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Tipping Towards an Opt-In

A few years ago, I became an instant fan of Malcolm Gladwell’s groundbreaking book – “The Tipping Point” – based on an epidemiological theory that says that in aggregate, “little things” can make a big difference.  Since then, I’ve observed the phenomenon play out on the policy stage several times – financial reform and healthcare are two immediate examples that come to mind – and I wonder if the theory has any application in what’s currently happening with online privacy today.  I think it does – particularly if you view a tipping point in scientific terms i.e. the point at which an object is displaced from a state of stable equilibrium due to a series of successive events, into a new equilibrium state qualitatively dissimilar from the first.

To say that online privacy was ever in a state of stable equilibrium is a stretch.  We are however, approaching the end of a current era in online advertising and marketing – an era in which companies captured personal and confidential data from users, and then monetized that data to sell ads back to those very same users, often without the user’s authorization or knowledge. That state of equilibrium has been threatened by many events in the last few months – market developments, consumer outcry and regulatory attention all converging to catapult data privacy and security onto the national agenda and into the mainstream press.  Some commentators, such as Jeff Chester, have characterized these events as a perfect storm; I see them a bit differently – not a storm, but a series of occurrences that finally “tipped” the issue, as companies attempted to push the privacy envelope with various features that compromised a user’s privacy (and in some cases the user’s express wishes to keep their data private).  Each of these features involved sharing data with a third party and not surprisingly, each triggered a privacy outcry – because they provided no meaningful way for users to opt-out of the feature before personal data was exposed.

It’s amazing to think that most of these pivotal events only happened during the last three months.  To recap:

February 9, 2010 – Google launches Google Buzz, and overnight, transforms users’ Gmail accounts into social networking pages, exposing personal contacts.  Google later remedies the situation by making the feature opt-in.

April 27, 2010 – 4 Democratic Senators led by Chuck Schumer of New York, send a letter to Facebook CEO Mark Zuckerberg complaining about the privacy impact of Facebook services, including its instant personalization feature (which exposed user profile data without authorization on launch).  Senator Schumer follows up his letter with a formal request urging the FTC to investigate Facebook.  Facebook eventually announces new privacy controls.

May 5, 2010 – EPIC and a coalition of other advocacy organizations file this complaint, urging the FTC to investigate Facebook.  In the complaint, they assert that “Faceboook’s business practices directly impact more American consumers than any other social network service in the United States.”

May 14, 2010 – Google announces, via a post on their policy blog, that their Streetview cars have inadvertently been capturing payload data from open WiFi networks – in violation of US, European and other global data protection laws – for over 3 years.

May 21, 2010 – The Wall Street Journal reports that a group of social networking sites – including Facebook, MySpace and Digg – routinely share user profile data with advertisers, despite public assurances to the contrary.

The result? With each successive product or feature launch, the privacy debate is now tipping towards a privacy regime that could be much stricter than anything we’ve seen before – a requirement that companies get a user’s affirmative opt-in to any use of personal data for advertising and marketing purposes.

Privacy nerds may want to revisit the words of David Vladeck, head of the FTC’s Bureau of Consumer Protection, in a New York Times interview that took place last August i.e. before the privacy mishaps of the last 3 months.  When asked about whether the FTC would mandate an opt-in standard for user disclosures, Mr. Vladek responded:

“The empirical evidence we’re seeing is that disclosures on their own don’t work, particularly disclosures that are long, they’re written by lawyers, and they’re written largely as a defense to liability cases. Maybe we’re moving into a post-disclosure environment. But there has to be greater transparency about what’s going on. Until I see evidence otherwise, we have to presume that most people don’t understand, and the burden is going to be on industry to persuade us that people really are well informed about this.”

The emphasis on transparency becomes even more important with the  impending rollout of the FTC’s privacy framework this summer.  Will  the FTC make an affirmative opt-in mandatory in all instances where personal data is being shared with a third party?  Clearly, an opt-in is one of the best ways to ensure transparency, and to give users meaningful notice about what data is being collected.  The question is whether an opt-in requirement would be so cumbersome it would turn users off of the service altogether.  For instance, would an opt-in be required once – before the feature is first launched, or each successive time it launches?

Also, it’s unclear whether the FTC’s framework will derive strength (or weakness) from a federal privacy law if such a law does indeed pass this session.  Critics on both sides have mostly panned the House legislation i.e. the Boucher-Stearns bill, but there is news of another, more stringent bill being drafted by Senator Schumer who reached his tipping point with Facebook as outlined earlier.

