
will, and we will do something about that''?
Would you--can you explain or describe the reforms and the
expected benefits that you would get from the reforms that you
are now considering?
Commissioner Pitofsky. Well, first of all, we have
introduced reforms. I believe the situation is better now than
it was 5 years ago.
Let me just give you an illustration. People complain, and
I understand why they would, about the burdens of Second
Requests, the great amount of documents that have to be
produced as a result of our investigations.
But the fact of the matter is right now, 80 percent of the
merger investigations that we undertake, and issue a Second
Request, the target companies never produce all the documents.
We do it on a quick-look basis.
Now, I do not know what the number was 5 years ago, but it
was not 80 percent. So we have modified the burden on the
business community, which we recognize is substantial, greatly.
Looking forward, I would advise the Committee that we are
introducing a reform right now. One of the things I have
learned from bar association representatives is that they are
concerned that the staff does not on a regular basis tell the
parties what it is that is bothering them that leads us to
introduce a Second Request. I did not do anything about that
issue because, frankly, I thought the staff was already doing
that.
But the bureau director has been directed to tell everybody
in our agency, ``When you go to a Second Request, you have an
obligation to tell the parties what it is that leads you to
this more substantial investigation.'' That will be changed on
a going-forward basis.
Senator Ashcroft. Let me ask you this: How effective is the
process for deciding which agency, the FTC or the anti-trust
division of DOJ, will be when you are allocating mergers? There
was a target established of a ten-day target. Is that working?
Is that being adhered to, and how is it going?
Commissioner Pitofsky. It is working. I think the
coordination, cooperation is better than any time in my
recollection. And we have got it down to about 9.5 days, so we
have hit the target. And I would like to do even better, and I
think we can do even better, but we certainly have reduced
substantially the time it takes to sort this out.
Senator Ashcroft. Anything else, Senator Wyden?
Senator Wyden. No, thank you.
Senator Ashcroft. Let me thank you very much for your
appearance here today, and I would hope that you would be
available to answer any inquiries in writing that members of
the Committee who could not attend today will submit.
We will try to get anything to you that we would want
answers from you on relatively quickly. And thank you very much
for your appearance and for your service to America.
Commissioner Pitofsky. Thank you very much.
Senator Ashcroft. Let me thank this group of individuals
who will address the Hart-Scott-Rodino Act and merger issues. I
ask them to keep their remarks to 5 minutes.
And I would be very pleased if, your having done so, you
wanted to submit additional remarks for inclusion in the
record, and I am confident that the good will of Senator Wyden
will provide unanimous consent that that will be done.
So with that in mind, let me first call on Mr. Howard
Adler, Junior, of Baker McKenzie here in Washington, D.C. to
proceed with such remarks as he would make in the 5 minutes.
STATEMENT OF HOWARD ADLER, JR., ESQ., BAKER MCKENZIE,
AND CHAIRMAN, U.S. CHAMBER OF COMMERCE HART-SCOTT-RODINO TASK
FORCE
Mr. Adler. Good morning, Mr. Chairman, Senator Wyden, I am
the Chairman of the Hart-Scott-Rodino Task Force of the United
States Chamber of Commerce. I am here to testify in support of
S. 1854, which the Chamber supports; but I want to address my
oral remarks mainly to the issue of the Hart-Scott-Rodino
filing fees.
It has long been the position of the Chamber that those
fees should be abolished, and that the funding of antitrust
enforcement should be decoupled from the fees collected from
acquiring companies in the Hart-Scott-Rodino process.
We understand that a kind of an addiction has developed to
the filing fees, and that addiction is not going to be cured
overnight. But we want to plant the seed; we want to start the
ball rolling for a real reconsideration of the propriety of
basing the funding of antitrust enforcement on the HSR filing
fees.
We heard Commissioner Leary say this morning that ideally
antitrust should be funded from appropriated funds. I believe
that if you ask Chairman Pitofsky, or Assistant Attorney
General Klein what they think, they would agree that in a
perfect world, the funding should come from public funds. It is
the Chamber's position that we ought to work toward a perfect
world. There is no reason why we should settle for less.
In my prepared statement, we go into considerable depth as
to why that should be the case. Let me make a few points.
The filing fee was not part of the original legislation. It
came into being in 1989 when there were huge budget deficits.
It appeared to be ``easy money''--a way of funding antitrust
off-budget. But we are a long way from that today. We have got
surpluses, and people are arguing about what to do with them.
So we are in a totally different environment fiscally than we
were in 1989.
I should emphasize that the U.S. Chamber supports strongly
vigorous antitrust enforcement. Everyone benefits; the public
benefits; our members benefit. Since everyone benefits,
everyone should pay. Under the present system, most of
antitrust enforcement is funded by companies that happen to be
making mergers in a particular year--mergers which in more than
95 percent of the cases do not even call for a Second Request
for information. In other words, they are benign competitively;
they are probably pro-competitive; and they are lawful. Thus,
we have an irrational system where companies doing what they
should be doing--that is investing their money in productive
acquisitions, are funding antitrust enforcement and not the
public at large. We think it is time to end that irrational
process.
Some have said that there is an analogy between the merger
filing fee and a user or regulatory fee that can properly be
imposed by a government facility or a regulatory body.
We have spelled out in our prepared statement why that is
false. Essentially, a valid user fee must be reasonably related
to the cost incurred on behalf of the person who is assessed
the fee and to the benefit he receives. That is not true at all
with the Hart-Scott-Rodino fees.
For more than ninety percent of the filings that are made,
we know from experience that somebody is going to look at it
for 5 minutes and say, ``This is trivial.'' Yet the $45,000 fee
has to be paid.
Another problem with the fees, and particularly with the
linkage between the fees and the funding, is that it creates
perverse incentives. Everybody knows that there are huge
categories of transactions that never present a competitive
problem. Yet the Federal Trade Commission, in considering
whether to create new exemptions, is faced with a Hobson's
choice: Either it continues to call for filings on trivial and
competitively benign transactions or it cuts down on those
useless filings and then loses its funding.
This is a dilemma the FTC would not have if we put the
funding back where it belongs, that is in treasury funds, which
is what every other country does.
So I hope we can at least start a dialogue on this issue
and have this Committee and others begin to reconsider whether
in the year 2000, when we are fiscally in such a different
circumstance than we were in 1989, we should perpetuate the
present filing fee system.
Let me say a word on the bill. We support raising the
threshold. We think it is irrational that in doing that we have
to raise the fee to $100,000 on larger transactions in order
``to preserve budget neutrality.'' This is another consequence
of the ``addiction'' to the Hart-Scott-Rodino fees.
I have looked at the numbers, while you would think $100
million mergers would call for more attention than others, in
fact 95 percent of those mergers do not get a Second Request.
My time has expired. Thank you very much.
[The prepared statement of Mr. Adler follows:]
Prepared Statement of Howard Adler, Jr., Esq., Baker McKenzie,
and Chairman, U.S. Chamber of Commerce Hart-Scott-Rodino Task Force
Introduction
Mr. Chairman and members of the Committee, good morning. I am
Howard Adler, Chairman of the Hart-Scott-Rodino Task Force at the U.S.
Chamber of Commerce. The U.S. Chamber of Commerce is a business
federation representing more than three million businesses and
organizations of every size, sector and region. The U.S. Chamber of
Commerce welcomes this opportunity to present its views regarding Hart-
Scott-Rodino (HSR) filing fees and S. 1854, the Hart-Scott-Rodino
Antitrust Improvements Act. Positions on issues of importance to the
business community are developed by a cross-section of the Chamber's
members serving on Committees, Subcommittees and Task Forces. This
Statement is the product of the Chamber's Council on Antitrust Policy
and its HSR Task Force. The Task Force was originally set up to address
the Chamber's members' concerns about the burdensome over-reporting
required under the existing HSR process. These concerns have been
exacerbated by the $45,000 filing fee and the over-dependence of the
Federal Trade Commission (FTC) and the Department of Justice's
Antitrust Division on revenues derived from those fees. The Chamber
believes the HSR system is broken and needs to be fixed.
The Chamber's testimony will address two points: First, there is no
principled justification for the present HSR filing fees, and they
should be abolished. Second, although S. 1854, introduced by Senators
Hatch, Kohl and DeWine, does not solve the filing fee issue, it
represents a commendable effort to limit the number of unnecessary
filings and to moderate the abuses of the Second Request process. S.
1854, therefore, has the strong support of the Chamber.
I. The Present HSR Filing Fee System Should Be Abolished
Congress originally imposed a $20,000 filing fee in 1989 during a
period of large budget deficits. The fee was subsequently raised to
$25,000 and then to $45,000 per transaction. Since 1989, we have gone
from a time of budgetary deficits to one in which the great political
debate is over how to use the enormous surpluses we now anticipate.
Furthermore, the number of reported transactions has escalated from
2,883 in 1989 to more than 4,500 in fiscal year 1998. As a result, in
that year, the HSR filing fee extracted more than $200 million from the
reporting companies, including many Chamber members.
While budget deficits in 1989 may have made the HSR filing fees an
attractive expedient, in 2000 the present system is indefensible on
several grounds: (a) antitrust enforcement benefits all Americans and
should be paid for by all Americans; (b) the analogy to a user or
regulatory fee is false; the HSR filing fee is a tax arbitrarily
imposed on overwhelmingly lawful transactions and which bears no
relation to either the cost to the Government or the value to the
``taxpayer''; and (c) the overdependence of the enforcement agencies on
HSR filing fees creates anomalous incentives and outcomes.
Antitrust Enforcement Should Be Paid For Out of Appropriated Funds
In urging repeal of the HSR filing fees the Chamber is not
advocating any curtailment in the funding available to the FTC and
Antitrust Division. To the contrary, the Chamber supports continued
antitrust enforcement which maintains a competitive marketplace, to the
benefit of the Chamber's members and all Americans. The Chamber
strongly believes, however, that since antitrust enforcement benefits
all Americans it should be paid for by all Americans and not only by
U.S. and foreign companies making overwhelmingly lawful and
procompetitive mergers.
More than 80 countries, impressed with the U.S. competitive model,
now have some form of antitrust law. To the best of the Chamber's
knowledge, no country other than the U.S. funds its antitrust
enforcement largely from merger reporting fees rather than appropriated
funds. It is anomalous that the richest of all these countries does not
also use its general treasury to support this vital and beneficial
function.\1\ The time has come to decouple antitrust enforcement
funding from the HSR filing fees.
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\1\ It is particularly anomalous because U.S. antitrust enforcers
generate significant revenues through the collection of fines. For
example, in fiscal year 1999, the Antitrust Division alone collected
more than $1 billion in criminal fines.
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The HSR Filing Fees Do Not Qualify As Valid User Or Regulatory Fees
Superficially, the HSR filing fees resemble user or regulatory fees
that are often and properly imposed by government entities; however,
the HSR fees do not meet the well-established requirements for those
legitimate fees.
In a June 1994 statement opposing a proposed increase in the HSR
filing fee,\2\ the Chamber pointed out that that fee is totally
inconsistent with the Independent Offices Appropriation Act of 1952
(IOAA), as amended (31 U.S.C. Sec. 9701 (1992)). IOAA provides that
when a federal agency wants to impose a user fee, that fee must be
``(1) fair; and (2) based on (A) the cost to the Government; (B) the
value of services or thing to the recipient; (C) public policy or
interest served; and (D) other relevant facts.'' (1994 Chamber
Statement at 9.) There is no way that the HSR filing fees could meet
these criteria. There has never been even a pretense that the filing
fees are related to the cost of processing the HSR filings, and any
attempt to make that argument would fail. In fiscal 1998, according to
the enforcement agencies' HSR Annual Report, 4,575 transactions were
reported.\3\ Of that number, less than 10 percent were even cleared to
one of the antitrust agencies for a competitive review (Id. Table III);
and substantive Second Request investigations were conducted in only
125 cases, amounting to less than 3 percent of the reported
transactions. (Id. Table II.)
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\2\ Statement of the U.S. Chamber of Commerce in Opposition to
Proposed Increase of Hart-Scott-Rodino Filing Fee From $25,000 to
$40,000 per Transaction (1994 Chamber Statement).
\3\ FTC and Antitrust Division, Annual Report to Congress, Fiscal
Year 1998, Pursuant to Subsection (j) of Section 7A of the HSR Act (HSR
Annual Report (1998)) at 25.
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Thus, there can be no doubt that the vast majority of HSR filings
are unconscionably profitable for the government. The vast bulk of the
more than $200 million collected in fiscal 1998 was used to finance the
investigation of a small number of anticompetitive mergers and other
antitrust enforcement. As set forth in the 1994 Chamber Statement (at
10), ``Since 90 percent or more of the reportable transactions require
no substantive review, there is . . . no significant cost to the
Government which must merely receive and review the filing to see that
it is in one of the categories that historically have presented no
competitive problem. The disproportion between that ministerial task
and the [then proposed] $40,000 fee is neither fair nor based on `the
cost to the Government.' '' On the other hand, for those relatively few
filings that lead to full-scale enforcement actions, the fee is merely
a drop in the bucket. Nor can there be a viable argument that the
overwhelming preponderance of companies whose filings raise no
competitive issue receive any ``value'' in return for their fees.
On September 20, 1996, Chairman Archer of the House Committee on
Ways and Means made the same point in a letter to Congressman
Livingston, Chairman of the House Committee on Appropriations. Writing
in opposition to a proposed increase in the HSR filing fee, Chairman
Archer referred to a Statement issued by the Speaker which sets forth
criteria for differentiating between `` `true' regulatory fees'' and
taxes that historically are within the jurisdiction of the Committee on
Ways and Means. The criteria for a regulatory fee are:
(i) The fees are assessed and collected solely to cover the
costs of specified regulatory activities (not including public
information activities or other activities benefiting the
public in general);
(ii) The fees are assessed and collected only in such manner
as may reasonably be expected to result in an aggregate amount
collected during any fiscal year which does not exceed the
aggregate amount of the regulatory costs referred to in (i)
above;
(iii) The only persons subject to the fees are those who
directly avail themselves of, or are directly subject to, the
regulatory activities referred to in (i) above; and
(iv) The amounts of the fees (a) are structured such that any
person's liability for such fees is reasonably based on the
proportion of the regulatory activities which relate to such
person, and (b) are nondiscriminatory between foreign and
domestic entities.
Archer Letter, at 1-2 (emphasis added). While Chairman Archer was
writing about a proposed increase in the current $45,000 fee, he
correctly pointed out that the ``FTC does far more than merely regulate
acquisitions subject to the Hart-Scott-Rodino Act [and that] there is
reason to believe that the amount of the current premerger notification
fees substantially exceeds the costs of the FTC and Antitrust Division
in evaluating reportable transactions under the antitrust laws.'' (Id.
at 2.) Accordingly, the current $45,000 fee violates criteria (i), (ii)
and (iii).
While the Senate is not bound by either IOAA or the Statement cited
by Chairman Archer, both of these authorities make clear that the HSR
fees are not reasonably related to the Government's merger review costs
or to the ``value'' to the companies that pay the fees. They,
therefore, amount to ``a tax on a small category of regulated
entities.'' (Archer Letter at 2.)
Like Chairman Archer, the Chamber would not object to HSR filing
fees decoupled from the funding of federal antitrust enforcement ``as
long as the amount of fees are reasonably related to the relevant
regulatory cost and fairly apportioned among affected entities.''
(Archer Letter at 2.) Other jurisdictions do this \4\ and we believe it
would be feasible to fashion an appropriate formula in the United
States, provided the fees are not used to fund general antitrust
enforcement.
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\4\ In Germany, ``the fee is determined according to the personnel
and material expenses of the enforcement agency, with account also
being taken of the economic significance of the concentration.''
[Rowley and Campbell, Multi-Jurisdictional Merger Review--Is It Time
For A Common Form Filing Treaty?, in Policy Directions for Global
Merger Review at 9, Appendix IV, note 9.] In Ireland, there is no fee
for ``Preliminary Merger Notifications.'' [Id. note 12] and in
Switzerland, no fee is charged for a ``First Phase Assessment'' but an
hourly rate is charged for a ``Second Phase Assessment.''
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The Present Reliance on HSR Filing Fee Revenues To Fund Antitrust
Enforcement Creates Anomalous Incentives and Outcomes
When less than three percent of more than 4,500 transactions even
merit a Second Request, it is apparent that there is a vast amount of
overreporting, creating an unnecessary burden on both American
businesses and the enforcement agencies. Yet the agencies' dependency
on filing fee revenues compromises their ability to deal objectively
with the problem.
There are, as the Chamber has pointed out, well-recognized
categories of transactions that historically have not had
anticompetitive effects (see 1994 Chamber Statement at 5-7); but the
FTC's ability to eliminate useless HSR reports is frustrated by the
linkage between the filing fees and the agencies' funding. As the
Chamber stated on an earlier occasion, ``The Commission is confronted
with a Hobson's choice; continue to demand substantially useless HSR
filings or substantially curtail the number of such filings and lose
needed funding.'' \5\
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\5\ Comments of the U.S. Chamber of Commerce on Federal Trade
Commission's Proposed Changes in Hart-Scott-Rodino Rules Issued July
28, 1995. In April 1996, the FTC implemented certain limited changes in
the HSR coverage. In light of the 1998 data cited above, those changes
had only minimal impact. See also Comments of the U.S. Chamber of
Commerce before the International Competition Policy Advisory
Committee, April 22, 1999, at 6 (``[T]he incentive to consider the
appropriate scope of the premerger reporting obligations has been
adversely affected, because consideration of limitations that may be
warranted on the basis of competition objectives must now be weighed
against the collateral fiscal effects.'').
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Another way to deal with the massive overreporting is to raise the
size-of-transaction reporting threshold above the $15 million level set
a quarter century ago.
S. 1854 does this by raising it to $35 million, thereby eliminating
approximately one third of the filings now required. Regrettably,
believing it necessary to ``ensure budget neutrality'' (Judiciary
Committee News Release, November 4, 1999), the sponsors of the bill
propose to raise the fee for transactions valued at more than $100
million to $100 thousand, irrespective of whether the transaction
presents any significant competitive issues. In fact, according to HSR
statistics, nearly 80 percent of transactions above $100 million were
not even cleared to one of the agencies for competitive review, and 94
percent failed to merit a Second Request.\6\ Thus, the proposed
increase may achieve budget neutrality but, like the basic fee, it has
no cost or value-based justification. Nevertheless, for reasons
indicated in Part II of this Statement, the Chamber supports S. 1854,
despite the fee increase it proposes.
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\6\ HSR Annual Report (1998), Exhibit A, Statistical Tables, Tables
I and III.
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II. The Chamber Supports Enactment of S. 1854
S. 1854 does two things. It raises the size-of-transaction
threshold to $35 million and it provides long-needed Second Request
reform. While the benefits of raising the threshold are diluted by the
perceived need to ensure budget neutrality, the Chamber nevertheless
supports this aspect of the bill since it will eliminate hundreds of
essentially useless low-end filings. In addition, the Chamber is
particularly in favor of the bill's provisions that deal with what has
come to be known as the ``Second Request.''
As originally conceived, the Second Request was to be a simple
mechanism through which the federal enforcement agencies would be able
to require the parties to produce at an early stage of the
investigation a small number of nonprivileged documents that would
allow the agencies to identify potential antitrust concerns and conduct
a preliminary antitrust analysis.\7\ More traditional agency
investigative tools that are subject to judicial review--subpoenas, in
the case of the FTC and civil investigative demands, in the case of the
Antitrust Division--were available for more extensive information
collection. By virtue of the law of unintended consequences, however,
the Second Request has grown into a huge burden upon the business
community.
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\7\ As Congressman Rodino made clear in the House Debate,
``[P]lainly, Government requests for additional information must be
reasonable. The House conferees contemplate that, in most cases, the
Government will be requesting the very data that is already available
to the merging parties, and has already been assembled and analyzed by
them. If the merging parties are prepared to rely on it, all of it
should be available to the Government. But lengthy delays and extended
searches should consequently be rare. . . . In sum, a government
request for material of dubious or marginal relevance, or a request for
data that could not be compiled or reduced to writing in a relatively
short period of time, might well be unreasonable. In these cases, a
failure to comply with such unreasonable portions of a request would
not constitute a failure to `substantially comply' with the bill's
requirements.'' [House Debate, September 16, 1976, 122 Cong. Rec.
H30877.]
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The typical Second Request now requires the production of hundreds
(and frequently thousands) of boxes of documents, each page of which
must be sorted, numbered and catalogued according to an ever-increasing
list of agency instructions and requirements. Additionally, the parties
must respond to extensive requests for interrogatory responses that
must be compiled into multiple volume answers or condensed into complex
databases, again subject to whatever instructions and requirements
agency lawyers and economists may devise at the moment. Indeed, the
process has spawned a cottage industry of copying vendors, database
managers and temporary personnel firms, all of them supporting a hugely
costly process that Congress never intended to exist.
Effective merger enforcement obviously requires an extensive amount
of information, and the agencies must have an effective way of getting
that information in a timely manner. The Second Request process,
however, has become excessive. Virtually every company that has
undergone a Second Request investigation can tell horror stories of
unreasonably broad demands, unnecessary burdens and huge compliance
costs, all seemingly unrelated to the real issues under investigation.
All too often many of the document boxes are not even opened.
The reasons for this excess are twofold. First, the assembly of
these voluminous submissions takes time, and the statute stays the
waiting period until compliance with the Second Request has been
completed. Thus, the more burdensome and time-consuming the Second
Request, the more time the agency has to conduct its investigation.
This relationship between time and burden has become so clear that many
agency staffs now insist that a party promise not to comply before a
certain date as a precondition to obtaining any meaningful modification
of the Request. Second, the agencies have absolutely no incentive to
minimize the burden. For all practical purposes, the agencies' power
with regard to these requests is functionally unreviewable. Recognizing
that the parties have no ability to obtain impartial review of their
Second Request determinations, the agencies have no incentive to narrow
the requests or to minimize the burden; quite the contrary, their
incentive is to avoid any risk of missing any conceivably relevant fact
by insisting that the parties produce everything.
Modern merger analysis probably has become too fact-intensive to
return the Second Request back into what Congress initially intended.
Given the time within which the agencies must investigate these complex
transactions, the Second Request likely must remain the government's
principal investigative tool. Effective merger investigation, however,
does not require that the agencies be totally free to impose excessive
costs on the parties. S. 1854, sponsored by Senators Hatch, Kohl and
DeWine, represents a step in the right direction, protecting the
agencies' need for the prompt submission of necessary information,
while providing safeguards against unnecessary burdens and agency
abuse. The proposed legislation improves the Second Request process in
two principal ways.
First, it introduces fair standards. The statute currently requires
that a party substantially comply with a Second Request. The
substantial compliance standard, however, imposes no limits upon the
agency in seeking information and does not lend itself to an obvious
definition of when appropriate compliance has been reached.
Accordingly, the agencies feel free to ask for just about anything and
to insist upon strict or literal compliance when it is to their
advantage to do so.
S. 1854 provides that the agencies can only seek information that is
not ``unreasonably cumulative or duplicative,'' and that does not
impose a burden or expense that ``substantially outweighs the benefit
of the information.'' Additionally, the bill would define substantial
compliance to mean that a party's submission ``does not contain a
deficiency that materially impairs the ability'' of the agencies to
investigate the transaction.
Second, S. 1854 provides a mechanism through which both the parties
and the agencies can obtain rapid judicial determinations with respect
to HSR compliance disputes through proceedings before a federal
magistrate. The availability of review by a neutral third party will
introduce needed balance into the Second Request process. Neither side
will enter into judicial review lightly. If the agency prevails, the
parties may not proceed with their transaction until compliance has
been achieved. If the submitting party prevails, the waiting period
will continue to run. Under this scenario, the prospect of judicial
review will discipline both sides, so that actual challenges should be
minimal.
Because Congress initially believed that the Second Request would
impose only a minimal burden upon the premerger notification process,
it did not feel a need to include the types of procedural safeguards
that would ordinarily accompany this type of governmental discovery
right; however, now that the Second Request process has emerged as an
important (and often oppressive) tool in government merger enforcement,
procedural safeguards are needed. The addition of a minimal amount of
government accountability--i.e., clearly articulated standards and an
opportunity for review by an impartial third party--will only benefit
the overall HSR premerger notification scheme.
