Statement of Commissioner Orson Swindle
In the Matter of
In this case, the Commission has voted to file a complaint in federal district court alleging that the defendants engaged in deceptive acts or practices in or affecting commerce in violation of Section 5 of the FTC Act by pretending to be individual depositors in order to obtain information from banks about the accounts of those depositors -- a practice called "pretexting." The complaint further alleges that defendants engaged in unfair acts or practices by selling information obtained in this fashion.
I wish to emphasize that my concerns about this case arise not from any belief that pretexting is an acceptable way to gather information. It is a noxious practice that exploits the desire of bank consumer service representatives to be helpful to forgetful customers. I am not suggesting that the Commission take no action against pretexting. The facts presented by this case, however, do not give me reason to believe that these defendants violated the Commission's current deception standard or the unfairness standard set forth in Section 5(n) of the FTC Act.
My objections to the deception portion of this case stem from my belief that if we decide not to adhere to our own interpretation of deceptive acts or practices under Section 5, we must explain our departure from previous policy. I find it troubling to face a Hobson's choice, that is, either silently disregarding long-standing precedent or letting likely culpable defendants off the hook. This is especially troubling since I believe there is a course that would allow us to proceed against the proposed defendants and provide a well-reasoned explanation of our departure from our own established interpretation of "deceptive acts or practices." By voting against this complaint, I am not advocating inaction but rather objecting to the method of action chosen.
In 1983, the Commission issued the Deception Statement, which set forth a three-part standard for deception under Section 5. This standard requires 1) a representation, omission, or practice that is likely to mislead the consumer; 2) that the representation, omission, or practice be likely to mislead a reasonable consumer under the circumstances; and 3) that the representation, omission, or practice be material, meaning that it is likely to affect a consumer's choice or conduct regarding a product or service. Cliffdale Associates, Inc., 103 F.T.C. 110, 175-83 (1984). In 1984, when the Commission adopted the Deception Statement in Cliffdale Associates, a formal adjudication, it "became the legal standard which the Commission had to apply in all future deception cases." Amrep Corp. v. FTC, 768 F.2d 1171, 1178 (10th Cir. 1985) (emphasis added), cert. denied, 475 U.S. 1034 (1986); see also Southwest Sunsites, Inc. v. FTC, 785 F.2d 1431, 1435 n.2 (9th Cir.) ("The new standard became binding on the FTC when it was adopted in Cliffdale Associates, Inc."), cert. denied, 479 U.S. 828 (1986). Accordingly, I do not believe that we can rely on interpretations of pre-Deception Statement cases that contradict the Deception Statement. Significantly, in Southwest Sunsites, Inc., 785 F.2d at 1436, the court concluded that the new deception standard "imposes a greater burden of proof on the FTC to show a violation of Section 5," whereas the "old standard reached deceptions that a consumer might have considered important, whether or not there was reliance." The court's conclusion flatly contradicts the premise that any theory advanced in a pre-Deception Statement case, although contrary to the Statement, survived the adoption of the new deception standard intact.
If one applies the deception standard consistently to either the depositor or the bank, the facts of this case do not satisfy the three-part test that the Commission has used since 1983. If the depositor is the "consumer" for purposes of the test, there is no representation to the depositor, either direct or through the bank.(1) In addition, even if the misrepresentation had reached the depositor, obviously it would not be likely to mislead the depositor into believing that the caller is the depositor.
The deception standard also is not satisfied if the bank, instead of the depositor, is considered to be the "consumer"-- whether direct or as an intermediary on behalf of its depositors.(2) The deception standard requires us to consider the practice from the perspective of the reasonable consumer and determine "whether the consumer's interpretation or reaction is reasonable." Cliffdale Associates, Inc., 103 F.T.C. at 177. While the caller makes a misrepresentation to the bank about his identity, the reasonableness of the bank's interpretation of and reaction to this claim must be evaluated in light of the bank's experience and expertise in protecting depositor information, because a "representation directed to a well-educated group, such as a prescription drug advertisement to doctors, would be judged in light of the knowledge and sophistication of that group." Id. at 179. I do not believe that it is reasonable for the bank to give out a particular depositor's account number and balance in response to an unknown caller's claim that he is that depositor -- a claim based on no more than a social security number and an address.(3) Because a bank would not be deceived by the misrepresentation of identity if it took the simple and reasonable precaution of requiring and enforcing its own policy of demanding a password or other confidential identifier before disclosing individual bank account information, the second prong of the test under the Deception Statement is not met.(4)
Although this case does not satisfy the legal standard set forth in the Deception Statement, the Commission could take the unprecedented step of adopting an interpretation of deception under Section 5 that is broader than the interpretation enshrined in Commission adjudicative decisions incorporating the Deception Statement. Principles of administrative law, however, require the Commission to state that it is departing from its previous policy and explain why it is doing so. "When an agency undertakes to change or depart from existing policies, it must set forth and articulate a reasoned explanation for its departure from prior norms." Telecommunications Research and Action Center v. FCC, 800 F.2d 1181, 1184 (D.C. Cir. 1986); see also Midwestern Transp., Inc. v. ICC, 635 F.2d 771, 777 (10th Cir. 1980) ("[A]n agency must apply criteria it has announced as controlling or otherwise satisfactorily explain the basis for its departure therefrom.").(5)
I believe that the Commission should bring this case as an administrative proceeding in order to develop and articulate a reasoned explanation for departing from the well-established requirements of the Deception Statement. Because this new theory of deception based directly on the statute requires application of the Commission's expertise to a novel regulatory issue, it should be adjudicated in an administrative proceeding. See FTC v. World Travel Vacation Brokers, Inc., 861 F.2d 1020, 1028 (7th Cir. 1988). We can still proceed against the defendants, who are clearly using dishonesty and trickery to obtain information,(6) while also fulfilling the Commission's duty to articulate a new interpretation of deception under Section 5.
