Cyberspace and the FTC: Some Current Matters of Interest

Address to the National Conference on State Legislatures

Date:
By: 
Orson Swindle, Former Commissioner

I. The Internet Economy

Last month, the University of Texas, backed by Cisco Systems, introduced a study of the current status of electronic commerce -- one of the very first attempts to measure the Internet economy. According to the Cisco study, the Internet economy generated an estimated $301 billion in revenue in 1998 and was responsible for over 1.2 million jobs. (These estimates are based on worldwide sales of Internet-related products and services by U.S.- based companies.)

The study divided the Internet economy into four layers: the infrastructure layer that includes companies like MCI Worldcom, AOL and Cisco; the applications layer that includes companies like Netscape, Microsoft, and Sun; the intermediary layer that includes companies like Schwab.com, Yahoo, and TravelWeb.com; and the commerce layer that includes companies like Amazon.com, IBM, and WSJ.com. It is important to note that many companies are players at multiple layers. Each layer produced a range of revenues from $56 billion to $115 billion and created from 230,000 to 482,000 jobs in 1998.

Let me put those figures in perspective. The Internet economy already is bigger than the energy industry ($230 billion), the telecommunications industry ($270 billion), and is almost as big as the automobile industry ($350 billion). The Internet economy is becoming as essential to American life as the automobile.

According to data provided by the U.S. Commerce Department,(2) consumers spent $3 billion online in 1997, $9 billion in 1998, and are projected to spend $30 billion in 1999.

II. FTC Activities In A Target Rich Environment -- Cyberspace

The world of cyberspace is a target rich environment for consumers -- rich in information, choices, opportunities, entertainment, knowledge and commerce. And, unfortunately, it is also a new and fertile field for those who prey on consumers with scams, deceit and outright thievery. Consumers have to be accountable and bear some level of responsibility for their actions. If a consumer is uncomfortable with a Web site then that individual has the freedom -- and should have the good common sense -- to go elsewhere on the Web. Government can play a positive role by educating consumers and businesses and by appropriate and rational attempts to minimize deception, unfairness and misleading practices. When the FTC finds abuses, the Commission should take legal action against the offenders. The FTC's traditional law enforcement role against deceptive or unfair practices is an appropriate way for government to intervene, as long as we do not over-stretch our authority or impose ourselves improperly and unnecessarily.

Law Enforcement Cases

For example, in the Geocities(3) case, the Commission settled allegations that the company misrepresented the purposes for which it collected personal identifying information from its customers. Contrary to its stated policy, Geocities permitted the information to be used for purposes such as target marketing by third parties. Accordingly, the Commission alleged that the company engaged in deceptive acts or practices in violation of Section 5 of the FTC Act.

Since our first Internet case in 1994, the FTC has brought 93 federal law enforcement actions against 239 defendants. Most of these cases have involved the traditional kinds of fraud such as business opportunity schemes, credit repair scams, pyramid schemes, and false claims for health-related products, to name a few. However, today's scam artists are definitely "computer literate" and use the Internet as well as the old methods of telemarketing, mail, etc. We are even seeing some truly "high tech-unique" scams emerge -- these guys are creative!

One of our more interesting hi-tech cases involved a modem hijacking operation. An adult web site hijacked consumers' computer modems by surreptitiously disconnecting them from their local Internet Service Providers and reconnecting them to high-priced international telephone calls, purportedly going to Moldova but actually terminating in Canada. We obtained an ex parte TRO and asset freeze within 31 days of learning about the scam. The two resulting orders bar the unlawful practices, and over 38,000 consumers should receive full redress worth an estimated $2.74 million.

Recently, the FTC took aim at Internet cramming -- a new hi-tech problem involving unauthorized charges for Internet services being placed or "crammed" on to monthly telephone bills. In FTC v. J.K. Publications, Inc., a group of California defendants allegedly charged consumers $19.95 per month for purported Internet services that consumers never ordered, authorized, or even heard of. Some consumers who were charged did not even own computers. The defendants allegedly hid behind a series of changing names, false Internet registration pages, unanswered phone numbers, and a maze of mail-box drops. The Commission obtained an ex parte TRO against the defendants, freezing their assets and appointing a receiver for two of the corporate defendants. This case is still in litigation.

Using Technology to Uncover and Address Consumer Problems

As the saying goes, two can play the game as well as one. To assist in our law enforcement efforts, we are working to improve our ability to track Internet advertising and new trends as they arise. Online advertising has enjoyed exponential growth -- from approximately $125 million at the beginning of 1997 -- to nearly $500 million by the end of 1998.

As a result, the FTC has devoted new resources to monitor this new advertising medium. The same rules apply about advertising as before: advertising cannot be deceitful and unfair. The Bureau of Consumer Protection now has an Internet Advertising group within our Division of Advertising Practices. This investment of resources will help us to systematically review web advertising with greater speed and improve our ability to stop problems before they become widespread.

Our database, Consumer Sentinel, is the first bi-national consumer fraud database that offers both U.S. and Canadian law enforcement fast and secure access to complaint data through the Internet. Consumer Sentinel incorporates data from our Consumer Response Center (1- 877- FTC-Help) which receives complaints directly from consumers. Consumer Sentinel compiles the data received from CRC and numerous other sources and provides over 130 U.S. and Canadian law enforcement offices with fast, secure access to fraud data via the Internet.