For these reasons, the Chamber strongly supports and urges
enactment of S. 1854
Senator Ashcroft. Thank you very much. It is good to have
witnesses that do not suffer the impairment of color blindness.
That light comes on, you go off, which is--the Senate is--
is afflicted mightily, and I am glad to see that you are not.
It is my pleasure now to call upon Mr. Albert A. Foer. He
is the president of the American Antitrust Institute and--and a
former FTC official.
So thank you very much.
STATEMENT OF ALBERT A. (BERT) FOER, PRESIDENT, AMERICAN
ANTITRUST INSTITUTE
Mr. Foer. Thank you, Mr. Chairman.
The American Antitrust Institute is an independent non-
profit education research and advocacy organization.
I would like to make a brief comment about the FTC
reauthorization and then turn to proposed changes in the merger
process.
To summarize my written statement, the Federal antitrust
agencies are substantially understaffed and underfunded, in
view of the law enforcement challenges that they face.
Given the continuation of unprecedented demands of the job,
we believe that the authorizations being proposed in S. 1687
represent only the extreme low end of what is needed.
The FTC's request to increase its full-time equivalents
from--from 979 to 1,133 in Fiscal Year 2001 seems well
justified.
This would be permitted by a funding level of $165 million,
and would still leave the FTC one-third smaller than it was in
1980, when it was not faced with the demands that it is today.
Turning to the Hart-Scott-Rodino amendments, I am going to
address four questions. First, what reforms are appropriate
with regard to Second Requests?
Before passage of the landmark Hart-Scott-Rodino
legislation, mergers and similar transactions were effectively,
though not formally out of the reach of the antitrust laws.
Under Hart-Scott-Rodino, the antitrust agencies have
created an administrative system that identifies those mergers
that are likely to be problematic and quickly allows the vast
majority to move forward.
All filings that do not get Second Requests--that is about
97 percent--are dealt with in an average of 20 days.
Although you may hear horror stories about the amount of
data being demanded by the agencies in their Second Requests,
these tend to caricature reality.
First, the volume of Second Requests is not very large. In
1998, it covered 125 transactions, only 2.7 percent of all
transactions.
Second, a very few large complicated and hard-fought cases
may color perceptions of what is involved. Over 85 percent of
the FTC Second Request transactions are resolved before there
is substantial compliance with the request.
Over 70 percent of the FTC Second Requests result in
productions of 50 document boxes or less and over 60 percent
result in productions of under 20 boxes.
The average time to complete a Second Request investigation
is only three to four months. About 60 percent of Second
Requests result in successful law enforcement actions. I submit
that these are very impressive numbers.
The agencies have a generally strong record of working with
parties to narrow requests and accommodate to what is feasible.
Given their workload and the deadlines that HSR imposes on
them, the agencies have a strong incentive to reduce the size
of document requests.
Review of Second Requests by a magistrate sounds better on
paper than it is likely to be in practice.
Indeed, we expect it would slow down the merger review
process and make it more expensive for all concerned.
The parties would spend a lot of time sparring in and out
of court. Moreover, it would change the strategic dynamics of
the pre-merger process.
The public gets only one bite at the merger apple and it
should be a full bite.
At a pre-discovery stage, which we are talking about,
enforcement officials should not be held to an unrealistic
standard requiring them to know exactly what data they will
need or what theory they will ultimately pursue.
The agencies have demonstrated a willingness to cooperate
with the private bar in streamlining the HSR process. Instead
of legislation, therefore, we believe the enforcement agencies
should be encouraged by this Committee to build on their
current internal appeals processes; perhaps creating a more
formally defined route for appeal within each agency structure.
The second question: Is it appropriate to increase the
thresholds for pre-merger notification reporting?
Because of the uncertainties and the tradeoffs--I recognize
this seems like a done deal, that everybody is in agreement
that we should raise it--but there are tradeoffs that need to
be taken into account.
On the one hand, smaller companies would save time and
money. On the other hand, we would not only allow 37 to 40
percent of the nation's merger transactions to effectively
disappear from the antitrust net, but we would also eliminate
the antitrust deterrent against any competitive smaller
mergers.
So we recommend instead--instead of giving a de facto
waiver to all these mergers, let's substantially reduce the
filing fees and direct the enforcement agencies to reduce the
reporting burden on small merging companies.
Third question: Is it appropriate to increase the fees
payable for larger transactions?
We endorse increasing the fee from $45,000 to $100,000 for
transactions larger than $100 million.
And we further suggest there should be created a mega-
merger category for the 4.2 percent of transactions, 193, that
are larger than a billion dollars.
And we would urge that the user fee for these be
considerably higher, for instance, $500,000.
What effect, fourth question, last question--what effect
will a reformed fee structure have on antitrust enforcement?
I basically agree with Howard Adler that the user fee is
not the right way to fund antitrust, but this is a problem that
applies to many agencies besides the FTC.
I also agree with Howard that it cannot be resolved
immediately. We have to look at where we are.
So starting from the current situation, it is important
that any modifications to the filing fees should preserve the
current anticipated level of funding.
The analysis in our written statement indicates that S.
1854 would result in an appropriations reduction of
approximately $3.6 million, and therefore would not be revenue
neutral.
Thank you for this opportunity to present our views.
Senator Ashcroft. I am grateful to you. Thank you for your
clear presentation.
[The prepared statement of Mr. Foer follows:]
Prepared Statement of Albert A. (Bert) Foer, President,
American Antitrust Institute
These are comments of the American Antitrust Institute concerning
S. 1687, the Federal Trade Commission Reauthorization Act of 1999, and
S. 1854, the Hart-Scott-Rodino Antitrust Improvements Act of 1999. The
American Antitrust Institute is an independent, non-profit education,
research, and advocacy organization that believes the antitrust laws
should play a more expansive and effective role in the national
economy. I am Albert A. Foer, President of the AAI.\1\
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\1\ Information concerning the AAI is available at http://
antittrustinstitute.org. Albert A. Foer is an attorney with experience
in private practice and also as C.E.O. of a chain of retail stores.
From 1975-1981, he held Senior Executive positions at the FTC,
including Acting Deputy Director of the Bureau of Competition.
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The Federal Trade Commission Reauthorization Act of 1999
Early last year the American Antitrust Institute published a 40-
page paper history of antitrust funding, titled ``The Federal Antitrust
Commitment: Providing Resources to Meet the Challenge.'' Copies were
made available to the Appropriations Committees at that time and can be
found at the AAI website.\2\ While some of the numbers require
updating, the argument we offered remains valid, namely that the two
federal antitrust agencies, i.e., the Federal Trade Commission and the
Department of Justice Antitrust Division, are substantially underfunded
and understaffed, in view of the law enforcement challenges they face.
In our paper, we urged Congress to contemplate a three-year expansion
of federal antitrust personnel on the order of 30-50%. At the time we
wrote, the FTC's budget for f.y. 1999 was $119 million. The increase in
S. 1687 to an authorization of $149 million in f.y. 2001 would be 25%
and to $156 million in f.y. 2002 would be 31%. Given the continuation
of the unprecedented challenges that are before us, we believe that the
authorizations being proposed in S. 1687 would be at the extreme very
low end of what is needed.\3\ The FTC's request to increase its FTEs
from 979 to 1133 in f.y. 2001 seems well-justified.\4\ This would be
permitted by a funding level of $165 million.
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\2\ Available at (http://www.antitrustinstitute.org/recent/
23.cfm.).
\3\ Our primary interest is in the Competition Mission rather than
the Consumer Protection Mission, which was not the subject of our
research. Our comments assume that the Competition Mission will receive
approximately half of the FTC's overall funding.
\4\ In 1980, this number was 1,719!
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What are the challenges that require additional federal antitrust
attention? First, we have a merger wave of unprecedented size and
scope, which is rapidly restructuring the American and the world
economy.\5\ The number of merger filings tripled from 1,529 in fiscal
year 1991 to 4,642 in fiscal year 1999. We are seeing something like a
15% increase this year. The dollar value of merger filings increased
over 11 fold during this period, an indication that mergers are
becoming larger and more complicated. Merger analysis is labor
intensive. Much depends on careful fact-gathering and analysis. Neither
the FTC nor the Justice Department is staffed adequately to deal with
what is arriving each and every day. The result is a rapid movement
toward more and more concentration in market after market.\6\
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\5\ The FTC has testified before Congress approximately 38 times on
mergers and consolidations, in the 105th and 106th Congresses,
reflecting substantial national concern about this merger wave.
\6\ As William Satire wrote in the New York Times on December 13,
1999, ``Oversight pays for itself; indeed. Justice brings in $10 in
fines for every $1 in its budget. But the F.T.C. and Justice are
overwhelmed by the rising momentum toward concentration throughout
American big business.''
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Second, the promise of deregulation has not been kept. That promise
was that antitrust would replace direct economic regulation as the
public's protection against the abuse of market power. It only
partially happened, with the result that consumers have not yet
received all of the benefits from competition to which they are
entitled. More needs to be done in the formerly regulated sectors of
our economy and special care must be given to the deregulation of
electricity, where the rules of the new game are yet to be written. The
FTC has played an extraordinarily important role in helping the States
adjust to electricity deregulation, but it has depended very largely on
one lone economist spending only half of his time on this subject.
Third, the economy has become more of a global marketplace,
changing the modes and challenges of antitrust. Even as some markets
become freer and more competitive, others are ruled by international
cartels. While these are more often under the Antitrust Division's beat
than the FTC's, both agencies have found that globalization increases
their workload. For example, antitrust analysis now regularly requires
understanding the international dynamics of an industry. Discovery
becomes more time consuming and complicated. Cooperation with foreign
antitrust agencies--which have proliferated since 1989--takes time.
Fourth, new technologies have created new antitrust issues, such as
the potential of network effects creating persistent monopolies. The
FTC already plays an important role in educating the public on the
consumer and competition aspects of rapidly changing technology-driven
markets, but merely keeping on top of developments, not to mention
developing and carrying out prudent public policies, is especially
time-consuming at this critical time in economic history.
The FTC has done a remarkable job of streamlining and improving its
productivity. However, today, the agency can only be described as
``strapped''. The FTC's budget request does not contain new programs.
It does request additional staff to carry out a number of tasks
Congress has imposed, such as implementing new identity theft
legislation, and it requests funding for certain internal technological
improvements, to make it possible, for example, to file Hart-Scott-
Rodino information on-line. Mainly, the FTC seeks funding for
additional staffing made necessary by the demands of the merger wave
and the rapid emergence of e-commerce. We urge that the authorization
be increased to better recognize these needs.
The Hart-Scott-Rodino Antitrust Improvements Act of 1999
We were also asked to comment on S. 1854, the Hart-Scott-Rodino
Antitrust Improvements Act of 1999. We direct our comments to the
following four questions: (1) What reforms are appropriate with regard
to ``Second Requests''? (2) Is it appropriate to increase the
thresholds for PMN reporting and, if yes, are the thresholds proposed
in S. 1854 appropriate? (3) Is it appropriate to increase the fees
payable for larger transactions and if yes, are the fees proposed in S.
1854 appropriate? And (4) What effect will a reformed fee structure
have on antitrust enforcement?
(1) What reforms are appropriate with regard to Second Requests?
The Hart-Scott-Rodino Antitrust Improvements Act of 1976 brought a
revolution to the antitrust laws with respect to merger enforcement.
Before this landmark legislation, mergers and similar transactions were
effectively, though not formally, out of the reach of the antitrust
laws. It was nearly impossible to obtain an injunction that would stop
a merger before it was consummated. Rather, the merger had to be
attacked after the fact. This assured that litigation would be a
prolonged process and that in most cases there would be no effective
remedy, because, as the saying went, it's too difficult to ``unscramble
the eggs'' once they have been cracked, stirred together and fried. H-
S-R changed all this, very dramatically. Today, mergers are challenged
before they are consummated. This has brought a much higher degree of
certainty to the process, speeded it up, and made it possible to obtain
effective remedies in those relatively few situations where the
transaction would violate the antitrust laws.
The antitrust agencies have worked diligently to make the premerger
notification program effective and they should be congratulated on
their success. They have created an administrative system that
identifies those mergers that are likely to be problematic and quickly
allows the vast majority to move forward.\7\ With respect to those that
may be problematic, they seek more information through a ``Second
Request''. About 60% of Second Requests lead to successful law
enforcement actions, and the Second Request process generally takes
less than four months.\8\ These are impressive facts, given the
complexity of today's mergers. It should also be mentioned that a 60%
success figure is probably about as high as good public policy would
warrant: if the agencies only sought more information on those
situations which were more or less automatic ``winners'', they would
not be casting their net widely enough.
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\7\ In fiscal year 1998, almost 70% of the filings received early
termination, on average in less than 16 days. For all filings that did
not receive a Second Request, the average time for review was less than
20 days. Letter from William J. Baer, Director, Bureau of Competition,
FTC, to International Competition Policy Advisory Committee.
\8\ Id.
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S. 1854 would modify provisions of the H-S-R Act with respect to
Second Requests. Second requests would be limited to information that
(a) is not unreasonably cumulative or duplicative, and (b) does not
impose a cost or burden on the parties that substantially outweighs the
benefits to the agencies in conducting their antitrust review. Parties
would have the right to petition a U.S. magistrate to review whether a
Second Request meets those standards. In addition, parties would have
the right to petition a U.S. magistrate for a determination of
substantial compliance with a Second Request. The waiting period after
substantial compliance would be extended from 20 days to 30 days.
We would be pleased to see the waiting period extended from 20 to
30 days. This would facilitate a more careful evaluation of the
materials received and would relieve some of the stress that the
current timeframe imposes on everyone.
With respect to the other proposals, it is not clear to us that a
significant problem exists, and we think the solution proposed is
unworkable. Although you may hear horror stories about the amount of
data being demanded by the agencies, these caricature the reality.
First, the volume of Second Requests is not very large. In 1998, it
covered 125 transactions, only 2.7% of transactions.\9\
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\9\ This percentage is a little less than typical. The average for
1987-1997 was 3.58%.
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Second, a few very large, complicated, and hard-fought cases may
color perceptions of what is involved. Over 85% of the FTC's Second
Request transactions are resolved before there is substantial
compliance with the request. Over 70% of the FTC's Second Requests
result in productions of 50 document boxes or less and over 60% result
in productions of under 20 boxes. The average time to complete a Second
Request investigation is three-to-four months, and many are completed
in much shorter time.\10\
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\10\ FTC letter to ICPAC, note 6 above.
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The agencies have a generally strong record of working with parties
to narrow requests and accommodate to what is feasible.\11\ Given their
workload and the deadlines that H-S-R imposes on them, the agencies
have a strong incentive to reduce the size of document requests. The
Antitrust Division has an internal appeal procedure for disputes,
leading to the Deputy Assistant Attorney General. In 4 years, we
understand, this process has been utilized only three times, and in two
of the three situations, the Deputy sided with the merging parties. The
FTC has an informal process that involves the Director or Deputy
Director of the Bureau of Competition whenever there is a Second
Request conflict between the parties and the investigation staff.
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\11\ For instance, in 1995, after discussions with the private bar,
the agencies produced a model Second Request form, so that the bar
would know what kind of information would be requested and could plan
ahead accordingly.
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The reality seems to be that there has been only a handful of
investigations requiring submission of large numbers of boxes of
documents. Usually, these were multibillion dollar, multi-market
transactions that transform entire industries. These are precisely the
type of transactions where a detailed and probing examination is
appropriate and where interconnections may not be apparent until data
is obtained. When an agency issues a Second Request, it does not have
enough information to evaluate the potential benefits of the
information requested. Its information in hand is extremely limited.
Unlike the parties to a transaction, the agency has no company
officials engaged in the business in question to whom it can turn for
information about the industry and its products, competitors and
customers.
You may hear complaints that the agencies ``game'' the premerger
rules, using Second Request demands to delay a transaction. The other
side, too, plays games, of course, sometimes dumping tons of documents
on an overworked agency staff in the hope of wearing them out and
causing them to overlook a needle buried in the haystack.
Introduction of a formal right of appeal in the midst of a Second
Request places a professionally conducted investigation in an untenable
chicken-and-egg conundrum: the enforcement officials cannot necessarily
determine the focus of the investigation until they have examined the
data; if they are precluded from the data on the basis that they
haven't identified their theories clearly enough, they will never
obtain the data needed for a professional evaluation of the various
possible theories.
It is also important to understand that a change in the rules will
affect the strategic dynamics of merger enforcement. Many cases are
efficiently settled because the merging parties know that they have
documents that will reveal the anticompetitive nature of their
transaction and that the data will have to be provided to the
investigators. By increasing the probability that they will not have to
provide data (maybe they can persuade the magistrate that it is not
necessary), we would be reducing the probability of settlement in these
cases.
As we see it, the intervention of a review by a magistrate sounds
better on paper than it is likely to be in practice. Indeed, we expect
it would slow down the merger review process and make it more expensive
for all concerned, with the parties spending a lot of time sparring in
and out of court. Magistrates tend to be busy and there is no guarantee
that their intervention will be swift. In the worst scenario, if the
magistrate happens to be unsympathetic to the antitrust laws or
unfamiliar with how an antitrust case is put together, he or she could
represent an open invitation for challenges that would have the effect
of making it more difficult to obtain important evidence and properly
evaluate the case. Moreover, a magistrate is used to participating in
civil cases where the plaintiff has had more opportunity to develop the
facts of the case; here, the government has typically had to rely on
the initial filings and a few telephone calls. Its Second Request must
necessarily be broad, often broader than what would be acceptable to a
magistrate who is used to reviewing discovery in private civil
litigation. This, it must be stressed, is a pre-discovery situation.
We are reluctant to see a generally satisfactory administrative
process be revised by legislation, which can be inflexible and
difficult to adjust at a later time. The agencies have demonstrated a
willingness to cooperate with the private bar in streamlining the
process.\12\ We believe there is a better way to deal with whatever
Second Request problem exists: the enforcement agencies should be
encouraged by this Committee to build on their current internal
processes, perhaps creating a more formally defined route for appeal
within the structure. Decisions in the relatively few situations that
will occur can best be made by people who understand how an antitrust
case is put together and can decide quickly. Importantly, the top
officials of the agency (perhaps, in the case of the FTC, the General
Counsel or a designated Commissioner) would have an appropriate
background for understanding the dynamics of an investigation and an
incentive not to waste resources. More to the point, however, is that
we are talking about an investigation of a law violation, not a
judicial determination of responsibility. It is premature at this stage
to insert the judiciary into the process.
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\12\ They are currently in the midst of a working with an American
Bar Association task force on Second Requests. Also see note 11 above.
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Some may argue that the enforcement agency does not need so much
data, because they are only preparing for a motion for a preliminary
injunction and more complete data can be obtained during discovery for
trial. In the context of modern merger practice, this is misleading. It
is almost always the case today that the decision of the Federal
District Court in a preliminary injunction determines whether or not
the transaction will go forward; in effect, the preliminary injunction
hearing is the trial and the parties need all their ammunition for that
one hearing. The public gets one bite at the apple and it should be a
full bite.
(2) Is it appropriate to increase the thresholds for PMN reporting,
and, if yes, are the thresholds proposed in S. 1854
appropriate?
The thresholds for reporting a planned merger were created in the
original Hart-Scott-Rodino law, dating back to 1976. They have not been
modified to reflect inflation. If the initial thresholds were in some
sense ``correct,'' then it is not unreasonable to modify them upwards
one time and thereafter to index them for future inflation. On the
other hand, the original thresholds were arbitrary then and remain
arbitrary now.
The important question is how many anticompetitive mergers will
escape federal attention if the threshold is lifted? How do the
negative effects of this compare to the positive effect of freeing a
substantial number of transactions from the reporting requirement?
The fact that a merger is relatively small does not necessarily
mean that it will not have an adverse impact on competition, if the
market itself is small. This is frequently the case in industries that
serve a primarily local market, such as radio broadcasting or certain
types of medical care. Moreover, there are many situations where the
dollar size of the transaction is unrelated to its importance. For
example, in the high tech industries, it is not unusual for a firm to
have little in the way of revenue, but to own intellectual property
that can create a new market or bring a big change to an existing
market. To exempt small transactions from reporting means that the
parties can go forward and consummate their deal without antitrust
interference. If the government later determines that the transaction
was anticompetitive, the only remedy is to try to ``unscramble the
eggs.'' The cost to the federal government of pursuing relatively small
mergers after the fact is likely to prove to be too high, with too
small a return. Therefore, the practical effect of raising the limit
for reporting will also be to provide a de facto safe harbor from
federal intervention for mergers that fall under the reporting
threshold.\13\
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\13\ Some small mergers that are anticompetitive may be scrutinized
by State officials, but the States play a relatively small role in
merger enforcement and many of them are not equipped to challenge
mergers.
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How many transactions will be affected? S. 1854 would raise the
filing threshold from $15 million to $35 million.\14\ The impact of S.
1854 would appear to be, roughly, the elimination of 37% of the
currently reported transactions. In absolute numbers, this would be
approximately 1,700 transactions.
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\14\ An initial problem is that official data on premerger
notification does not neatly correspond with the $35 million benchmark.
According to the most recent Annual Report to Congress on the Hart-
Scott-Rodino law. for f.y. 1998 of the 4,728 merger transactions
reported to the FCC and DOJ, 5.2% were smaller than $15 million, 21.7%
were in the $15-$25 million category, and 25.4% were in the $25-$50
million category. If we make the assumption (not necessarily precise,
but an indicator of magnitude) that transactions in the $25-50 category
are spread equally, then those from $25-$35 million would account for
10/25ths (.4) of the statistical category, or 10.16% of transactions.
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In FY 1998, there were a total of 17 Second Requests by the two
agencies in the <$35 million range.\15\ This is only 1% of the reported
transactions under $35 million, and .4% of all transactions reported.
Over 60% of the FTC's Second Requests in the 1999 fiscal year resulted
in successful enforcement actions.\16\ It is likely that 7-8 mergers
that would have been stopped or modified would fall through the net if
the threshold is lifted to $35 million.
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\15\ Again applying .4 to the $25-50 million data supplied by the
agencies.
\16\ Remarks of Richard Parker, Director, FTC Bureau of
Competition, to panel discussion sponsored by Charles River Associates,
reported in FTC:WATCH, Nov. 8, 1999. We do not know whether the 60%
figure applies evenly to all categories of transactions by size or if
it remains fairly constant from year to year, but if we make the
assumption that it does and that the same proportion applies to the
Antitrust Division (which in fact is believed to have a lower
percentage), then the number of enforcement actions in the <$35 million
range during 1998, the record high year, was about 10. If indeed the
Division has a smaller percentage of Second Requests going to
successful enforcement, then it is likely that the actual number of
enforcement actions that would have been lost under S. 1854 in FY 1998,
had the proposed threshold been applied would be in the range of 7-8.
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Changes in government policies and procedures often have
unanticipated consequences as parties ``re-game'' the system in light
of the new rules. If we raise the threshold to permit 7-8
anticompetitive mergers to pass through the antitrust net, we are also
sending a signal to others in the small-size category that they need no
longer worry about antitrust. Their legal advisors will be able to
counsel them that horizontal mergers previously unthinkable can now be
undertaken with minimal concern of antitrust interference. A probable
effect of the change in threshold, therefore, would be the triggering
of more anticompetitive mergers in local and regional markets.
There is no commonly accepted methodology for converting these
considerations into a consumer welfare loss. There is also no way to
predict whether these mergers, most probably local or regional in
effect, would be challenged (most likely, after the fact) by state
antitrust authorities.
To the extent that elimination of 37% of the premerger filings
frees up government staff, this should not be viewed as a savings;
rather it would release resources that could be shifted from relatively
quick reviews of small transactions to work on larger transactions, of
which there is a plentiful supply. During the current merger wave,
which has utterly stretched the resources of the two antitrust
agencies, this reallocation might slightly relieve a little of the need
for more personnel, but it should not result in noticeable budgetary
savings.
