Biden Administration Tech Policy: Federal Trade Commission (FTC)

Under President Joe Biden, the FTC will face most of the same issues presently before the agency.

In a Biden Administration, the FTC may tip from three Republican Commissioners, including the chair, to a majority of Democrats if Chair Joseph Simons steps down as has been rumored for some months now, in part because of political pressure and displeasure from the Trump White House. However, it is not uncommon for chairs to stay on even if a President of a different party comes to power, and, in fact, it rarely occurs that a sitting chair resigns at the beginning of a new presidency as occurred when then Chair Edith Ramirez resigned at the beginning of the Trump Administration in 2017. However, by law, the President may not remove the FTC chair or any commissioner except for “inefficiency, neglect of duty, or malfeasance in office.”

However, the President may, and almost always does in the event the White House changes hands, designate a new chair, and either of the sitting Commissioners could become the new chair: Rebecca Kelly Slaughter or Rohit Chopra. However, the latter’s term actually ended in September 2019 and can serve until he is re-confirmed or a successor is confirmed. It is not clear whether Chopra would be re-nominated given his view on regulating is to the left of Biden’s historical position on such issues. However, Chopra has support from Senator Elizabeth Warren (D-MA), a key stakeholder a Biden White House may try to keep happy. However, Chopra’s name was floated for the head of the Consumer Financial Protection Bureau (CFPB), the agency where he served as the Deputy Director. So, it may come to pass that President-elect Joe Biden gets to appoint two Democrats to the FTC if Simons steps down and Chopra moves on to the CFPB.

Of course, the FTC will almost certainly continue as the de facto federal data protection authority (DPA) for the United States and will use its Section 5 powers to investigate and punish privacy, data security, and cybersecurity violations. The agency is one of the two federal antitrust enforcers, a recently revived area of federal law that has bipartisan interest and support, and is on the verge of filing an antitrust action against Facebook, alleging violations of antitrust law in the social messaging market, especially on account of its WhatsApp and Instagram acquisitions. Conceivably, the FTC under Democratic leadership may have a more aggressive posture towards technology companies and other swaths of the economy that have undergone increased consolidation.

Moreover, most of the privacy bills in Congress would assign the responsibility of enforcing the regime at the federal level to the FTC, a power it would share with state attorneys general as is the current case with respect to antitrust and data security enforcement. The crucial question will be whether the agency receives the resources necessary to maintain its current responsibilities while taking on new responsibilities. At present, the House is proposing a $10 million increase to the agency’s budget from $331 million to $341 million.

Another aspect of the FTC that bears watching is how federal courts construe the agency’s power because a significant portion of the FTC’s ability to use its enforcement powers will hinge on court cases and possible Congressional tweaks to the FTC Act.

A few weeks ago, the FTC recently wrote the House and Senate committees with jurisdiction over the agency, asking for language restoring the power to seek and obtain restitution for victims of those who have violated Section 5 of the FTC Act and disgorgement of ill-gotten gains. The FTC is also asking that Congress clarify that the agency may act against violators even if their conduct has stopped as it has for more than four decades. Two federal appeals courts have ruled in ways that have limited the FTC’s long used powers, and now the Supreme Court of the United States is set to rule on these issues sometime next year. The FTC is claiming, however, that defendants are playing for time in the hopes that the FTC’s authority to seek and receive monetary penalties will ultimately be limited by the United States (U.S.) highest court. Judging by language tucked into a privacy bill introduced by the chair of one of the committees, Congress may be willing to act soon.

The FTC asked the House Energy and Commerce and Senate Commerce, Science, and Transportation Committees “to take quick action to amend Section 13(b) [of the FTC Act i.e. 15 U.S.C. § 53(b)] to make clear that the Commission can bring actions in federal court under Section 13(b) even if conduct is no longer ongoing or impending when the suit is filed and can obtain monetary relief, including restitution and disgorgement, if successful.” The agency asserted “[w]ithout congressional action, the Commission’s ability to use Section 13(b) to provide refunds to consumer victims and to enjoin illegal activity is severely threatened.” All five FTC Commissioners signed the letter.

The FTC explained that adverse rulings by two federal appeals courts are constraining the agency from seeking relief for victims and punishment for violators of the FTC Act in federal courts below those two specific courts, but elsewhere defendants are either asking courts for a similar ruling or using delaying tactics in the hopes the Supreme Court upholds the two federal appeals courts:

  • …[C]ourts of appeals in the Third and Seventh Circuits have recently ruled that the agency cannot obtain any monetary relief under Section 13(b). Although review in the Supreme Court is pending, these lower court decisions are already inhibiting our ability to obtain monetary relief under 13(b). Not only do these decisions already prevent us from obtaining redress for consumers in the circuits where they issued, prospective defendants are routinely invoking them in refusing to settle cases with agreed-upon redress payments.
  • Moreover, defendants in our law enforcement actions pending in other circuits are seeking to expand the rulings to those circuits and taking steps to delay litigation in anticipation of a potential Supreme Court ruling that would allow them to escape liability for any monetary relief caused by their unlawful conduct. This is a significant impediment to the agency’s effectiveness, its ability to provide redress to consumer victims, and its ability to prevent entities who violate the law from profiting from their wrongdoing.

