FEDERAL TRADE COMMISSIONA Positive AgendaFor Consumers:The FTC Year In ReviewFederal Trade CommissionApril 2003FEDERAL TRADE COMMISSION1.877.FTC.HELPFOR THE CONSUMERWWW.FTC.GOVFederal TradeCommissionThe FTC Year in ReviewA Positive AgendaFor Consumers:The FTC Year In ReviewApril 2003Federal Trade CommissionTimothy J. Muris, ChairmanSheila F. Anthony, CommissionerMozelle W. Thompson, CommissionerOrson Swindle, CommissionerThomas B. Leary, CommissionerFederal TradeCommissionA Positive Agenda for ConsumersFederal TradeCommissionThe FTC Year in ReviewContentsIntroduction ................................................................................................................................... 1A. Goals ...................................................................................................................................... 1B. 2002-2003 Highlights ............................................................................................................. 1Chapter 1: Competition Law Enforcement .................................................................................. 2A. Nonmerger Enforcement ........................................................................................................ 31. Bringing More Nonmerger Cases.................................................................................................. 32. Focusing on Key Sectors of the Economy .................................................................................... 43. Clarifying the Scope of Antitrust Coverage ................................................................................... 6B. Merger Enforcement ............................................................................................................... 71. Non-HSRReportableTransactions ............................................................................................... 72. Mergers in Key Economic Sectors ................................................................................................ 83. Improving Merger Review and Resolution .................................................................................. 10C. Part 3 Administrative Process ............................................................................................... 11Chapter 2: Consumer Protection Law Enforcement and Rulemaking.................................... 12A. Fraud and Deception ............................................................................................................ 121. Tools to Identify Fraud and Deception......................................................................................... 122. LawEnforcement ........................................................................................................................ 14B. Consumer Privacy ................................................................................................................ 171. LawEnforcement ........................................................................................................................ 172. Rulemaking ................................................................................................................................. 19Chapter 3: Special Policy Instruments for Assisting and Complementing Law Enforcement ... 19A. Competition Policy................................................................................................................ 191. Hearings, Workshops, Studies, and Reports .............................................................................. 192. Advocacy ..................................................................................................................................... 213. Competition Policy Research and Development ...................................................................... 22B. Consumer Protection............................................................................................................ 221. WorkshopsandReports .............................................................................................................. 222. Advocacy ..................................................................................................................................... 243. Consumer and Business Education and Outreach ..................................................................... 25Chapter 4: International Activities ............................................................................................. 27A.Competition........................................................................................................................... 281. Cooperation in Enforcement and Policy Development ............................................................... 282. MultilateralCompetitionCooperation .......................................................................................... 283. Trade/CompetitionFora .............................................................................................................. 29B.Consumer Protection ............................................................................................................ 291. Cross-BorderFraud..................................................................................................................... 