We draw the following conclusions: (1) Raising the threshold to $35
million will allow approximately 37% of currently reported mergers to
disappear from the antitrust radar screen. (2) At current merger rates,
this will mean that something on the order of 17 transactions that
would have merited further investigation will be left unattended and
something on the order of 7-8 transactions that would have triggered
successful enforcement actions will be allowed through the net. (3)
These numbers need to be adjusted, on the one hand, for possible
actions by State law enforcement agencies, and, on the other hand, for
the de facto permission that lack of enforcement will give companies to
engage in a larger but unpredictable number of anticompetitive mergers
having a primarily local or regional impact. (4) Merging companies will
clearly save over $100 million in filing fees and attorney fees, but
consumers will pay many millions of dollars a year in additional
monopoly rents. Depending on the magnitude of price increases that are
the result of anticompetitive mergers and assumptions made with respect
to point (3) above, the loss to consumers could be either less than or
in excess of the savings for companies.
Because of the uncertainties in the tradeoff, we would recommend an
alternative way of attacking the issue. Instead of giving a de facto
waiver to all of these mergers, substantially reduce their filing fee
and direct the enforcement agencies to reduce the initial reporting
burden on small merging companies.
(3) Is it appropriate to increase the fees payable for larger
transactions and, if yes, are the fees proposed in S. 1854
appropriate?
The fee paid for filing a premerger notice is a user fee and should
in some rough way be apportioned to the costs imposed on the
government. In a general way, it is likely that the larger transactions
require more of the government's time and expenses, because larger
transactions tend to be more complicated, involve more product lines
and more geographic markets, thus more data and analysis. It is
therefore appropriate to increase the fees for larger transactions.
S. 1854 increases the fee from $45,000 to $100,000 for transactions
>$100 million. In 1998, this would have involved 1,326 transactions. We
endorse this and further suggest that there should also be a mega-
merger category for the 193 (4.2%) of transactions above $1 billion.
These are the most complicated and most costly to investigate, on
average, and we urge that the user fee for these be considerably
higher, e.g., $500,000.\17\
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\17\ These largest mergers also have the most dramatic impact on
the public in terms of plant closings, layoffs, community desertions,
etc. For this class, we urge that the merging companies be required to
file information with the public as to the nature of the merger, the
markets that are involved, and explanations for any claimed efficiency
gains (including anticipated layoffs and plant closings). To increase
the transparency of decisions regarding the largest mergers, we suggest
that the agencies provide a written report when they close the
investigation after a Second Request has been answered.
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(4) What effect will a reformed fee structure have on antitrust
enforcement?
The federal antitrust effort has become dependent on H-S-R filing
fees. By law, fees collected by the agencies in conjunction with the
receipt of premerger notifications are for the exclusive use of the two
antitrust enforcement agencies.\18\ The funds are split evenly between
the Antitrust Division and the FTC, although the FTC uses roughly half
of its funding for consumer protection.
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\18\ See Pub. L. No. 101-162, sec. 605, 103 Stat. 1031 (1989), as
amended by Pub. L. No. 101-302. Title II, 104 Stat. 217 (1990) (``Fees
collected for [H-S-R filings] shall be divided evenly between and
credited to the appropriations, Federal Trade Commission, `Salaries and
Expenses' and Department of Justice, `Salaries and Expenses, Antitrust
Division'. . . Provided further That fees made available to the Federal
Trade Commission and the Antitrust Division herein shall remain
available until expended.'') Filing fees were initially proposed by
Senator Howard Metzenbaum as a method of supplementing antitrust
revenues, beginning in fiscal year 1990. The FTC's dependence on filing
fees has increased from 20% in 1990 to 100% in f.y. 2000.
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In recent federal budgets, Congress has tied the agencies' funding
to the premerger notification income. Again in 2000, 100% of the
antitrust budget will come from filing fees.\19\ We are not persuaded
that it is in the public's long-term interest for antitrust enforcement
to be tied to the level of merger activity in this way. For the moment,
it provides some stability in funding, but of course this can change if
the merger wave slows down--or if Congress changes the formulation for
income. When an agency ``earns'' its funding as a result of a certain
type of activity, it is subject to a skewing of its activities in favor
of that activity. Moreover, in the case of antitrust, the merger wave,
which drives mandatory deadlines under the HSR law, has forced the
agencies to focus on mergers, to the exclusion of many other types of
situations that might better deserve their focus. Roughly speaking, the
two antitrust agencies now must spend 75% of their resources on
mergers, up from about 33% not so many years ago. This implies that
other types of antitrust concerns are probably getting less attention
than they should.
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\19\ This arrangement means that Congress can fund antitrust
without taking anything from any other program's budget. If Congress
were looking for an additional way to increase antitrust funding, it
could look to the fines and penalties levied by the Department of
Justice in antitrust cases. In most past years, this ran in the range
of $100 million, but last year, as the Department became particularly
active with respect to international cartels, it was over $ 1 billion.
This money goes to a fund for crime victims, but some of it could
probably be diverted to antitrust law enforcement.
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However, starting from the current situation, it is important that
any modifications to the PMN filing fees should preserve the current
anticipated level of funding. We have seen that the fees which will be
lost at the <$35 million end of the spectrum would have amounted to
$76.5 million in 1998. The new fees that would be generated at the
>$100 million end would be $55,000 (the new fee of $100,000 minus the
old fee of $45,000) times 1,326 transactions, or $72.9 million. This
amounts to an appropriations reduction of approximately $3.6 million,
and is therefore not revenue neutral.\20\
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\20\ Although it is theoretically possible that some large
transactions will not be undertaken as a result of the increased cost
of filing under S. 1854, this seems highly unlikely in view of the fact
that $55,000 is only .05% of a $100 million transaction. As noted
earlier, we do not believe that the 37% reduction of the filings will
actually translate into material savings for the agencies.
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Thank you for this opportunity to present the views of the American
Antitrust Institute.
Senator Ashcroft. Mr. Stephen Bolerjack is the senior
counsel of the Ford Motor Company with the Antitrust and Trade
Regulations Division.
His practice areas include franchising, antitrust and trade
regulation.
It is a pleasure to have you here, Mr. Bolerjack. Please
proceed.
STATEMENT OF STEPHEN BOLERJACK, COUNSEL, ANTITRUST AND TRADE
REGULATIONS, FORD MOTOR CO., ON BEHALF OF THE NATIONAL
ASSOCIATION OF MANUFACTURERS
Mr. Bolerjack. Thank you very much, Mr. Chairman, Senator
Wyden. I am here today representing the National Association of
Manufacturers, presenting their views on this, and we thank the
Committee for the opportunity to be here today.
Three general points, all on the Hart-Scott reform issue.
Number one, like everyone who has addressed the point so far,
the NAM believes that merger enforcement by the antitrust
agencies should not be funded through these fees.
It creates a built-in conflict of interest at the agencies.
We lay out in our written remarks other deleterious effects of
having the fees fund the agencies.
However, again, as the other speakers have already
identified, we view this as more of a long-term effort. We do
not believe these changes can occur immediately.
But the NAM strongly supports a return to the situation as
it existed prior to 1989 where the general revenues are used to
fund the agencies and there not be a linkage between merger
filing fees, if any, and the funding of the agencies. We are
proposing the fees be eliminated.
Point number two: We strongly support an increase in the
threshold that was passed in 1976 and has not been changed, the
$15 million threshold.
Again, as speakers have already addressed, and I will not
belabor the point, we believe that for several reasons.
You have the agency staffers looking at very small
transactions that have little or no chance of imposing an anti-
competitive impact in any market.
We lay out the statistics in some detail in the written
testimony, but for transactions $25 million and below, Second
Requests are issued in approximately \9/10\th of 1 percent of
all filings. However, there is a $45,000 fee for each of those
filings.
The FTC does not publicly release the data based on the
$35,000--excuse me, the $35 million value of the transaction
figure.
For the figure between $25 and $50 million that \9/10\ths
of 1 percent goes up to approximately 1.3 percent of the
transactions that are subjected to a Second Request; again, a
very, very small number.
And I would also submit that excluding these transactions
from the filing requirement is not giving a waiver to the
parties involved. If customers, competitors, or suppliers have
concerns about a merger, they can certainly raise them with the
Trade Commission or the Department of Justice.
They can take action at the Department of Justice by
issuing a CID. At the Trade Commission there is subpoena
authority.
It is not a free pass. It is not insulation.
The third point is Second Request reform. We have had a
number of discussions--of horror stories. Everyone agrees there
are horror stories.
These requests are incredible. They require the production
of tens or hundreds of thousands or even millions of pages of
documents.
To put things in perspective, we heard some figures about
production of boxes of documents. Estimate between four and
five thousand pages of documents per box, so we hear, ``Gee, we
are doing a great job. The request involved only 50 boxes.''
That is a quarter of a million pages of documents, all of
which have to be searched for, photocopied, indexed, and little
sticky labels applied in the appropriate and designated method.
The legislation has created a cottage industry of this that
Congress never intended to establish. It is not going to go
away.
The NAM supports merger enforcement at an appropriate
level.
The NAM recognizes that the agencies, number one, must
receive significant amounts of information about problematic
mergers on a very timely basis.
There is no one gainsaying that.
Another point is the ability to internally resolve these
concerns. We have seen in the past the agencies attempt through
one method or another, in very good faith, to attempt to
resolve these concerns.
And the administration changes. They may view their
attempts as more successful than their customers, if you will,
have viewed them.
We feel that some reform of this must be embedded in
legislation. And so the NAM strongly supports S. 1854, the
amendment legislation.
Thank you for your time.
[The prepared statement of Mr. Bolerjack follows:]
Prepared Statement of Stephen Bolerjack, Counsel, Antitrust and Trade
Regulations, Ford Motor Co., on Behalf of the National Association of
Manufacturers
Mr. Chairman, and members of the Subcommittee, my name is Stephen
Bolerjack. I am before you today representing the views of the National
Association of Manufacturers (NAM).
The NAM is the nation's largest national broad-based industry trade
group. Its 14,000 member companies and subsidiaries, including
approximately 10,000 small manufacturers, are in every state and
produce about 85 percent of U.S. manufactured goods. The NAM's member
companies and affiliated associations represent every industrial sector
and employ more than 18 million people.
The NAM's mission is to enhance the competitiveness of
manufacturers and improve living standards for working Americans by
shaping a legislative and regulatory environment conducive to U.S.
economic growth, and to increase understanding among policymakers, the
media and the general public about the importance of manufacturing to
America's strength.
I will focus my comments on the premerger notification regime
established by the Hart-Scott-Rodino (HSR) Act in 1976. The NAM
believes that the current system is imposing unneeded costs and delays
on businesses engaged in an acquisition, and is much in need of reform.
Filings under the HSR Act are required from both sides for
acquisitions of voting securities or assets in excess of $15 million
(or 15 percent of the acquired party), a threshold that has not been
changed in twenty-four years. Acquisitions involving very small
businesses, those with total gross sales or assets of less than $10
million for the business and its owners, do not require a filing. In
this case, the buyer still must pay a filing fee of $45,000, and the
parties must serve a thirty-day ``waiting period'' after filing before
the transaction may be closed. If the antitrust agencies believe the
deal may present concerns, they can issue a ``Second Request'' for
additional information, which requires both sides to search for, copy
and index hundreds of thousands or even millions of pages of documents,
produce stacks of responses to interrogatories, and provide executives
for deposition. The deal may not be closed until both sides have
``fully complied'' with the Second Request, and served an additional
twenty-day waiting period. The antitrust agencies' determination to
issue a Second Request, the scope of the information and documents
required, and the decision whether the parties have provided sufficient
information to comply, are, in essence, unreviewable in court.
The NAM was very pleased last year when Senate Judiciary Committee
Chairman Orrin Hatch raised the question of premerger filing fees with
the Attorney General during oversight hearings of the Department of
Justice. The NAM wrote Chairman Hatch to thank him for raising this
issue since it has been a concern of the NAM for many years. In
addition, NAM President Jerry Jasinowski also notified members of the
Federal Trade Commission (FTC) and others with an interest--including
the full membership of the Senate Committee on Commerce, Science and
Transportation--that the NAM would try to pursue reform of HSR fees and
processes. Thus, the NAM was even more pleased when Chairman Hatch
began discussions and released draft HSR reform legislation for review.
Prior to adjourning for the first session, Chairman Hatch introduced S.
1854, the Hart-Scott-Rodino Antitrust Improvements Act of 1999.
The NAM appreciates your reviewing the topic of HSR reform during
the FTC reauthorization hearings. The NAM understands that you and your
Subcommittee intend to work with Chairman Hatch during the second
session to see what reforms are possible for enactment this Congress.
Thank you for exploring this issue and for any assistance that you can
provide in order to bring about sound and meaningful HSR reforms as
soon as possible.
1. The Filing Fee Should Be Eliminated
The NAM has long opposed the HSR filing fee. Currently set at
$45,000 per premerger notification, it is a tax on transactions, not a
user fee, and should be eliminated. The NAM would like to note that
House Ways and Means Committee Chairman Bill Archer has expressed
agreement with this view. In a letter to House Appropriations Committee
Chairman Bill Livingston dated September 20, 1996, Chairman Archer
noted that ``the mere reauthorization of a preexisting fee that had
historically been a tax would not necessarily require a sequential
referral to the Committee on Ways and Means. However, if such a
preexisting fee were fundamentally changed, it properly should be
referred to the Committee on Ways and Means.'' Chairman Archer's letter
specifically was about the proposal a few years back to substantially
increase the fees once more without any offsetting reform. A copy of
Chairman Archer's letter is attached, for the Subcommittee's
convenience.
HSR fees have generated more than $200 million in revenue in recent
years. The fees provide almost all the budget for the Antitrust
Division of the Department of Justice and the Federal Trade
Commission--funding not only merger enforcement, but also the
Division's criminal enforcement efforts and many of the FTC's consumer
protection activities.
Dependence on the merger filing fees for agency operations is bad
public policy for three reasons. First, reliance on filing fees for
funding exposes the agencies to a substantial funding cut when the
current merger wave ends, which is inevitable. For example, filings
dropped more than 40 percent between 1989 and 1991. Second, the filing
fee eliminates any incentive for the agencies to achieve efficiencies
by reducing the workload generated by the filings; decisions about new
exemptions from filing that are warranted based on competition policy
must be weighed against the resulting funding cuts. Third,
overburdening the agencies with a large number of filings on deals with
little or no competitive concerns in order to maintain funding diverts
resources from matters of real concern.
Sound public policy requires that this built-in conflict of
interest be eliminated. Congress should fund the law-enforcement
missions of the agencies based on the priorities assigned to competing
funding requests, as it did prior to 1989.
2. The Filing Threshold Should Be Increased
The $15 million ``size of the transaction'' threshold has been
unchanged since the legislation was enacted in 1976, and should be
substantially increased to account for inflation. It should also be
indexed to account for future inflation, so the same problem will not
need to be faced in the future. These changes will eliminate the need
for filings on the smallest deals--those least likely to raise serious
antitrust concerns but that nevertheless impose needless burdens on the
antitrust agencies and the filing parties.
When passed in 1976, the HSR Act was described as covering only the
largest acquisitions--the sponsors estimated about 150 transactions a
year. Although the number of filings was never that small, the number
of filings has rapidly increased in recent years, reaching almost 5,000
filings in 1998. If the original threshold had been indexed for
inflation using the Consumer Price Index (CPI-U), it would now be more
than $40 million and the number of filings would be substantially
reduced. Using the gross domestic product deflator, the threshold
should be around $27 million.
The threshold needs to be changed to account for the inflation of
the past twenty-four years. The NAM supports the threshold proposed in
S. 1854, the ``Antitrust Improvements Act of 1999'': $35 million. This
in essence takes account of inflationary effects since President Ford
signed the HSR Act and wisely places the updated threshold between the
two indicators mentioned above.
In addition, the threshold needs to be indexed to account for
inflation in the future to assure this problem does not recur. It is
noteworthy that the fine for violating HSR is indexed to account for
inflation, but the dollar value for determining whether a filing is
required is not. Again, S. 1854 remedies this dichotomy. I would note
as well that the fees--while not part of the HSR Act when passed--have
more than increased from $20,000 to $45,000.
Restoring the line drawn in the original statute between small
mergers, which would not be subject to the expense and delay required
by premerger notification, and larger mergers, which would remain
subject to the premerger review system, is unlikely to interfere with
the mission of protecting competition. The statistics published by the
FTC indicate that in fiscal year 1998, it received filings on 1,235
transactions valued at $25 million or less, and issued Second Requests
in 11 transactions, or less than 1 percent. The agency does not publish
statistics for transactions valued at $35 million or below, but for
transactions valued between $25 million and $50 million, an additional
16 Second Requests were issued in 1,163 transactions, or about 1.3
percent of the time. Of course, a majority of the Second Requests in
these larger mergers would likely be in mergers that would continue to
be subject to premerger review.
Unfortunately, filing fees generate most of the budget of each of
the agencies. To assure that the change in threshold, which will
significantly reduce the number of filings, is revenue neutral, S. 1854
sets up a two-tier fee system: $45,000 for transactions valued between
$35 million and $100 million, and $100,000 for transactions over $100
million. The NAM supports this increase in order to obtain the other
benefits of the legislation, but continues to believe that filing fees
should be eliminated.
3. Second Request Reform
The experience of NAM member companies is that the Second Request
process is extremely burdensome and cries out for reform, giving due
recognition to the need of the agencies for information necessary to
conduct an antitrust analysis of the proposed transaction. Existing
procedure encourages the agencies to issue requests for any information
and documents they believe might conceivably be relevant to analysis or
useful in possible litigation, without regard to the burden placed on
the parties. The power of agency staffers to insist on literal
compliance with an overbroad request is functionally unreviewable.
Since a Second Request automatically extends the deadline for final
agency decisions, the Second Request option is available for the
agencies' convenience whenever there is a backlog.
Responding to a Second Request is an incredible undertaking. It
frequently requires the parties to review the files of hundreds of
employees, searching for documents which number in the hundreds of
thousands or often millions of pages, which must be copied, numbered
and indexed according to agency requirements. The parties must also
prepare mounds of responses to interrogatories, frequently developing
data never used in the course of business or creating databases to
specifications set by agency lawyers and economists. The cost for this
process is frequently measured in the millions of dollars, and
sometimes in the tens of millions. These costs are frequently incurred
in transactions that go forward as presented to the agency.
Examples of unreasonable actions by the agencies during the course
of a Second Request abound. Every practitioner I know can tell stories
of numerous boxes of documents returned unopened, refusals to eliminate
demands for documents on subjects completely unrelated to the issues
under investigation, and refusals by agency staff to even identify what
they thought the issues were or the basis for any antitrust concern.
The current procedure provides no incentive whatever for the
agencies to reduce the burden imposed by a Second Request. There is no
practical way for the parties to obtain impartial, third party review
of agency actions taken pursuant to a Second Request. Thus, the
incentive among agency staff is to insist that the parties literally
comply with the request to eliminate any possible criticism for missing
any data. A number of years ago I was discussing a potential Second
Request with a staffer and requested that a product line that the
staffer agreed was unlikely to raise competitive concerns not be
included. The staffer refused to exclude the product line, and frankly
told me that issuing a full Second Request raised no questions from his
superiors, but he had to justify any changes from the standard form or
exclusions of data requested.
The Second Request procedure is broken. The balance of power is so
far skewed toward the agencies that these requests are placing an
enormous burden on business. For this reason the NAM strongly supports
S. 1854, sponsored by Senators Hatch, Mike DeWine and Herb Kohl. The
NAM recognizes that some of these problems can be alleviated through
internal agency procedures. Nevertheless, only legislative changes will
ensure continued and long-term relief.
The NAM supports effective merger oversight, and recognizes that
the agencies need significant amounts of information in a timely manner
to perform this mission. S. 1854 protects the ability of the agencies
to obtain needed information, but also protects parties to a
transaction under review from unnecessary burdens. First, the bill
limits the ability to issue burdensome requests; the agencies may not
request information that is ``unreasonably cumulative or duplicative,''
or requests that impose a burden or expense on the parties that
outweighs any likely benefit to the agencies in conducting ``a
preliminary antitrust review of the proposed transaction.'' This will
help prevent abuses by staffers insisting on literal compliance with
unreasonable requests. Second, the bill also sets a standard for
``substantial compliance''; a party has complied if there is no
``deficiency that materially impairs the ability of [the agencies] to
conduct a preliminary antitrust review of a proposed transaction.'' In
any review by a third party, this focuses attention on the legitimate
need for the information, rather than on literal compliance with the
request.
Finally, S. 1854 provides a procedure for the parties or the
agencies to obtain review by a federal magistrate of Second Request
compliance disputes. The availability of review by a neutral third
party provides balance to a process that is skewed toward the agencies,
and will provide the incentive, currently missing, for the agency
staffs to reduce the burden imposed on business. The NAM believes the
parties will carefully consider all alternatives before invoking the
procedure and taking the risks inherent in judicial review, and the
review will not become a part of most or many Second Request
proceedings.
For these reasons, the NAM strongly supports and urges enactment of
S. 1854 and, again, appreciates the opportunity to appear before you. I
will be happy to try to answer any questions that you may have.
Committee on Ways and Means
U.S. House of Representatives
Washington, DC
September 20, 1996
The Honorable Bob Livingston
Chairman
Committee on Appropriations
H-218 U.S. Capitol
Washington, DC 20515
Dear Chairman Livingston:
I am writing to you regarding the proposed increase in Hart-Scott-
Rodino fees adopted by the Senate Appropriations Committee in an
amendment to H.R 3814, the ``Departments of Commerce, Justice, and
State, the Judiciary, and Related Agencies Appropriations Act, 1997.''
I strongly object to any increase in the overall amount of these fees
and wish to inform you of my opposition, especially as you work on a
possible continuing resolution.
As you know, I am committed to protecting the jurisdictional
interests of the Committee on Ways and Means and to ensuring that all
revenue measures are properly referred to this Committee. To this end,
the Committee on Ways and Means relies upon the statement issued by
Speaker Foley in January 1991 (and reiterated by Speaker Gingrich on
January 4, 1995) regarding the jurisdiction of the House Committees
with respect to fees and revenue measures. Pursuant to that statement,
the Committee on Ways and Means generally will not assert jurisdiction
over ``true'' regulatory fees that meet the following requirements:
(i) The fees are assessed and collected solely to cover the
costs of specified regulatory activities (not including public
information activities and other activities benefiting the
public in general);
(ii) The fees are assessed and collected only in such manner
as may reasonably be expected to result in an aggregate amount
collected during any fiscal year which does not exceed the
aggregate amount of the regulatory costs referred to in (i)
above;
(iii) The only persons subject to the fees are those who
directly avail themselves of, or are directly subject to, the
regulatory activities referred to in (i) above; and
(iv) The amounts of the fees (a) are structured such that any
person's liability for such fees is reasonably based on the
proportion of the regulatory activities which relate to such
person, and (b) are nondiscriminatory between foreign and
domestic entities.
Additionally, pursuant to the Speaker's statement, the mere
reauthortization of a preexisting fee that had not historically been
considered a tax would not necessarily require a sequential referral to
the Committee on Ways and Means. However, if such a preexisting fee
were fundamentally changed, it properly should be referred to the
Committee on Ways and Means
Currently, the Hart-Scott-Rodino Antitrust Improvements Act of 1976
imposes a $45,000 premerger notification filing fee on certain
acquisitions. Proceeds from these fees are used as offsetting
collections in appropriating funds for the Federal Trade Commission
(the ``FTC'') and the Antitrust Division of the Department of Justice
(the ``Antitrust Division''). The modification proposed by the Senate
Appropriations Committee would establish a three-tiered fee structure
(ranging from $25,000 to $95,000). Proceeds from these fees would be
used to fund entirely the budgets of the FTC and the Antitrust
Division.
These increased fees are inconsistent with requirements (i), (ii),
and (iv) listed above. The FTC does far more than merely regulate
acquisitions subject to the Hart-Scott-Rodino Act. Indeed, there is
reason to believe that the amount of current premerger notification
fees substantially exceeds the costs of the FTC and Antitrust Division
in enforcing the Hart-Scott-Rodino Act and evaluating reportable
transactions under the antitrust laws. Under the proposed fee increase,
any pretext regarding linkage of the fees to regulatory costs is
abandoned. This is plainly an attempt to fund the entire FTC and
Antitrust division, which both have broader consumer protection
responsibilities, by imposing a tax on a small category of regulated
entities. Accordingly, any additional premerger notification ``fees''
are more properly viewed as taxes within the jurisdiction of the
Committee on Ways and Means.
