Protecting consumers from the FTC: Three cheers for harm!

In the waning days of her time as head of the Federal Trade Commission (FTC), former Chairwoman Edith Ramirez initiated two problematic enforcement actions: a “pure” Section 5 Unfair Methods of Competition case against Qualcomm and a case against D-Link alleging unfair and deceptive practices. Both cases are troubling. Each is premised on conduct that, while controversial, is neither directly nor empirically connected to consumer harm. Rather, these cases continue the FTC’s efforts in recent years to expand the scope of its statutory authority to encompass conduct that the commission finds objectionable — often based on untested theories and with no consideration of whether that conduct actually harms consumers or competition. Since taking over the reins of the commission, Acting Chair Maureen Ohlhausen has spoken out against cases such as these, arguing that FTC action must be predicated on conduct that causes concrete consumer harm. This is a much-needed shift in focus and discipline, returning the commission to the roots of its consumer protection mission, and placing an important check on a commission that in recent years has become the tech sector’s roving band of vigilante industrial organizers.

Harm focuses resources on cases that are important to consumers, not to commissioners

A first benefit of tying commission actions to demonstrated harm is that it ensures that it focuses the commission’s resources on addressing conduct that is actually harmful to consumers, not conduct that is merely concerning to individual FTC staff and commissioners. The digital economy has created myriad new concerns about competitive and consumer harms. The economics of digital platforms create the (often incorrect) impression that these markets are dominated by anticompetitive monopolies. And using personal information as the currency that drives these markets has both given rise to new classes of potential consumer harms occurring at previously unknown scales and has also created new challenges in identifying and assessing those harms. It is almost certainly the case that some of the concerns about consumer harm in these markets is well-founded. At the same time, it is just as certainly the case that these markets overwhelmingly have benefited consumers and competition and that many of these new concerns will ultimately prove to be ill-founded. Many public servants — such as Ohlhausen — approach their jobs in government from a position of humility. However, many others do not. The incentives that face commissioners and FTC staff consistently push them to advance new legal theories against the biggest, newest, or simply most interesting concerns. Untethering commission actions from a requirement of concretely demonstrating potential consumer harm frees the commission to pursue its worst inclinations. Rather than being an agency dedicated to the protection of consumers, the FTC becomes an activist think tank dedicated to developing novel theories of consumer harm.

Harm prevents the FTC from itself harming consumers

In their zeal to pursue new theories of harm, it is easy for regulators to lose sight of the bigger picture. Frequently, the same activity that regulators may view as problematic for some consumers is beneficial to others. Indeed, it is even the case that a given consumer may be both harmed by and benefit from the same activity. When regulators are rushing ahead of the state of the law, their theories are rarely sufficiently developed to differentiate between these distinct effects. And we even more rarely have developed the tools that are needed to measure these effects. On net, are either individual consumers or consumers as a whole made better off by trading personal information for free online services? If an internet-connected device uses misleading language to get consumers to take steps that improve that device’s security, but that may reduce the user’s overall understanding of security, is that harmful? These are hard generational questions to which we do not know the answers — but some at the FTC are quite willing to risk the baby to spite the bathwater. These concerns are particularly important when we are dealing with a regulatory agency. Were the FTC to bring the cases that it does as ordinary civil suits, under ordinary legal rules, it would bear the burden of proving harm. In such settings, claims such as those the FTC has been advancing in recent years typically do not fare well (indeed, they are generally thrown out of court for lack of standing). But as a regulatory agency enforcing a flexible statute, the FTC is afforded more latitude than ordinary litigants. Courts will generally defer to agencies such as the FTC, giving the agency the benefit of the doubt both in its interpretation of whether the FTC Act requires the commission to prove harm at all and in its determination of whether given conduct is harmful. Requiring a demonstration of harm is therefore both doubly and triply important. Not only does it place a check on the commission’s incentives to develop new legal theories, but it also ensures that the commission’s theories are well-developed enough to prevent the commission from causing harm on its own. It also accounts for the relatively diminished role of the courts in overseeing the commission's conduct.

Harm provides constitutionally necessary meaning to the FTC’s statute

The entire reason that the question of harm is even an issue is that the FTC’s statute is exceptionally broad and vague. It proscribes “unfair” methods of competition and “unfair and deceptive” acts and practices — it does not, however, define “unfair.” In the 1980s, Congress forced the FTC to spell out in some detail how it interpreted the meaning of an “unfair” act or practice — details that Congress subsequently added into the statute. But even this amendment leaves substantial questions: to be “unfair,” an act or practice must “cause or be likely to cause substantial injury to consumers.” The problem is that it is relatively easy to come up with new theories of how a firm’s conduct could be likely to cause substantial injury — especially in the digital economy where every action affects millions of users, is multiplied across dozens of intermediaries and other stakeholders, and involves harms that are measured in fractions of cents. In this environment, slight changes in assumptions or beliefs are sufficient to change the effects of an act or practice from substantial to negligible, and the likelihood of harm stemming from that act or practice from merely “possible” to downright “probable.” Indeed, the FTC is currently litigating a case in the 11th Circuit (LabMD, which I have written about extensively) in which this distinction between “probably” and “possible” is likely to figure prominently. In this case, the FTC’s chief administrative law judge dismissed an FTC unfairness claim, in part on the grounds that the FTC had read “likely to cause substantial harm” as meaning that harm was merely “possible” — a reading that the judge felt was problematic on its own and also suggested that the underlying statute was unconstitutionally vague. The FTC reversed the judge and re-instated the complaint, arguing that the judge had insisted on such a high level of “probability” as to make the statute’s “likely to cause” language meaningless. The problem is that the margin between “possible” and “probable” can be razor thin, especially when we are discussing novel, unproved, theories of harm. In cases such as these, the humble, responsible regulator does not run headlong into new theories. Rather, the humble, responsible regulator doubles down on harm, using concrete harms to guide its enforcement priorities. Let us hear three cheers for harm: one for harm as a guide for what cases to bring; one for harm as something for regulators to avoid creating themselves; and one for harm as the lodestone that can be used by the FTC, companies and consumers, and the courts for identifying core conduct that violates the FTC Act.

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