I saved my most important “little thing” for last. Even if you don’t believe that the privacy debate has yet to reach a tipping point, consider this: in June, the Supreme Court will issue its decision in City of Ontario v. Quon. This is the first time that the Supremes have considered the crucial question of what expectation of privacy users have in their electronic communications.  Their decision will most likely impact any regulatory or legislative scheme around privacy currently being proposed by the federal agencies or Congress.  Most importantly, a Supreme Court decision that finds an expectation of privacy in electronic communications will most certainly translate into increased obligations on companies that deal in these types of electronic communications and data.  A tipping point?  Absolutely.  In fact, such a decision would definitely signal something much bigger (to quote another popular book title) – a Game Change for advertising and marketing on the web.

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Today at the ABA: Expanding the FTC’s Role through Financial Reform

April 22, 2010 1 comment

I have also posted this entry to the ABA’s Secure Times blog.

The big question being debated at this morning’s session on financial reform legislation and the proposed Consumer Financial Protection Agency/Bureau: how will the legislation impact the FTC’s authority, both in terms of rulemaking and imposition of civil penalties?

In December 2009, the House passed the “Wall Street Reform and Consumer Protection Act of 2009” (HR 4173).  An important provision in the bill would strip the FTC of its powers to regulate consumer financial protection — while also expanding the agency’s powers in two key ways.  First, by giving the FTC “APA” rulemaking authority for areas that fall within the FTC’s jurisdiction and second, by giving the agency greater latitude to assess civil penalties for unfair and deceptive practices.

These amendments will surely impact FTC enforcement of online advertising, marketing, privacy, and data security.  For instance, violations under the FTC’s expanded authority could trigger civil penalties even in the absence of an FTC order. Civil penalties would be assessed in antitrust cases brought by the FTC that include a consumer protection claim.

In addition, the HR 4173 language that expands the FTC’s authority would impose liability on companies that “substantially assist” in an unlawful act, even if the company does not have direct knowledge or responsibility for the violation.  This provision will probably raise some serious concerns for companies currently enjoying a safe harbor under the Communications Decency Act.

Today, FTC rulemaking jurisdiction comes in two flavors – “APA” rulemaking under certain laws as prescribed by Congress e.g. the Children’s Online Privacy Protection Act, as well as general rulemaking authority under the 1975 Magnusson-Moss Act.  Under the latter, the FTC can only regulate “prevalent” unfair and deceptive acts, and must justify that regulation with “substantial evidence.”   The key difference between these two types of rulemaking occurs during judicial review; a court can overturn an FTC regulation under Magnusson-Moss if the rule lacks a substantial evidentiary record to support it.  In contrast, FTC regulations enacted under the APA rulemaking scheme, such as those implementing COPPA, can only be overturned if the agency was “arbitrary or capricious” in enacting the rule – a much higher standard. As former FTC Chairman Muris explained in his presentation at the panel, Magnusson-Moss gives the FTC authority to act only when a problem occurs often enough to justify a rule, or when a problem has a common cause in a sufficient number of cases.

Current FTC Chairman Jon Leibowitz, supported by President Obama and the Administration, has strongly advocated for an expansion in the FTC’s authority, stating that it is “critical” for the FTC to carry out its mission of protecting consumers.  In particular, Leibowitz has argued that the procedural requirements of Magnusson-Moss – such as the requirement that a practice be prevalent before the agency can act – makes FTC rulemaking more burdensome than at most other federal agencies. Although the relevant amendments expanding the FTC’s power are missing from the Senate version of the legislation, it is widely expected that these differences will be worked out in conference.  Financial reform legislation appears to be on a fast track – earlier today, a Senate panel approved the bill, and both Republicans and Democrats have indicated that passage is likely.

The CFPA would be a new independent federal agency – the composition of which would vary depending on whether you are looking at the House (5 members and a Director for two years) or Senate Bill (5 members).  Its enactment would strip the FTC and other federal banking agencies of their federal consumer protection powers under a number of laws, including the Electronic Funds Transfer Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, the Secure and Fair Enforcement for Mortgage Licensing Act, the Truth in Lending Act and the Truth in Savings Act.   In short, any product or service that results from or is related to engaging in a financial activity and that is to be used by a consumer “primarily for personal, family or household purposes” will come under the new agency’s purview.

At today’s session, we saw differing viewpoints from both Tim Muris, former FTC Chairman, and Julie Brill, incoming FTC Commissioner, on this current push to expand the FTC’s authority under financial reform legislation.