The jurisdictional interest of the Committee on Ways and Means
relates solely to the use of the Hart-Scott-Rodino premerger
notification fees as a means of generally financing the FTC and the
Antitrust Division. We do not have an interest regarding how much
funding should be available to the FTC and the Antitrust Division and
how Hart-Scott-Rodino fees should be designed (as long as the amount of
fees are reasonably related to the relevant reguiatory costs and fairly
apportioned among affected entities).
I look forward to working with you to address these concerns. With
best personal regards,
Sincerely,
Bill Archer
Chairman
Senator Ashcroft. Senator Wyden.
Senator Wyden. I do not have any questions. I think it's
been an excellent panel. And you have--you have the challenge
of trying to compete with the Federal Trade Commission and all
that we asked of them, but your comments have been very, very
helpful. And we appreciate it and we will look carefully at
them as we review the statute. Thank you.
Senator Ashcroft. Thank you. I would like for any of you to
answer this for me.
The proposed legislation is to reduce the workload by about
40 percent of the cases of merger applications.
If you were to look at that 40 percent in the last four or
5 years, and I think this may be your Second Request language,
Mr. Bolerjack, but how many of those would have been denied as
mergers of that 40 percent?
Mr. Bolerjack. That is very difficult to answer. I think if
you get into our written testimony, even where they imposed the
Second Request, you are talking about a grand total, for
mergers of under $50 million, of 26 Second Requests out of--I
don't have the number handy, not that it matters.
Senator Ashcroft. Well, what I am asking is not--it seems
to me that after a Second Request it still might be that they
do not deny the merger.
Mr. Bolerjack. Absolutely, yes, sir.
Senator Ashcroft. So does anyone know the answer to the
question of how many are denied?
Mr. Foer.
Mr. Foer. I have done some analysis that is in the prepared
statement. The numbers I was working with were from fiscal year
1998, which were the last published----
Senator Ashcroft. Yes.
Mr. Foer. --but what it came down to was probably seven or
eight mergers a year that would have been stopped or
substantially changed would fall through the net.
And I say would fall through the net, because I do not
think anybody would go after them once the threshold is lifted.
They would have to be attacked after consummation of the
merger, which is very difficult, costly and often usually in
the past did not result in very effective relief.
So I think that counselors----
Senator Ashcroft. But the law is the same, is it not? I
mean, basically the offensive law----
Mr. Foer. It would be----
Senator Ashcroft. --so what you are saying is a court would
not reach the same judgment as the FTC would.
Mr. Foer. What I am saying is I do not think that the FTC
or Justice Department would ever challenge these.
Senator Ashcroft. They would not even think it was worth
it.
Mr. Foer. It would not be worth it.
Senator Ashcroft. So it is not a very--well, that--that
answers my question.
Mr. Foer. But I would like to add one more point.
Senator Ashcroft. Because if it is not worth it to do it,
why were they doing it in the first place?
And if--if we take a number of--of things that are worth
doing down to zero, that should settle this question.
Mr. Foer. May I respond?
Senator Ashcroft. Well, I--yes, you can. Go ahead.
Mr. Foer. Well, first of all, there is a difference in the
cost benefit analysis, if you are going to seek an injunction
before the merger or if you are going to have to come after it
after the eggs have been broken and mixed together and fried.
That was--that was too difficult to do.
On relatively small mergers, it just will not be done. And
these mergers will, in effect, have a free pass.
Now, is it important? We said--I said seven or eight. But
if counselors are now----
Senator Ashcroft. I understand your other point----
Mr. Foer. Okay.
Senator Ashcroft. --which you have made in your remarks. I
got the answer to my question and--but you--you--you--you think
that there is a certain appropriate chilling effect that the
filing has.
Mr. Foer. Yes.
Senator Ashcroft. And you do not want to lose that?
Mr. Foer. Yes.
Senator Ashcroft. I--I understand that.
Mr. Adler. May I add a comment, Mr. Chairman?
Senator Ashcroft. Yes, you may.
Mr. Adler. If you go back to the original intent of Hart-
Scott-Rodino, it was never intended that it was going to pick
up absolutely every merger. The legislative history shows that
it was understood that some mergers would not be pre-reported.
So if you miss seven or eight in the reporting process, that is
perfectly consistent with the original intent of Congress.
Senator Ashcroft. Well, if--and if the harm is not so
egregious as to even when it is understood later on occasion
the pursuit by the authorities, you've got to wonder whether
the harm is that substantial to the culture.
[Pause.]
Let me just clarify your points about fees. Your point is
not that these fees just fund the merger supervision
activities, but that they fund the entirety of the FTC, so it
is a massive subsidization.
Mr. Adler. Yes. Because if----
Senator Ashcroft. But you are against--you would be against
a fee which just funded the merger supervision?
Mr. Adler. Yes. Because what you would have would be the
acquiring companies in thousands of benign and even
procompetitive mergers cross-subsidizing the enforcement costs
for the Exxon/Mobils and other huge cases that are very
resource consuming.
Senator Ashcroft. Well, you could avoid a cross-subsidy if
your fee structure were related to cost like bank examiners.
If they spend 2 days in the bank, they charge 2 days. If
they spend 2 years, they charge 2 years, so in theory, you are
against even if they had specific cost allocations, you are
against it?
Mr. Adler. No, and we say in our prepared statement that if
you could fashion a fee that would be related to cost, that
would be more akin to a user fee, and we would not oppose that.
Indeed, that is what Germany does.
Senator Ashcroft. I am not proposing it. I just kind of
wanted to clarify what your position was.
I have only been involved in one merger myself. It was 31
years ago, I think, my wife would remind me.
There was a fee attendant there too. And I do not know what
we were subsidizing, but it has been a good merger.
I do not have any further questions, if the Senator from
Oregon, I thank you for your kindness and you all have--I--I
concur with him in that your testimony has been valuable and
helpful and straightforward. I appreciate it.
And I would now like to call the next group of witnesses to
the witness table.
[Pause.]
It is my pleasure to welcome you. I thank you for your
patience, and I am delighted that you are here to help us.
We first call upon Mr. Daniel Jaye, the Chief Technology
Officer for Engage Technologies. Engage delivers interactive
data based marketing products and information services.
Mr. Jaye, thank you for coming to help us understand better
this area of concern related to privacy. Thank you.
STATEMENT OF DANIEL JAYE, CHIEF TECHNOLOGY OFFICER, ENGAGE
TECHNOLOGIES
Mr. Jaye. Thank you, Mr. Chairman. I appreciate the
opportunity to testify before you today on these issues of
importance to your Committee, to Internet users, and to the
future of our Internet economy.
As you said, I am Daniel Jaye, with Engage Technologies of
Andover, Massachusetts, a CMGI company.
Engage is a leading provider of Internet marketing
solutions.
Engage's technologies and services allow web site operators
and advertisers to tailor their commercial and editorial
content in innovative ways likely to be of the greatest
interest to a visiting Internet user--all without ever learning
an individual's identity.
I would like to address two topics today; first, Engage's
technology is a powerful example of just how effectively the
marketplace can and will meet consumer demand for privacy; and
second; industry self-regulation as meaningful further
assurance of consumer privacy online.
Engage's business model not only accommodates, but is in
fact borne of consumers' interest in protecting their privacy
online.
When I joined with CMGI Chairman and CEO David Wetherell to
create Engage in 1995, we were guided by a few simple but
fundamental propositions.
If the Internet was truly to deliver an abundant array of
information and services that were both affordable and
appealing to a mass audience, the medium would require
advertising support.
And if that support was to prove sustainable, the medium
would have to demonstrate particular proficiency at delivering
the right ads to the right audience.
At the same time, all businesses agree that, in order for
the Internet to be successful, consumers must have trust and
confidence in the medium.
However, different companies have different business
models.
In our business, we believed that privacy-sensitive
technology brings a competitive advantage.
From the onset, in our approach, marketers do not need to
know the actual identity of a consumer to effectively market
online.
In our approach, they simply need to know the interests,
general vicinity and broad demographics of a website visitor to
provide information about the products and services that the
visitor is most likely to find useful.
At Engage we do not collect names, e-mail addresses, home
addresses or personal or other sensitive information of any
kind.
And we firewall that non-personally identifiable
information we collect through a patent-pending technology we
call dual-blind identification.
This ensure that individual websites can never determine a
web browser's identity or know what other sites the user may
have visited.
Indeed, Engage itself does not maintain information about
when a browser visits a particular web page. Instead, we
accumulate information about the aggregate amount of time spent
on different types of content to gain some sense of a visitor's
likely interest, but not who that visitor is or when and where
they have been on the web.
Our solution is built upon the principle that it should
never be possible for us or anyone else to determine or even
triangulate a visitor's real world identity based on the data
that we store.
We have built our business on the fundamental belief that
consumers will feel comfortable with a technology specifically
designed to protect their privacy.
Consumer comfort and security is no less critical to the
businesses who are our customers.
Advertisers and website publishers that want to protect
their brand and retain loyal customers cannot afford to do
business with companies that ignore consumer privacy concerns.
And, of necessity, they will ultimately embrace only those
technologies and practices that can provide tailored and
effective online advertising without compromising consumer
privacy.
This is a powerful marketplace force, and the growing
industry support of technologies like ours is proof that the
market is working.
Beyond the protections inherent in technologies such as
ours, policymakers can and should rely as well on our
industry's commitment to and strong self-interest in effective
self-regulation.
In the few short years over which the Internet has
blossomed, the online industry has already made tremendous
strides in voluntary or industry-mandated adoption of the right
way to do business.
Online companies can ill-afford to be out of step with
rising industry standards for privacy protection.
Industry self-regulatory programs that establish and
enforce meaningful privacy principles are thus essential to
effective consumer privacy protection.
Our industry has quickly and aggressively risen to this
challenge.
The Online Privacy Alliance has brought together more than
90 associations and corporations in a cross-industry coalition
that has produced not only widespread implementation of its
substantive guidelines, but also significant progress in
consumer education on this subject.
Consumers wishing to make informed choices about the
privacy practices of the websites they visit have become
increasingly familiar with the seal and the guidelines of the
various third-party organizations that have come to police
compliance with online privacy standards. These include TRUSTe
and the Better Business Bureau's BBBOnline program.
Beyond this--these industry-wide self-regulation efforts,
other groups have been at work to tailor standards to
particular segments of the online marketplace.
We are participating in the Network Advertising Initiative,
working with our counterparts, to expand industry standards in
a way that ensures consumer confidence in the privacy afforded
by the critical marketing support services our businesses
provide.
One tool common to this array of programs is the posting of
privacy statements and the full disclosure in simple language
and in plain sight, of all data collection and use practices.
If I can just have a minute to finish on the self-
regulatory principles?
Senator Ashcroft. Please----
Mr. Jaye. Thank you. Numerous companies now contractually
require publishers to post privacy policies.
Another standard approach affords consumers the ready
choice to opt out of information collection and use.
As you know the Federal Trade Commission has encouraged our
industry's extensive self-regulatory efforts, and now the
agency has convened a new Advisory Committee on Online Access
and Security.
As a member of this committee, the committee is working to
develop even more effective means to ensure that consumers feel
and are safe and secure in their online travels.
These self-regulatory and FTC oversight initiatives bolster
what are already formidable marketplace checks on online
businesses' protection of consumer privacy.
Effective self-regulation of the Internet is not only the
right thing to do, it is the necessary thing to do.
In fact, 70 to 80 percent of the ad space on the Internet
today is unsold or undersold.
For Web publishers to attain profitability, they must be
allowed to deploy and use the innovative marketing capabilities
that initially attracted advertisers.
Thus, this is not the time to risk undermining the
effectiveness of online advertising.
The viability of e-commerce, of an advertising-supported
Internet, and thus of all of the Internet's tremendous economic
and societal benefits depends on it.
Thank you.
Senator Ashcroft. Thank you. You were true to your one-
minute word. Thank you.
[The prepared statement of Mr. Jaye follows:]
Prepared Statement of Daniel Jaye, Chief Technology Officer,
Engage Technologies
Thank you, Mr. Chairman. I appreciate the opportunity to testify
before you today on these issues of importance to your Committee, to
Internet users, and to the future of our Internet economy.
My name is Daniel Jaye. I am the Chief Technology Officer and Co-
Founder of Engage Technologies, Inc. of Andover, Massachusetts.
Engage is a leading provider of ``next generation online marketing
solutions.'' Just what does that description mean, free of at least
some of the Internet jargon?
It means that Engage technology and services allow web site
operators and advertisers to tailor their commercial and editorial
content in innovative ways likely to be of the greatest interest to a
visiting Internet user--all without ever learning an individual's
identity.
And we know how important that is to Internet companies, as Engage
is a majority-owned operating company of CMGI, Inc.--an Internet
incubator and investment company that funds or operates a tremendous
array of successful Internet businesses.
I would like to address two topics today: first, Engage's
technology as a powerful example of just how effectively the
marketplace can and will meet consumer demand for privacy; and, second,
industry self-regulation as meaningful further assurance of consumer
privacy online.
Let me begin, then, with an explanation of how Engage's business
model not only accommodates, but is in fact borne of, consumers'
interest in protecting their privacy online. When I joined with CMGI
Chairman & CEO David Wetherell to create Engage in 1995, we were guided
by a few simple but fundamental propositions. If the Internet was truly
to deliver an abundant array of information and services that were both
affordable and appealing to a mass audience, the medium would require
advertising support. And if that support was to prove sustainable,
online advertising would have to make up in quality what it lacked in
quantity: the medium would have to demonstrate particular proficiency
at delivering the right ads to the right audience. At the same time,
all businesses agree that, in order for the Internet to be successful,
consumers must have trust and confidence in the medium.
Different companies have different business models. In our own
business, we believed that privacy-sensitive technology would bring a
competitive advantage. So, from the outset, Engage has developed a
unique technology in which online marketers understand the interests of
web site visitors based strictly upon anonymous, non-personally
identifiable information. In our approach, marketers do not know the
actual identity of a consumer to effectively market online. They simply
know the interests, general vicinity, and broad demographics of a web
site visitor in order to provide information about products and
services that visitor is most likely to find useful. We do not collect
names, e-mail addresses, home addresses, or personal (or otherwise
sensitive) information of any kind.
And we firewall the non-personally identifiable information we
collect through a patent-pending technology we call ``dual-blind''
identification: this ensures that individual web sites can never access
the identity even of the individual's web browser or know what other
sites a user may have visited. Indeed, Engage itself does not maintain
information about when a browser visits a particular web page. Instead,
we accumulate information about the aggregate amount of time spent on
different types of content in order to gain some sense of a visitor's
likely interests--but not who that visitor is or just when and where
they have been on the web. Our solution is built upon the principle
that it should never be possible for us (or anyone else) to determine
(or even ``triangulate'') a visitor's real world identity based on our
abstracted data.
We have built our business on the fundamental belief that consumers
will feel comfortable with a technology specifically designed to
protect their privacy. Consumer comfort and security is no less
critical to the businesses who are our customers. Advertisers and web
site publishers that want to protect their brand and retain loyal
customers cannot afford to do business with companies that ignore
consumer privacy concerns. And, of necessity, they will ultimately
embrace only those technologies and practices that can provide tailored
and effective online advertising without compromising consumer privacy.
This is a powerful marketplace force, and the growing industry support
of our technology is proof that the market is working.
Beyond the protections inherent in technologies such as ours,
policy makers can and should rely as well on our industry's commitment
to--and strong self-interest in--effective self-regulation. In the few
short years over which the Internet has blossomed, the online industry
has already made tremendous strides in voluntary or industry-mandated
adoption of ``the right way'' to do business. And for the same
competitive reasons I mentioned a moment ago, online companies can ill
afford to be out of step with rising industry standards for privacy
protection.
Industry self-regulatory programs that establish and enforce
meaningful privacy principles are thus essential to effective consumer
privacy protection. (Indeed, other countries' forays into governmental
regulation of privacy have only confirmed the greater efficacy of
active industry self-regulation.) Our industry has quickly and
aggressively risen to this challenge.
The Online Privacy Alliance has brought together more than 90
associations and corporations in a cross-industry coalition that has
produced not only widespread implementation of its substantive
guidelines, but also significant progress in consumer education on this
subject.
Consumers wishing to make informed choices about the privacy
practices of the web sites they visit have become increasingly familiar
with the seal and the guidelines of the various ``third party''
organizations that have come to police compliance with online privacy
standards. These include TRUSTe, of which Engage is proud to be a
licensee and sponsor, and the Better Business Bureau's BBBOnline.
Beyond these industry-wide self-regulation efforts, other groups
have been at work to tailor standards to particular segments of the
online marketplace. We are participating in the Network Advertising
Initiative, working with our counterparts in online network advertising
to expand industry standards in a way that ensures consumer confidence
in the privacy afforded by the critical marketing support services our
businesses provide.
One tool common to this array of self-regulatory programs is the
posting of privacy statements and the full disclosure, in simple
language and in plain sight, of all data collection and use practices.
And, reflective of how our competitive industry is driven to compete in
terms of privacy protection as well, Engage has been a leader in
contractually requiring our customers to post a privacy page disclosing
their relationship to us and to provide a direct link to our privacy
page.
Another standard approach affords consumers the ready choice to
``opt out'' of information collection and use. In our case, consumers
need only visit our www.engage.com privacy page, click on our opt-out
link, and their browser will no longer be the subject of any behavioral
information collection or use.
As you know, the Federal Trade Commission has encouraged our
industry's extensive self-regulation efforts, and now the agency has
convened a new Advisory Committee on Online Access and Security. I am
proud to be joining with this broad array of industry and consumer
representatives working to develop even more effective means to ensure
that consumers feel--and in fact are--safe and secure in their online
travels.
These self-regulation and FTC oversight initiatives bolster what
are already formidable marketplace checks on online businesses'
protection of consumer privacy. The needs of our advertisers to
attract--and not repel--consumers will ensure that we get the job done.
Effective self-regulation of Internet privacy is thus not only the
right thing to do--it's the necessary thing to do. In fact, 70-80
percent of the ad space on the Internet today is unsold or undersold.
For Web publishers to attain profitability, they must be allowed to
deploy and use the innovative marketing capabilities that initially
attracted advertisers.
Thus, this is no time to risk undermining the effectiveness of
online advertising. The viability of e-commerce, of our advertising-
supported Internet, and thus of all the Internet's tremendous economic
and societal benefits depends on it.
Thank you.
Senator Ashcroft. It is my pleasure now to call upon the
Honorable William H. Sorrell.
Mr. Sorrell is the Attorney General of the State of Vermont
and it is a pleasure to have you here, Mr. Sorrell.
STATEMENT OF WILLIAM H. SORRELL, ATTORNEY GENERAL, STATE OF
VERMONT
Mr. Sorrell. Thank you very much, Mr. Chairman, Senator
Wyden.
I am pleased to be here and grateful to the Committee for
hearing from the National Association of Attorneys Generals on
certain of the matters that are before the Committee today.
I have prepared some written comments, which I have filed
and I hope will be accepted as part of the record of these----
Senator Ashcroft. Without objection, they will be included
and so would any submissions by those who join you on the
panel.
Mr. Sorrell. Thank you, Mr. Chairman. I want to just--in
less than 5 minutes--highlight a few of the points that I raise
in my written comments.
First of all, we support the reauthorization of the Federal
Trade Commission.
The FTC has a long history of excellent work to protect
consumers in this country.
At the same time, I want to highlight the fact that the
Attorneys General around the country have a long history of
aggressively enforcing our consumer protection laws.
We are at ground zero, if you will, in dealing with
consumer fraud.
We have worked individually. We have worked on a multi-
state basis. We have worked collectively with the FTC,
particularly in the area of telemarketing fraud--and I think
effectively as partners.
But as the chair suggested earlier this morning, we are in
a changing world and with the Internet the pace of change, as
we heard at an AG's meeting in Palo Alto, California, last
month--on the Internet that exponential change is now an
accepted sociological fact.
And so we, in trying to exert our traditional enforcement
powers are struggling to keep up with this rate of exponential
change.
We have taken aggressive actions to deal with--Senator
Brownback was talking--online pharmacies and unlicensed
practice of medicine and unlicensed pharmacies doing business.
We have also taken action in a number of states to deal
with the sale of Bidis, or flavored cigarettes to children.
We've dealt with issues of false health claims that we
heard the chair of the Federal Trade Commission talking about
earlier.
We have also been very, very concerned about consumer
privacy, about the collection of information about what
consumers do, and not just the purchases they make on the
Internet, but the sites that they browse, and where they browse
within individual sites.
And we are very concerned about the technology that allows
the collection of vast amounts of personal data and very easy
transmittal of this data to other entities for commercial and
other purposes.
We have--through our chair, our president this year,
Washington Attorney General Christine Gregoire set up a privacy
study group. And we are very actively concerned as Attorneys
General--we will be meeting next month and talking about the
Internet. And we will be talking about privacy. And those will
be ongoing concerns for us.
We urge you that whatever you--what action you should take
in regulating the Internet commerce going forward that you not
pre-empt the States' ability to go our own ways.
In the same way that you have given us the authority in
telemarketing fraud and such to have the States be laboratories
and to go further, if they wish, to protect individual state's
consumers.
We urge you to continue to give us that right to do so as
it relates to Internet commerce.
Certainly, with the rate of exponential change, with the
thousands of websites coming online daily, with those who prey
upon people, either criminally from child pornography, to
online gaming, to those who fraudulently conduct online
commerce, the challenges to the FTC and to the States to try to
stay abreast of that and to try to regulate those activities
that prey upon consumers--the challenges are great.
We need adequate resources to be able to do that. The
Federal Government has been generous in terms of giving
resources to the Department of Justice and to the FTC to deal
with telemarketing fraud, also to the states.
We have greatly benefited from Federal resources at the
state level in dealing with telemarketing fraud. We hope that
as you continue your work in this area relating to the Internet
that you will see fit to provide adequate resources for us to
be able to do the job.
Thank you very much, Mr. Chairman.
Senator Ashcroft. Thank you, Attorney General Sorrell.
[The prepared statement of Attorney General Sorrell
follows:]
Prepared Statement of William H. Sorrell, Attorney General,
State of Vermont
Chairman Ashcroft, Senator Bryan, and members of the Subcommittee,
thank you for your invitation to testify today on issues of importance
to the state Attorneys General: supporting and strengthening the long-
standing partnership between the states and the Federal Trade
Commission in protecting this nation's consumers; protecting consumers
as they navigate the Information Superhighway; and preserving the
privacy of those consumers.
The Attorneys General strongly support the work of the Federal
Trade Commission, with which we have had an ongoing, longstanding, and
valued partnership. As the Commission stated after the passage of the
FTC's Telemarketing Sales Rule, which gave the states the ability to go
into federal court and obtain nationwide relief against fraudulent
telemarketers, there are now ``fifty-one cops on the beat'' against
telemarketing fraud. This collective enforcement approach has been very
successful. Since 1996, the states have obtained more than 300
injunctions against and over 150 convictions of fraudulent
telemarketers. Many of those injunctions have been obtained in concert
with the FTC, and the FTC has served as an invaluable resource to the
states as they pursue fraudulent telemarketers. In addition, with the
help of funding from the Department of Justice, the National
Association of Attorneys General has coordinated the training of over
500 state and local law enforcers from all 50 states, the District of
Columbia, and three territories in the investigation and prosecution of
fraudulent telemarketers. This collaborative effort with district
attorneys and state and local investigators has allowed state and local
governments to leverage scant resources and shared expertise in the
telemarketing fraud arena.
The states and the FTC have continued their partnership as fraud
has shifted from the phone lines to cyberspace. Joint state-federal
enforcement sweeps and surfs--targeting false health claims, fraudulent
business opportunities, and pyramid schemes--have put cyber-scammers on
notice that we will continue our ``zero tolerance'' policy, no matter
the medium chosen to exploit consumers.
State Attorneys General have recently recognized the need for a
coordinated, ``real time'' state and local effort to root out Internet
fraud. Federal, state and local law enforcers are already at work to
develop a ``24/7'' network of investigators and prosecutors dedicated
to the detection, investigation, and prosecution of Internet criminals.
Certainly, increased funding to ensure that the state and local network
is strong, smart, and well-equipped will, as in the telemarketing
arena, enable state and local enforcers to provide a valuable
complement to federal civil and criminal cyber-enforcement efforts.
We look forward to a continued cooperative relationship with the
FTC.
