Mergers Reported under HSR Act Down Slightly in FY 2012

This posting was written by Tobias J. Gillett, Contributor to Wolters Kluwer Antitrust Law Daily.

The number of mergers reported under the Hart-Scott-Rodino (HSR) Premerger Notification Program between October 1, 2011 and September 30, 2012 decreased approximately 1.4% from the previous fiscal year, according to the Hart-Scott-Rodino Annual Report for fiscal year 2012, issued on April 31 by the FTC and Department of Justice Antitrust Division.

The report states that 1,429 transactions were reported under the HSR Act during FY 2012, down from the 1,450 reported in FY 2011, but still significantly more than the 1,166 reported in FY 2010 and the 716 reported in FY 2009.

During FY 2012, the FTC brought 25 merger enforcement actions, including three in which the Commission initiated administrative litigation; 15 in which it accepted consent orders for public comment; 14 which resulted in final orders (with one still pending); and seven in which the transactions were abandoned or restructured as a result of antitrust concerns raised during the investigation.

The Antitrust Division also challenged 19 merger transactions that it concluded might have substantially lessened competition if allowed to proceed as proposed. These challenges resulted in seven consent decrees, seven abandoned transactions, two restructured transactions, and three transactions in which the parties changed their conduct to resolve Justice Department concerns. In addition, the agencies brought two actions against parties for failing to comply with the HSR notification requirements, resulting in a total of $1.35 million in civil penalties.

Other highlights of the report include a 10.9% decline from FY 2011 in the number of merger investigations in which second requests were issued, from 55 in FY 2011 to 49 in FY 2012. The number of transactions in which early termination was requested decreased from 82% (1,157) of reported transactions to 78% (1,094) of such transactions, while the number of requests granted out of the total requested increased from 77% in fiscal year 2011 to 82% in fiscal year 2012.

The report also discusses recent developments in HSR enforcement, including the FTC’s August 2012 issuance of a Notice of Proposed Rulemaking proposing changes to the premerger notification rules. The changes would revise the rules to provide a framework for determining when a transaction involving the transfer of rights to a patent in the pharmaceutical industry is reportable under the HSR Act. The FTC also published adjustments to its reporting thresholds, as required by the 2000 amendments to Section 7A of the Clayton Act, that increase the threshold from $66 million to $68.2 million.

The report contains descriptions of various FTC and Antitrust Division enforcement actions and includes appendices with tables of statistics summarizing transactions from fiscal years 2003-2012, as well as tables regarding the number of transactions reported and filings received by month during that period and data profiling Hart-Scott-Rodino premerger notification filings and enforcement interests. The report concludes that the HSR Act continues to do "what Congress intended, giving the government the opportunity to investigate and challenge those relatively large mergers that are likely to harm consumers before injury can arise."

The HSR Act requires certain proposed acquisitions of voting securities or assets to be reported to the FTC and the Antitrust Division prior to consummation. It imposes a waiting period, usually of 30 days (15 days in the case of a cash tender offer or a bankruptcy sale), before the parties may complete the transaction. The FTC and DOJ can issue second requests for more information, which will extend the waiting period for 30 days (10 days in the case of a cash tender offer or a bankruptcy sale) after compliance with the request. The FTC and DOJ may challenge the transaction in federal district court or in administrative proceedings.

FTC Nominee Faces Questioning from Senate Commerce Committee

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

George Mason University Law Professor Joshua D. Wright faced tough questions from members of the Senate Commerce, Science, and Transportation Committee yesterday afternoon as the committee considered his nomination to serve on the FTC. If confirmed, Wright would replace Commissioner J. Thomas Rosch—a fellow Republican—who remains at the Commission although his term expired in September.

Wright, an economist, has written extensively on antitrust law and economics and is a regular contributor to the Truth on the Market blog. Some of those writings have raised concerns among committee members that Wright might not be right for the FTC.

“I profoundly respect the Federal Trade Commission as an institution, its role in protecting consumers, and its mission in ensuring the effective operation of markets,” Wright said in his prepared testimony. “The Commission has earned its reputation as the world’s premiere competition and consumer protection agency.”

However, Senator Barbara Boxer (D-California) said that some of Wright's writings gave her pause. She questioned why Wright would want to be a member of a Commission that he recently described as having “a history and pattern of appointments evidencing a systematic failure to meet expectations.”

Wright explained that he was not talking about the entire mission of the FTC. His criticism stemmed from the Commission's enforcement record under its FTC Act, Sec. 5 unfair methods of competition authority, as opposed to its consumer protection authority. Wright said that he believed greatly in the FTC's fundamental mission of protecting consumers.

Senator Frank Lautenberg (D-New Jersey) also wondered how Wright’s apparent anti-regulatory stance squared with serving as a regulator. “How do you protect the safety of consumers without rules?” the senator asked.

“I do believe in rules and regulation,” said Wright, in response to the questioning. He added that regulations can harness markets to work for consumers but can also operate to the detriment of consumers.

Commerce committee members also sought assurances from Wright that he would recuse himself from FTC proceedings involving companies for which the nominee had authored reports. Wright stated that he would recuse himself from law enforcement matters pertaining to Google and other appropriate cases where potential conflicts called for recusal for a period of two years.

Noting that the FTC can “sometimes move at a glacial pace,” Senator Maria Cantwell (D-Washington) pressed on the adequacy of the two-year period of recusal.

Wright said that he would check with ethics officials at the FTC about his obligations and would recuse himself if appropriate, but the pledge did not seem to satisfy Cantwell.

Wright also said that, if confirmed, he would look into oil market manipulation. Senators Boxer and Cantwell both believe that the FTC should do more to determine whether market manipulation or false reporting by oil refineries contributed to near-record gas prices in Western states this year. Cantwell wants the agency to take a more aggressive role in policing potential oil market manipulation.

Boxer said that she was not happy with the Commission because it “has never so much as scolded” the oil companies.

Wright also pledged support for the FTC’s efforts to develop a “Do Not Track” mechanism for protecting consumer privacy on the Internet. He said that he supported the Commission’s view in favor of Do Not Track and the FTC privacy report's inclusion of notice and choice obligations.

FTC Revises “Green Guides” for Environmental Marketing Claims

This posting was written by Jeffrey May. Editor of CCH Trade Regulation Reporter.

Marketers should not make broad, unqualified environmental claims, such as "green" or "eco-friendly," for their products, according to the FTC’s recently revised "Green Guides." The agency’s guides for environmental marketing claims, among other things, encourage marketers to qualify general environmental benefit claims, limiting such claims to a specific benefit or benefits.

The agency released the revised guidance on October 1, nearly two years after the proposed changes were published for public comment. The revised guides take into account nearly 340 unique comments and more than 5,000 total comments received, according to the agency.

The revised guides have a new section devoted to the use of certifications and seals of approval to communicate environmental claims. The agency emphasizes that certifications and seals may be considered endorsements that are covered by the FTC’s Endorsement Guides (CCH Trade Regulation Reporter ¶39,038), and includes examples that illustrate how marketers could disclose a “material connection” that might affect the weight or credibility of an endorsement.

In addition, the Green Guides caution marketers not to use environmental certifications or seals that don’t clearly convey the basis for the certification, because such seals or certifications are likely to convey general environmental benefits.

In addition, there is new guidance on "renewable energy" claims, "renewable materials" claims, "non-toxic" claims, "free-of" claims, and "carbon offset" claims. Marketers are expected to have competent and reliable scientific evidence to support such claims. Moreover, claims should be qualified as necessary to avoid confusion. For instance, marketers should qualify renewable materials claims unless an item is made entirely with renewable materials.

The agency also provides some clarification to existing provisions addressing claims related to compostability, degradability, recyclability, and recycled content. For instance, the agency suggests that marketers qualify recyclable claims when recycling facilities are not available to at least 60 percent of the consumers or communities where a product is sold.

“The introduction of environmentally friendly products into the marketplace is a win for consumers who want to purchase greener products and for producers who want to sell them,” said FTC Chairman Jon Leibowitz, announcing the guides. “But this win-win can only occur if marketers’ claims are truthful and substantiated. The FTC’s changes to the Green Guides will level the playing field for honest business people and it is one reason why we had such broad support.”

FTC, EC Approve Universal’s Acquisition of EMI Recorded Music

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

The FTC announced on September 21 that it had closed its investigation of the proposed acquisition by Vivendi, S.A., parent company of Universal Music Group, of EMI Recorded Music without taking any action. Universal is the largest recorded music company in the world. EMI is the fourth largest.

On the same day, the European Commission (EC) also approved the transaction; however, approval was conditioned upon the divestiture of EMI's Parlophone label and numerous other music assets on a worldwide level. The EC focused its investigation on the markets for digital music and had concerns that the transaction, as originally proposed, would have allowed Universal to significantly worsen the licensing terms it offers to digital platforms that sell music to consumers. Universal’s commitments resolved the EC concerns.

The proposed merger would bring together two of the four so-called global "major" record companies, leaving only three majors, the EC said in a statement. The EC was concerned that, following the merger, Universal would enjoy excessive market power vis-à-vis its direct customers, who sell physical and digital recorded music at retail level. In particular, the EC focussed its investigation on the markets where record companies license their music to digital retailers such as Apple and Spotify.

The EC found that the proposed transaction could have increased Universal's size in a way that would likely have enabled it to impose higher prices and more onerous licensing terms on digital music providers. This could have negatively affected the possibilities for innovative providers to expand or launch new music offerings and would ultimately have reduced consumers' choice for digital music, as well as cultural diversity in Europe.

Neither the FTC nor any commissioner commented publicly on the matter; however, FTC Bureau of Competition Director Richard Feinstein issued a related statement. “After a thorough investigation into the likely competitive effects of the merger, Commission staff did not find sufficient evidence that the acquisition would substantially lessen competition in the market for the commercial distribution of recorded music,” Feinstein concluded.

The statement noted that, while "the Commission did not conclude that a remedy was needed to protect competition in the United States … the remedy obtained by the European Commission to address the different market conditions in Europe will reduce concentration in the market in the United States as well."

George Mason Professor to Be Nominated as FTC Commissioner

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

George Mason University (GMU) Law Professor Joshua D. Wright has been picked to replace FTC Commissioner J. Thomas Rosch—a fellow Republican—when his term expires later this month. The White House announced the intended nomination on September 10.

In addition to serving as a professor at GMU School of Law and holding a courtesy appointment in the Department of Economics, Wright is the Research Director and a Member of the Board of Directors of the think tank International Center for Law & Economics. He has written extensively on antitrust law and economics and is a regular contributor to Truth on the Market blog.

Wright previously served as the inaugural Scholar in Residence at the FTC Bureau of Competition, from January 2007 to July 2008. Before joining GMU, Wright taught at the Pepperdine University School of Public Policy and clerked for Judge James V. Selna of the U.S. District Court for the Central District of California.

He received a B.A. in Economics at the University of California, San Diego and a J.D. and a Ph.D. in Economics from the University of California, Los Angeles (UCLA), where he was Managing Editor of the UCLA Law Review.

Myspace Joins Social Networking Sites Whose Privacy Claims Have Been Challenged by the FTC

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

Today, Myspace joined other popular social networking websites—such as Facebook, Google Buzz, and Twitter—in pledging to refrain from making false consumer privacy claims in light of a Federal Trade Commission challenge.

The operator of myspace.com has agreed to settle FTC charges that it violated Section 5(a) of the FTC Act by misleading users about what information third-party advertisers received about them. The FTC complaint alleged that Myspace made numerous promises to its users regarding the extent to which it shared consumers’ personal information with third-party advertisers.

Myspace's privacy policy allegedly promised it would not share users personally identifiable information, or use such information in a way that was inconsistent with the purpose for which it was submitted, without first giving notice to users and receiving their permission to do so. The privacy policy also promised that the information used to customize ads would not individually identify users to third parties and would not share non-anonymized browsing activity.

According to the FTC complaint, from January 2009 through June 2010, and again from October 2010 through October 2011, when Myspace displayed advertisements on its website from certain unaffiliated third-party advertisers, Myspace and/or its affiliate provided those advertisers with the Friend ID of the user who was viewing the page.

Myspace assigns a persistent unique numerical identifier, called a “Friend ID,” to each user profile created on Myspace. The Friend ID can be used to access information about the user, including location, gender, age, display name, and, in many cases, the user’s full name, according to the agency. With this information, a third-party advertiser could take simple steps to get detailed information about individual users.

In addition, Myspace allegedly certified that it complied with the U.S.-European Union Safe Harbor Framework, which provides a method for U.S. companies to transfer personal data lawfully from the European Union to the United States. As part of its self-certification, Myspace purportedly claimed that it complied with the Safe Harbor Principles, including the requirements that consumers be given notice of how their information will be used and the choice to opt out. The FTC alleged that these statements were false. The agency challenged similar claims by Facebook and Google Buzz last year.

Proposed Consent Order

A proposed consent order contains provisions designed to prevent Myspace from engaging in future practices similar to those alleged in the complaint, according to the FTC. Myspace would be prohibited from misrepresenting the privacy and confidentiality of any “covered information,” as well as the company’s compliance with any privacy, security, or other compliance program. Myspace also would be required to establish and maintain a comprehensive privacy program and to obtain biennial assessments of its privacy program by independent, third-party auditors for 20 years.

The complaint and proposed settlement, In the Matter of Myspace LLC, FTC File No. 102 3058, appear here on the FTC website.

FTC Drops Suit After Healthcare System Abandons Enjoined Takeover

This posting was written by Darius Sturmer, Editor of CCH Trade Regulation Reporter.

The FTC announced on April 13 that it has dismissed a complaint it filed against a Rockford, Illinois, healthcare system—OSF Healthcare System—seeking to block OSF's proposed acquisition of rival health care provider Rockford Health System, in light of OSF's decision to abandon the transaction.

OSF arrived at its decision to scrap the deal after the federal district court in Rockford recently granted the agency's motion to preliminarily enjoin it, pending an FTC trial (2012-1 Trade Cases ¶77,850).

The FTC issued the complaint in November 2011, alleging that OSF's proposed acquisition of Rockford Health System would reduce competition in two markets in the Rockford area: (1) general acute-care inpatient services, and (2) primary care physician services. That complaint can be found at CCH Trade Regulation Reporter ¶16,666.

In granting preliminary injunctive relief on April 5, the federal court found that the Commission had made a strong prima facie showing that the combination would have adverse competitive effects. The court rejected arguments by the companies that various competitive considerations and constraints would preclude them from being able to raise prices to supracompetitive levels following the merger, and it further noted and that the companies failed to present sufficient proof of extraordinary efficiencies that would rebut the FTC's case.

"The Federal Trade Commission is gratified by OSF Healthcare's decision to abandon its attempt to acquire rival hospital services provider Rockford Health System," said Chairman Jon Leibowitz.

"As we said in November when we filed our complaint, health care consumers and employers in Rockford would have paid a price had the deal been allowed to proceed. The FTC remains vigilant, and will not hesitate to challenge deals in the health care sector that are likely to decrease competition and lead to higher prices or fewer services."

Further information regarding In re OSF Healthcare System appears here on the FTC website. The order dismissing the FTC complaint will appear at CCH Trade Regulation Reporter ¶16,763.

FTC Rescinds Consumer Financial Protection Rules

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

Today, the Federal Trade Commission (FTC) rescinded nine regulations because the agency's rulemaking authority with respect to them has been  transferred to the Consumer Financial Protection Bureau (CFPB). These rules were republished by the CFPB, effective December 30, 2011. The FTC still has authority to bring law enforcement actions to enforce these rules.

The 2010 Dodd-Frank Act transferred to the CFPB most of the FTC’s rulemaking authority under the Fair Credit Reporting Act, as well as rulemaking authority under Sec. 43 of the Federal Deposit Insurance Act and portions of the Fair Credit Reporting Act. The Dodd-Frank Act also transferred rulemaking authority for two regulations recently issued by the FTC for services related to mortgage loans under Sec. 626 of the 2009 Omnibus Appropriations Act.

Fair Credit Reporting Act

In light of the transfer of rulemaking powers, the FTC rescinded under the Fair Credit Reporting Act:

• identity theft definitions (16 CFR 603, now at 12 CFR 1022.3);
• free annual file disclosures rule (16 CFR 610, now at 12 CFR 1022.130);
• prohibition against circumventing treatment as a nationwide consumer reporting agency (16 CFR 611, now at 12 CFR 1022.140);
• duration of active duty alerts (16 CFR 613, now at 12 CFR 1022.121); and
• appropriate proof of identity (16 CFR 614, now at 12 CFR 1022.123).

Under the Under the Fair Credit Reporting Act, the FTC continues to have rulemaking authority for its “Identity Theft Red Flag Rules” (16 CFR 681) and its rules governing “Disposal of Consumer Report Information and Records” (16 CFR 682). The FTC also retains rulemaking authority under Fair Credit Reporting Act with respect to motor vehicle dealers.

Mortgage Rules

The FTC also rescinded two rules on mortgage loan practices: the Mortgage Acts and Practices-Advertising or “MAP-Ad” Rule (16 CFR 321) and the Mortgage Assistance Relief Services or MARS Rule (16 CFR 322).

The MARS rule, which prohibited mortgage relief companies from making false or misleading claims among other things, was issued in November 2010. On at least two occasions-once in 2011 and once in 2012--the FTC has filed court actions for violations of the MARS rule. The MARS rule has been recodified as Mortgage Assistance Relief Services (Regulation O, 12 CFR1015).

The MAP-Ad rule took effect in August 2011. It prohibited misrepresentations regarding terms of mortgage credit products in commercial advertising. To date, the FTC has not brought an action alleging a violation of this rule. The MAP-Ad rule was republished by the CFPB at 12 CFR 1014.

Federal Deposit Insurance Corporation Improvement, Federal Debt Collection Practices Acts

In addition, FTC rules governing disclosure requirements for depository institutions lacking federal deposit insurance under the Federal Deposit Insurance Corporation Improvement Act (16 CFR 320, now 12 CFR 1009) and procedures for state application for exemption from the provisions of the Federal Debt Collection Practices Act (16 CFR 901, now 12 CFR 1006) were rescinded.

Leibowitz, Pozen Discuss Year’s Highlights at ABA Spring Antitrust Meeting

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

FTC Chairman Jon Leibowitz and Sharis A. Pozen, Acting Assistant Attorney General in charge of the Department of Justice Antitrust Division, discussed the active enforcement agendas at their agencies at the American Bar Association Section of Antitrust Law Spring Meeting on March 30 in Washington, D.C.


Acting Assistant Attorney General Pozen said that the Antitrust Division had an “amazing” year. With respect to criminal enforcement, she noted the recent conviction of AU Optronics Corporation of Taiwan, its U.S. subsidiary, and its former president and former executive vice president for conspiring to fix prices of thin-film transistor-liquid crystal display (TFT-LCD) panels.

On the civil enforcement side, Pozen mentioned two recent successes in the merger enforcement area. She called AT&T’s decision to abandon its proposed acquisition of T-Mobile USA Inc. in the face of a Justice Department challenge a “tremendous victory” and an example of federal/state cooperation. Pozen also noted a federal district decision enjoining H&R Block, Inc.’s proposed acquisition of 2SS Holdings, Inc.—the maker of “TaxACT” tax preparation software (2011-2 Trade Cases ¶77,678). She commended the decision, saying it read like a treatise. Other recommended reading, according to Pozen, is the competitive impact statement, explaining the consent decree resolving the government’s monopolization allegations against United Regional Health Care System of Wichita Falls (2011-2 Trade Cases ¶77,619).

The FTC continued to focus on the health care sector over the past year, the FTC chairman pointed out in his remarks. Leibowitz noted three hospital merger cases in litigation. First, he mentioned the Commission opinion requiring ProMedica Health System to divest rival St. Luke's Hospital in Toledo, Ohio. Second, he said that the FTC was waiting for a federal district court to rule on its request for a preliminary injunction to block OSF Healthcare System’s proposed acquisition of Rockford Health System, which would combine two of the three major hospital systems in Rockford, Illinois. Finally, the FTC chairman highlighted the U.S. Solicitor General’s Supreme Court petition questioning a decision of the U.S. Court of Appeals in Atlanta (2011-2 Trade Cases ¶77,722), holding that the proposed combination of the only two hospitals in Albany, Georgia, was immune from an FTC antitrust attack under the state action doctrine.

Looking ahead, Pozen, who is resigning effective April 30, said that she hoped for a smooth transition to her successor. William Baer—the head of the antitrust group at the Washington, D.C. office of Arnold & Porter, LLP, and a former director of the FTC Bureau of Competition—was nominated to serve as the Assistant Attorney General in charge of the Antitrust Division on February 6. The nomination is pending in the Senate Judiciary Committee.

FTC Chairman Leibowitz said that top enforcement priorities going forward would focus on technology and health care issues, as well as “last dollar fraud,” such as deceptive foreclosure rescue and bogus credit repair schemes. In the technology area, Leibowitz said the FTC was involved in a number of open investigations that he could not discuss. The chairman also noted in his remarks that, with the recent Senate confirmation of Maureen Ohlhausen, the Commission would be operating with a full five-member team.

FTC Commissioners Testify on Fiscal Year 2013 Appropriations Request . . .

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

In testimony before the U.S. House Appropriations Subcommittee on Financial Services and General Government on March 5, the FTC summarized the agency's Fiscal Year (FY) 2013 budget request and described its ongoing work to promote competition and protect American consumers.

The testimony, delivered by FTC Chairman Jon Leibowitz and Commissioner J. Thomas Rosch, outlined steps the agency has taken to carry out its mission. It described FTC consumer protection initiatives as well as recent efforts to ensure that American consumers benefit from competition in the health care, technology, and energy sectors.

The testimony requested $300 million to support 1,186 "full-time equivalent" employees (FTEs) to meet the challenges of FY 2013. This is an overall decrease of $11,563,000 below the FTC’s FY 2012 enacted appropriation, according to the testimony. The FTC anticipates a decrease of $25.5 million related to the replacement of satellite space at 601 New Jersey Avenue due to an expiring lease in August 2012. There are increases for mandatory pay adjustments and technology improvements, among other initiatives.

Commissioner Rosch dissented from the appropriations requested for the FTC, noting that “in these austere times we should do more to perform those [consumer protection or competition] missions with fewer resources.”

. . . Express Concern over GSA Study on Relocating Agency

In a March 8 letter to the leaders of the House Transportation and Infrastructure Committee, the four FTC commissioners expressed concerns with a resolution directing the General Services Administrator to prepare a plan to move the agency out of its headquarters building at 600 Pennsylvania Avenue to Constitution Center, a privately-owned building next to the U.S. Department of Housing and Urban Development.

The commissioners stated that the move would impose well over $100 million in wholly unnecessary costs. In addition, “it is completely infeasible for the FTC to shoehorn its entire Washington, DC operation into the available space at Constitution Center,” according to the commissioners.

The resolution is part of an effort led by House Transportation and Infrastructure Committee Chairman John Mica (Florida) to transfer control of the building at 600 Pennsylvania Avenue, called the Apex Building, to the National Gallery of Art. Rep. Mica introduced the proposed “Federal Trade Commission and National Gallery of Art Facility Consolidation, Savings, and Efficiency Act of 2011” (H.R. 690) in February 2011.

In response to that bill, the then-five commissioners sent a letter to members of the House committee expressing their opposition to the efforts and arguing that the move would impose additional costs on the American taxpayer.

Later in 2011, Congressman Mica included provisions calling for the relocation of the FTC and transfer of the 600 Pennsylvania Avenue property to the National Gallery of Art in legislation proposing a “National Women's History Museum” (H.R. 2844). Rep. Mica contends that relocating the FTC will save taxpayer dollars.

FTC Conditionally Approves Acquisition in Disk Drives Market

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

The FTC will allow Western Digital Corporation’s proposed acquisition of Viviti Technologies Ltd., formerly known as Hitachi Global Storage Technologies, to proceed, subject to divesture of selected Hitachi Global Storage Technologies assets related to the manufacture and sale of desktop hard disk drives to Toshiba Corporation.

A proposed consent decree would resolve FTC charges that the proposed acquisition would likely have harmed competition in the market for desktop hard disk drives used in personal computers.

According to the agency, the deal as originally proposed would have left only two companies, Western Digital and Seagate Technology LLC, in control of the entire worldwide market for desktop hard disk drives—key inputs into computers and other electronic devices that are used to store and allow fast access to data.

“Protecting competition in the high-tech marketplace is a high priority for the FTC,” said FTC Bureau of Competition Director Richard Feinstein. “This order will ensure that vigorous competition continues in the worldwide market for desktop hard disk drives and that consumers are not faced with higher prices or reduced innovation as a result of this deal.”

Timing of Filings

In a March 5 statement accompanying the complaint and proposed consent order, the FTC explained the relationship of its analysis of the proposed Western Digital/Hitachi acquisition to an acquisition by Seagate Technology LLC of Samsung Electronics Co. Ltd.'s hard disk drive assets. The FTC reviewed the Western Digital/Hitachi transaction at the same time as it reviewed Seagate Technology/Samsung transaction. The two transactions were announced within weeks of each other.

“Commission staff reviewed both matters at the same time in order to understand the effects on competition resulting from each transaction on its own, as well as the cumulative effect on the relevant markets if both transactions were allowed to be consummated,” according to the FTC. The agency earlier closed its investigation
of the Seagate Technology/Samsung transaction without taking action.

European Commission

In reviewing the two transactions, the European Commission (EC), on the other hand, followed a priority rule and gave priority to the transaction that was notified first. As a result, Seagate’s planned acquisition of Samsung’s hard-disk operations, which was notified to the EC prior to the planned Western Digital/Hitachi combination, was assessed assuming that Western Digital and Hitachi were still separate competitors. The implications of the second deal were not considered.

In November 2011, the EC announced that clearance of the Western Digital/Hitachi combination was conditioned upon the divestment of essential production assets for 3.5-inch hard disk drives, including a production plant, and accompanying measures. The Seagate Technology/Samsung transaction was approved by the EC without conditions.

The case is Matter of Western Digital Corporation, FTC File No. 111 0122, Docket No. C-4350, CCH Trade Regulation Reporter ¶16,738. The proposed consent agreement appears here at 77 Federal Register 14523, March 12, 2012.

Congress Restricts Funds for FTC Report on Food Marketing to Children

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

Federal legislation to fund the FTC and other agencies for Fiscal Year (FY) 2012, which was approved by Congress on December 17, would restrict the FTC from issuing principles or guidelines governing food marketing.

The “Consolidated Appropriations Act, 2012” states that none of the funds appropriated to the agency may be used "to complete the draft report, entitled ‘Interagency Working Group on Food Marketed to Children: Preliminary Proposed Nutrition Principles to Guide Industry Self-Regulatory Efforts,’ unless the Interagency Working Group on Food Marketed to Children complies with Executive Order 13563."

Cost-Benefit Analysis

The executive order, issued January 18, 2011, requires government agencies, among other things, to conduct a cost-benefit analysis when issuing regulations. Agencies also are expected to invite and consider public comments on proposals.

Food Marketing Guidelines

The restriction on FTC funding was part of the House of Representatives' version of appropriations measure. The House Committee Report did not support the FTC, either as part of the Interagency Working Group on Food Marketed to Children or acting independently, issuing “principles or guidelines governing food marketed to children unless a peer-reviewed scientific study conclusively demonstrates that regulating food marketing directed to children is the most effective way of changing long-term eating behavior and reducing obesity.”

Interagency Working Group

The House Committee Report advised the agency not to rely on any guidance issued by the Interagency Working Group on Food Marketed to Children to engage in enforcement actions under its existing authority.

The Interagency Working Group on Food Marketed to Children—comprised of Centers for Disease Control and Prevention, the FTC, the Food and Drug Administration, and the U.S. Department of Agriculture—was convened in 2009 to develop nutrition standards for foods marketed to children and define the scope of marketing to which those standards.

The Working Group released preliminary proposed voluntary principles to guide industry self-regulation for public comment in April 2011. FTC Bureau of Consumer Protection Director David C. Vladeck testified before a House subcommittee hearing on October 12 regarding the agency’s participation in the working group.

FY 2012 Appropriations

The bill authorizes $311,563,000 in funding for the FTC in FY 2012. This is $20,200,000 above the FY 2011 enacted level and $14,437,000 below the budget request. The figures are based on Senate recommendations. The House version had called for an appropriation of $284,067,000, which would have been $7,296,000 less than fiscal year 2011 and $41,933,000 less than the request.
The spending measure does not include other provisions included in an earlier Senate bill. Proposed increases to the Hart-Scott-Rodino (HSR) Act premerger filing fees are not in the final measure.

Also missing was language in the Senate measure that would have precluded the conveyance of the FTC headquarters building on Pennsylvania Avenue to the National Gallery of Art or other entity unless the government received fair market value for the property.

FTC Promotes Competition in Health Care, High Tech, Energy Markets, Chairman Testifies

This posting was written by John W. Arden.

In testimony before a House subcommittee yesterday, Federal Trade Commission Chairman Jon Leibowitz highlighted the agency’s recent efforts to promote competition and benefit consumers in the pharmaceutical, hospital, high tech, and energy markets.

“As members of this Subcommittee well know, competitive markets are the foundation of our economy, and effective antitrust enforcement is essential for those markets to function well,” Leibowitz told the House Judiciary Subcommittee on Intellectual Property, Competition, and the Internet.

“Vigorous competition promotes economic growth by keeping prices down, expanding output and the variety of choices available to consumers, and promoting innovation.”

Pay-for-Delay Agreements

In the health care industry, the FTC has focused on ending anti-competitive "pay-for-delay" pharmaceutical agreements, blocking anticompetitive mergers, and developing policy guidance regarding new health-care collaborations, said Leibowitz.

One of the Commission’s top competition priorities has been ending anticompetitive "pay-for-delay" agreements—settlements of patent litigation in which a branded drug manufacturer pays a generic drug manufacturer to keep its product off the market for a time. “Settlements like these enable branded manufacturers to buy more protection from competition than the assertion of their patent rights alone would provide.”

For the last 15 years, the agency has taken the position that these pay-for-delay agreements violate the antitrust laws. Some courts have upheld these agreements, causing them to become commonplace.

Health Care Mergers

This year the FTC has brought several merger enforcement actions in the health care markets of hospitals, dialysis centers, pharmaceutical manufacturers, and pharmacies, said Leibowitz. The Commission also continues to review mergers between pharmaceutical manufacturers and is investigating a merger involving pharmacy benefits managers.

“With the costs of prescription drugs increasing faster than other health care costs, the Commission is committed to preventing pharmaceutical and related mergers that may allow companies to exercise market power by raising prices,” the chairman noted.

Technology Industries

The Commission has ongoing investigations into potentially anticompetitive conduct by dominant firms in high-profile, high-tech industries. In 2009, a Commission action against Intel Corporation alleged that the computer chip giant used exclusive dealing agreements that punished companies wanting to utilize or distribute competing products. This blocked competitors from reaching consumers with their products and unlawfully
maintained Intel’s monopoly, he said.

Another probe of the high-tech industry—involving the Google-AdMob merger—culminated in a Commission decision not to file a case. “Taking account of Apple’s anticipated entry into the market, the Commission determined that future competition in mobile advertising was not likely to be harmed by the merger.”

Energy Markets

In view of the importance of gasoline pricing to consumers and businesses, the FTC is conducting an investigation of petroleum industry practices and pricing. Among the issues under investigation are whether producers, refiners, transporters, marketers, or traders have:

(1) Engaged in practices that has lessened or may lessen competition in the production, refining. Transportation, distribution, or wholesale supply of crude oil or petroleum products or

(2) Provided false or misleading information about the wholesale price of crude oil or petroleum products to a federal department or agency.

The Commission monitors daily retail and wholesale prices of gasoline and diesel fuel in 20 wholesale regions and approximately 360 retail areas across the country.

Chairman Leibowitz also summarized the agency’s international initiatives and consumer protection enforcement actions, including those focused on Internet fraud and privacy.

Text of the Chairman’s prepared statement appears here on the FTC website.

FTC Should Attempt to Block Express Scripts’ Acquisition of Medco: Antitrust Institute

This posting was written by John W. Arden.

The American Antitrust Institute (AAI) has asked the Federal Trade Commission to seek an injunction against Express Scripts’ acquisition of Medco Health Solutions, which “poses a threat to substantially lessen competition in the provision of pharmacy benefit manager services throughout the United States.”

In a November 30 letter addressed to FTC Chairman Jon Leibowitz, the AAI stated that the combination of two of the three largest national pharmacy benefit management services (PBMs)—and the additional vertical integration that such a combination fosters—would threaten competition and raise prices to large plan sponsors and, ultimately, consumers.

The three largest providers of PBM services control more than 80 percent of the “large plan sponsor market,” and the combined Express Scripts-Medco firm would control approximately 50 percent of that market, according to AAI President Albert A. Foer and Advisory Board Member Dan Gustafson. The third of the “big three” PBMs is CVS Caremark.

This market share is particularly concerning because of the structure of the market and the substantial barriers to entry and expansion, the letter said. The three major PBMs already have significant cost advantages from economies of scale and from vertical integration in mail order and specialty pharmacy distribution.

“When faced with these difficult entry and expansion barriers, the remaining second tier PBMs cannot adequately constrain potential anticompetitive conduct because of their smaller size, geographic limitations, lack of buyer power, and, in some cases, perceived conflicts regarding their corporate affiliation with plan sponsors.”

Large Plan Sponsors

More than 40 of the “Fortune 50” corporations rely on the three largest PBM providers. “Not surprisingly, when one of the big three PBMs loses a large plan sponsor, it almost inevitably [goes] to another one of the big three.”

Smaller competitors typically lack adequate claims-processing capabilities to serve national accounts and have only limited ability to secure discounts and rebates from drug suppliers and to provide lower dispensing fees from pharmacies.

Specialty and Mail Order Distribution

The proposed combination of Express Scripts and Medco is likely to lead to the merged entity’s exercise of enhanced buyer market power in the market for specialty and mail order pharmacy distribution, according to the letter.

“The proposed merger would heighten the risk that these major PBMs would push compensation to many retail pharmacies below what would be competitive levels, ultimately leading to higher prices and lost jobs. An adverse impact on the delivery of pharmaceutical services at the retail level should be sufficient by itself to raise serious concerns about the proposed merger.”

Exclusion of Rivals in Specialty Pharmacy Services

The merged firm would have the ability and incentive to exclude rivals in the provision of specialty pharmacy services, it was alleged. All of the big three PBMs have acquired specialty pharmaceutical companies recently, reducing the number of independent specialty pharmacies and giving the big three power over the downstream specialty pharmacy distribution chain.

Exclusion of Rivals in Mail Order Pharmacy Services

The merger would create the largest mail order pharmacy in the country, accounting for nearly 60 percent of all mail order prescriptions processed, according to the AAI.

“This poses several potential competitive threats. First, further consolidation of the PBM market would exacerbate the competitive disadvantages that smaller, second tier PBMs without vertically integrated mail order operations already face. Second, consolidation of mail order pharmacies threatens to lead to anticompetitive self-dealing. A vertically integrated PBM can channel prescriptions to its own mail order facilities instead of to retail pharmacy competitors, even if the cost of filling the prescription is more than it would be at a local pharmacy.”

Small community pharmacies may also be threatened by this mail order business, the letter maintained.

In light of these competitive threats, the AAI urged the FTC to seek to enjoin the merger.

Text of the letter appears here on the American Antitrust Institute’s website.

FTC Proposes Amendments to Children’s Online Privacy Protection Rule

This posting was written by John W. Arden.

The Federal Trade Commission has proposed amendments to the Children’s Online Privacy Protection Rule in order to ensure that the rule continues to protect children’s privacy, as online technologies evolve. The agency is seeking public comment on the proposal through November 28, 2011.

According to a September 15 press release, the proposed amendments would give parents control over what personal information websites may collect from children under 13 years of age.

The Children’s Online Privacy Protection Act (COPPA) (CCH Trade Regulation Reporter ¶27,590) requires operators of websites or online services directed to children under 13—or those having actual knowledge that they are collecting personal information from children under 13—to obtain verifiable consent from parents before collecting, using, or disclosing such information.

The FTC rule implementing COPPA—the Children’s Online Privacy Protection Rule (CCH Trade Regulation Reporter ¶38,059)—became effective in 2000.

In April 2010, the Commission sought public comment on the COPPA Rule, posing numerous questions for public consideration, holding a public roundtable, and reviewing 70 comments from industry representatives, advocacy groups, academics, technologists, and members of the public.

Proposed changes to the rule, released today, include:

Definitions. The FTC proposes updating the definition of “personal information” that may not be collected from children under 13 without parental consent to include geolocation information and certain “persistent identifiers” such as tracking cookies used for behavioral advertising. The agency further proposed a change to the definition of “collection” to allow children to participate in interactive communities, without parental consent, as long as the operators take reasonable measures to delete children’s personal information before it is made public.

Parental notice. The Commission seeks to streamline and clarify the direct notice that operators must give parents prior to collecting children’s personal information in a succinct “just-in-time” notice rather than just in a privacy policy.

Parental consent mechanisms. New proposed methods of obtaining verifiable parental consent would include electronic scans of signed parental consent forms, video-conferencing, and use of government-issued identification checked against a database. These new methods would supplement the existing methods of obtaining parental consent, which include signed parental consent forms, parents’ use of a credit card in connection with a transaction, and parents' calls to a toll-free telephone number. The FTC proposes eliminating parental consent through “e-mail plus,” an e-mail to a parent coupled with another step such as sending an e-mail confirmation.

Confidentiality and security. Proposed rules would strengthen confidentiality and security by requiring that operators ensure that any third party to whom they disclose personal information has reasonable procedures to protect that information, retain the information for only as long as reasonably necessary, and properly delete that information.

Safe harbor. The FTC proposes to strengthen its oversight of self regulatory “safe harbor programs” by requiring groups to audit their members at least annually and to report the results of audits to the Commission.

The 122-page notice of proposed rule and request for comments appears here on the FTC website.

Submission of Comments

Interested persons may submit comments online here or may send a hard copy of comments to: Federal Trade Commission, Office of the Secretary, Room H-113 (Annex E), 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580.

Write “COPPA Rule Review, 16 CFR Part 312, Project No. P-104503” on the submissions.

Justice Department, FTC Enter into Cooperation Agreement with Chinese Antitrust Agencies

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

The Department of Justice Antitrust Division and the Federal Trade Commission announced today that they have entered into a cooperation agreement with China’s three antitrust agencies. The new Memorandum of Understanding was signed on July 27 in Beijing and took effect immediately.

The U.S. antitrust agencies have similar agreements with a number of other foreign counterparts. Earlier this year, the Department of Justice and FTC announced a Memorandum of Understanding with Chile.

This latest agreement sets out a framework for cooperation between the U.S. antitrust agencies and the People’s Republic of China National Development and Reform Commission, Ministry of Commerce, and State Administration for Industry and Commerce. The document calls for joint dialogue on competition policy at the senior official level. It also envisions ad hoc working groups to facilitate discussions on particular issues.

In addition, the agreement anticipates communication and cooperation on competition law enforcement and policy between individual U.S. antitrust agencies and PRC antimonopoly agencies. Under the agreement, the U.S. antitrust agencies and each of the PRC antimonopoly agencies, individually, may engage in communication and cooperation, separate from the joint dialogue, at the senior or working level. The agreement also notes that, “when a U.S. antitrust and a PRC antimonopoly agency are investigating related matters, it may be in those agencies’ common interest to cooperate in appropriate cases, consistent with those agencies’ enforcement interests, legal constraints, and available resources.”

Confidentiality

The agencies do not intend to exchange confidential information “if the communication is prohibited by the laws governing the agency possessing the information or would be incompatible with that agency’s interests.” When information is communicated, the agencies have agreed to maintain its confidentiality to the extent consistent with applicable laws.

Antitrust Chief’s Remarks

“Our cooperative relationship with the Ministry of Commerce, the National Development and Reform Commission and the State Administration for Industry and Commerce has steadily strengthened,” said Christine Varney, Assistant Attorney General in charge of the Department of Justice Antitrust Division. “This memorandum of understanding is a reflection of that relationship, and, by establishing a framework for enhanced cooperation among our agencies, the MOU also allows us to move to the next chapter in our collaboration on competition law and policy matters.”

FTC Chairman’s Statement

“In the three years since China’s antimonopoly law came into effect, its enforcement agencies have risen in prominence and have quickly developed many of the important analytical techniques used by leading antitrust agencies around the world,” FTC Chairman Jon Leibowitz said. “We look forward to continuing to share our experiences with China’s enforcement agencies as they confront many of the same challenges in implementing their laws that other agencies have faced, and we are confident that China will continue to build its agencies and enforcement mechanisms in positive ways.”

The text of the agreement with the Chinese authorities will appear at CCH Trade Regulation Reporter ¶13,512. The Memorandum of Understanding with Chile appears at CCH Trade Regulation Reporter ¶13,511.

Guidance for Online Advertising Under Review by FTC Staff

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

The FTC is seeking public comment through July 11, 2011, on its guidance document published in 2000 that advises businesses how federal advertising law applies to advertising and sales on the Internet. The agency is looking for input on how its "Dot Com Disclosures: Information About Online Advertising" should be modified to reflect the dramatic changes to the online world since 2000. The May 3, 2000, FTC staff paper appears at CCH Trade Regulation Reporter ¶50,175.

The FTC staff has identified the following questions on which it has a particular interest in obtaining the public's views:

(1) What issues have been raised by online technologies or Internet activities or features that have emerged since the business guide was issued (e.g., mobile marketing, including screen size) that should be addressed in a revised guidance document?

(2) What issues raised by new technologies or Internet activities or features on the horizon should be addressed in a revised business guide?

(3) What issues raised by new laws or regulations should be addressed in a revised guidance document?

(4) What research or other information regarding the online marketplace, online advertising techniques, or consumer online behavior should the staff consider in revising "Dot Com Disclosures"?

(5) What research or other information regarding the effectiveness of disclosures --and, in particular, online disclosures --should the staff consider in revising "Dot Com Disclosures"?

(6) What specific types of online disclosures, if any, raise unique issues that should be considered separately from general disclosure requirements?

(7) What guidance in the original "Dot Com Disclosures" document is outdated or unnecessary?

(8) What guidance in "Dot Com Disclosures" should be clarified, expanded, strengthened, or limited?

(9) What issues relating to disclosures have arisen from such multi-party selling arrangements in Internet commerce as (1) established online sellers providing a platform for other firms to market and sell their products online, (2) website operators being compensated for referring consumers to other Internet sites that offer products and services, and (3) other affiliate marketing arrangements?

(10) What additional issues or principles relating to online advertising should be addressed in the business guidance document?

(11) What other changes, if any, should be made to "Dot Com Disclosures"?

Comments can be filed until July 11, 2011, at: https://ftcpublic.commentworks.com/ftc/dotcomdisclosures . Alternatively, comments, noted as "Dot Com Disclosures, P114506," can be submitted in paper form to: Federal Trade Commission, Office of the Secretary, Room H-113 (Annex I), 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580.

Identity Theft Is Top Consumer Complaint of 2010

This posting was written by Jeffrey May,Editor of CCH Trade Regulation Reporter.

For the eleventh consecutive year, identity theft tops the list of consumer complaints to the Federal Trade Commission, according to an annual report issued March 8.

The 250,854 identity theft complaints accounted for 19 percent of the 1,339,265 total complaints lodged during the 2010 calendar year.

Debt collection complaints were in second place, with 144,159 (11 percent), followed by Internet services (5 percent); prizes, sweepstakes, and lotteries (5 percent); and shop-at-home and catalog sales (4 percent).

The number of identity theft complaints far outdistanced complaints in other categories in the top five.

For the first time, "imposter scams"--where imposters posed as friends, family, respected companies, or govcernment agencies to get consumers to sent them money--made the top 10, the agency noted.

Complaints by State, Metropolitan Areas

The 98-page report breaks out complaint data on a state-by-state basis and provides data for 50 metropolitan areas reporting the highest per capita incidence of fraud and the highest incidence of identity theft.

The states with the most fraud complaints per 100,000 people are Colorado, Maryland, Nevada, Alaska, Florida, Arizona, Washington, Delaware, New Hampshire, and Virginia. The states with the most identity theft victims per 100,000 people are Florida, Arizona, California, Georgia, Texas, Nevada, New Mexico, New York, Maryland, and Illinois.