I also have concerns about the unfairness allegation, which advances a new theory of consumer injury based solely on the disclosure of "private" financial information. The FTC Act states that the Commission has no authority to declare an act or practice unfair unless it "causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition." 15 U.S.C. § 45(n) (emphasis added). We have never held that the mere disclosure of financial information, without allegations of ensuing economic or other harm, constitutes substantial injury under the statute.(7) My colleagues rely on Beneficial Corp., 86 F.T.C. 119 (1975), aff'd in part and remanded on other grounds, 542 F.2d 611 (3d Cir. 1976), for the proposition that the Commission has previously recognized that the misuse of certain types of information can be "legally unfair." That case, however, does not support an expansive interpretation of our unfairness authority for several reasons.
First, in Beneficial, the ALJ and the Commission based the unfairness determination specifically on the fiduciary relationship between the customer and his tax preparer. 86 F.T.C. at 146, 172. In fact, the ALJ, uncontradicted by the Commission, emphasized that the unfairness determination was not based on "broad ethical desiderata, such as the need to protect personal privacy of individuals." Id. at 149. In the case at hand, the only possible fiduciary relationship is between the bank and its depositors, not between the defendants and the bank or the depositors. Thus, at best, Beneficial might have supported an unfairness allegation against the bank for the unauthorized disclosure of its depositors' account numbers and balances.
Second, Beneficial cannot be relied upon as precedent even if the Commission were alleging that the bank's disclosure of information is unfair. The FTC Act was amended after the Beneficial case and now specifies: "In determining whether an act or practice is unfair, the Commission may consider established public policies as evidence to be considered with all other evidence. Such public policy considerations may not serve as a primary basis for such determination." 15 U.S.C. § 45(n). In finding injury, however, both the ALJ and the Commission in Beneficial relied almost exclusively on general public policy regarding the confidentiality of tax information and the privileged nature of a tax preparer's relationship with its customers. 86 F.T.C. at 147-48, 171-73. That option is no longer open to the Commission under the amended FTC Act. Unlike in Capital Club of North America or in the children's privacy area, the Commission has not been presented with any evidence that would create reason to believe that consumers are likely to suffer a substantial injury -- i.e., economic harm or a threat to health or safety -- from defendants' actions. Merely to "posit" that substantial consumer injury "could" flow from the disclosure of private financial information does not satisfy the statute's requirement that the challenged practice "cause or [be] likely to cause substantial injury to consumers." 15 U.S.C. § 45(n).
Third, the concept of "financial information" is extremely broad and may be construed to extend well beyond bank account numbers and balances to reach many types of information that some consumers may consider "private" in a colloquial sense. I am concerned that this case represents a foray into broader privacy regulation.
I have voted against filing this complaint with great reluctance because I believe that the government should take steps to prevent the defendants' acts and practices. I am unwilling, however, to permit this hard case to make bad law.
1. While the Deception Statement has been applied to misrepresentations to third parties who pass on misrepresentations to consumers who are thereby misled and injured, that is not this case. In fact, if the intermediary banks had passed on the misrepresentations to their depositors before releasing their account numbers and balances, the scheme probably would have been thwarted.
2. Notably, the complaint does not articulate under what fiduciary, agency, or contractual theory the bank acts as the "consumer" on behalf of its depositors.
3. As already noted, in certain circumstances deception within the meaning of the Deception Statement may occur when a representation is made not to a consumer directly, but to an intermediary acting on behalf of a consumer. Even in those circumstances, however, the intermediary must have acted reasonably in being misled.
4. This is not a case in which a representation conveys more than one meaning and the Commission is assessing the reasonableness of one of several possible interpretations. The misrepresentation of identity is open only to the interpretation intended by the caller: that the caller is the depositor. The governing deception standard requires the Commission to assess the reasonableness of the bank's reaction to that claim. Just as it would be unreasonable for the depositor to react as if a claim "I am you" were true, it is unreasonable for a bank, in the circumstances of this case, to react as if the claim "I am your account holder" were true.
5. The mere filing of a complaint implicitly based on a new interpretation of deception under Section 5 does not supply the required explanation in this case because "[c]ourts have rejected as inadequate agency counsel's articulation of a statutory interpretation when that interpretation has been inconsistent with a prior administrative construction." Church of Scientology of Cal. v. IRS, 792 F.2d 153, 165 (D.C. Cir. 1986) (en banc) (Silberman, J. concurring), aff'd, 484 U.S. 9 (1987); see also Pitzak v. OPM, 710 F.2d 1476, 1479 n.2 (10th Cir. 1983).
6. The Commission also could have sought an injunction in aid of its administrative proceeding pursuant to Section 13(b) of the FTC Act, so that the defendants' conduct would be halted pending a decision in the administrative proceeding.
7. For example, in FTC v. Capital Club of North America Inc., No. 94-6335 (D.N.J. Jan. 19, 1995) (consent), while we challenged as unfair defendants' unauthorized disclosure of credit card information to third parties, we also alleged that consumers were subsequently harmed by the unauthorized debiting of their credit cards. Thus, the substantial injury was not the mere disclosure of the information but the ensuing economic injury resulting from the unauthorized charges. Similarly, in the area of children's privacy, staff identified the substantial injury stemming from the unauthorized release of children's personally identifiable information as being the risk of injury to or exploitation of those children by pedophiles who use such information to identify and recruit children for sexual relationships. Letter from Jodie Bernstein, Director, Bureau of Consumer Protection, Federal Trade Commission, to Center for Media Education (July 15, 1997).