Apart from our coordinated efforts with the FTC, the nation's
Attorneys General have long been the local cops on the beat protecting
consumers from fraudulent business practices. In the early 1990's, the
office of Iowa Attorney General Tom Miller revolutionized telemarketing
fraud enforcement when it instituted an undercover taping protocol
through which fraudulent telemarketers' deceptive pitches were captured
on tape. Iowa's work provided the evidence for myriad state and local
criminal and civil prosecutions of fraudulent telemarketers, both in
this country and abroad. Iowa's work grew into the National Tape
Library, a joint state-federal repository housing tens of thousands of
fraudulent tape recordings. The National Association of Attorneys
General currently serves as chair of the joint state-federal steering
committee that oversees the operation of the Library.
In fulfilling our mission to protect the consumers in our states,
we have followed fraudulent scammers as they moved from Main Street to
the Information Superhighway. The Attorneys General have pursued such
traditional law violations as deceptive sales, investment and business
opportunity scams, pyramid schemes, and false health claims onto the
Internet. In addition, the states have taken the lead on some law
enforcement problems that are peculiar to the Internet. Led by Kansas
Attorney General Carla Stovall, the Attorneys General have brought law
enforcement actions against dozens of defendants for the illegal online
sale of prescription drugs. The Attorneys General also have attacked
the illegal sale of India bidis cigarettes to this nation's youth;
online auction fraud; Internet gambling; and Internet spamming,
cramming, and slamming. What has emerged as a result of our activity is
a united and concerted assault at the state level on myriad forms of
Internet fraud.
Protecting consumers who travel on the Internet is a priority for
the state Attorneys General. When she became NAAG's President last
summer, Washington Attorney General Christine Gregoire deemed the
Internet as one of the major initiatives of her Presidential year.
Toward that end, last month NAAG convened a conference at Stanford
University Law School to address the impact of the Internet and high
technology on the mission of the Attorneys General. The conference,
which was hosted by California Attorney General Bill Lockyer,
highlighted the ongoing Internet-related law enforcement initiatives
undertaken by the Attorneys General and provided a forum at which
Attorneys General could grapple with upcoming Net issues and
challenges. We also addressed the best means by which state Attorneys
General and their federal and local partners can attack cybercrime.
The state Attorneys General have a particular interest in
addressing consumers' concerns about protecting their privacy as
Internet commerce becomes the norm. NAAG has created a Privacy Working
Group, which I serve as co-chair. Many Attorneys General have
introduced legislation that will enhance the privacy of consumers who
transact business over the Internet. Idaho Attorney General Al Lance,
Illinois Attorney General Jim Ryan, Minnesota Attorney General Mike
Hatch, Missouri Attorney General Jay Nixon, New York Attorney General
Eliot Spitzer, Washington Attorney General Christine Gregoire, and I
have recently introduced Internet privacy legislation targeting spam;
prohibiting Internet companies from selling personal information
obtained from Internet users; and requiring web sites that collect
information from users to disclose how that information will be used.
The concerns of the Attorneys General and our constituents are also
reflected in the Report of Washington Attorney General Christine
Gregoire's Privacy Task Force. The Task Force included business,
consumer, and legislative leaders. During a four-month span, more than
125 consumers testified, wrote to, or e-mailed the Task Force.
Consumers' concerns included: the frequency with which personal
information is collected; the entities with whom that information is
shared; the disclosure of that personal information without the consent
or knowledge of the consumer; consumers' lack of access to the
information that is collected from and disseminated about them; the
accuracy of the information that is disseminated; and the need for
meaningful regulatory and/or enforcement approaches to these issues.
In closing, I want to stress a couple of points. First, any federal
law enforcement approach to protecting consumers who travel the World
Wide Web must include the states. We ask you to take such steps to
ensure that the states can play a full and constructive role in the
effort to police the Internet. Second, we urge you to not preempt the
states. As fifty-one Attorneys General recently said to each of you
with respect to pending Electronic Signatures bills, ``[w]e have strong
concerns about any federal legislation that preempts state laws in
areas traditionally reserved to the states, particularly when there
should be no conflict between the federal goals and state jurisdiction.
. . .'' Consumer protection on the Internet is one such area.
Thank you.
Senator Ashcroft. Ms. Deirdre Mulligan has done work
focusing on developing legal and technological means to
increase individual control over personal information that is
held by commercial and governmental parties.
And it sounds to me like your area of expertise is the
subject of what we are interested in, so we are very pleased to
hear from you.
Would you proceed with your testimony?
STATEMENT OF DEIRDRE MULLIGAN, STAFF COUNSEL, CENTER FOR
DEMOCRACY AND TECHNOLOGY
Ms. Mulligan. Thank you. It's a pleasure to be here. And
you made me realize that I need to rewrite my biography. It is
a little bit of a mouthful.
CDT is, as you said, a non-profit. We work on First
Amendment and privacy issues, particularly in the burgeoning
area of the digital marketplace.
We firmly believe that the Internet has much potential to
offer consumers and individuals a vibrant experience, both for
our cherished democratic values, and also for the exchange of
things like goods and services.
We also believe that the Internet poses some real risks,
and right now one of those risks happens to be the loss of
personal privacy.
We firmly believe that technology has a role to play here.
As Mr. Jaye has elaborated, there are many technical decisions
that are being made in the marketplace today about where to
store data, what kind of data to collect, how to retain it.
There are standards being developed, such as the platform for
privacy preferences and tools that will hopefully come to the
marketplace to enable individuals to exercise realtime control
over their data.
We also firmly believe that there is a role for self-
regulation to play and that both through technology leadership
and through policy leadership, by stepping up to the plate and
working with the Federal Trade Commission, the state AG's, and
with consumer organizations and privacy organizations, that the
private sector can help set benchmarks.
We also believe that Congress has a role to play here. We
believe that the Children's Online Privacy Protection Act,
which was a product of some very fine leadership by members of
the full Committee, working with the Federal Trade Commission,
the business community, children's advocates and privacy
advocates, provided a sound model for crafting public policies
that can map onto the Internet in an incredibly sensitive and
technologically appropriate way.
I have an article that I would like to submit for the
record. What I would like to do is highlight a few of the new
issues that are facing consumers today.
There has, indeed, been an effort in the business community
to address some consumer concerns. We know that there are
laudable efforts such as TRUSTe and BBBOnline to promote
raising the privacy bar in the private sector. There are
members of those organizations. Unfortunately, those members
are still relatively small. If you take TRUSTe, right now,
membership is about 1,000.
As we heard from Commissioner Swindle, there are about
three million commercial websites, and they are growing
tremendously each month.
You can see that self--self-regulatory agencies have an
awful lot of water to carry if they want to get from 1,000 to--
3 million and growing.
We believe that their efforts need to be bolstered and that
legislation should, in fact, provide a baseline upon which good
business practices will produce a race to the top.
But consumers on the Internet looking for privacy policies,
unfortunately, sometimes find them very difficult to read.
An expert in communications to the public who has a broad
range of specialities, particularly looking at consent forms in
the context of managed care and other things, sent me an
analysis of a privacy policy of a very large business on the
web. In his estimation, he said it was basically a graduate
level reading text and that on average the sentences contained
about 26 words.
And he graded the sentences as being ``complex, pompous,
and very difficult to comprehend.'' I think, in fact, that is
what many consumers find when they are out on the web.
However, reading those policies happens to be the core of
protecting your privacy today. Frequently what individuals find
is that to maintain control over their information, which is
core of privacy--an individual's ability to determine what
happens to personal data--they must ``opt out.''
There are instances where individuals can act anonymously,
protecting their privacy completely--but the goal here is to
facilitate a whole range of interactions, some of them
commercial where individuals are going to willingly turn over
information, because they are really interested in the goods or
service. And the question is what happens to their data after
that point. Today, the answer is consumers have to take steps
to protect it. One of the things they frequently have to do is
opt out. And that means that as an individual you can object
and tell a company not to use your data for other purposes.
Today, opting out can be quite a task. It means reading a
privacy policy at every single website you come to.
In November, CDT unleashed a new website, and that website
is designed to help consumers find a single one-stop shop to
remove their names from profiling databases, marketing lists,
telemarketing lists, to simplify ``opting out'' by giving
consumers a single place where they can do this rather than
having to visit all these separate shops.
In addition to helping thousands of consumers who were very
thankful to have this one-stop shop, we found that many of the
services that were provided by businesses to ``opt out,'' in
fact, did not work.
I will use the online profiling companies as an example.
Features at Flycast and Matchlogic just did not perform and had
to be corrected. While consumers were being told they could
take a step to protect their privacy, in fact, the feature did
not function.
More troublingly we found that one of the self-regulatory
seals being displayed was expired.
Once they have been told that they can protect their
privacy, we now have--may I take another minute or two of the--
of the Chair's time?
Senator Ashcroft. You have one more minute----
Ms. Mulligan. I will wrap up.
Senator Ashcroft. We have gone a minute over on previous
cases. Keep going.
Ms. Mulligan. You have got it.
Consumers have found that once they finally figured out
where to look, they are supposed to be looking for privacy
policies with the business that they were doing business with,
they now find that there are new ventures on the marketplace,
ad profiling, and ad management companies that are, in fact,
reaching through those websites and collecting information from
consumers.
These are businesses that consumers have no relationship
with.
They are frequently unaware of these organizations. And
these organizations are reaching through and collecting
detailed information and creating profiles that are used at a
whole host of websites to target--as we heard earlier from Mr.
Jaye--both advertising and content. In other words, this
information is being used to make decisions about what you see
and what you view on the Web.
I look forward to working with the Committee. I thank you
for holding this hearing. The FTC has played an enormously
useful role in moving discussions of privacy forward. And I
hope to continue to be able to work with them. Their funding is
critically important.
Senator Ashcroft. Thank you very much.
[The prepared statement of Ms. Mulligan follows:]
Prepared Statement of Deirdre Mulligan, Staff Counsel,
Center for Democracy and Technology
I. Introduction
The Center for Democracy and Technology (CDT) is pleased to have
this opportunity to testify about privacy in the online environment and
the Federal Trade Commission's role in developing privacy policy. CDT
is a non-profit, public interest organization dedicated to developing
and implementing public policies to protect and advance civil liberties
and democratic values on the Internet. One of our core goals is to
enhance privacy protections for individuals in the development and use
of new communications technologies. We thank the Chairman for the
opportunity to participate in this hearing and look forward to working
with the Committee to develop policies that support civil liberties and
a vibrant Internet.
To being, I would like to offer three points to guide the Committee
as it begins to address the protection of individual privacy:
The Internet presents new challenges and opportunities
for the protection of privacy. Our policies must be grounded in
an understanding of the medium's unique attributes and its
unique potential to promote democratic values. It must also
address the unique risks the Internet poses to our values
including personal privacy. As many .coms tout the benefits of
customized content and personalized advertising they play down
the personalized tracking and profiling that support such
applications. The Internet will best serve individuals if we
recognize the risks to privacy and develop public policies and
technologies that address them. There is little doubt that the
Internet holds great promise for maximizing our democratic
values and growing our economy, however sound public policies
play an integral part in ensuring we achieve these goals. I
look forward to working with the Committee to explore
legislative options for protecting privacy on the Internet.
Increasingly, the rules that govern society are
embodied in computer code. This code, and the products built
upon it, can enhance or limit the collection of personal
information and can either afford or deny individuals control
over their information. Technical decisions including whether a
product is designed to keep information on an individual's own
computer or on a remote server, what personal information a
product collects, and for how long information is retained have
important implications for privacy. The availability of robust
encryption, the development of strong authentication devices,
and the deployment of technical standards such as the Platform
for Privacy Preferences are an important component of
protecting privacy on the Internet.
Privacy is a complex value. Ensuring that individuals'
long-held expectations of autonomy, fairness, and
confidentiality are respected as daily activities move online
requires a thoughtful, multi-faceted approach combining self-
regulatory, technological, and legislative components. These
expectations exist vis-a-vis both the public and the private
sectors. By autonomy, I mean the individual's ability to
browse, seek out information, and engage in a range of
activities without being monitored and identified. Fairness
requires individuals maintain control over the information that
they provide to the government and the private sector. The
concept of fairness is embodied in the Code of Fair Information
Practices \1\--long-accepted principles specifying that
individuals should be able to ``determine for themselves when,
how, and to what extent information about them is shared.'' \2\
In terms of confidentiality, we need a strong Fourth Amendment
in cyberspace.
---------------------------------------------------------------------------
\1\ The Code of Fair Information Practices as stated in the
Secretary's Advisory Comm. on Automated Personal Data Systems, Records,
Computers, and the Rights of Citizens, U.S. Dept. of Health, Education
and Welfare, July 1973:
There must be no personal data record-keeping systems whose very
existence is secret.
There must be a way for an individual to find out what
information about him is in a record and how it is used.
There must be a way for an individual to prevent information
about him that was obtained for one purpose from being used or made
available for other purposes without his consent.
There must be a way for the individual to correct or amend a
record of identifiable information about him.
Any organization creating, maintaining, using, or disseminating
records of identifiable personal data must assure the reliability of
the data for their intruded use and must take precautions to prevent
misuse of the data. Id.
The Code of Fair Information Practices as stated in the OECD
guidelines on the Protection of Privacy and Transborder Flows of
Personal Data http://www.oecd.org/ [at the time this hearing was held].
1. Collection Limitation Principle: There should be limits to the
collection of personal data and any such data should be obtained by
lawful and fair means and, where appropriate, with the knowledge or
consent of the data subject.
2. Data quality: Personal data should he relevant to the purposes
for which they are to be used, and, to the extent necessary for those
purposes, should be accurate, complete and kept up-to-date.
3. Purpose specification: The purposes for which personal data are
collected should be specific not later than at the time of data
collection and the subsequent use limited to the fulfillment of those
purposes or such others as are not incompatible with those purposes and
as are specified on each occasion of change of purpose.
4. Use limitation: Personal data should not be disclosed, made
available or otherwise used for purposes other than those specified in
accordance with the ``purpose specification'' except: (a) with the
consent of the data subject;, or (b) by the authority of law.
5. Security safeguards: Personal data should be protected by
reasonable security safeguards against such risks as loss or
unauthorized access, destruction, use, modification or disclosure of
data.
6. Openness: There should be a general policy of openness about
developments, practices and policies with respect to personal data.
Means should be readily available of establishing the existence and
nature of personal data, and the main purposes of their use, as well as
the identity and usual residence of the data controller.
7. Individual participation: An individual should have the right
(a) to obtain from a data controller, or otherwise, confirmation of
whether or not the data controller has data relating to him; (b) to
have communicated to him, data relating to him:
--within a reasonable time;
--at a charge, if any, that is not excessive;
--in a reasonable manner, and,
--in a form that is readily intelligible to him; (c) to be given
reasons if a request made under subparagraphs (a) and (b) is denied,
and to he able to challenge such denial; and, (d) to challenge data
relating to him and, if the challenge is successful to have the data
erased, rectified completed or amended.
8. Accountability: A data controller should be accountable for
complying with measures which give effect to the principles stated
above.
\2\ Alan Westin. Privacy and Freedom (New York: Atheneum, 1967), 7.
I have attached a law review article that elaborates on these three
points, authored by CDT's Executive Director, Jerry Berman, and myself.
I will devote the remainder of my testimony to providing the Committee
with an overview of important privacy issues on the Internet and some
thoughts on the roles of the Federal Trade Commission and Congress as
we seek policies to protect privacy.
II. Privacy policies on the Web
Last July, I provided the Subcommittee on Telecommunications with
CDT's report, ``Behind the Numbers: Privacy Practices on the Web.'' The
report concluded that Fair Information Practices were the exception
rather than the rule on the World Wide Web; private sector enforcement
programs covered a very small segment of commercial Web sites; and
individuals' privacy concerns remained largely unaddressed. The report
was based in part on the Georgetown Internet Privacy Policy Survey,
released last July, which found that while more Web sites were
mentioning privacy, only 9.5% provided the types of notices required by
the Online Privacy Alliance, the Better Business Bureau and TRUSTe.
The Georgetown Survey found that an increased number of Web sites
provided consumers with some information about what personal
information is collected (44%), and how that information will be used
(52%). But, on important issues such as access to personal information
and the ability to correct inaccurate information, the survey found
that only 22% and 18% respectively of the highly trafficked Web sites
surveyed provided consumers with notice of their rights. On the
important issue of providing individuals with the capacity to control
the use and disclosure of personal information, the survey found that
39.5% of these sites said that consumers could make some decision about
whether to be re-contacted for marketing purposes--most likely an
``opt-out''--and fewer still, 25%, said they provided consumers with
some control over the disclosure of data to third parties.\3\
---------------------------------------------------------------------------
\3\ This number is generated using the data from Q32 (number of
sites that say they give consumers choice about having collected
information disclosed to outside third parties)--64--and dividing it by
256 (the total survey sample (364) minus the number of sites that
affirmatively state they do not disclose data to third-parties (Q29A)
(69) and the number of sites that affirmatively state that data is only
disclosed in the aggregate (Q30) (39)).
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While a year has passed, a recent report indicates that adherence
to Fair Information Practices is not the norm on the Web. A report
released last week on the privacy policies and practices of health Web
sites found that while 19 of the 21 Web sites surveyed had privacy
policies, they failed to meet Fair Information Practice Principles.\4\
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\4\ Report on the Privacy Policies and Practices of Health Web
Sites, Janlori Goldman and Zoe Hudson, Health Privacy Project,
Georgetown University, and Richard M. Smith. http://ehealth.chcf.org
[at the time this hearing was held].
---------------------------------------------------------------------------
Overall, reports and surveys over the past year have found that
even the most frequently trafficked consumer Web sites do not
adequately inform individuals about how their personal information is
handled. More troubling is the finding that health Web sites, where
individuals divulge sensitive information, are not providing
individuals' personal information with strong privacy protections. At
the same time these same busy consumer-oriented Web sites are
collecting increasingly detailed personal information.
III. New threats to individuals' privacy
It is difficult for individuals to limit the use and disclosure of
their personal information. Where ``privacy statements'' are posted
they are frequently written in complex and confusing language. An
expert in communicating with the public provided CDT with an analysis
of a prominent company's privacy statement. He found the statement to
be written at the graduate school reading level with each sentence
averaging 24 words.
If a consumer finds a privacy statement and successfully deciphers
it she frequently finds that if she fails to ``opt-out'' (object) her
name, address, and other personal information will be shared with
undefined ``others.'' Today, to limit the reuse of personal information
an individual must search every Web site for an opportunity to ``opt-
out,'' and hope that the opt-out features work as promised, which CDT
has found is not always the case.
On November 15, CDT launched a new Web site, ``Operation Opt-Out,''
to give consumers a simple one-stop location to ``get off the lists''--
the mailing and telephone lists and profiling databases that have
proliferated with the digital economy. Operation Opt-out has assisted
thousands of individuals to limit the use of their personal
information.
In addition to helping individuals, Operation Opt-Out produced
useful information about whether companies do what they say. During its
second week Operation Opt-Out ran a feature on how to ``opt-out'' of
the online profiling or ``network advertising'' companies data systems.
We found several problems with the opt-out features offered by the
online profiling companies. Problems ranged from broken ``opt-out''
features at Flycast \5\ and Matchlogic,\6\ to Matchlogic's display of
an expired TRUSTe seal.
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\5\ To Flycast's credit, they were quick to fix this problem once
we contacted them, however, we have no idea how long the opt-out was
broken and how many consumers were effected by this problem.
\6\ Matchlogic now provides an online opt-out feature.
---------------------------------------------------------------------------
Individual's ability to limit the use and disclosure of their
personal information by businesses with which they have chosen to
interact remains difficult. But of increasing concern are the
activities of online profiling companies, or network advertisers, who
collect data without the individual's knowledge or consent. With
growing frequency, navigational and other data is being captured by
advertising networks or ``profiling companies.'' With the permission of
the Web site, but not the individual, these profiling companies place
unique identifiers on individuals' computers. These identifiers are
then used to track individuals as they surf the Web. The individual's
profile grows with time, because online profiling is a continuing
collection of his online behavior, despite the fact that the individual
disconnects. The navigational data collected may include information
such as Web sites and Web pages visited, the time and duration of the
visit, search terms typed in search engines' forms, and other queries,
purchases, ``click through'' responses to advertisements, and the
previous page visited. In addition to long lists of collected
information, a profile may contain ``inferential'' or ``psychographic''
data--information that the business infers about the individual based
on the behavioral data captured. From this amassed data, elaborate
inferences may be drawn, including the individual's interests, habits,
associations, and other traits.\7\
---------------------------------------------------------------------------
\7\ A psychographic study ``joins consumers' measurable demographic
characteristics with the more abstract aspects of attitudes, opinions
and interests.'' Data mining specialists code demographic, media,
purchasing and psychographic data from surveys, throw them together and
analyze them until some groups with shared characteristics can be
distinguished from all other groups. They can identify those groups
most likely to buy specific products and services by including
questions relating to a product about past buying habits or future
intentions to purchase. Every kind of psychographic study adds the
dimension of psychology and/or lifestyles to a demographic inquiry and
uses quantitative survey techniques. Cf. Rebecca Piirto HEATH,
Psychographics: Qu'est-Ce Que C'est?, Marketing Tools, Nov.-Dec. 1995;
http://www.demographics.com/publications/mt/95__mt/9511__mt/MT3gg.htm
(last viewed on Nov. 12, 1999).
---------------------------------------------------------------------------
The practices of online profiling companies have far-reaching
impacts on consumers' online privacy. The companies that engage in
profiling are hidden from the individual. They reach through the Web
site with whom the individual has chosen to interact and, unbeknownst
to the individual, extract information about the individual's
activities. In the rare instances where individuals are aware of the
fact that a third party is collecting information about them, they are
unlikely to be aware that this information is being fed into a growing
personal profile maintained at a data warehouse,\8\ on which data
mining \9\ can be exercised.
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\8\ A ``data warehouse'' is a system used for storing and
delivering huge quantities of data, while data warehousing refers to
the process used to extract and transform operational data into
informational data and loading it into a central data store or
``warehouse''. Data warehousing allows data from disparate databases to
be consolidated and managed from a single database., which in turn
allows for the development of longer and more ``accurate'' profiles
more efficiently and less expensively.
\9\ ``Data mining'' is ``a set of automated techniques used to
extract buried or previously unknown bits of information from large
databases.'' (Ann CAVOUKIAN, Data Mining: Staking a Claim on your
Privacy (Information and Privacy Commissioner of Ontario, Canada), Jan.
1998, http://www.ipc.on.ca/web__site.eng/matters/sum__pup/PAPERS/
datamine.htm (last viewed on Oct. 6, 1999). A successful data mining
operation will make it possible to unearth patterns and relationships,
and afterwards, use the new information to make proactive knowledge-
driven business decisions. Data mining focuses on the automated
discovery of new facts and relationships in data. For more information,
cf. Kurt Thearling, From Data Mining to Database Markering, Oct. 1995,
http://www3.shore.net/kht/text/wp9502/wp9502.htm (last viewed on Oct.
17, 1999).
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At many Web sites individuals are told that ``cookies'' are
harmless bits of data that help customize and personalize their
experience. While ``cookies'' themselves are not per se bad, the use of
``cookies'' to secretly tag and monitor individuals across multiple Web
sites undermines individuals' ability to determine to whom and under
what circumstances to disclose information about themselves. The
practices of these profiling companies undermines individuals'
expectations of privacy by fundamentally changing the Web experience
from one where consumers can browse and seek out information
anonymously, to one where an individual's every move is recorded.
While several of the companies engaged in profiling state that they
do not correlate information with identifying information such as name,
and e-mail address, this does not on its own address the privacy
concerns at issue. The highly detailed nature of the profiles and the
capture of information that can be reasonably easily associated with a
specific individual raise questions about the claims of anonymity and
promises of non-identifiability. While the companies, in some
instances, may not be tying information that they gather about
individuals' use of the Internet to their name and address, the
information may be quite capable of revealing the individual's
identity, through the use of various computer tools and software.
While the name and e-mail address of the individual may remain
obscure, the information the individual is able to access, the offers
made to the individual are being determined by the business based on
specific information collected about the individual. While the concern
raised by the use of information about the individual to alter what
information they see in the context of advertising may appear
relatively trivial, this same practice, and perhaps data, can be used
to make other decisions about the individual that even a privacy-
skeptic may find objectionable. The info collected about the individual
could be used to alter the prices at which goods or services, including
important services such as life and health insurance, are offered,
employed by a government, and could be used to alter the information
viewed by individuals. While the impact of altered advertisements on
the individual--harm? benefit?--can be disputed, these other examples
indicate that there is a privacy interest in information about
individuals actions and interactions when it is collected and used to
make decisions about them.