Earlier in the year, by a split vote across party lines, the Federal Trade Commission (FTC) asked a United States (U.S.) appeals court to reconsider a ruling that overturned a lower court’s ruling that Qualcomm has violated antitrust laws in the licensing of its technology and patents vital to smartphones. Republican Commissioners Noah Joshua Phillips and Christine Wilson voted against filing the brief asking for a rehearing with Chair Joseph Simons joining the two Democratic Commissioners Rohit Chopra and Rebecca Kelly Slaughter in voting to move forward with the brief. This case could have major ramifications for antitrust law and the technology sector in the U.S. and for the 5G market as Qualcomm is a major player in the development and deployment of the technology necessary for this coming upgrade in wireless communications expected to bring a host of intended and unintended improvements in communications.

In the brief, the FTC argued the (U.S.) Court Of Appeals for The Ninth Circuit (Ninth Circuit) did not disagree with the District Court’s factual findings of anticompetitive conduct and rather took issue with the lack of “a cogent theory of anticompetitive harm.” The FTC argued the case should be reconsidered on three grounds:

  • The Ninth Circuit ruled on the basis of formal labels and not economic substance contrary to established Supreme Court law
  • Facially neutral surcharges by one market participant to its rivals is, in fact, an unequal and exclusionary burden on rivals, conduct the Supreme Court has ruled violates antitrust law; and
  • Harm to customers is indeed a central focus and concern of antitrust cases and ruling that this harm is outside relevant antitrust markets is also a misreading of established law.

As noted, the Ninth Circuit reversed a U.S. District Court’s decision that Qualcomm’s licensing practices violated the Sherman Antitrust Act. Specifically, the lower court held these practices “have strangled competition in the Code Division Multiple Access (CDMA) and premium Long-Term Evolution (LTE) modem chip markets for years, and harmed rivals, original equipment manufacturers (OEMs), and end consumers in the process.” Consequently, the court found “an unreasonable restraint of trade under § 1 of the Sherman Act and exclusionary conduct under § 2 of the Sherman Act….and that Qualcomm is liable under the FTC Act, as “unfair methods of competition” under the FTC Act include “violations of the Sherman Act.”

However, the Ninth Circuit disagreed, overturned the district court and summarized its decision:

  • [We] began by examining the district court’s conclusion that Qualcomm had an antitrust duty to license its standard essential patents (SEPs) to its direct competitors in the modern chip markets pursuant to the exception outlined in Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985). [We] held that none of the required elements for the Aspen Skiing exception were present, and the district court erred in holding that Qualcomm was under an antitrust duty to license rival chip manufacturers. [We] held that Qualcomm’s OEM-level licensing policy, however novel, was not an anticompetitive violation of the Sherman Act.
  • [We] rejected the FTC’s contention that even though Qualcomm was not subject to an antitrust duty to deal under Aspen Skiing, Qualcomm nevertheless engaged in anticompetitive conduct in violation of § 2 of the Sherman Act. [We] held that the FTC did not satisfactorily explain how Qualcomm’s alleged breach of its contractual commitment itself impaired the opportunities of rivals. Because the FTC did not meet its initial burden under the rule of reason framework, [We were] less critical of Qualcomm’s procompetitive justifications for its OEM-level licensing policy—which, in any case, appeared to be reasonable and consistent with current industry practice. [We] concluded that to the extent Qualcomm breached any of its fair, reasonable, and nondiscriminatory (FRAND) commitments, the remedy for such a breach was in contract or tort law.

The FTC has a number of significant outstanding rulemakings.

In early 2019, the FTC released notices of proposed rulemaking (NPRM) for two of the data security regulations with which some financial services companies must comply:

The reassessment of the Safeguards Rule began in 2016 when the FTC asked for comments. The proposed Safeguards Rule demonstrates the agency’s thinking on what data security regulations should look like, which is important because the FTC is the agency most likely to become the enforcer and writer of any new data security or privacy regulations. Notably, the new Safeguards regulation would require the use of certain best practices such as encrypting data in transit or at rest or requiring the use of multi-factor authentication “for any individual accessing customer information.” Moreover, the other financial services agencies charged with implementing the section of Gramm-Leach-Bliley (GLB) that requires financial services companies to safeguard customers’ information may follow suit (e.g. the Federal Reserve Board or the Comptroller of the Currency.)

In the proposed rule, the FTC noted that its changes to the Safeguards Rule would “include more detailed requirements for the development and establishment of the information security program required under the Rule…[and] [t]hese amendments are based primarily on the cybersecurity regulations issued by the New York Department of Financial Services, 23 NYCRR 500 (“Cybersecurity Regulations”), and the insurance data security model law issued by the National Association of Insurance Commissioners (“Model Law”).”

In the Safeguards Rule proposal, the FTC explained “[t]he proposal contains five main modifications to the existing Rule.”