Former Chairman Muris views the FTC’s current role as important, and he sees FTC rulemaking as relevant in certain areas – e.g. the do-not-call rules.  He is concerned about the current proposals to expand the FTC’s authority because the agency often lacks industry-specific knowledge and expertise (I see this most recently in the area of privacy, as the FTC is currently gleaning this knowledge through its Exploring Privacy roundtable series). Muris also thinks the agency’s rulemaking authority under Magnusson-Moss is more than sufficient as it imposes an obligation on the agency to be clear about its proposed theories while focusing its evidence on key questions.  He cites the agency’s recent business opportunity rulemaking as an example of an instance where the FTC initially proposed a broad rule that would have disproportionately impacted both fraudulent and legitimate business.  The FTC eventually narrowed its proposed business opportunity rule after the public comment process.

On civil penalties, Muris thinks these are important only when a company violates an FTC order or rule.  He sees blanket civil penalty authority as a mistake that may have unintended consequences – such as a penalty on a firm’s stock price.  He’s also concerned that the standard of review laid out in the financial reform legislation will return the FTC’s definition of unfairness to its pre 1994 definition i.e. the Sperry-Hutchinson or “cigarette rule” which defines an unfair practice as one that is injurious to consumers, violate established public policy or is it unethical or unscrupulous.  As many know, Congress amended the FTC Act in 1994 to specify that an unfair act or practice is one that causes or is likely to cause substantial injury to consumers that is not reasonably avoidable and is not outweighed by countervailing benefits to consumers or competition.

Providing a counterpoint to Muris’ remarks, FTC Commissioner Julie Brill, speaking “on behalf of herself,” is generally in favor of expanding the FTC’s authority.  She sees the FTC as both a law enforcement and regulatory agency.  She views civil penalties as just “one of the arrows” in the FTC’s quiver – not to be used in every instance, but as appropriate.  As a law enforcer, she does not see the FTC’s request to have civil penalty authority as unusual – since most state AGs already have this type of authority.  To view such penalties as “automatic” is particularly misleading to her, since the FTC would only be able to obtain such penalties after judicial review in court. Brill also sees the FTC as a regulatory agency and notes that APA rulemaking is enjoyed by most other federal agencies. In addition, she points out that APA rulemaking under the proposed amendments would also be subject to review by a judge in court. Brill also views civil penalties as helpful in quantifying equitable remedies to compensate consumers for their injury – e.g. disgorgement or restitution for data breach violations.

Taking a broader view of the situation, Brill sees an expansion of the FTC’s authority as a way to make the agency’s enforcement efforts more effective – which benefits both consumers and competition in the long run. She also feels that consumers want an agency that has the right enforcement tools – not an “emasculated” FTC – and finds it surprising that the issue is even being debated, given the events of the financial meltdown and the current economic recession.

On the subject of FTC regulation, Brill is strongly in favor of an update, noting that rulemaking under Magnusson-Moss can often take up to 8 – 10 years.  She recalls comments she made on the hearing aid rule as an Assistant AG in Vermont in 1992 – rules that have yet to be issued, nearly 20 years later.  Her statements suggest that expanded rulemaking authority might give companies in dynamic industries – such as technology – FTC regulation that actually keeps pace with innovation.

The question of course, is whether such FTC regulation would also stifle innovation preemptively.  Companies have started to take note of the recent push to expand the FTC’s power, and it is likely that the topic will continue to be debated fiercely in the coming weeks as financial reform legislation comes to a vote. Some have even expressed concerns that such an expansion of the FTC’s rulemaking authority could impact funding and investment in technology and Internet companies by both Wall Street and Silicon Valley VCs.  For more, take a look at this transcript of the Progress & Freedom Foundation’s recent forum entitled “Supersizing the FTC.”

Blogging (or Live-Blogging) at the ABA Spring Antitrust Meeting

April 16, 2010 Leave a comment

Depending on wireless access, I will either be blogging or live-blogging certain tracks of the 2010 ABA Spring Antitrust Meeting, which will be held next week, April 21 – 23, in Washington DC.  The posts will appear on the ABA’s Secure Times blog and here, at the Balancing Act.

Please check back here on April 21st – I look forward to your review of my posts and of course, I always welcome comments!