Recently it has become clear that DoubleClick intends to attach
identities to the extensive profiles they collect about individuals'
online activities. It is unclear whether other online profiling
companies will follow a similar path. DoubleClick's privacy statement
had stated that its cookies identified computers, not people--that it
couldn't link its ``cookies'' to names and home addresses or other
elements of personal identity and didn't want to do so. After its
purchase of the consumer transaction database Abacus, DoubleClick
acknowledged that it intended to tie surfing habits and online searches
to personal identity. DoubleClick's Abacus Alliance has arranged to
collect names, addresses, and other personal information from Web sites
where Internet users knowingly register. So far, at least ten Web sites
(the Company hasn't said who they are) have agreed to participate by
providing DoubleClick the identity of their subscribers. Thus,
DoubleClick, to whom an individual has never revealed her identity, may
have access to an individual's name, credit card number, and home
address.
As these companies merge with each other and with companies such as
Abacus that maintain detailed personally identifiable profiles about
individuals' offline activities, the consolidation of offline and
online profiles will erode the distinction between online and offline
identity. Online companies are aware of the sensitivity this raises.
Consumers have shown an aversion to having their online activities tied
to their identity. Finally, recent revelations about government demands
for access to individual profiles created in the consumer marketplace
warn us that even the most benign information, such as grocery
purchases, that provides insights into individuals' behavior are sought
out by the government.
The profiling activities of these companies pose unique threats to
individual privacy.
IV. Consumer Reaction to Profiling
On February 1, 2000, CDT launched a consumer campaign to alert
consumers to the threat that online profiling poses to privacy and to
encourage consumers to say no to DoubleClick's plans to create a data
system to track individuals' online and offline activities and their
identities. At CDT's Web site consumers are able to ``opt-out'' of
DoubleClick's tracking activities, send a letter to DoubleClick's CEO
and send a letter to several prominent companies that use DoubleClick's
services. In less than three days 13,000 people used our Web site to
opt-out of DoubleClick's tracking; over 6,000 individuals sent messages
to DoubleClick's CEO; and, in the first 36 hours, over 4,400 e-mail
messages were sent to prominent DoubleClick affiliates. Several
companies have responded to consumer concerns and clarified their
policy of not disclosing subscriber information to DoubleClick.
We believe that the public's voice is important when evaluating
whether a business' practices comport with individuals' expectations of
privacy. The e-mail we received from individual citizens and the
participation of thousands of individuals in our campaign indicates
that many individuals object to DoubleClick's practice of tracking and
monitoring individuals and do not want information about their identity
included in such a system.
V. The Federal Trade Commission's role in protecting individual privacy
Over the past five years the Federal Trade Commission's activities
in the area of information privacy have expanded. The Commission has
convened seven workshops to explore privacy on the Internet, issued
several reports, conducted surveys, and brought several important
enforcement actions in the area of privacy. Finally, the Commission
played a pivotal role in shaping the Children's Online Privacy
Protection Act and crafting rules to implement it that map onto the
Internet. The Commission's work has played an important role in
bringing greater attention to privacy issues and pushing for the
adoption of better practices in the market place.
While the Commission's contributions to the protection of
individual privacy have and will continue to be important, their
mission and jurisdiction places limits on their involvement in many
important privacy issues such as government collection and use of
personal information. They are not able to provide the forum for all
privacy discussions--and there are many important privacy discussions
waiting to occur.
However, keeping with its mission, the FTC must have the resources
and staff to continue their privacy agenda. The upcoming Web survey,
the Advisory Committee on Online Access and Security, the ongoing
exploration of online profiling are important. The detailed and
thorough work of the Commission enables advocates, businesses, and
policy makers to better understand the privacy issues and to choose the
appropriate tools to address them. Over the next few months the
Commission's work will produce reports and surveys that will aid this
Committee as it evaluates the growing number of legislative proposals
to protect privacy and examines the role of ongoing self-regulatory
efforts. It is important that the FTC be provided with funding to hold
workshops, issue reports, enforce the Children's Online Privacy
Protection Act, and take action against abuses of privacy in the
marketplace.
VI. The role of Congress
As Congress moves forward this year, we look forward to working
with you and all interested parties to ensure that fair information
practices are incorporated into business practices on the World Wide
Web. We must adopt enforceable standards, both self-regulatory and
legislative, to ensure that information provided for one purpose is not
used or redisclosed for other purposes without the individual's consent
and to ensure that the Fourth Amendment follows our personal
information into cyberspace.
The challenge of implementing privacy practices on the Internet is
ensuring that they build upon the medium's real-time and interactive
nature to foster privacy and that they do not unintentionally impede
other beneficial aspects of the medium. Implementing privacy
protections on the global and decentralized Internet is a complex task
that will require new thinking and innovative approaches. Both
legislation and self-regulation are only as good as the substantive
policies they embody. As we said at the start, crafting meaningful
privacy protections that map onto the Internet requires us to resolve
several critical issues. While consensus exists around at least four
general principles (a subset of the Code of Fair Information
Practices)--notice of data practices; individual control over the
secondary use of data; access to personal information; and, security
for data--the specifics of their implementation and the remedies for
their violation must be explored. We must wrestle with difficult
questions: When is information identifiable? How is it accessed? How do
we create meaningful and proportionate remedies that address the
disclosure of sensitive medical information as well as the disclosure
of inaccurate marketing data? For the policy process to successfully
move forward these hard issues must be more fully resolved.
The Federal Trade Commission and several members of the full Senate
Commerce Committee are well aware of the hard issues that must be
resolved and are working to address them. I am a member of the Federal
Trade Commission's Committee on Online Access and Security tasked with
exploring how to implement the important principle of providing
consumers with access to their data and what security measures are
appropriate to protect personal information on the Internet. I believe
that the work of that Committee will provide useful information to
Congress as it examines options for protecting privacy. I would welcome
the opportunity to provide the Committee with information about our
progress and look forward to working with members of this committee, to
develop a framework for privacy protection in the online environment.
The Online Privacy Protection Act, S. 809, introduced by Senators
Burns (R-MT) and Wyden (D-OR), the Electronic Rights for the Twenty-
First Century (E-RIGHTS), S. 854, introduced by Senator Leahy (D-VT),
forthcoming proposals, and the Children's Online Privacy Protection Act
of 1998 (COPPA) provide an excellent starting point for this
discussion. COPPA demonstrated that Congress could take action to
protect privacy and ensure consumer trust in electronic commerce. By
providing some flexibility to the Federal Trade Commission Congress
ensured that technology and innovation would not be unintentionally
stunted by efforts to protect children's privacy. The leadership of
Internet-savvy members of this Committee and others will be critical as
we seek to provide workable and effective privacy protections for the
Internet.
VII. Conclusion
No doubt, privacy on the Internet is in a fragile state. Providing
protections for individual privacy is essential for a flourishing and
vibrant online community and marketplace. It is clear that our policy
framework did not envision the Internet as we know it today, nor did it
foresee the pervasive role information technology would play in our
daily lives. Providing a web of privacy protection to data and
communications as they flow along networks requires a unique
combination of tools--legal, policy, technical, and self-regulatory. I
believe that legislation is an essential element of the online privacy
framework and we look forward to working with this Committee toward
that end. Whether it is setting limits on government access to personal
information, ensuring that a new technology protects privacy, or
developing legislation all require discussion, debate, and
deliberation. I thank the Committee for the opportunity to share our
views and look forward to working with the members and staff and other
interested parties to foster privacy protections for the Digital Age.
Senator Ashcroft. Senator Wyden.
Senator Wyden. Thank you, Mr. Chairman. I know both of us
are supposed to be somewhere at 1 o'clock. And you have been so
kind to me. Would you like to go and ask your questions first?
Senator Ashcroft. I do not think I have got questions to
ask. There are a lot of questions that could be asked.
Senator Wyden. Yes.
Senator Ashcroft. I mean this is kind of like--should be
like a law school class. I mean, I should be asking you are you
in favor of allowing businesses to sell at a discounted price
to people who are willing to let their data be involved in a
data base, you know, or--you know, are you willing to let the
costs reflect--I mean, I think there are lots of very
interesting questions here.
But I think you have done a great job of sort of priming
this pump. And I hope you would keep information flowing to us,
because there are just--there are a lot of very interesting
things.
I--some people want--Ms. Mulligan mentioned that some
people want to be able to be included on lists.
I know I like the Cool Fares that come out from Continental
Airline, so I want them to know that I am interested in their
fares. And they ship them to me every Tuesday in case I can get
somebody from my family to go visit my son in Houston. And I
want to know about that.
So some of the information, we all want people to have.
Others, we do not. And getting this properly managed, well----
I have no questions. I want to say that there could--there
are lots of questions. I do not think I have the time to do it
today.
I need to be out of here in 2 minutes, as the seconds fly.
Senator Wyden. John, thank you. And I'm going to ask a
couple of real quick ones.
And what is your pleasure? Would you like me to adjourn at
that point?
Senator Ashcroft. My sense is that if you would like to ask
questions, then you are welcome to do so and I----
Senator Wyden. I will do two or three minutes worth.
Senator Ashcroft. --and I would invite the members of this
panel to submit in writing any additional comments they would
like to make.
And I thank them all for coming. And I thank you for being
willing to continue the hearing.
Senator Wyden. I thank you for giving me all the time this
morning.
A couple of just real quick questions. Again, sorry, that
we are just so jammed for time.
Question for you, Mr. Sorrell. I have not been any big fan
of preemption. We have worked very closely with the attorneys
general since my days with the Gray Panthers. I am going to
consumer rights causes.
And I guess at the same time, if the Internet is not
interstate commerce, I do not know why you have an Article 1,
because, I mean, this seems to me to be about the clearest,
most straight forward, you know, case of an area where you
really ought to have, you know, Federal jurisdiction.
What would be your response to that?
Mr. Sorrell. Well, Senator, I thank you. Telemarketing
fraud is not limited to a state by state operation.
Frankly, a lot of the telemarketers since the states have
become more aggressive in--in moving against fraudulent
telemarketers have moved north of the border and they are
operating out of Canada right now.
So clearly the extent of e-commerce is more than what is
happening in the telemarketing area. And the speed of it is
more.
I guess the question is: Is it sufficiently different in
kind and scope that a national standard makes sense or should
the individual states as their own laboratories be able to for
themselves to--to--to balance that issue between not wanting to
retard or deny to its state's consumers the benefits of e-
commerce, but at the same time, be able to go further?
You suggested earlier that--that you have submitted a
bill--introduced a bill and you are being told that maybe you
should have gone further on the issue of opt-in versus opt-out.
If the Congress decides, for example, that there should be
an opt-out standard, why would not Vermont, which has gone
further than a number of other states on privacy issues--for
example, the access to personal credit histories and such--why
should not Vermont balancing that issue of the--the--the
potential drag or potential hindrances to Vermont consumers, be
able to go further if protecting consumers even more than a
national standard if that is what Vermonters want to do?
Senator Wyden. I just remained concerned about the
possibility of 50 standards and, you know, you are a small
Oregon business or a small Vermont business, and all of a
sudden you are trying to do business with a kind of blizzard of
various state kind of rules.
And I would like to think that maybe there are some lessons
that we have learned in the past in terms of how to come up
with something that makes sense for you all--and hang on just a
second--makes sense for you all, and addresses what I think is
inherently an interstate, you know, activity--the Internet to
me is an interstate. I think you might as well get rid of, you
know, Article 1.
Now, in the Electronics Signatures Bill, we specifically
allow the states to enact their own electronic transaction laws
as long as they are consistent with the Uniform Commercial
Codes, Uniform Electronic Transactions Act model.
This assures that the Federal and the state laws
specifically recognize that it is inherently, you know,
interstate in nature and yet that was something that the state
AG's supported.
They said, ``You know, that is something that we think is
fair on both sides.''
And my question would be not that kind of model be a good
one for us to look at in the privacy area as well, given the
fact that you all have been willing to support that in the
Electronics Signature?
Mr. Sorrell. First, I--I do not--I do not want to suggest
that states necessarily are going to go further than whatever
Congress will do, because we do not know what Congress will do.
But I want to express a concern on behalf of the states
that if the states's hands are tied and they are not able to go
further, we think that would be unfortunate.
As to the electronic transfers issue, I really have to
study that issue more because I was under the understanding
that we maintained flexibility in that--in that area.
So I would like the opportunity to submit something in
writing to the Committee in response to your question.
Senator Wyden. Let--let--let us do that. It is very
important. You know, we are anxious to work with you, as I say.
I--I think you all perform an enormous service. Oregon has
a fabulous attorney general, Hardy Myers, who----
Mr. Sorrell. Yes. He is--he is one of the good ones.
Senator Wyden. Right.
Mr. Sorrell. There are a lot of good ones. Hardy is very
good.
Senator Wyden. Yes. Right. I talk to you now continually
and, frankly, the thing I am looking for is something that
might serve as a model.
And our understanding was that states could enact their own
electronic transaction laws as long as it was in line with the
Uniform Commercial codes effort in this area.
And if you guys would take a look at this and give it to us
for the record, my question is: Does this have some promise as
a kind of model that would be fair to you folks and--and----
Mr. Sorrell. I know that in Vermont right now, we are
debating in the commerce committee in--in the House what--which
Vermont laws are to be exempted from the Digital Signatures
provisions, and it is hotly contested right now.
Senator Wyden. Yes. Ms. Mulligan, just one question. And I
feel sort of like Senator Ashcroft. I would stay here for hours
asking you all questions if we were not so under the gun and I
think you know we are probably one of the more conspicuous
consumers of CDT, you know, work in terms of using your
products.
And my question to you is it is not unlike what I asked Mr.
Pitofsky is, you know, we have got this tidal wave of, you
know, consumer fear coming and I really see the tsunami hitting
the shore here quickly.
My question to you is: What is your sense of how you
establish in law a kind of baseline of conduct to make it clear
that you are sending a very powerful message to bad actors, you
know people are not willing to do even the minimal in terms of
privacy protection, are not willing to even enforce, you know,
the minimal.
How do you have a baseline of conduct for the bad actors so
that you deal with them, while at the same time encouraging and
rewarding the companies that adhere to the kind of standards
that you all and others that lead this field have been putting
forward.
Ms. Mulligan. Thank you for the question. We have really
appreciated your leadership on this issue.
And I think that the bill that was introduced by yourself
and Senator Burns certainly sets out a model similar to the
Children's Online Privacy Protection Act where you are looking
to create incentives for good industry behavior.
There is a notion of safe harbors. Now, the safe harbors do
not mean anybody can sail in. It still involves the FTC and a
public review, ensuring that those safe harbors actually meet
the concerns that need to be addressed.
But it does allow for the flexibility that, I think, you
and I both believe is critically important.
And I think that the rulemaking under Children's Privacy
Protection Act, highlights that there are still going to be
issues that come up.
I think that because the Act provided flexibility, the FTC
can hear new issues and new proposals can come in.
If there is a new industry that springs up and it needs its
own--it believes it has a different approach that needs to be
examined, it can come in with a proposal for a safe harbor and
it can get a fair shake to see if it meets the test.
And I think that is the kind of flexibility that will make
sure that any proposal that comes through, at least this
Committee, is technically astute.
And I think that is critically important. We do not want a
law that is out of date.
Senator Wyden. Well, I should quit while I am ahead. You
all are the people that we are going to be calling often, all
three of you, in terms of trying to work on these kinds of
issues.
Because I think everybody is struck by how--the velocity at
which this issue is moving. People have known it was important,
but now in poll after poll, these privacy issues are like the
second or third biggest concern, you know, in the country.
It sort of goes education, you know, prescription drugs and
privacy in some sort of, you know, order. So we are going to be
counting on the input and the Counsel of all three of you
frequently.
And unless you have anything to add further, just in the
interest of time, we will let you go at this point. So the
Subcommittee is adjourned.
[Whereupon, at 1:02 p.m., the hearing was adjourned.]
A P P E N D I X
Response to Written Questions Submitted by Hon. John Ashcroft to
Robert Pitofsky, Sheila F. Anthony, Thomas B. Leary, Orson Swindle, and
Mozelle W. Thompson
Question 1. The FTC has announced that it will conduct another
sweep of privacy policies posted on commercial web sites within the
next few weeks. The Commission has also established an Advisory
Committee on Online Access and Security, made up of consumer and
business experts, to study the complex issues involved in providing
consumer access to, and security of personally identifiable
information. Both the survey and the Commission recommendations will
help this Committee and Congress determine if privacy legislation is
necessary and if so what type of legislation would be necessary. It
would make sense for the Commission to provide the data from the sweep
and the recommendations of the Advisory Committee in one package that
will help the Committee interpret the data from the results of the
survey. Will the Commission issue both of these reports in one package
or will one report precede the other?
Answer. As your question indicates, the Commission is conducting a
survey of commercial web sites to help determine whether self-
regulation has continued to improve the protection of consumer privacy.
The survey will be qualitative as well as quantitative: it will look
beyond the mere existence of policies and examine the adequacy of those
policies. In particular, we are looking for clear disclosure of what
type of information is collected and what is done with it, whether
consumers can exercise choice about how information is collected and
shared, whether access to information is afforded along with any
ability to correct errors, and what, if any, sort of security is
provided.
As you also note, the Commission has established a Federal Advisory
Committee on Online Access and Security to advise the Commission on the
cost and benefit issues of access and security in the online context.
The Advisory Committee's report, which need not reach any consensus
views, is expected in mid-May, also will provide information relevant
to the Commission's consideration of how to best address the fair
information principles of online access and security.
The survey of web sites, analysis of the data, and the work of the
Advisory Committee are parallel but complementary initiatives. Assuming
these projects are completed on schedule, we will address them in
reporting to Congress.
Question 2. There is a natural tension between access and security
of private data. The broader the requirements for data access, the
greater the danger from hackers or other inappropriate disclosures. We
just saw Yahoo shut down for three hours on Monday by hackers.
Yesterday, E-bay, Amazon.com, CNN and Buy.com were shut down as well.
How will the FTC balance the interest of consumer access to data versus
the need for data security?
Answer. The Federal Advisory Committee on Online Access and
Security currently is considering how to balance issues involving the
interplay between the interest in providing consumers with access to
their data and the need for appropriate security for that data. In
examining how and what information is collected and stored, the
Committee also will consider whether the consolidation of consumer
information databases to facilitate access makes the information more
vulnerable to security breaches by hackers. Another issue addresses
whether technology provides sufficiently sound authentication
mechanisms to permit access and protect security simultaneously. We
look forward to reviewing the Committee's findings and recommendations
on these important issues.
Question 3. How will the FTC address the question of barriers to
entry for small and mid-sized Internet business that might not have the
staff and financial resources to provide the same or similar levels of
access and security as larger or more well established e-businesses?
Answer. The Commission is sensitive to the special issues that may
be presented to particular sectors of the business community and took
care to ensure that representatives from small and medium sized
companies and from industry associations were appointed to the Advisory
Committee. The Advisory Committee is considering the costs and benefits
of providing online access and security for small and medium
businesses. We expect the Advisory Committee's report to examine
whether access and security issues raise special concerns for these
sectors, and the Commission also will consider these points in its
report on online privacy.
Question 4. During the hearing Chairman Pitofsky mentioned that one
way to address privacy may be through a mix of legislation and self-
regulation based on the type of information collected. Usually,
consumers list health records, financial records and information about
children as sensitive enough to require protection under the law as
opposed to self-regulation. What other areas would you consider of
interest to require protection?
Answer. The Commission has supported legislation requiring privacy
protections for the most sensitive types of personal information,
including the Children's Online Privacy Protection Act (information
collected from children) and the privacy provisions of the Gramm-Leach-
Bliley Act (personal financial information). Additionally, the
Commission has indicated its support for HHS's proposed privacy rules
governing medical records. The question remains, however, how best to
address other aspects of online privacy, including issues involving
profiling, as discussed in response to Question 5 below.
In June 1999, a majority of the Commission concluded that self-
regulatory initiatives should be given greater opportunity to develop.
These industry initiatives have resulted in notable progress. In 1999,
a study showed that the posting of at least one privacy disclosure had
increased in one year from 14 percent to 66 percent of Web sites
surveyed. Nonetheless, the Commission has challenged industry to
continue this progress by improving both the quantity and quality of
privacy disclosures.
The Commission is in the process of assessing the progress of
industry self-regulatory initiatives through its comprehensive survey
of commercial Web sites, described in response to Question 1. Moreover,
the report of the Advisory Committee will provide the Commission with
additional important information that will assist it in addressing
online privacy protection for consumers.
Question 5. Currently, much of the discussion of privacy had
focused on the Internet. However, we are beginning to see the merger of
information collected both online and offline. Do you believe it will
continue to make sense to draw a distinction between information
collected online and offline?
Answer. The FTC has focused much of its attention to privacy on the
Internet because this has been identified as a principal concern to
consumers. Indeed, surveys consistently tell us that many consumers are
reluctant to purchase products or services from Web sites because of
privacy concerns. These apprehensions are understandable in light of
technology that makes it possible to collect, store, manipulate and
disclose personal information on an unprecedented scale and at
unprecedented speed.
As your question recognizes, however, new issues are emerging. We
are concerned about the growing industry practice of collecting online
``profiling'' data from consumers, with or without their knowledge,
that may be merged with information from any source, online or offline.
A related issue to consider is to what extent the reasons behind our
efforts to protect online privacy also apply to information gathering
in the offline world.
Question 6. H.R. 1858, the ``Consumer and Investor Access to
Information Act'' gives the FTC enforcement authority over the sale or
distribution of certain public databases. Have you had a chance to
review this bill and determine how you would enforce such a regulation?
Do you feel the FTC is the appropriate agency to enforce the provisions
of this bill?
Answer. Last summer, the Commission had the chance to review and
comment extensively on H.R. 1858, the proposed ``Consumer and Investor
Access to Information Act of 1999,'' in response to a request from
Chairman Tauzin of the House Subcommittee on Telecommunications, Trade
and Consumer Protection. As noted in that 1999 statement, the
Commission appreciates the recognition of its experience with the
underlying enforcement issues that the proposed vesting of enforcement
authority reflects. At the same time, however, the statement observes
that the enforcement burden would appear to be considerable. No federal
administrative agency has previously had jurisdiction over claims of
misappropriation or infringement of intellectual property-type rights,
and the Commission would be hampered in its efforts to provide
effective enforcement without a commensurate increase in its resources.
The Commission's statement identifies several complex rule-making
and adjudicative issues raised by H.R. 1858, such as the amount of
investment by the database's creator, the degree of subsequent copying,
disaggregation of governmental and private content in databases,
determination of what constitutes misuse, and evaluation of effects of
the duplicate database on the original database creator's market and
returns to investment. If called upon to enforce the legislation, the
Commission would exercise its best judgment as to enforcement
priorities, in keeping with its statutory responsibility to issue
complaints ``if it should appear to the Commission that a proceeding by
it . . . would be to the interest of the public.'' 15 U.S.C. Sec. 45.
Competitive implications would appear to be appropriate considerations
in this context.
A complete copy of the Commission's 1999 statement is attached for
your reference.*
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*The information referred to has been retained in the Subcommittee
files.
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Question 7. Under S. 1854 a magistrate must use the standards
``unreasonably cumulative or duplicative'' and ``imposes a burden or
expense that substantially outweighs any likely benefit'' to evaluate
the propriety of an agency's Second Request. Some have argued that this
standard is vague and will be difficult for the magistrate to use. How
do you respond to those concerns?
Answer. The Commission opposes S. 1854's provisions for revising
the ``Second Request'' process. The current LISR premerger notification
process is essentially sound, allowing the agencies to clear roughly 97
percent of the notified transactions within the initial waiting period
without issuance of a Second Request. We recognize that there have been
some cases where the Second Request process has not been entirely
satisfactory. The antitrust agencies and the private bar are currently
engaged in a cooperative effort to improve the process, and we expect
visible results. In fact, as a result of information developed during
this process, the Commission has just approved a new appeals process
for parties who have disputes with staff attorneys regarding a Second
Request. Achieving the desired improvements to the Second Request
process does not require legislative change. Moreover, we are concerned
that the provisions in the bill would handicap and delay the agency's
efforts to assess whether proposed mergers are likely to be
anticompetitive, with little or no industry benefit. In fact, some have
argued that S. 1854 contains provisions that will make the merger
review process considerably more cumbersome for government and industry
alike.