  • First, it adds provisions designed to provide covered financial institutions with more guidance on how to develop and implement specific aspects of an overall information security program, such as access controls, authentication, and encryption.
  • Second, it adds provisions designed to improve the accountability of financial institutions’ information security programs, such as by requiring periodic reports to boards of directors or governing bodies.
  • Third, it exempts small businesses from certain requirements.
  • Fourth, it expands the definition of “financial institution” to include entities engaged in activities that the Federal Reserve Board determines to be incidental to financial activities. Such a change would add “finders”–companies that bring together buyers and sellers of a product or service–within the scope of the Rule.
  • Finally, the Commission proposes to include the definition of “financial institution” and related examples in the Rule itself rather than incorporate them by reference from a related FTC rule, the Privacy of Consumer Financial Information Rule.

The FTC’s Safeguards Rule applies to the following and other entities:

[M]ortgage lenders, “pay day” lenders, finance companies, mortgage brokers, account servicers, check cashers, wire transferors, travel agencies operated in connection with financial services, collection agencies, credit counselors and other financial advisors, tax preparation firms, non- federally insured credit unions, investment advisors that are not required to register with the Securities and Exchange Commission, and entities acting as finders.

The FTC explained that it “is proposing to expand the definition of “financial institution” in both the Privacy Rule and the Safeguards Rule to specifically include so-called “finders,” those who charge a fee to connect consumers who are looking for a loan to a lender…[because] [t]his proposed change would bring the Commission’s Rule in line with other agencies’ interpretation of the Gramm Leach Bliley Act.”

As part of its regular review of its regulations, the FTC released asked for input on its Health Breach Notification Rule (HBN Rule) promulgated in 2010 per direction in the “American Recovery and Reinvestment Act” (ARRA) (P.L. 111-5). When enacted, Congress expected this regulation to be temporary as policymakers thought a national breach notification statute would shortly be enacted that would make the FTC’s regulations superfluous, but that has obviously not happened. And, hence the FTC continues to have regulations governing breach notification and security of some health information for entities not subject to the “Health Insurance Portability and Accountability Act” (HIPAA)/“Health Information Technology for Economic and Clinical Health Act” (HITECH Act) regulations, which are generally healthcare providers and their business associates. Incidentally, it is possible the FTC’s HBN Rule would govern breaches arising from breaches of vendors involved with COVID-19 contact tracing.

As explained in the current regulation, the HBN Rule “applies to foreign and domestic vendors of personal health records (PHR), PHR related entities, and third party service providers, irrespective of any jurisdictional tests in the Federal Trade Commission (FTC) Act, that maintain information of U.S. citizens or residents.” This rule, however, “does not apply to HIPAA-covered entities, or to any other entity to the extent that it engages in activities as a business associate of a HIPAA-covered entity.”

And yet, the FTC conceded it “has not had occasion to enforce its Rule because, as the PHR market has developed over the past decade, most PHR vendors, related entities, and service providers have been HIPAA-covered entities or “business associates” subject to the Department of Health and Human Services’ (HHS) rule.” The FTC foresees utility and need for the HBN Rule “as consumers turn towards direct-to-consumer technologies for health information and services (such as mobile health applications, virtual assistants, and platforms’ health tools), more companies may be covered by the FTC’s Rule.” Accordingly, the FTC “now requests comment on the HBN Rule, including the costs and benefits of the Rule, and whether particular sections should be retained, eliminated, or modified.”

In terms of how the HBN Rule functions, the FTC explained:

  • The Recovery Act directed the FTC to issue a rule requiring these entities, and their third-party service providers, to provide notification of any breach of unsecured individually identifiable health information.
  • Accordingly, the HBN Rule requires vendors of PHRs and PHR related entities to provide: (1) Notice to consumers whose unsecured individually identifiable health information has been breached; (2) notice to the media, in many cases; and (3) notice to the Commission.
  • The Rule also requires third party service providers (i.e., those companies that provide services such as billing or data storage) to vendors of PHRs and PHR related entities to provide notification to such vendors and entities following the discovery of a breach.
  • The Rule requires notice “without unreasonable delay and in no case later than 60 calendar days” after discovery of a data breach. If the breach affects 500 or more individuals, notice to the FTC must be provided “as soon as possible and in no case later than ten business days” after discovery of the breach. The FTC makes available a standard form for companies to use to notify the Commission of a breach. The FTC posts a list of breaches involving 500 or more individuals on its website. This list only includes two breaches, because the Commission has predominantly received notices about breaches affecting fewer than 500 individuals.

Moreover, per the current regulations, the FTC may treat breaches as violations of regulation on unfair or deceptive practices, permitting the FTC to seek and possibly levy civil fines of up to $43,000 per violation.

© Michael Kans, Michael Kans Blog and michaelkans.blog, 2019-2020. Unauthorized use and/or duplication of this material without express and written permission from this site’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Michael Kans, Michael Kans Blog, and michaelkans.blog with appropriate and specific direction to the original content.

Image by Gerd Altmann from Pixabay

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