The consumer protection and private advertising tracks for this year’s ABA Spring Antitrust Conference are laid out below:

Wednesday:

8:45-11:45: Antitrust and Consumer Protection Fundamentals

9:00-10:30: Handling State Attorney General Advertising Cases: Substantive & Procedural Questions

10:45-12: It’s Not Easy Being Green: Environmental Claims, Standards and Deception (this session with focus on  third-party certification)

2-3:30 Administrative Litigation at the FTC – Navigating the Shifting Procedural Waters

2-3:30 Is Nothing Typical?  Applying the New Standards in the Revised FTC Testimonial Guides

3:34-5:15 Economics & Consumer Protection Law

3:45-5:15 False Claims of IP Protection: Competition & Consumer Protection Perspectives

Thursday:

8:15-9:45: Consumer Financial Protection:  Assessing the New Landscape

8:15-9:45: False Advertising Litigation: The Lanham Act Preliminary Injunction Hearing

1:30-3: Enforcement Priorities in Advertising Law

Friday:

8:15-9:45: Changing Standards for Certifying Class Actions (the panel will address both antitrust and consumer protection standards)

8:15-9:45: Security & Privacy in the Cloud: Developing the Right Framework for Service Providers, Business customers, and Consumers

Categories: Uncategorized Tags: , , , ,

You’ve Been Tagged (and now you know it)

January 27, 2010 Leave a comment

In a clever and clearly self-regulatory move, the Future of Privacy forum and a coalition of companies have come up with a symbol that lets you know when advertisers are using your behavioral data and demographics to serve ads.  Read more about it in today’s New York Times.

Categories: Regulation Tags: ,

Technology, Free Speech and the SCOTUS decision in Citizens United v. FEC

January 21, 2010 Leave a comment

Technology figured in today’s landmark Supreme Court decision in Citizens United v. FEC. The 5-4 decision removes limits on campaign spending by corporations, non-profits and unions and will result in a lot more money being poured into the political process, starting with the 2010 mid-term elections.  The decision also gives some insight into how the SCOTUS views the link between technology and the first amendment in political campaigns — and whether certain technologies should be treated differently than others when it comes to political speech.

Notable dicta from the majority opinion centers around the importance of technology in the decision to strike down campaign finance laws that date back to the Tillman Act of 1907:

…”Rapid changes in technology—and the creative dynamic inherent in the concept of free expression—counsel against upholding a law that re- stricts political speech in certain media or by certain speakers…”

The facts of this SCOTUS case centered around Hilary, the Movie, a 90 minute slashing critique and documentary about Hilary Clinton that was released during the 2008 Presidential race and funded by a conservative, DC-based nonprofit named Citizens United. Citizens United sought wider distribution of the movie through a cable on-demand service, but was blocked from doing so by the Federal Election Commission.  The issue before the court was whether a full-length movie fell within FEC regulations that prohibit corporations and unions from using their general treasury funds to fund “electioneering communications” through cable, broadcast or satellite transmission.  Surprisingly, the court sought to expand the inquiry further (for reasons you must read in their decision), choosing to issue a decision on whether any limit on campaign spending by corporations or unions is constitutional.

A tangential issue was whether to differentiate between video (or cable) on demand vs. broadcast services for purposes of electioneering communications. At oral argument, noting that consumers choose to watch on-demand programming just like they do DVDs, Justice Scalia remarked: “Here you have a medium in which somebody listens only if that person wants to listen. So the person speaking wants to speak, and the person hearing wants to hear. It seems to me that’s a stronger First Amendment interest.”

Today’s decision didn’t address the broadcast vs. VOD point directly, but given the dicta in this decision, we may see a different first amendment analysis for on-demand vs. broadcast political content.

And it also appears that the Court will continue to treat broadcast and internet content differently when it comes to disclaimer and disclosure requirements for political ads. In this decision, the Court rejected Citizen United’s claim that the FEC’s disclosure and disclaimer requirements were invalid because they are imposed on broadcast, but not Internet content.  As this part of the FEC’s rules were upheld, we still get to know who funds a particular broadcast ad and the candidate that ad supports.

No doubt about it, a big beneficiary of this decision will be the online advertising industry – particularly marketers and campaign strategists. And now that the money will flow even more freely, it will be interesting to see what form this new advertising takes.  My bet is on the long-form campaign documentary (a la Hilary, the Movie), with guest appearances by Hollywood stars and Beltway pundits, a good helping of human interest and a perfectly timed soundtrack.  Candidates must already be thinking about how to marry potential content into their social media plans.  And the rest of us are guaranteed to be humored or incensed (at least once), by something we see this fall – whether it’s on TV, on demand or on the web.

Categories: Elections 2010 Tags: