FTC Chairman Says Rulemaking Would Target Negative-Option, Not Behavioral Ads

A commission once so unpopular in Congress that it lost half its funding is well aware of having overreached and can be trusted now with broader rulemaking authority, FTC Chairman Jon Leibowitz told the Association of National Advertisers (ANA) conference Thursday in Washington. He sought to dispel advertisers’ fears that expanded commission authority, provided for in a bill passed by the House to create a financial regulatory agency, would produce an agency “on steroids,” in the words of former Chairman Jim Miller, that goes after a broad range of online practices. One of the industry’s biggest fears is apparently off the table: regulation of behavioral advertising.

The ANA promotes “socially responsible marketing” through the National Advertising Review Council and other self-regulatory bodies, easing the FTC’s load so it can pursue “hardcore fraudsters,” Leibowitz said. The industry is antsy about the House bill, now in the Senate Banking and Commerce committees, he acknowledged, but the legislation is needed remove “medieval” restrictions that essentially require the FTC to go to trial to punish misconduct. Under the “peculiar” structure set up by the Magnuson-Moss law, which requires several years to get a rule through, the commission hasn’t started a rulemaking in 32 years, Leibowitz said.

When Congress has given the FTC special authority under the Administrative Procedure Act, such as to create the do-not-call registry, the results have been popular, Leibowitz said. The commission holds public workshops with business, though the Act doesn’t require them, because it wants their comments, he said. The new legislation would make it easier for the FTC to impose rules, under the Administrative Procedure Act, give it civil penalty authority under Section 5 of the FTC Act, let it pursue “aiding and abetting,” and give it the power to file some lawsuits on its own. The Department of Justice takes as long as two months to file on behalf of the commission, and during that time consumers continue to be harmed by quick-money scams, such as robocalls for fake charities, Leibowitz said.

The commission’s reliance on redress in civil cases isn’t much of a deterrent to wrongdoers, such as companies that flood users’ computers with pop-up ads, Leibowitz said. Civil penalties will make them think twice about harming consumers, he said. “We wouldn’t go after media companies,” using aiding-and-abetting authority, for running ads that the commission finds deceptive or impose a “general duty” to screen ads, because the FTC is “very mindful” of First Amendment concerns. It would go after a company that continues processing payments for a “shady operation” that has high chargeback rates and that is clearly making unauthorized charges on consumer accounts, he said. The practices were the subject of a Senate Commerce Committee investigation into “mystery charge” providers that enroll Internet users in subscription programs after they make online retail purchases and click on special offers. “Every time we try to bring these cases we have a series of obstacles raised by defendants” who say the FTC can’t punish aiding and abetting, he said.

The FTC would use expanded authority only where consumers suffer “significant harm,” bad behavior is common in the industry, standards would improve practices and the expected burdens are “reasonable,” Leibowitz said. “We'd really be stupid if we try to solve every problem in American society with a rule,” he said, so the commission will use any new authority “very judiciously.” Leibowitz directed that statement to Stu Ingis of the Venable law firm, counsel to the Interactive Advertising Bureau and one of the commission’s most vocal critics in the audience.

Negative-option marketing, including the “mystery charge” variety, would be a prime candidate for a rulemaking, but the FTC would first gather information on the types and frequency of such scams, Leibowitz said. It would also look for exceptions, since several magazines use “a form” of the marketing and it’s considered legitimate in most cases. Where business practices and consumer expectations are “evolving,” self-regulation is working and First Amendment issues are involved, the FTC would hold back, he said. Again directing his statement to Ingis, Leibowitz said that would include behavioral advertising and marketing to children. It would show “enormously bad judgment” to pursue those matters, Leibowitz said. “We do believe in self-regulation."

Leibowitz made a distinction between rulemakings and “guidelines.” A set of guidelines about endorsements raised the hackles of product-review bloggers. The FTC’s guidelines simply lay out “best practices,” and the commission has no interest in making them mandatory, he told a questioner. The commission hasn’t brought a case against a celebrity for failing to make a “reasonable inquiry” into the product to be endorsed, Leibowitz said. The FTC is taking a “long, hard look” at proposals to regulated food marketing to those under 18, which could involve social media, and the commission will make a proposal “in the not-too-distant future."

Leibowitz seemed to defer on privacy rules to Rep. Rick Boucher, D-Va., the House Communications Subcommittee chairman, whose general privacy bill is expected to land this spring. “We all know that whatever the default is, is what consumers tend to” stick with, he said, speaking of behavioral ads and a possible opt-in requirement. Though opt-in gives consumers “more ability to know what they're agreeing to,” it’s not an excuse for bad behavior such as Sears’ collecting sensitive information from opt-in customers’ computers, Leibowitz said. That incident resulted in a settlement between the company and the commission. Leibowitz said Boucher’s bill may include an opt-in mechanism and fumbled to explain his own preference.

Commission Could Become ‘Unguided Missile'

The advertising industry is under assault from the FTC, FCC and other agencies, said Dan Jaffe, ANA executive vice president of government relations, following Leibowitz’s keynote. Purportedly “voluntary” food marketing standards under development by the FTC, FDA, Centers for Disease Control and Prevention and the Agriculture Department would inevitably extend to advertising in media consumed by adults, he said. FCC Chairman Julius Genachowski’s recent claim that 10 hours of children’s programming on average only has one ad for healthy food, during an event featuring Sesame Street’s Elmo (CD March 15 p5), is based on bad data, Jaffe said. But “if important people believe it, it’s almost fact.” The ANA is working with other groups to file a “magnum opus” in the FCC’s inquiry on protecting children, he said -- adding that advertising dollars largely make kids’ programming possible.

Leibowitz’s assurances the FTC will be cautious with new authority belie the wide latitude in the Administrative Procedure Act, and courts only have authority to overturn agency rulemakings if the results are “arbitrary and capricious,” a high standard, Jaffe said. Advertisers could face million-dollar penalties for running Super Bowl ads later judged deceptive, he said. The FTC is setting itself up to be a media regulator on every platform: “It is not healthy for the FTC to be an unguided missile or a car speeding ahead with inadequate brakes.” The FDA’s new focus on social media in drug marketing, and its reconsideration of the so-called one-click-away rule for listing drug side effects, threaten advertisers. And Boucher’s privacy bill “would not be a good deal.”