The Federal Trade Commission (FTC) has been on a tear. The court losses that punctuate its campaign make it hard to call it a winning streak, but the concerted efforts to reinvigorate the Commission’s “national nanny” status will leave plenty of marks for years to come. Notably, the FTC’s struggle against the private sector cuts across both of its major bureaus—the Competition Bureau and the Consumer Protection Bureau—and avails itself of all the tools within and legally beyond its reach, from enforcement actions to guidance and rulemakings. While you may see headlines about the impact on larger companies with household names, the effects on small business are unfortunately overlooked, most notably by the FTC itself. Here’s a quick rundown of the recent actions and how they would affect the app ecosystem:
Negative Option Rule:
This is a proposed rule that would impose new requirements on companies, including app makers, that offer subscriptions and similar options for consumers. Unsurprisingly, one feature of this rule is an effort to stretch the Commission’s statutory authority to write rules and seeks to reach conduct beyond the offering of a negative option (an agreement to purchase a good or service unless consent is revoked later). FTC’s rules, as proposed, would impose numerous requirements on the small business digital economy that are infeasible and unduly burdensome, and that exceed Congress’ authority granted to FTC, presenting a real possibility that federal courts would not let the rules stand at all. In general, companies need to shape any subscription or negative option purchase arrangements to fit the context in which consumers encounter the offers and their reasonable expectations and need the ability to find their own way to get to the negative option rule’s objectives. The bottom line is that the FTC’s rules would significantly disadvantage small businesses with limited resources by prescribing one-size-fits-all communications arrangements and further mandating many of the steps to take in accomplishing those communications, which would remove our members’ ability to differentiate themselves in the marketplace and would upend the existing consumer-centered approach successful subscription and negative option models use.
ACT | The App Association sent a letter and several member companies signed on to a group letter to the FTC highlighting our concerns with this proposed rule.
Hart-Scott-Rodino Merger Filing Rules:
Any merger or acquisition with a value of over $111.4 million triggers a requirement under Hart-Scott-Rodino (HSR) Act to file a notice of intent to merge or acquire, along with some information about the transaction. Recently, the FTC issued a notice of proposed rulemaking (NPRM) outlining some potential updates to the rules that would require several times the amount of paperwork to be filed with an HSR notification that is required today with no related benefit to consumer protection, ultimately making it unnecessarily more difficult for small business innovators to accomplish pro-competitive mergers, a primary pathway to success. Today, if FTC staff determines that the transaction raises competition concerns, they generally issue a “second request” for more information about the merger that could support their decision whether or not to officially challenge the transaction. Second requests usually also require substantially more detail about the transaction and therefore impose significant costs on the merging parties in the form of legal fees and staff resources. Under current rules, about 2 percent of HSR filings draw a second request, and the FTC only challenges about 1 percent. The NPRM would essentially push the content of a second request into the initial filing, which would drastically raise the average legal costs associated with acquiring a company over the threshold value and distribute those costs to lower-dollar mergers that are less likely to raise competition concerns. The proposed rules would also require merging parties to disclose privileged information that the current rules allow to be protected, adding substantial risks for all parties to the transaction. A barrier to exit is also a barrier to entry, and, unless significantly revised, the proposed HSR updates would impose significant barriers to exit for App Association members.
Merger Guidelines:
Separately from—but related to—the HSR proposal, the FTC, with the Department of Justice (DoJ), has also recently proposed new merger guidelines. Unlike official rules like those promulgated under HSR, guidelines lack the force and effect of law, but are rather influential nonetheless. They are intended to signal to the market how the FTC and DoJ plan to evaluate proposed mergers for potential competitive harm, and therefore, the kinds of mergers likely to be challenged. Unfortunately, the proposed updates to these important guidelines would reframe them as generally anti-merger and would interpret existing antitrust law completely differently from the way the FTC and DoJ have interpreted the law for decades as it relates to mergers. For example, the new proposed guidelines cite decades-old precedent the agencies have not relied on since the 1960s, ignoring more recent caselaw that strikes the legally required balance between intervention and enabling procompetitive mergers. The guidelines also now list attributes of mergers that may lead to agency challenges, again in a spirit of looking only at potential negative aspects of mergers while sidelining their potential pro-competitive benefits. If adopted as a new merger review framework by a federal court, the guidelines would create novel legal presumptions that would rule out a wide range of procompetitive mergers. Together with the formidable HSR proposal, the FTC is sending a clear message to potential acquiring firms and App Association members looking for a big (or even a medium) exit: “don’t bother.” Ultimately, they would put into place new barriers to small businesses seeking success via pro-competitive mergers.