The metropolitan areas of more than 100,000 people with the most consumer fraud complaints per 100,000 were (1) Dunn, North Carolina; (2) Greeley, Colorado; (3) Mount Vernon-Anacortes, Washington; (4) Boulder, Colorado; and (5) Thomasville-Lexington, North Carolina.

The metropolitan areas of more than 100,000 people with the most identity theft complaints per 100,000 were (1) Miami-Fort Lauderdale-Pompano Beach, Florida; (2) Brownsville-Harlingen, Texas; (3) Dunn, North Carolina; (4) McAllen-Edinburg-Mission, Texas; and (5) Madera, California.

The top 10 complaint categories were:

1. Identity Theft......................250,854 complaints.............19%
2. Debt Collection.....................144,159 complaints.............11%
3. Internet Services...................65,565 complaints..............5%
4. Prizes, Sweepstakes, Lotteries...64,085 complaints.............5%
5. Shop-at-Home, Catalog Sales......60,205 complaints..............4%
6. Imposter Scams......................60,158 complaints..............4%
7. Internet Auctions...................56,107 complaints..............4%
8. Foreign Money Offers.............43,866 complaints.............3%
9. Telephone, Mobil Services......37,388 complaints..............3%
10. Credit Cards.......................33,258 complaints...............2%

The FTC report (“Consumer Sentinel Nework Databook for January--December 2010”) appears here on the FTC website.

Will the FTC Be Forced Out of Its Headquarters Building?

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

Over the years there have been legislative efforts to move the Federal Trade Commission out of its historic headquarters at 600 Pennsylvania Avenue to make the space available for the agency’s neighbor, the National Gallery of Art. The FTC and its staff have called the Apex Building home since 1938.

Legislation once again has been introduced in Congress calling for the transfer of the FTC building to the National Gallery. In response, the five FTC Commissioners sent a letter today to the leadership of the House Transportation and Infrastructure Committee, expressing their opposition to the move.

The proposed “Federal Trade Commission and National Gallery of Art Facility Consolidation, Savings, and Efficiency Act of 2011” was introduced on February 14 by House Transportation and Infrastructure Committee Chairman John Mica(Florida).

The measure (H.R. 690) would transfer control of the building at 600 Pennsylvania Avenue to the National Gallery of Art to enable the museum to house and exhibit works of art and to carry out administrative functions. The National Gallery would remodel the building with private funds, and the building would be renamed the North Building of the National Gallery of Art.

The FTC would be relocated to another government-owned building in Washington, D.C., under the proposal. The legislation lists two possible locations: (1) Federal Office Building Number 8 in Southwest Washington, D.C., and (2) 1800 F Street, N.W., Washington, D.C. But other locations could be considered.

A similar proposal introduced in the 109th Congress in 2005 by Rep. Mica called for the transfer of the Apex building to the National Gallery but did not specify where the FTC might be relocated.

Rep. Mica contends that moving the FTC would saves hundreds of millions of dollars in lease costs and building renovation costs. Presumably, the FTC would be consolidated into one location. Currently, the FTC has a satellite building and conference center at 601 New Jersey Avenue, N.W.

Commissioners’ Objections

The Commissioners oppose the efforts to move the FTC to another location.

“Forcing the FTC out of its federally-owned headquarters would displace our agency from a building that it has continuously occupied since it was designed and built for us over 70 years ago,” according to the letter.

The Commissioners also contend that the move will actually cost taxpayers more money. They argue that “the FTC would have to build new courtrooms for conducting adjudications as well as replace its extensive information technology infrastructure, including infrastructure for tracking, investigating, and fighting online and offline fraud.”

In addition, they suggest that taxpayers would still be responsible for maintenance and operations of the new North Building of the National Gallery. It also was suggested that the FTC’s move could also displace other federal agencies.

The letter concludes with a quote from President Franklin Roosevelt, as he laid the cornerstone for the FTC building in 1937:

“May this permanent home of the Federal Trade Commission stand for all time as a symbol of the purpose of the Government to insist on a greater application of the Golden Rule to the conduct of corporations and business enterprises in the relationship to the body politic.”

Congress Passes Bill Limiting Application of FTC “Red Flags Rule”

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

This January, lawyers, doctors, and small businesses will most likely not have to comply with a Federal Trade Commission regulation, known as the "Red Flags Rule," which will require certain businesses to develop written identity theft prevention programs.

Yesterday, Congress passed legislation that will limit the application of the rule to financial institutions and creditors that regularly use consumer reports or furnish information to consumer reporting agencies.

The proposed "Red Flag Program Clarification Act of 2010" (S. 3987) now awaits the President's signature.

The FTC's Red Flags Rule (16 CFR Part 681) was promulgated under the Fair and Accurate Credit Transactions Act (FACTA). The rule, which is set to take effect on January 1, 2011, will require certain businesses and organizations to develop a written program that identifies and detects identity theft warning signs or "red flags."

As written, the FTC rule would apply to small businesses—such as health care providers—that do not require full payment at the time of service. However, the Red Flag Program Clarification Act of 2010 would amend the Fair Credit Reporting Act to prevent the application of the rule to entities that advance funds for expenses incidental to services provided.

FTC Chair's Statement

In a statement issued today, FTC Chair Jon Leibowitz said that he was "pleased that Congress clarified its law, which was clearly overbroad."

The chairman's statement went on to say that the rule gives businesses the flexibility to tailor their written ID theft detection program to the nature of the business and the risks it faces.

Businesses with a high risk for identity theft may need more robust procedures—like using other information sources to confirm the identity of new customers or incorporating fraud detection software. Groups with a low risk for identity theft may have a more streamlined program—for example, simply having a plan for how they’ll respond if they find out there has been an incident of identity theft involving their business.

The effective date for the Red Flags Rule has been delayed a number of times, as the agency awaited clarification from Congress or the courts. Most recently, the FTC postponed enforcement until December 31, 2010.

Reaction from Professional Associations

The American Bar Association lauded Congress for clarifying how the FTC should apply the Red Flags Rule. The ABA had sued the FTC to block the rules. The federal district court in Washington, D.C. last year ruled that the FTC lacked authority to apply its Red Flags Rules to attorneys (2009-2 Trade Cases ¶76,825).

"At last, the American legal profession has clear and final relief from attempts to solve a non-existent problem that would have created paper-pushing and raised legal costs," said ABA Chair Stephen Zack in a December 7 statement.

The American Medical Association also issued a statement on December 7, saying that "the bill will help eliminate the current confusion about the rule’s application to physicians."