Business and Consumer Education

The Internet has seen an explosion of entrepreneurs who may be entering the business world for the first time. Some may unwittingly violate the law because they do not know basic advertising and consumer protection principles. The FTC has done a number of things to educate these businesses. First, we have developed a unique concept called a "Surf Day." The Commission conducted its first Surf Day in December 1996 and focused on pyramid schemes that had begun to proliferate on the Internet. In an effort to educate online entrepreneurs, the FTC, along with state and federal partners across the country, surfed the Internet for three hours and sent business education messages to over 500 suspected pyramid schemes. The messages offered guidance about the difference between multi-level marketing and illegal pyramids and provided the FTC's Web address for more information.

Since our first surf for pyramid schemes, the Commission has employed this technique over a dozen times since, conducting Surf Days targeting problems ranging from business opportunity fraud to "miracle cure" health product claims; exaggerated earnings claims; credit repair scams; fraudulent on-line coupon booklets and "get-rich-quick" schemes, among others.

Consumers

The Commission also uses the Internet to reach consumers when they are most vulnerable -- surfing in areas of the Internet likely to be rife with fraud and deception. The Commission has posted several "teaser" websites in these areas. Teaser sites mimic real scams, using common buzz words and exaggerated income or product claims. Consumers can click through a teaser site but when they arrive at the last page, they receive a sobering warning: "If you responded to an ad like [this] http://www.ari.net/NetOpportunities, you could get scammed." The warning page gives advice on how to avoid a particular scam and provides a hyper-text link back to our own Web site--http://www.FTC.GOV-- where consumers can learn more. The Commission has now posted nine teaser sites on pyramid schemes, Internet business opportunities, scholarship scams, deceptive vacation advertisements, deceptive travel agent opportunities, false weight loss claims, fraudulent vending opportunities and credit repair schemes.

The Commission's Web site--http://www.FTC.GOV is another resource for consumers on the Web. We post all of our publications on our home page, as well as on the U.S. Consumer Gateway -- http://www.Consumer.gov -- a "one-stop" link to a broad range of federal information resources. This site is designed so that consumers can locate information by category, such as Food, Health, Product Safety, Your Money, Technology and Transportation. http://Consumer.gov has more than 60 participating agencies linked to it.

We also are actively involved in educating consumers and businesses about the Year 2000 conversion. We developed education materials and posted them to a special Y2K site within Consumer.gov. This site also links to private sector Y2K web sites. In addition, we are supporting a free Y2K information line (1-888-USA-4-Y2K) with the General Services Administration's Federal Information Center.

III. Privacy-- Emotion and Reason in a Race for Hearts and Minds

Privacy of personal information, especially financial and medical information, is of paramount importance to consumers. Through computers and the medium of the Internet, the ability to collect vast quantities of personal information is mind-boggling. As consumers learn more and more about what is being collected about them, there is the possibility of a significant erosion of confidence in their own ability to protect their privacy on the Internet. This in turn has the potential for thwarting the growth of Internet use, and in particular, the expansion of electronic commerce. The concern is legitimate. The solution to this concern is very difficult. There must be a careful balance between protecting privacy and allowing information-sharing when necessary to serve customers.

On July 13, 1999, the FTC submitted "Self-Regulation and Privacy Online: A Report" to Congress. The report ultimately reaches the correct and obvious conclusion: no legislative action is necessary at this time. As FTC Chairman Robert Pitofsky noted, "We are at the dawn of the most impressive new sector of the economy that this country has ever seen. It is dynamic. It is fast changing. It is remarkable the extent to which people are becoming committed to doing commerce on the Internet. In a circumstance like that, you want to stay flexible about the nature of regulation that you impose."(4)

I think significant self-regulatory progress has been made, but continued vigilance is needed because we are not where we want to be in protecting personal privacy. The way to get where we want to be is not through more laws and regulation. Rather, industry, privacy and consumer advocates, and the Commission should be able to make further progress by continuing to work hard and work together. In the event that our joint efforts do not produce results, I would caution industry that there are many eager and willing to regulate. If industry wants to have the freedom to adopt privacy policies in response to market incentives and not government regulation, I encourage industry to continue to lead the way.

IV. Closing

First and foremost, our Founding Fathers had it right: government should play only a minimal role in our lives. I believe it was Will Rogers who once observed: "All government programs have three things in common: a beginning, a middle, and no end."

There is an incredibly exciting new world of economic and educational power before us brought on by the convergence of technology, information and entrepreneurship that may be ushering in one of the greatest expansions of freedom, choice and independence mankind has seen. For certain, there are hazards associated with this new environment. How we protect consumers and, at the same time, make it possible for the vast potential to develop is critical. Excessive regulation, new forms of taxes and other government inspired actions can do real harm.

I recently met John Chambers, CEO of Cisco Systems Inc., and he said something that caught my attention. "We need to be very careful not to rush in and really stifle the opportunity this gives our country in terms of job growth and economic growth by applying old-world regulations to this new world," said Chambers. Mr. Chambers implored me and others in government to understand these issues before acting.

I agree that Government should look before it leaps and it should strive to do no harm. Regulators should have the benefit of a full evaluation of the facts and the consequences, both intended and possibly unintended, before imposing a bureaucratic solution.

Endnotes:

1. The views expressed by Commissioner Swindle in this written text and in his oral remarks are his own and do not necessarily reflect the views of the Commission or other Commissioners.

2. Written Remarks by Secretary of Commerce William M. Daley, Press Conference on E-Commerce, Washington, D.C., February 5, 1999.

3. GeoCities, C-3849 (Feb. 12, 1999) (consent order challenging misrepresentations about the Web sites's use of personal information collected from children and adults.)

4. Testimony of the Federal Trade Commission, Hearing on Electronic Commerce: The Current Status of Privacy Protections For Online Consumer, Tuesday, July 13, 1999, U.S. House of Representatives, Committee on Commerce, Subcommittee on Telecommunications, Trade, and Consumer Protection.