Although the limitations on the Second Request process contained in
S. 1854 may sound reasonable in theory, in practice they are
unworkable. At the time a Second Request is issued, the agency
generally cannot evaluate the cost-benefit trade-off of a request. At
that point, the agency has only limited knowledge about the competitive
concerns raised by the transaction, and thus about the potential
benefit of the information to the investigation. The agency also is
unfamiliar with the manner in which particular parties maintain their
records, and thus has no way to weigh the costs of submission against
the benefits, or to determine which requests will be cumulative or
duplicative. Typically, these concerns are addressed successfully
through negotiation, during which the parties provide information
relevant to the need for particular material. Imposing the bill's
unworkable constraints on the scope of the Second Request at the outset
would hinder the agencies' ability to conduct the investigations
necessary to halt anticompetitive transactions.
Because only a single Second Request is allowed, an agency cannot
address burden concerns by staging requests through a narrow initial
request and then serving additional requests as it learns more. The
``staging'' of information to he supplied is currently addressed
through negotiations between the agencies and the parties, using
information the parties provide to the agency and other information
staff develops to winnow its areas of competitive concern.
S. 1854 would appear to limit the agencies' ability to obtain
materials needed for a preliminary antitrust review. This approach
fails to recognize the basic structure of the HSR statute, which
requires the agency to seek a preliminary injunction at the conclusion
of its investigation where warranted by competitive concerns. Courts
often examine the entire substance of the agency's case, usually
pursuant to parties' requests, even in preliminary injunction actions.
For example, in the FTC's most recent preliminary injunction action,
the court held a seven-week hearing and examined the entire case in
detail.\1\ Thus, even where the matter before the court is a request
for preliminary injunction, the agency must be prepared to present its
entire case on the merits. The bill's limitation would seriously harm
the agency's ability to do so.
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\1\ FTC v. Cardinal Health, Inc., 12 F. Supp 2d 34 (D.D.C. 1998).
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S. 1854 would limit agency premerger investigations even further.
In non-merger investigations, the agency may seek any materials
relevant to the investigation. Under S. 1854, parties could fail to
provide some of the required information, yet claim substantial
compliance with the request. The agency could then insist on submission
only of information whose absence would ``materially impair'' the
antitrust review. ``Materially impair'' is an extraordinarily high
standard, and the bill apparently would allow a party to claim
substantial compliance and refuse further submissions regardless of the
burden--even if that burden is small and the information is relevant.
Imposition of so high a standard would obviously create perverse
incentives to make less than candid disclosures.
The bill's restrictions on Second Requests would likely lead to
instances of both under-enforcement and over-enforcement. If
investigations are too severely limited, the agency could be unable to
obtain enough information even to identify competitive problems that
may exist in a proposed merger. Where the agency is able to identify
problems, it could still be unable to obtain enough evidence through a
narrowed Second Request to initiate an action to enjoin the merger
temporarily. In other instances, the bill's Second Request restrictions
could put the agency in the untenable position of filing suit within
the statutory time limits, but before it had an appropriate opportunity
to discover information needed to evaluate adequately the likely
competitive effects of a merger. This information deficit would force
the agencies to rely heavily on post-complaint discovery in preliminary
injunction actions, and deprive the agencies and the merger proponents
of an important opportunity to avoid litigation. This could result in
unnecessary lawsuits and waste of resources--of the parties, the
agencies, and the judiciary.
The bill would also create a magistrate judge review process for
Second Requests that would be impracticable and impose delay on both
the agency and the parties investigated. The bill would permit review
by a magistrate judge of the scope of the Second Request and of any
claim of deficient submissions. The fundamental flaw is that magistrate
review would likely involve too much delay--through preparation,
hearing, and the magistrate's decision process--in an inquiry that
should proceed as expeditiously as possible. We believe that the HSR
review process works best when it is least adversarial. Magistrate
review and other formalistic elements would inject an adversarial tone
throughout the process, and hamper ready resolution of potential
antitrust concerns.
The Commission recognizes that there are instances in which the HSR
Second Request process may have imposed unnecessary costs and burdens
on merging parties. While we believe that these instances are rare, we
are committed to exploring ways to improve the process. Specifically,
the Commission is currently conducting an internal review of its HSR
procedures and practices. As part of this review process, Commission
staff is meeting with members of the antitrust bar and the business
community to listen to their concerns.
This process is already yielding effective results. The Commission
has just put in place a new appeals process for parties who believe
that compliance with portions of the Second Request should not be
required. Under this new appeals process, parties who have exhausted
reasonable efforts to obtain a modification to a Second Request from
the lead staff attorney and the Assistant Director in charge of the
investigation may file a petition with the General Counsel of the
Commission. The General Counsel is independent of the Bureau of
Competition which conducts merger investigations. After a party has
filed a petition, the General Counsel will hold a conference with the
petitioning party and the investigating staff. The conference shall
take place within seven business days of the petition. The petitioning
party and the investigating staff may both submit, no later than three
business days before the conference, a five-page brief to the General
Counsel setting forth their positions with regard to the requested
Second Request modification. The General Counsel is then required to
issue a final decision on the petition within three business days after
the conference. Thus, the entire appeals process should take no longer
than 10 business days.
As the internal review process continues, we will make additional
appropriate changes to its HSR procedures and practices. These changes
will be made public. We believe that this internal review process is
likely to yield better results than the proposed legislation.
Question 8. This year at least 22 states will consider legislation
affecting Internet privacy and online fraud. As more state legislatures
address these issues, are you concerned that a patchwork quilt of
Internet regulation will spring up making it difficult for businesses
and consumers to determine which laws apply?
Answer. As you note, legislation is pending in several states that
would mandate privacy protections, often in terms that vary from state
to state. For example, California proposes to restrict Internet service
providers from disclosing personal information without consent; New
York is considering restrictions on the collection and disclosure of
personal information by both online service providers and financial
institutions, among others. Differences in legal requirements across
state boundaries may lead to confusion among consumers and businesses
and could add to compliance costs for businesses. This highlights the
need to carefully consider the impact of legal regulations, at the
federal or state level, on consumers and businesses.
______
Response to Written Questions Submitted by Hon. Sam Brownback to
Robert Pitofsky
Question 1. The latest the Senate will be able to adequately review
the FTC report on marketing violence to children in a hearing would be
in July. We would like to review it sooner, preferably in May. When
will the final FTC report on the marketing of violence to children be
ready for Senate review? If the final report is not ready until June or
July, can we expect a preliminary report in April or May?
Answer. I recognize the importance of the issues we are studying
and the need to complete the report as quickly as possible. I believe
the report will offer parents important information on the operation of
industry self-regulatory efforts, and will also provide a basis for
improved self-regulatory efforts.\1\
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\1\ Indeed, some industries have taken steps to improve the
operation of the system since the study was initiated. For example, the
Interactive Digital Software Association (the trade association for the
video game industry) announced an advertising campaign to increase
awareness of video game ratings among parents, which included the use
of public service announcements by Tiger Woods and the requirement that
television ads announce a game's rating in the audio portion of the ad.
IDSA and the Entertainment Software Rating Board, which rates video
games, announced the formation of an Advertising Review Council. The
Council issued advertising guidelines designed to avoid inappropriate
or deceptive advertising, a program whereby game magazines would screen
advertisements for compliance with the ad guidelines, and an
advertising complaint review process.
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Given the scope of the Commission's study, it would be difficult if
not impossible to issue the report sooner than late summer. The
Commission staff sent information request letters to 51 companies,
including movie studios, video and computer game manufacturers and
software developers, music recording companies, retail store outlets,
and movie theater chains. The letters requested extensive information
and documents, including general background on the companies and their
sales figures; marketing plans for products that have been rated or
labeled due to violence; Internet advertising and marketing
information; information on audience demographics; policies or
practices to restrict or limit the sale of rated or labeled products;
research regarding purchasers of rated or labeled products; and
complaints received about violence in products or advertising. The
companies are still in the process of submitting the requested
documents and information, and we do not expect to receive full
productions until the middle of April.\2\ Staff may also need to follow
up with some of the companies. In addition to the requests to the
industry members, staff is gathering information from an array of other
sources. For example. staff is contracting with an independent survey
firm to conduct a nationwide survey of parents and children to learn
their understanding and use of the various rating systems, and also is
conducting Internet surfs to review online marketing and product
accessibility. In addition, staff has collected information from the
industry trade associations and ratings groups, as well as from
parents' and children's advocacy groups.
---------------------------------------------------------------------------
\2\ The request letters were sent right after the New Year,
following a four-month Paperwork Reduction Act-required public comment
process.
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Question 2. To ensure the accuracy of the information you retrieve,
I assume that you will be corroborating the information received from
entertainment industry sources with outside sources. What steps are you
taking to corroborate industry information?
Answer. Staff is taking a number of steps to ensure the accuracy of
the information we are receiving. First, staff directed the companies
to certify their responses as correct and complete and to list any
responsive materials being withheld. The letters specifically state
that anyone who knowingly and willfully makes false statements or
representations to a United States government agency is subject to
fines and/or imprisonment. In addition, staff is conducting its own
advertising monitoring. For example, staff has contracted with a
company to screen print advertisements for the products in question, so
that we can see where the products are being advertised. Staff is
videotaping certain television programs popular with teens and
reviewing their advertising. In addition, staff has contracted with a
television monitoring service to provide information on where
advertisements for the products ran. Staff has also asked parents and
children's advocacy groups to provide information on the advertising of
rated products in media popular with young people.
Question 3. One of the best indicators of whom violent
entertainment is being marketed to is who buys it. Have you been able
to obtain demographic purchasing data of adult-rated or labeled
entertainment products?
Answer. I agree that data on the demographics of purchasers of
entertainment products that are rated as inappropriate for children due
to violence would be valuable to our study. Staff has asked each of the
companies for any information they have on the ages of the target
audiences for their entertainment products that are rated or labeled
due to violent content, as well as any information on the actual
purchasers of these products. Thus, to the extent that the companies
have this information, it is responsive to our requests and should be
provided. Staff is also purchasing data on teen attendance at movies
and similar demographic purchasing data.
Question 4. Will the final FTC report include information on the
total amount spent by children on adult-labeled entertainment products?
Answer. Staff has requested that the companies provide information
on their total sales as well as sales of products that are rated due to
violent content. Staff has not requested data on the amount spent by
children on products rated as inappropriate for children. Based on what
we know at this time, it is unlikely that such data exist. Moreover,
the data are unlikely to be broken down according to the product's
rating or it may not be clear if a child or adult purchased the
product. (For example, one marketing company surveys opening-night
movie theater attendance in select cities for some films. This survey
will yield what percentage of the audience was under 18 on opening
night in those cities, but it will not indicate whether a parent or a
child purchased the child's ticket.) Accordingly, it may not be
possible to report on the total amount spent by children on these
products.
Question 5. Will you be investigating the cross-marketing of
characters and themes from adult-rated video games and movies to
children via toys, action figures, and Halloween costumes?
Answer. Staff has requested that the industry members provide
information regarding the cross-marketing of their products through
whatever means, including toys, action figures, Halloween costumes,
fast-food promotions, etc. Staff also requested information on the
relationship between the licensors and the licensees, including control
over advertising and packaging copy to help us learn the workings of
these cross-marketing arrangements.
Question 6. Will the report contain information on which
entertainment companies market adult-labeled entertainment to children,
and how much profit they gain as a result?
Answer. Within the constraints of the confidentiality provisions of
the Federal Trade Commission Act and the Commission's Rules of
Practice, the study will report on the practices of a broad cross-
section of the entertainment industry, including the major film
studios, music recording companies, video and personal computer game
manufacturers, movie theater chains, and electronic goods and mass
merchandise retail stores. The report may contain publicly available
information regarding sales and profitability, for example from such
sources as annual reports, other reports for investors, or public
filings with the Securities and Exchange Commission. However, the
Commission is prohibited by Section 6(f) of the Federal Trade
Commission Act, 15 U S.C. Sec. 46(f), from making public trade secrets
or other confidential commercial or financial information.
Question 7. In your testimony before the Committee, you stated that
the process for determining which agency, the Department of Justice,
Antitrust Division or the FTC will review a merger was down to about
9.5 days. It is my understanding that this represents an average time
period. How many mergers take longer than ten days and do you have a
list of transactions that have taken longer?
Answer. During FY 1999, the FTC and Justice cleared 422 HSR merger
investigations to each other. Of these, 77% were cleared before the
10th day of the HSR waiting period (i.e., within 10 days of the date on
which the parties submitted their HSR premerger notification forms to
the agencies). Issues of clearance need to be resolved as early in the
HSR waiting period as possible, so that investigating staff has as much
of time as possible to investigate the proposed transaction. Without
sufficient time to obtain preliminary information about a transaction
during the initial waiting period, staff may believe it necessary to
seek the issuance of Second Requests that ultimately prove to have been
unnecessary.
Our Second Request statistics demonstrate that issuance of Second
Requests because of insufficient time is highly unlikely. Of the 47
transactions cleared to the FTC after the 10th day of the HSR waiting
period in FY 1999, the Commission issued only 3 Second Requests.
We keep careful records of clearance requests that required longer
than 10 days. From those records we review problem areas to improve the
processes of coordination between our agency and the Antitrust
Division.
Question 8. During the hearing you mentioned that you are currently
working with the anti-trust bar to resolve problems affecting the Hart-
Scott-Rodino Act merger process. How are these discussions going and
when do you expect to complete this process and make additional
recommendations for changes to the process?
Answer. Over the past few months, we have engaged in an ongoing
dialogue with members of the private bar and members of the business
community that we believe is providing information helpful to
improvement efforts by both agencies Our discussions have included
representatives of the Antitrust Section of the ABA, the New York City
Bar Association, the National Association of Manufacturers, the Chamber
of Commerce and the American Antitrust Institute.
In addition, over the past year the Premerger Notification Office
has conducted a regular series of brown bag lunches used to solicit
practitioners' views on improvements to the HSR process. Input has
proven invaluable in determining areas of the HSR rules that require
substantive revision, as well as assisting in improvements to the
administrative process.
Our effort to hear and appropriately address concerns continues.
Within the next two or three months, we believe we will implement a
number of changes to the HSR process to address concerns raised by the
business community and private bar, and we are already undertaking
improvement efforts. The Commission's Bureau of Competition has
instituted a formal review of all proposed Second Requests in the
Bureau Director's office to make certain that the requests are no
broader than necessary. To encourage better communication between staff
and parties to the transaction, the Bureau Director is directing his
staff, soon after a request has been issued, to offer by to meet with
the parties to discuss the anticompetitive concerns raised by the
proposed transaction. So that modification proposals for Second
Requests are resolved expeditiously, the Bureau Director is directing
his staff to respond to each modification request within five business
days of receipt of the modification proposal.
Moreover, the Commission has just put in place a new appeals
process for parties who believe that compliance with portions of a
Second Request should not be required. Under this new appeals process,
parties who have exhausted reasonable efforts to obtain a modification
to a Second Request from the lead staff attorney and the Assistant
Director in charge of the investigation may file a petition with the
General Counsel of the Commission. The General Counsel is independent
of the Bureau of Competition which conducts merger investigations.
After a party has filed a petition, the General Counsel will hold a
conference with the petitioning party and the investigating staff. The
conference shall take place within seven business days of the petition.
The petitioning party and the investigating staff may both submit, no
later than three business days before the conference, a five-page brief
to the General Counsel setting forth their positions with regard to the
requested modifications. The General Counsel is then required to issue
a final decision on the petition within three business days after the
conference. Thus, the entire appeals process should take no longer than
10 business days.
We are working on other possible modifications as well, and based
upon our continuing work with the private bar and the business
community we expect these to be implemented in the near future.
______
Response to Written Questions Submitted by Hon. John McCain to
Robert Pitofsky
Question 1. Given that the FTC will not complete its
congressionally-mandated report on ``Marketing Violence to Children''
until it is too late for the Senate to hold hearings on the content of
this report, will you agree to submit an interim or preliminary report
to the U.S. Senate no later than May 31, 2000?
Answer. I recognize the importance of the issues the agency is
studying and the staff is striving to complete the report as quickly as
possible. I believe strongly that it is essential to the integrity of
the study that its specific findings be reported in context once the
entire review is complete. Staff is still in the process of receiving
information and documents from industry members and does not expect to
have received full returns until mid-May. Agency staff is also
commissioning a survey of parents and children about the entertainment
rating systems and their purchasing behavior, and does not expect to
receive that data until June. A partial report based on an incomplete
review of the data runs a risk of error, as well as of unfairness, by
possibly penalizing those companies that provided information in a more
timely manner than others.
In addition, issuing a preliminary report would raise several
procedural difficulties. Almost all the information received has been
marked confidential; under the Federal Trade Commission Act and our
Rules of Practice, we are required to give the companies notice before
such information can be released. The companies then have the
opportunity to challenge that release in federal district court, and
the Commission is prohibited from releasing the information until the
court rules. The industry members have already voiced strong concerns
about our study and the release of any marketing information they deem
confidential. A preliminary report increases the risk of early
intervention by industry and ultimate delay.
Staff remains available to brief the Committee or its staff on the
status of the report, as well as on the methodology followed in
conducting this study.
Question 2. Will you provide a list of the companies from which you
requested information?
Answer. The following is a list of the companies and trade
associations from which staff requested information. This list has not
been made public:
Video/Personal Computer Game Companies
Acclaim
Activision
Apogee Software
Capcom
Eidos
Electronic Arts
GT Interactive
Id Software
Interplay
Konami
Midway Games
Sega
Sierra
Movie Studios
Metro-Goldwyn-Mayer
Miramax Films
New Line Cinema
Paramount Pictures
Sony Pictures Entertainment
Twentieth Century Fox
United Artists
Universal Studios
Walt Disney Company
Warner Bros.
Movie Theaters
AMC Theatres
Carmike Cinemas
Cinemark Theatres
General Cinema
Loews Cineplex
National Amusements
Regal Cinemas
Music Recording Companies
BMG
EMI
Sony Records
Time Warner
Universal Music Group (includes Polygram)
Music Television Channels
Black Entertainment Television (BET)
Music Television (MTV)
Retailers
Amazon.com
Babbage's
Best Buy
Blockbuster Video
cdnow.com
Electronics Boutique
E-Toys.com
Hollywood Video
Musicland (includes Sam Goody)
Target Stores, Inc.
Tower Music
Toys `R' Us
Trans World Entertainment Corp. (includes Record Town, Saturday
Matinee, and Camelot)
Wal-Mart
Trade Associations
Entertainment Software Rating Board
Interactive Digital Software Assn.
Motion Picture Assn. of America
National Assn. of Recording Merchandisers
National Assn. of Theatre Owners
Recreational Software Advisory Council
Recording Industry Assn. of America
Video Software Dealers Assn.
Question 3. Will you provide the Senate with information pertaining
to the amount of money spent by children on adult-rated products, as
well as toys, action figures, Halloween costumes, and dolls based on
characters or themes from adult-labeled products?
Answer. Agency staff is seeking information regarding the amount of
money spent by children on adult-rated products, as well as toys and
other products based on characters or themes from adult-rated products.
Staff has asked each of the companies for any information they have on
the ages of the purchasers of these products. Staff has also requested
that the industry members provide information regarding the cross-
marketing of their products through whatever means, including toys,
action figures, Halloween costumes, and dolls. Thus, to the extent that
the companies have this information, it is responsive to the requests
and should be provided. The information staff has received thus far,
however, suggests that the marketers and the retailers do not routinely
collect and record the ages of those purchasing their products. As a
result, staff is looking for other sources for this data. For example,
staff is purchasing data on teen attendance at movies and similar
demographic purchasing data. Although surveys are occasionally
conducted, staff has not yet found a source for comprehensive data on
the ages of purchasers. In addition, the sales data for these
industries may not be broken down according to the product's rating or
the rating of the product on which it is based. Accordingly, it may be
difficult to construct accurate data on how much money children spend
on adult-rated products and related toys, etc.
Question 4. The amount of money spent by children on adult-labeled
entertainment products is of obvious importance to this study. Will you
provide Congress with that information?
Answer. Staff has requested that the companies provide information
on their total sales as well as sales of products that are rated or
labeled due to violent content. As explained above, however, it does
not appear that theaters and other retailers make it a practice to
record the ages of their customers. Accordingly, it likely will not be
possible to report comprehensively on the total amount spent by
children on these products.
Question 5. Will the final report include information on
methodology and level of responsiveness of each company, should the
Congress or the White House feel the need to extend the research
period?
Answer. The final report will describe how staff collected the
information, including the methodologies used to conduct the study, and
will attach as appendices the survey instruments and demand letters
used to collect the information. Almost all of the companies contacted
expressed a willingness to comply voluntarily and are currently
supplying the information requested. Each company was directed to
certify its responses as correct and complete and to list any
responsive materials being withheld; the agency will report which
companies provided those certifications and note any companies that
failed to supply any of the key materials requested.
______
Supplemental Prepared Statement of Howard Adler, Jr., Esq.,
Baker McKenzie, Chairman, U.S. Chamber of Commerce, Hart-Scott-Rodino
Task Force
I respectfully request permission to supplement my Statement before
the Subcommittee of February 9, 2000, to add to the record relevant
portions of the Final Report of the International Competition Policy
Advisory Committee to the Attorney General and Assistant Attorney
General for Antitrust (``ICPAC Report''). That Report is the product of
an intensive two-year study of international antitrust issues by a
distinguished committee appointed by the Attorney General.\1\ It was
presented to Attorney General Reno and Assistant Attorney General Klein
on February 28, a little more than two weeks after my testimony.
---------------------------------------------------------------------------
\1\ The Co-Chairs of ICPAC were James F. Rill, Assistant Attorney
General for Antitrust in the Bush Administration, and Paula Stern,
former Chairman of the International Trade Commission. Its Executive
Director was Merit E. Janow, Professor in the Practice of International
Trade in the School of International and Public Affairs, Columbia
University. Members of ICPAC were Zoe Bard, President, The Markle
Foundation; Thomas E. Donilon, Senior Vice President, General Counsel
and Corporate Secretary, Fannie Mae; John T. Dunlop, Lamont University
Professor, Emeritus, Harvard University; Eleanor M. Fox, Walter J.
Derenberg Professor of Trade Regulation, New York University School of
Law; Raymond V. Gilmartin, Chairman, President and Chief Executive
Officer, Merck & Company, Inc.; Vernon E. Jordan, Jr., Senior Managing
Director, Lazard Freres & Co. LLC; Steven Rattner, Deputy Chairman,
Lazard Freres & Co. LLC; Richard P. Simmons, Chairman, Allegheny
Technologies Incorporated; G. Richard Thoman, President and Chief
Executive Officer, Xerox Corporation; and David P. Yoffie, Max & Doris
Starr Professor of International Business Administration, Harvard
Business School.
---------------------------------------------------------------------------
The Advisory Committee addressed three issues of major importance
for the global economy and international competition:
``multijurisdictional merger review; the interface of trade and
competition issues; and future directions in enforcement cooperation
between U.S. antitrust authorities and their counterparts around the
world, particularly in their anticartel prosecution efforts.'' (ICPAC
Report at 1.) Because the Committee's analysis and recommendations on
the first of these topics bear directly on the subject of the February
9 hearing, I have asked the Subcommittee to add the following excerpts
from the Report to the hearing record.\2\
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\2\ The full Report can be found at http://www.usdoj.gov/atr/icpac/
finalreport.htm.
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The Advisory Committee analyzed with great thoroughness the merger
review practices in the approximately 60 countries that now have some
form of merger control. It found that the number of merger control
regimes, the divergences in reporting thresholds and requirements, and
a variety of deficiencies in reporting thresholds, review time periods,
and other practices created a significant burden on international
trade. It, therefore, recommended ``a number of practices designed to
rationalize the application of review procedures.'' (Id. at 13.)
Moreover, believing that ``one of the most effective ways in which the
United States can stimulate global reform is leading by example,'' the
Committee recommended that the United States should ``examine its own
merger review system in an attempt to identify and correct those
aspects of the system that create uncertainty and unnecessary
transaction costs.'' (Id. at 13.)
In so recommending, the Advisory Committee relied on the U.S.
Chamber's plea for U.S. reform.
In light of the proliferation and disparity of filing
requirements around the globe, the increasingly complicated
regulatory framework, and the associated escalation of
transaction costs to meet the demands of the myriad
jurisdictions, the United States can serve an important role by
establishing a benchmark for the rest of the world. Before the
United States can legitimately lay claim to a position of
global leadership in the field of merger review, however, the
US. first needs to conduct a balanced, candid assessment of its
domestic requirements.
(Id. at 123-24) (emphasis added). In line with that recommendation, the
Committee conducted such an assessment. It made a number of
recommendations, several of which add support to the positions
advocated by the Chamber in its February Statement and, by so doing,
support the objectives of S. 1854. The following excerpts incorporate
the essence of the Committee's recommendations with regard to (a) The
HSR Reporting Threshold; (b) The Need to Delink Funding of Antitrust
Enforcement From the HSR Filing Fees; and (c) The Second Request
Process.
A. The Recommendations Re. the Filing Fee Threshold
The Advisory Committee strongly recommends an increase in the HSR
size-of-transaction threshold to somewhere in the range of $33 million
to $43 million, with three members advocating an increase to $50
million. The following excerpts highlight the factual basis and
reasoning for this recommendation:
[T]he Advisory Committee recommends that the current
notification thresholds be carefully reviewed to ensure that
they are only as broad as necessary to identify transactions
that may cause an appreciable anticompetitive effect. While
recognizing that small transactions are not necessarily
competitively benign, the Advisory Committee finds that the
notification thresholds currently employed by the premerger
notification regime are too low and capture too many lawful
transactions. The Advisory Committee believes that the United
States will not be well positioned to advocate that other
jurisdictions review and revise their own premerger
notification thresholds until it has addressed these same
issues in its own system. (Committee's emphasis)
* * *
[O]nly a small percentage of transactions captured by the
notification thresholds currently in place leads to enforcement
action. Indeed, no enforcement action is taken against more
than 98 percent of all notified transactions. In addition, the
annual level of filings made with the U.S. antitrust agencies
has increased significantly since the HSR Act was enacted. The
Advisory Committee believes that this increased level of
filings is attributable not only to increased merger activity,
but also to the failure to adjust the notification thresholds.
They have not been changed since the HSR Act was enacted in
1976.
* * *
Enforcement statistics for 1998 suggest that adjusting the
notification thresholds to keep up with inflation measured in
1998 dollars should not materially compromise the enforcement
mission of the US. antitrust agencies. Depending on the base
year and deflator used, that calculation would mean increasing
the size-of-transaction threshold in the $33 million to $43
million range. Although data are not publicly available for
that range, HSR statistics show that raising the threshold to
$25 million or $50 million would have eliminated approximately
25 to 50 percent of transactions notified in fiscal year 1998.
(Chamber's emphasis)
In 1998 transactions valued below $25 million raised few
competitive concerns. In that year, the agencies received
filings on 1,235 transactions valued at $25 million or less.
The agencies issued Second Requests in only 11 (less than 1
percent) of these transactions. Indeed, in 95 percent of the
1,235 transactions, neither agency sought clearance to even
contact the parties. The filing fees alone in the 1,224
transactions in which no Second Request was issued, however,
cost the acquiring parties $55.1 million.
Likewise, only 27, or just over 1 percent, of the 2,398
transactions valued at $50 million or less received Second
Requests. Although Second Request investigations represented
only a small percentage of notified transactions valued below
$50 million, almost 9 percent of all investigated transactions
involve transactions valued at less than $25 million and
approximately 20 percent of all investigations involve
transactions valued at less than $50 million, indicating that
some small transactions raise sufficient antitrust concerns to
warrant a more complete investigation.
If a transaction is not captured by the thresholds, however,
the agencies have the authority to investigate and take
enforcement action, if needed. For example, in each of the last
two years the DOJ opened more than 50 investigations of
transactions that were not reportable under the HSR Act.
Although the agencies contend they have very little ability to
detect nonreportable transactions, the Advisory Committee
balances that concern with the recognition that only a small
fraction of transactions that fall below notification
thresholds will pose the threat of competitive harm. Thus, the
Advisory Committee concludes that increasing the filing
threshold in the $33 million to $43 million range should not
materially affect the quality of Clayton Act enforcement
efforts. Three Advisory Committee members advocate raising the
size of the transaction threshold higher, to $50 million.
(Chamber's emphasis)
To sum up, the Report strongly supports raising the filing fee
threshold roughly to reflect inflation since 1976. Doing so would set a
good example for foreign merger authorities, and ``should not
materially compromise the enforcement mission of the U.S. antitrust
agencies.'' ICPAC Report at 127. In view of the findings of the
Advisory Committee, the $35 million threshold proposed in S. 1854 is at
the very low end of the range recommended in the Report. The U.S.
Chamber agrees with the three Committee members who advocated raising
the size of action threshold to $50 million, and urges Congress to
adopt the $50 million size of transaction threshold.
B. The Recommendation to Delink Filing Fees from Antitrust Enforcement
Funding
In recommending an increase in the reporting threshold, the
Advisory Committee recognized the unfortunate fact that antitrust
funding has become dependent on HSR filing fees. Echoing the view
expressed by Commissioner Leary and the Chamber at the February 9
hearing, the Committee stated,
``Ideally, no competition authority should be dependent on
filing fees for its budgets, staff salaries, or bonuses. A
linkage of this nature may skew incentives to revise
notification thresholds because consideration of limitations
that may be warranted on the basis of competition-oriented
objectives must be weighed against the collateral fiscal
effects. Another risk that must be considered is that the
ability of competition authorities to fund their law
enforcement activities may be compromised when the current
merger wave subsides.'' (Chamber's emphasis.)
(ICPAC Report at 105-06.) Because this undesirable dependency on filing
fees presently exists, the Committee specified that the increase in the
filing threshold should not be done at the expense of the antitrust
enforcement budget. Its preferred solution, like the Chamber's, is
total delinkage of the fees from the budget. The following excepts
reflect the Committee's reasoning on this point.
Any efforts to revise notification thresholds must account
for the fact that filing fees currently constitute a
significant source of revenue for the U.S. antitrust agencies.
To ensure that the DOJ and FTC will be able to pursue their
enforcement missions vigorously, it is imperative to provide
alternative sources of funding to offset the loss of any funds
that may result from revision of HSR thresholds. (Committee's
emphasis) This goal may he accomplished by delinking the fees
from the budget and by direct funding from general revenue. If
funds are not directly appropriated, alternative funds may be
realized in a variety of ways, including raising the filing
fee, adjusting the fee based on the size of the transaction, or
assessing the fee based on the complexity of the transaction
and the amount of work performed by the reviewing agency,
although these alternatives would not accomplish delinking the
fees from the budget. (Chamber's emphasis).
The existing linkage between filing fees and funding for the
DOJ and FTC creates a conflict of interest for the agencies and
also exposes them to substantial funding cuts if filings were
to decrease, as occurred between 1989 and 1991 when filings
dropped more than 40 percent. The Advisory Committee is of the
view that filing fees should be delinked from funding for the
agencies, but that any efforts to do so must occur in an
environment where sufficient funds are assured from other
sources. This step would be beneficial both for the United
States and for those countries around the world that have
followed the US. lead in implementing filing fees and have
linked them to agency budgets. (Chamber's emphasis)
(ICPAC Report at 129.)
While finding the linkage of ``filing fees to agency budgets
clearly . . . undesirable as a matter of sound public policy'' (ICPAC
Report at 106), the Committee recognized the necessity of accomplishing
that goal without denying appropriate funding to the enforcement
agencies. As noted, the Committee's preferred method is ``direct
funding from general revenue'' (id. at 129); however, the Committee
recognized several alternatives under which the HSR filing fees would
more closely resemble a traditional regulatory or user fee:
For example, the revision of thresholds could be accompanied
by measures to increase filing fees for reportable
transactions, or to levy filing fees scaled to the size of the
transaction. Similarly, filing fees also could be assessed
based on the amount of work performed by the reviewing
authorities. In Germany, for example, the size of the filing
fee for a transaction depends upon the economic importance and
complexity of the case. Filing fees generally range from
DM10,000 to DM100,000 (for straightforward cases, it is
typically less than DM20,000). In exceptional cases, the fee
may amount to as much as DM200,000.(39) Similarly, in
Switzerland, no fee is required if a transaction is cleared
within the initial review period. A filing fee is imposed if a
second-stage investigation is opened and is based on the amount
of work performed by the agency.
(Id. at 106.) The Committee explicitly recognized, however, that
``these alternatives would not accomplish delinking the fees from the
budget'' (id. at 129) and ``that when a transaction must be reviewed in
several jurisdictions, filing fees will quickly mount.'' (Id. at 106.)
For all of the reasons stated in the Chamber's February 9
testimony, in its submission to the Advisory Committee, and in the
ICPAC Report, the Chamber strongly believes that total delinkage of
agency funding from the HSR filing fees can only be accomplished by a
return to the practice of funding the highly important antitrust
enforcement activities through general funds, as was the practice at
the time HSR was enacted. While the other funding alternatives cited by
the Committee would be a modest improvement over the present system,
the Chamber agrees with the Committee that they would not accomplish
delinkage and would foster costly and undesirable proliferation of
filing fees around the world. The Chamber is also concerned that an
uncapped fee based on work performed by the antitrust agency could lead
to excessive investigating.
C. The Second Request Process
Although the Advisory Committee does not recommend legislative
reform of the Second Request process, its study revealed the serious
defects in that process that have caused the Chamber to support the
reform provisions of S. 1854. The following excerpts reflect these
findings of the Committee:
Although the HSR system avoids placing undue burdens on
merging parties at the initial filing stage, it is by far the
most demanding in the second-stage review process with respect
to the information and documents that merging parties are
required to provide. The Advisory Committee recognizes,
however, the flexibility of the U.S. system that enables the
agencies and merging parties to resolve issues in many matters
with only limited production of documents and information. Data
provided by the U.S. agencies indicate that more than half of
all firms complied only partially with the Second Request and
that many transactions were resolved with the submission of 50
or fewer boxes of documents. (Emphasis added)
Many business groups and practitioners that appeared before
the Advisory Committee, however, perceive the Second Request
process to be ``unduly burdensome.'' The Advisory Committee too
is concerned that the data may not indicate the full extent of
the burden. For example, even if parties ultimately did not
substantially comply with the Second Request, they may still
have undertaken a full document search to be prepared to comply
fully with the Second Request in the event that settlement
negotiations break down. In addition, in a handful of notable
instances, merging parties have been required to submit
hundreds of boxes of documents, multiple gigabytes of
computerized data, and extensive answers to dozens of
interrogatory questions. These instances fuel the perception of
the unduly burdensome nature of the Second Request process.
(ICPAC Report at 137)
* * *
The U.S. agencies can take several measures to address
perceptions regarding the Second Request process. First, the
Advisory Committee recommends that when the agencies issue a
Second Request, they give the merging parties their reasons
(either orally or in writing) for not clearing the transaction
within the initial review period. An explanation of the
substantive concerns prompting the Second Request will
facilitate transparency in the merger review process and will
help the parties to understand that the Second Request is based
on genuine substantive concerns rather than on strategic
motivations. (Id. at 139)
* * *
Merging parties and agency staff frequently are able to
negotiate modifications to the scope of Second Requests. The
level of willingness to engage in productive negotiations of
this nature appears to vary greatly among staff members and
merging parties, however, and modification requests sometimes
may not be resolved in a timely fashion. To institutionalize a
willingness to engage in productive modification negotiations,
the Advisory Committee recommends that the agencies impress on
agency staff the importance of being open to negotiating timely
modifications to the scope of requests. Success in this
endeavor also requires a willingness on the part of merging
parties and their advisors. (Emphasis added)
When modification negotiations break down, parties should be
encouraged to use the appeals process. Since its inception in
1995, however, that process has never been used at the FTC and
has been used only three times at the DOJ. . . . Because the
agencies want the appeals process to be used, the Advisory
Committee recommends that the agencies make the procedure more
attractive to merging parties. Commentators have suggested this
can be achieved by making the appeals process more expeditious
and its outcome more transparent. Further, the agencies should
actively encourage merging parties to use the process as well
as to involve direct supervisory officials in the modification
negotiation process, when necessary.
The Advisory Committee recommends that the agencies attempt
to institutionalize these and other best practices to ensure
the integrity and effectiveness of the Second Request process.
The institutionalization of these best practices is
particularly important because at least some of the perceived
problems identified by the private bar appear to stem from
differences in practices by individual staff attorneys. Thus,
the agencies at the highest levels should articulate principles
or best practices to guide staff during the Second Request
process and should ensure that procedures are practiced
consistently throughout the agencies. (Id. at 140-41)
The U.S. Chamber generally agrees with the Committee's descriptions
of the problems but questions whether these long-standing deficiencies
can be resolved through voluntary institutionalization of best
practices. S. 1854 provides a legislative clarification as well as an
effective appeals process that the Chamber, for reasons set forth in
its February 9th Statement, believes should be enacted.
______
Joint Prepared Statement of Janet L. McDavid, Hogan & Hartson LLP, and
John Sipple, Clifford Chance Rogers & Wells
My name is Janet McDavid. I practice law at Hogan & Hartson LLP in
Washington, DC. I am the current Chair of the Section of Antitrust Law
of the American Bar Association, but I am providing this statement
today in my individual capacity and not on behalf of either the ABA or
the Antitrust Section. John Sipple of Clifford Chance Rogers & Wells
assisted in preparing this statement. John is a former head of the
FTC's Premerger Office and is also active in the Antitrust Section, but
he also is providing this statement in his individual capacity.
The Antitrust Section is studying S. 1854, but we have not yet
completed our analysis. Nor have we sought ABA approval to take any
position on the Bill. We do hope to be in a position to discuss these
issues in greater detail soon and to provide final views on various
elements of the Bill. Today, both John and I are providing our personal
views on the pros and cons of the major elements of the Bill without
taking any position on the merits--our views are not necessarily the
views of the ABA or the Antitrust Section.
My practice has been almost entirely in the area of antitrust law
for more than 20 years. During that period, I have spent well over two-
thirds of my time on investigations of mergers, acquisitions, and joint
ventures by the Federal Trade Commission and Antitrust Division, so I
am very familiar with the process. Most recently, I represented Mobil
in its merger with Exxon and American Electric Power in its merger with
CSW.
I believe that the merger review process is one of the most
important law enforcement responsibilities of both Agencies, and they
generally do an excellent job with inadequate resources. However, in
recent years I have become increasingly concerned about problems in the
merger review process in transactions being reviewed at both the FTC
and the Antitrust Division. The problems I have encountered are not
universal. In fact, there are many staff in both Agencies who conduct
efficient, focused, fair reviews of mergers. As Chair of the ABA
Antitrust Section, I have set up a small working group of lawyers from
the private bar and both Agencies to work together to try to improve
the process from the perspective of both the merging parties and the
Agencies. That work began last Fall and is continuing.
I should emphasize that not all of the problems that I have
observed in the process are the fault of the Agencies. There are those
in the private bar who are not cooperative in the process, who withhold
or delay providing information requested by the Agencies, and who even
mislead the Agencies. That conduct makes it hard for the Agencies to do
their job properly. There are no provisions in S. 1854 to address those
problems by private lawyers and their clients. But it is important to
remember that this is not a one way street with and that not all of the
problems are on the Agency side.
S. 1854, the premerger reform legislation introduced by Senators
Hatch, DeWine, and Kohl, has several critical elements. The first two
elements relate to filing thresholds and filings fees. The other major
elements make substantive revisions to the standards governing Second
Requests and establish procedures for review by a Federal Magistrate in
the District of Columbia. Again, I want to emphasize that we are
presenting only our personal views, and that we are identifying both
pros and cons of the major elements of the Bill without taking any
position on the Bill.
S. 1854 increases the size of transaction threshold under the HSR Act
from $15 million to $35 million.
Pros:
Many HSR filings are unnecessary. Each year, the
Agencies conclude that at least 70% of filings raise no
competitive concerns at all. Serious investigations are
conducted in only about 10% of filings. As a result, the
premerger notification reporting net is being cast far too
wide. These unnecessary filings impose substantial burdens on
the business community--legal fees, filing fees, and time
devoted to compliance.
The proposed increase in the transaction threshold
will decrease the burden on the business community by reducing
the number of transactions subject to the notification and
waiting period requirements of the HSR Act. It is estimated
that approximately one third of the 4,642 transactions reported
in FY 1999 fall below the proposed $35 million threshold and
will no longer require notification if S. 1854 is enacted.
The size of transaction dollar threshold has not been
raised since the HSR Act was enacted in 1976. As a result, in
real dollars, the reporting threshold has fallen to a level
equivalent to about $4.5 million in 1976, requiring
notification for many transactions that the law was never
intended to reach. The proposed increase is an adjustment that
is long overdue.
Increasing the threshold is essentially a cost benefit
analysis, weighing the burden on the business community against
the interests in having the antitrust Agencies notified of
every transaction prior to its consummation. Although the
antitrust Agencies will not receive notification for some
smaller transactions that may raise competitive concerns, the
burden placed on the business community for smaller
transactions arguably outweighs the benefits to the antitrust
agencies. In any event, the Agencies can and do review
transactions that are not reportable
Cons:
Fewer filings will mean less revenue for the antitrust
enforcement Agencies (which are funded almost entirely by
filing fees), unless the filing fees are increased.
Since the FTC and the Antitrust Division will no
longer be notified of transactions valued at $35 million or
less, some transactions that raise serious antitrust concerns
may go undetected by the enforcement Agencies or be consummated
prior to detection. Although the Agencies are empowered to
investigate transactions that are not subject to the HSR Act
requirements, the detection of smaller transactions that may
violate the antitrust laws is more difficult and will depend on
complaints, reviewing the trade press, and other means.
The increase in the dollar threshold will result to
some extent in the loss of the deterrent effect that results
from the recognition that a transaction must be notified to the
enforcement Agencies before consummation.
S. 1854 establishes a two-tiered filing fee structure based on the
dollar value of the transaction and increases filing fees.
Pros:
A filing fee based on the dollar value of the
transaction appears to be more equitable than a flat filing
fee. Larger transactions may be more complex and require
greater Agency resources.
The funding for the antitrust Agencies will not be
adversely affected by the increase in the size of transaction
dollar threshold (which reduces the number of filings) because
the two-tiered structured is designed to make the threshold
increase revenue neutral.
Cons:
Funding the budgets of the FTC and the Antitrust
Division through filing fees sets a bad example for other
nations that have adopted or are about to adopt merger
notification requirements. If the use of filing fees to fund
antitrust enforcement Agency budgets is adopted by other
jurisdictions (as it has been), transaction costs will increase
for multinational transactions.\1\
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\1\ Many people have questioned whether it is appropriate to fund a
law enforcement function, such as antitrust enforcement, through user
fees at all.
Funding almost the entire budget of both the FTC and
the Antitrust Division from revenues derived from filing fees
is inequitable because it requires firms involved in reportable
transactions to fund the enforcement activities of the Agencies
unrelated to the review of mergers and acquisitions. For
instance, the filing fee funds the consumer protection function
of the FTC and non-merger antitrust enforcement work of the FTC
---------------------------------------------------------------------------
and the Antitrust Division.
Since the budgets of the Agencies are based on filing
fees, the Agencies have no incentive to adopt new exemptions,
they can do under the HSR Act, to exempt classes of
transactions that are unlikely to violate the antitrust laws.
Thus, as a matter of public policy, provisions should be
included in S.1854 to eliminate this disincentive.
The creation of a two-tiered filing fee structure will
be more difficult to administer than a flat filing fee or a
filing fee based on the total assets or annual net sales of the
acquiring person. The total assets or annual net sales are
relatively easy to determine using the most recent, regularly
prepared financial statements. The precise value of a
transaction is much more difficult to determine.
The change in filing fees creating a two-tiered system
based on the value of the transaction will pose many valuation
issues and require several changes to the HSR Rules. Basing the
filing fee on the value of the transaction will require the
modification and adoption of several new rules. For example,
rules will be required to address the following issues:
--How will parties determine the value of a transaction when
notification is filed based on a letter of intent or an
agreement in principle rather than an executed agreement?
--Will the affidavit requirement require modification to
require parties attest that a ``good faith valuation'' has been
performed?
--How will parties determine the value of an exclusive
license?
--What is the dollar value of a voting securities acquisition
involving the purchase of shares for the 15%, 25% or 50%
thresholds? Is the value of the transaction to be based on the
value of the shares meeting the reporting threshold or the
value of the highest number of shares that can be acquired if
the threshold is met (15% versus 24.99%). If a person files to
met or exceed the 50% threshold, should the fee be based on the
number of shares that can be acquired of the 50% threshold is
met, the actual percentage of shares that the person intends or
has contracted to acquire or 100%.
Given the complexities of the HSR Rules and the
interpretations that have developed over the life of the
program, drafting modifications to the HSR Rules is a very
arduous, and time consuming process. It is important that any
modifications that are adopted must be consistent with
regulatory scheme that is in place.
S. 1854 establishes substantive standards for agency requests for
information in a merger review. Under the Bill, Agency requests
must not be unreasonably cumulative and may not impose undue
burden or expense on the parties that outweighs the benefits to
the Agency of receiving that information. If information is not
supplied, the Agency may raise deficiencies only if its ability
to review the transaction has been materially impaired.
Pros:
There is no doubt that many Agency requests today are
over-broad and unduly burdensome. The Bill would impose some
discipline on the Agencies and result in more narrow, focused
requests.
Cons:
These are very uncertain standards, and neither the
Agencies nor the bar has any idea what they mean or how to
interpret them.
It is very hard for the Agencies to conduct a cost
benefit analysis at an early stage in the investigation--
especially before the Agency has had access to some of the data
it seeks. It is impossible to do so if private counsel fail to
produce relevant information prior to the issuance of the
Second Request, which is a tactic used by some lawyers.
The Bill requires that the Agencies identify their competitive concerns
at the time a Second Request is issued.
Pros:
This will force the Agencies to focus their requests
on the real concerns.
Because staff must justify Second Requests to their
management, this is already done internally so it imposes
little additional burden on the Agencies.
Indeed, Chairman Pitofsky has already committed that
the FTC will do this orally on a non-binding basis. I welcome
that commitment, and hope that Antitrust Division will follow
his lead.
Cons:
The Agency may not know all the issues early in the
process, so this statement could foreclose inquiry into issues
that arise later in the investigation.
The Agencies may provide broad, largely meaningless
requests to minimize that risk, and thereby undermine this
requirement.
The Bill provides that the parties to the merger may petition a
designated Magistrate Judge in the U.S. District Court in the
District of Columbia to review the issuance and scope of a
Second Request and the parties' compliance with the request.
Pros:
This ``levels the playing field'' by interposing a
disinterested third party review so the Agencies no longer hold
all the cards.
This review could provide the parties with some
recourse for burdensome requests.
The only appeal now available is internal review by
Agency management. Most parties hesitate to seek review because
they believe that management will back the staff and that they
will alienate the staff by ``going over their heads.''
Cons:
This is likely to result in both the parties and the
Agencies becoming ``dug in'' and intransigent at an early stage
in the process, which is not conducive to a negotiated
resolution. This could increase the burdens on both the parties
and the Agencies.
Magistrates are unfamiliar with the merger review
process and the legal issues involved in mergers, so they are
not well equipped for this task. These disputes are not like
the typical civil discovery disputes that Magistrates regularly
review, where the presumptions typically favor the party
seeking discovery. There could be uncertain or confused
precedents as a result.
The review process could result in significant delays
for all involved. No time limits or deadlines are proposed in
the Bill, although it appears that review should be
expeditious. The risk of delay alone could discourage parties
from seeking review.
Unlike typical civil discovery rules (e.g. Fed. R.
Civ. P. 37), there is no requirement that the parties and the
Agency attempt to resolve their dispute prior to invoking
review by a Magistrate.
We in the private bar are working with the Agencies to
improve the merger review process--with or without legislation.
We are hopeful that our efforts will yield improvements. After
the Antitrust Section has completed it detailed analysis of S.
1854 and secured ABA approval to convey its position to
Congress, we will be happy to work with Congress on addressing
the important issues raised by the Bill.