Unfair Methods of Competition (UMC) Enforcement Policy Statement:
The FTC has two halves: consumer protection and competition. The competition half enforces the FTC Act’s prohibition against UMC. In general, the FTC’s authority to stop anticompetitive conduct under its UMC prong is approximately coextensive with the other main federal antitrust statute, the Sherman Act. If UMC applies to a given act or practice, the Sherman Act does too—but in limited cases, courts will not dismiss complaints alleging a “standalone” violation of UMC (a claim challenging conduct alleged to violate UMC but not the Sherman Act). The FTC’s 2015 enforcement principles statement identified these instances as narrow and only if the enforcement action sought “the promotion of consumer welfare.” Although some advocates argue that the long-established consumer welfare standard is too high a bar for enforcers to meet, it has nonetheless been the North Star of antitrust enforcement. Last year, the FTC rescinded the enforcement principles and then issued a new enforcement policy statement that interprets the FTC’s standalone UMC authority to reach a broad range of pro-competitive conduct. Unmoored from consumer welfare, the FTC appears to be sending a shot across the bow that it could challenge virtually any kind of conduct that could be characterized as UMC. The introduction of new ambiguities into UMC enforcement presents unique challenges to small business and startup digital economy innovators that need to make plans (and take risks) based on clear rules of the road.
Forthcoming UMC Complaint Targeting Online Marketplace Conduct:
The FTC is apparently gearing up to bring a sweeping antitrust case against Amazon, challenging a number of online marketplace offerings that are generally beneficial for small businesses that rely on these marketplaces to compete and create jobs. App Association members usually distribute at least some of their offerings through online platforms with complementary services, so they have a strong interest in their continued improvement (and therefore in federal agencies not declaring them illegal). Among other things the claim is expected to challenge Amazon Marketplace’s steering of sellers to Fulfillment by Amazon, the logistics service greatly appreciated by parents (and all consumers) everywhere because of its two-day shipping guarantee. In another part of the complaint, the Commission is expected to reassert a challenge that failed quickly and decisively in DC to Amazon’s practice of offering to feature sellers, if the sellers guarantee they are not selling for lower prices on other platforms. Obviously, requiring online marketplaces to feature higher prices and eliminating wrap-around services like logistics would anger consumers. But it would also undermine competitive prospects for small app companies that leverage online marketplaces.
Health Breach Notification Rule (HBNR):
We were happy to see the Commission’s enforcement action against Flo, resulting in a settlement enjoining onward transfer of sensitive health information without affirmative consent from the app’s users. However, following that order, the FTC began an effort to expand the scope of a disused rule limited to “personal health records (PHRs)” to proscribe intentional onward transfer by apps like Flo. The effort began with a policy statement articulating such an expanded reading of the rule and then a NPRM proposing to stretch its applicability. The App Association’s Connected Health Initiative provided detailed comments to FTC explaining the practical impact of the FTC’s proposals, and how the FTC’s proposed expansion of the rule exceeds congressional intent in numerous ways. Further, as the App Association explained in congressional testimony, the HBNR guidelines and NPRM contravene the statutory authority Congress gave the Commission, treating a privacy violation as a breach of security.
Commercial Surveillance and Data Security Rulemaking:
With the misleading term “commercial surveillance” as its centerpiece, this effort began in August of last year as an advance NPRM (ANPRM) and is hard to summarize because it seems to propose such a diverse range of FTC rules. As we pointed out in our comments on this docket, it is far from clear that the FTC has the statutory authority to write such broad-ranging rules, even under its organic rulemaking allowance. The ANPRM serves as a shining example of why Congress saddled the Commission with more onerous rulemaking processes than other agencies—the sheer breadth of its purview occasionally invites just this kind of scattershot overreach.
In Conclusion:
The FTC’s main job is to protect consumers from unfair or deceptive acts or practices and UMCs. The more it creeps away from these purposes, the worse off consumers (voters, constituents, clients, customers) will be and the worse App Association members’ prospects will be. Congressional oversight, or even legislation, is sorely needed to shine a light on the Commission’s wayward path and make it accountable for achieving its important goals.