292. Other International Cooperation .................................................................................................. 303. Cross-Border Law Enforcement .................................................................................................. 31C.International Technical Assistance........................................................................................ 31Conclusion: Honoring the FTCs Past and Building Its Future ............................................... 32Federal TradeCommissionA Positive Agenda for ConsumersFederal Trade CommissionThe FTC Year in Review - 1IntroductionThis report offers the competition policy andconsumer protection communities an overview of theactivities of the Federal Trade Commission (FTC) inthe last twelve months.The report summarizes theagencys chief initiatives and describes the aims thatmotivate the use of its resources.In many areas, thediscussion of matters begun in the past year alsoindicates the agenda that the FTC will pursue in thecoming years.A. GoalsThe FTC acts to ensure that markets operateefficiently to benefit consumers.The FTCs twinmissions of competition and consumer protectionserve a common aim:to enhance consumer welfare.The Commissions competition mission promotesfree and open competitive markets, bringingconsumers lower prices, innovation, and choiceamong products and services.The Commissionsconsumer protection mission fosters the exchange ofaccurate, non-deceptive information, allowingconsumers to make informed choices in theirpurchases.Thus, these missions complement eachother accurate information in the marketplacefacilitates fair and robust competition and maximizebenefits for consumers.Five principles guide the development of theCommissions positive agenda for consumers.Inexercising its competition and consumer protectionauthority, the FTC should: Promote competition and the unfetteredexchange of accurate, non-deceptive informationthrough strong enforcement and focusedadvocacy; Stop conduct that most threatens consumerwelfare, such as horizontal agreements andfraudulent and deceptive practices; Employ a systematic approach for identifying andaddressing serious misconduct, with specialattention to harmful behavior in key economicsectors; Apply all elements of the agencys distinctiveportfolio of policy instruments prosecutingcases, conducting studies, performing research,holding hearings and workshops, engaging inadvocacy before other government bodies, andeducating businesses and consumers toaddress competition and consumer protectionissues; and Improve the institutions and processes by whichcompetition and consumer protection policies areformulated and applied.B. 2002-2003HighlightsIn the past year, the FTC used its uniquecomplement of enforcement and other policyinstruments to address critical consumer concerns inseveral areas.Highlights include: Health Care: Prescription Drugs.Medicaltherapy increasingly relies on newpharmaceuticals as alternatives to more invasivetreatments, such as surgery.To help ensure thatanticompetitive practices do not injure consumersby reducing the availability or increasing the priceof drugs, the FTC published a study examiningthe frequency of anticompetitive abuses to blockmarket entry of lower-cost generic drugs;provided comments to the Food and DrugAdministration (FDA) on the potential formisusing procedures under the Hatch-WaxmanAmendments governing generic entry; andbrought law enforcement actions againstbranded drug companies alleging improperefforts to delay generic entry.Among othersignificant matters, the Commission reached asettlement with Bristol-Myers Squibb (BMS)resolving charges that BMS abused the Hatch-Waxman process to obstruct the entry of genericcompetition for two anti-cancer drugs and ananti-anxiety agent. Energy: Gasoline.In an administrativecomplaint filed last month, the FTC alleged thatUnion Oil Company of California (Unocal)improperly manipulated the process by which theCalifornia Air Resources Board set regulationsFederal Trade CommissionA Positive Agenda for Consumers - 2for phase 2 reformulated gasoline.The agencycontended that Unocals anticompetitive conductpotentially could cost California consumershundreds of millions of dollars per year in highergasoline prices. Privacy: Do Not Call.During the past yearthe Commission promulgated far-reachingamendments to its Telemarketing Sales Rule.Among the most important changes, the FTClaunched its National Do Not Call registry,possibly the most significant consumer protectioninitiative in recent years.The registry will be acentral database of telephone numbers ofconsumers who choose not to receivetelemarketing calls.The agency will implementthe system by making it operational in specificgeographic areas over several months andexpanding the system until it covers the entirenation.Once the registry is complete,telemarketers will be required to pay a fee to gainaccess to the registry and then to scrub theirtelemarketing lists against the telephonenumbers in the database.This fall, consumerswho have placed their telephone numbers on theregistry will begin to receive fewer unwantedtelemarketing calls. Financial Practices: Deceptive Lending.LastSeptember, the Commission reached asettlement with Associates First CapitalCorporation and Associates Corporation of NorthAmerican to resolve charges that the firms hadengaged in systematic and widespread deceptiveand abuse practices involving subprime lending.Among other obligations, the companies agreedto pay consumers $215 million in redress thelargest consumer protection settlement in FTChistory. E-Commerce: A Unified Approach toMaintaining Efficient Markets.The Internetsdevelopment has created a bounty of consumerissues, requiring the FTC to draw on all of itscompetition and consumer protection capabilities.In the past year, the FTC formed an Internet TaskForce to analyze state regulations that mayrestrict the entry of new Internet competitors andto share its findings with bodies whose acts mightaffect the development of Internet commerce.The agency hosted a three-day public workshopto examine potential anticompetitive barriers to e-commerce in various industries.TheCommission also brought significant lawenforcement actions that continue its historicalrole of leading efforts to keep the Internet freefrom fraud, deception, and abuse.The chapters below describe these and otherinitiatives more fully.These achievements attest tothe vision and dedication of the agencys fiveCommissioners and its exceptional staff.Chapter 1Competition Law EnforcementThe FTCs competition mission seeks to promoteand protect rivalry in the marketplace to giveconsumers the benefit of robust price competitionand the best possible array of product choices andprices.While some of its work involves respondingto external developments, such as Hart-Scott-Rodinopremerger filings and consumer and businesscomplaints, the FTC nevertheless sets a positivecompetition agenda systematically.In deciding howto use its competition resources, the FTC considersseveral factors, including: the type of conduct involved and the danger itposes to consumer welfare; the economic sector involved and its importanceto consumer welfare; the selection of the best policy tool to correctcompetitive problems; and the performance of competition policy researchand development to improve the agencysunderstanding of marketplace phenomena andtheir impact on consumers.Moreover, in carrying out its competition agenda,the FTC seeks to work as efficiently as possible,Federal Trade CommissionThe FTC Year in Review - 3both to stretch its resources and tolimit the burden imposed on privateparties.The FTCs competition missionhas flourished.In the past year, theFTC approved 31 antitrustenforcement actions, including twoPart 3 administrative enforcementactions, four preliminary injunctionactions, one temporary restrainingorder action, and 19 consentagreements (ten merger cases andnine nonmerger cases).In anadditional five instances, FTCinvestigations led parties to abandonproposed mergers.The agency alsopursued many non-enforcementinitiatives studying various marketsand business practices, examining the intersection ofantitrust with other areas of law, giving the bar andthe business community guidance on compliance,performing competition advocacy before othergovernment bodies, improving and streamlining FTCprocedures, and cooperating with competitionagencies worldwide.A. NonmergerEnforcementThe FTCs nonmerger program has beenespecially active in the past year.During the 1990s,a tidal wave of mergers forced the FTC to divertsubstantial resources from its nonmerger programsto scrutinize proposed transactions.The decline inrecent years from the historically unprecedentedpeaks of merger activity in 1999 and 2000 hascreated opportunities for the Commission to re-emphasize nonmerger antitrust work.1. Bringing More Nonmerger Cases In 2001, the FTC began restoring balancebetween merger and nonmerger matters to itscompetition agenda.In 2001, the FTC staff opened56 new nonmerger investigations, compared to 25 in2000.In 2002, the staff opened 59 new nonmergerinvestigations.(See Figure 1.)Guiding the FTCsrenewed focus on nonmerger matters is a systematicapproach to case generation.Key areas of concernhave included standard setting, professionalassociations, state boards, exceptions to andimmunities from antitrust laws, and health care andprescription drugs.This approach has yielded anumber of notable cases.Standard-Setting Cases.Most standard-settingactivities are legitimate and enhance the efficientoperation of markets.On occasion, however, thestandard setters, acting alone or in concert,manipulate the process to anti-consumer ends.Some standard setting involves quasi-governmentalentities, and the anticompetitive conduct mayresemble the abuse of governmental process.In thepast year, two standard-setting matters led toadministrative litigation. Rambus.Last June, the FTC filed anadministrative complaint charging that Rambus,a participant in an electronics industry standard-setting organization, failed to disclose inviolation of the organizations rules that it had apatent and several pending patent applicationson technologies that eventually were adopted aspart of the industry standard.The standard atissue involved a common form of computermemory used in personal computers and otherelectronic products.According to the complaint,Relationship Between Merger and Nonmerger Enforcement0102030405060701995 1996 1997 1998 1999 2000 2001 2002Investigations0.000.501.001.502.002.503.003.50Transactions (In Trillions) Nonmerger InvestigationsValue of HSR TransactionsFigure 1Federal Trade CommissionA Positive Agenda for Consumers - 4the inclusion of Rambuss patented technology inthe standard allowed it to gain millions of dollarsin royalty fees each year, and potentially morethan a billion dollars over the life of the patents,all at the expense of consumers in the form ofhigher prices. Unocal.As mentioned above, the FTC recentlyissued an administrative complaint charging thatUnocal subverted the process by which theCalifornia Air Resources Board (CARB) adoptedregulations on phase 2 reformulated gasoline.The complaint alleges that Unocal madematerially false and misleading statements toCARB and others, which led CARB unknowinglyto adopt regulations requiring the use oftechnology covered by Unocal patents.Professional Association Cases.The FTCpursued significant investigations involving the rulesof conduct for various professional associations.Agreements among professionals that limitcompetition among themselves, often under theguise of professional association by-laws or codes ofconduct, harm consumers much like smoke-filledroom conspiracies.The FTC recently accepted twoconsent agreements from professional groups.TheAmerican Institute for the Conservation of Historicand Artistic Works settled charges that itsCommentaries to the Guidelines for Practicecondemn as unprofessional behavior the consistentundercutting of local or regional market rates. TheNational Academy of Arbitrators settled charges thatits Code of Professional Responsibility violated thelaw in forbidding virtually all forms of advertising.The FTC is pursuing other potentially harmfulrestrictions imposed by professional associations,trade associations, or boards, using means includingsophisticated spider software to search the Internetfor restrictions of this kind.2. Focusing on Key Sectors of the EconomyAs part of its proactive approach, the FTCconcentrates resources on anticompetitive conductin areas of the economy that have a major impact onthe consumer budget, including health care andenergy.Health Care.Health-related products andservices account for more than 15 percent of theU.S.s gross domestic product, an increase of 25percent since 1990.Without effective antitrustenforcement, those figures could grow even higher.In the 20 years since the Supreme Court affirmed theFTCs jurisdiction over health care professionals inthe American Medical Association case, the agencyhas worked to remove artificial barriers to thedevelopment of new and more efficientarrangements for delivering and financing healthcare services.The FTCs major health care caseshave involved physicians and prescription drugs.Physicians.In the past year, the FTC acceptedsettlements with four groups of physicians forallegedly colluding to raise consumers costs.Thenumber of physicians involved ranged from 41 in onematter in the Denver area to more than 1,200 in acase in Dallas-Fort Worth.The FTCs orders will puta stop to collusive conduct by these physicians thatharms employers, individual patients, and healthplans by depriving them of the benefits ofcompetition in the purchase of physician services.Similar cases are currently under investigation.Prescription Drugs.The growing cost ofprescription drugs is another significant concern forconsumers, employers, governments, and healthplans.A major focus of the FTCs nonmergerenforcement program has been anticompetitiveconduct to forestall generic entry.The agency haschallenged three types of conduct thatpharmaceutical firms allegedly have used to delaygeneric competition:(1) agreements between abrand-name drug manufacturer and a generic firm tokeep the generic off the market for a period of time,(2) unilateral conduct by branded manufacturers todelay generic entry, and (3) agreements amonggeneric drug manufacturers to divide the genericmarket.Federal Trade CommissionThe FTC Year in Review - 5 Bristol-Myers Squibb (BMS).Last month, theFTC reached a landmark consent agreementwith BMS, mentioned above, to resolve chargesthat the company engaged in anticompetitiveacts over the past decade to obstruct the entry oflow-price generic competition for three of BMSswidely-used pharmaceutical products:two anti-cancer drugs, Taxol and Platinol, and the anti-anxiety agent, BuSpar.The complaint allegedthat, over the course of the past decade, BMSengaged in various anticompetitive acts acrossthe three drug products.According to the complaint, BMS abusedFood and Drug Administration (FDA) regulationsto obstruct generic competitors; misled the FDAabout the scope, validity, and enforceability ofpatents to secure listing in the FDAs OrangeBook; breached its duty of good faith and candorwith the Patent and Trademark Office (PTO)while pursuing new patents claiming these drugs;filed baseless patent infringement suits againstgeneric drug firms that sought FDA approval tomarket lower-priced drugs; and paid a would-begeneric rival $72.5 million to abandon its legalchallenge to the validity of a BMS patent and tostay out of the market until the patent expired.Alleged to be central to BMSs strategy was theabuse of the regulatory scheme arising underHatch-Waxman Amendments, which govern theFDAs process for approving generics.The FDA does not review whether patentslisted in the Orange Book actually meet thestatutory criteria.The FTC alleged that BMSrepeatedly violated Orange Book listing criteria totrigger Hatch-Waxmans provision for a 30-monthstay on FDA approval of generic drugs,extending without justification its monopolypower.The FTCs proposed consent ordercontains strong and in some respects,unprecedented relief.The relief includes aprovision prohibiting BMS from triggering a 30-month stay based on any patent that BMS lists inthe Orange Book after the filing of an applicationto market a generic drug.This provision, byitself, should protect consumers from the risk thatBMS will engage in many of the abuses set forthin the Commissions complaint.The BMS case is the most recent in a series ofcases alleging anticompetitive conduct to delay theintroduction of lower-cost generic drugs.Othersinclude: Biovail.In October 2002, the Commissionapproved a consent order resolving charges thatBiovail Corporation (Biovail) illegally acquired alicense to a patent and improperly listed thepatent in the Orange Book as claiming Biovailshigh blood pressure drug, Tiazac.Under currentlaw, that action and the subsequent filing of alawsuit by Biovail against a potential genericentrant triggered an automatic 30-month stay ofFDA approval of the generic competitor to thebranded product. Biovail/Elan.The Commission alleged that twogeneric competitors, Biovail and ElanCorporation, entered into an agreement thatprovided substantial incentives for the two firmsnot to compete in the markets for the 30 mg and60 mg dosage forms of generic Adalat CC, ananti-hypertension drug.The Commissionapproved a consent order in August 2002requiring the firms to terminate their agreementand prohibiting them from entering similaragreements in the future. Schering (Settlement with American HomeProducts).An April 2002 settlement resolvescharges that American Home Products enteredinto an agreement with Schering-PloughCorporation to delay introduction of a genericpotassium chloride supplement in exchange formillions of dollars.This action is related to thematter involving Schering Plough and Upsher-Smith, which remains in administrative litigation.Energy.Antitrust enforcement helps ensure thatthe markets for gasoline and other refined petroleumproducts are, and remain, competitive.Althoughmost FTC energy-related enforcement actions haveFederal Trade CommissionA Positive Agenda for Consumers - 6involved mergers, the nonmerger side also has beenactive.Notably, the FTCs recent administrativecomplaint against Unocal, described above, allegesthat Unocals anticompetitive conduct potentiallycould cost California consumers hundreds of millionsof dollars per year in higher gasoline prices.3. Clarifying the Scope of Antitrust CoverageThe state action and Noerr-Pennington doctrinesimmunize substantial areas of commerce fromcompetitions beneficial discipline. While the coreprinciples underlying these antitrust doctrines arevalid, some lower court decisions have expandedtheir reach well beyond the precepts the SupremeCourt originally articulated.The scope of theseimmunities remains ambiguous and controversial insome respects.Through study and analysis, and bybringing carefully selected enforcement actions, theFTC is seeking to clarify the scope of the state actionand Noerr-Pennington immunities.State Action.The state action doctrine confersantitrust immunity upon certain private conduct takenpursuant to state policy.When first articulated inParker v. Brown, the doctrine rested on the notionthat Congress did not intend to limit the statessovereign regulatory power when it passed theantitrust laws.Since then, however, some courtshave not considered whether the anticompetitiveconduct in question was intended to be protected bythe state legislature or was necessary to accomplishthe states aims.In other instances, courts havegranted broad immunity to quasi-official bodies,including entities composed of market participants,with only a tangential connection to the state.TheFTC is pursuing matters that should clarify the twoprongs of the state action defense:a cleararticulation of the states intent to displacecompetition and active supervision ofanticompetitive private agreements. Indiana Household Movers andWarehousemen, Inc.In a major attempt toclarify the requirements for state action immunity,the FTC last month announced a proposedsettlement with Indiana Household Movers andWarehousemen, Inc. (IHM&W).The settlementwill bar IHM&W, which represents approximately70 household goods movers doing business inIndiana, from filing collective intrastate rate tariffswith the Indianas Department of Revenue.According to the Commissions complaint, infiling tariffs on its members behalf, IHM&Willegally reduced competition for household goodsmoving services within Indiana by setting andmaintaining collective rates to the detriment ofconsumers.The FTC concluded that, becauseIndiana did not actively supervise IHM&Ws pricefixing, the entity did not qualify for immunity.Theproposed settlement and the agencys Analysisto Aid Public Comment give the businesscommunity significant guidance concerning thestate action doctrines scope and the standardsthat must be met to immunize anticompetitiveconduct as an activity of the state.Noerr.Noerr immunity shields certain efforts byfirms to petition government bodies to suppresscompetition.Noerr, however, sometimes is invokedto shield efforts to exclude rivals through the misuseof governmental process.Such conduct isparticularly harmful to consumers and beyondNoerrs original scope.The FTC is developing casesthat focus on issues such as: Material misrepresentations to thegovernment.Noerr immunity rests on theassumption that the government knowingly hasgranted petitions for action havinganticompetitive effects.Conduct that deceivesthe government should lack immunity.TheFTCs Unocal complaint, mentioned above,alleges that Unocal defrauded CARB intoadopting a standard for low emissions gasolinecovered by the companys patents.Only afterpassage of the new standard did Unocal disclosethe existence of its patent and demand royalties,according to the complaint.Similarly, the FTCcomplaint in the Bristol-Myers Squibb casealleged, inter alia, that the firm misled thegovernment by taking inconsistent positionsbefore two agencies obtaining a patent byFederal Trade CommissionThe FTC Year in Review - 7telling the PTO that its application claimed solelythe use of the metabolite of buspirone and notthe use of buspirone itself, while listing the patentin the FDAs Orange Book and affirming to theFDA that the patent did claim a method of usingbuspirone.(See Box 1.) Merely triggering ministerial actions.If Noerrprotects petitioning, the immunity is inappropriatefor conduct that merely triggers ministerialgovernment action, as the party has not trulysought a discretionary decision.For example, apharmaceutical firms listing of a patent in theFDAs Orange Book, together with aninfringement suit against a generic producer,would result in an automatic FDA stay on genericentry under current law.Because the result isautomatic and therefore involves no governmentdecision, Noerr should not give the firm antitrustimmunity.B. MergerEnforcementMerger enforcement remains prominent,although merger activity has fallen and amendmentsto the Hart-Scott-Rodino (HSR) Act have lowered thenumber of reported mergers.In the past year, theFTC brought numerous merger enforcement actions,including actions against firms in the key industriesof health care, energy, and food.The Commissionauthorized the staff to seek preliminary injunctions toblock four mergers and authorized the staff to seek atemporary restraining order to stop a merger in a fifthcase.The Commission also accepted consentagreements in ten merger cases.FTC investigationsalso resulted in the abandonment of five othermergers.1. Non-HSR Reportable TransactionsIn the past year, the FTC investigated severalnonreportable mergers, including Meade/Tasco.Inaddition, the Commission reached a consentagreement with MSC.Software Corporation (MSC). Meade/Tasco.In May 2002, the Commissionauthorized the staff to seek a temporaryrestraining order and a preliminary injunction infederal district court to pre-empt any attempt byMeade Instruments Corporation, the leadingmanufacturer of performance telescopes andSchmidt-Cassegrain telescopes in the UnitedStates, to buy assets of Tasco Holdings, Inc.sCelestron International (Celestron), the number-two performance telescope provider in the UnitedStates and the only other supplier of Schmidt-Cassegrain telescopes.According to theCommission, Meades purchase of Celestronassets would have reduced competition in theperformance telescope market and created amonopoly in the market for Schmidt-Cassegraintelescopes.Meade had indicated its stronginterest in acquiring all or some of Celestronsassets, an acquisition that might not have beenreportable.The parties subsequently abandonedthe transaction. MSC.The FTC finalized a consent order toresolve competitive concerns at issue in the MSCcase, which the Commission placed inadministrative litigation in 2001.Under thesettlement, MSC must divest at least one clonecopy of its current advanced Nastran software,including the source code.The divestiture will bethrough royalty-free, perpetual, non-exclusivelicenses to one or two acquirers.This case isnotable because it requires MSC to divest notonly the assets acquired but also additional assets that were needed to restore the lostcompetition.Pursuing a Pattern Acts on the fringe of possible Noerr protectionbecome more troublesome when taken incombination.For example, the FTCs recently settledcase against BMS relied on the alleged combinationof the firms inequitable conduct at the PTO, wrongfulOrange Book listings, sham litigation, and paymentsfor generics not to enter all undertaken in anattempt to obtain or maintain monopoly power.Box 1Federal Trade CommissionA Positive Agenda for Consumers - 82. Mergers in Key Economic SectorsA number of the FTCs merger cases involvedeconomic sectors with major consumer impact.Health Care.The FTC completed investigationsof several health-related merger cases in the pastyear, including: Cytyc/Digene.An action challenging CytycCorporations (Cytyc) proposed $420 millionpurchase of Digene Corporation (Digene), inwhich the FTC was prepared to allege that themerger of these two manufacturers ofcomplementary cervical cancer screening testswould allow the combined firm to use its marketpower in one market to impede competition inanother market liquid pap tests.The partiesabandoned the merger before the FTC staff fileda motion in a federal district court to enjoin thetransaction.(See also Box 2.) Amgen/Immunex.A consent agreementrequiring divestiture of assets and licensing ofintellectual property rights in threebiopharmaceutical markets to cureanticompetitive effects of Amgen Inc.s $16 billionacquisition of Immunex Corp. Baxter/Wyeth.A settlement in BaxterInternational Inc.s $316 million acquisition ofWyeth Corporation to preserve competition inmarkets for certain general anesthetics,neuromuscular blocking agents, antiemetics, andnew injectable iron replacement therapies. Quest/Unilab.A consent agreement to resolveconcerns that Quest Diagnostics, Inc.s $827million acquisition of Unilab Corporation wouldharm competition for clinical lab services inNorthern California.In addition, the FTC in 2002 formed a MergerLitigation Task Force, whose mission includesinvestigating recently consummated hospitalmergers.The antitrust agencies have not fared wellin challenging proposed hospital mergers in recentExamining Vertical MergersAlthough vertical mergers are less likely to haveanticompetitive effects than mergers between directrivals, anticompetitive vertical mergers can occur.The FTCs review of the proposed Cytyc/Digene andAvant!/Synopsys vertical mergers show how differentfacts lead to different outcomes.Cytyc/Digene involved the merger of twocomplementary cervical cancer screening tests.Synopsys/Avant! combined two complementaryintegrated circuit design software products.The FTCvoted to block the former and to close the latterinvestigation.The theory of competitive harm in bothcases involved the combined firms incentive to useits market power in one product to harm competitionin the complementary product.The method by whichharm would occur, the incentives of the firms to actanticompetitively, and the potential impact oncompetition and consumers differed significantlybetween the cases, as did the FTCs ability to forecastthe likelihood of future events.The means by which the combined Cytyc firmcould harm rivals were well-defined.The theory wasthat Digene would not support rival liquid pap testsuppliers in obtaining FDA approval necessary for useof the Digene product in combination with the rivalsproducts.In contrast, the Synopsys theory was thatthe firm would make improvements to its logicalsynthesis product that worked better with the Avant!place-and-route product than with rival products.Exactly what changes would occur was unclear.Cytyc/Digene appeared to have strong incentives toact anticompetitively, while Synopsys/Avant!sincentive to limit interoperability with its rivals (andantagonize customers) was unclear.Moreover, in Cytyc, TriPath (the other liquid paptest competitor) and new entrants allegedly would besubstantially impeded without the merged firmscooperation.In contrast, Avant! faced significantcompetitors downstream who would not besubstantially impeded from competing.That thosecompetitors might lose sales to Avant! post-mergerdid not show that the transaction would likely beanticompetitive.Another difference between thecases involved the timing of the anticompetitivethreat.In Cytyc, the alleged potential harm wouldoccur in the short term; industry participantsanticipated that TriPath could be severely threatenedimmediately.In contrast, the competitive harm inSynopsys was not anticipated to happen untilsometime in the future, if at all.Potential efficiencies and customer views alsowere important.Synopsys/Avant! had the strongability to create an improved, more integrated product.Box 2Federal Trade CommissionThe FTC Year in Review - 9years.The Task Force is screening consummatedmergers and, if it finds competitive problems, willconsider recommending enforcement actions.TheTask Force also is analyzing which litigationstrategies worked and which failed in the previoushospital merger cases.The Task Force will report itsfindings regarding consummated mergers that itdoes not recommend be challenged.Energy.In recent years, the FTC hasinvestigated numerous oil mergers and has analyzedthe competitive effects of these transactions in manyindividual product/geographic market combinations.When necessary, the agency has insisted onremedial divestitures to cure potential harm tocompetition.Matters in the last 12 months includeConoco/Phillips, a $35 billion merger, for which theCommission accepted a settlement requiring thefirms to divest two refineries and related marketingassets, terminal facilities for light petroleum andpropane products, and certain natural gas gatheringassets.Food.The food sector has immensesignificance for American consumers.The FTC hascarefully monitored mergers at all levels of thisindustry from production to retail sales. Wal-Mart/Supermercados Amigo.In the recentacquisition of Amigo, the largest supermarketchain in Puerto Rico, by Wal-Mart, the largestgeneral merchandiser in the world, theCommission required the divestiture of fourAmigo stores where direct competition would beeliminated between Wal-Mart club stores or asupercenter and Amigo supermarkets.Althoughin past cases the FTC has defined the relevantproduct market as supermarkets, evidence hereindicated that Puerto Rico consumers use clubstores interchangeably with full-servicesupermarkets and supercenters.The FTCmodified its analysis in this case to incorporatean expanded market definition. Kroger/Raleys.Krogers acquisition of 18Raleys supermarkets in the Las Vegas, Nevadaarea last year also illustrates how the FTCaccounts for facts specific to each transaction.The Commission authorized its staff to seek atemporary restraining order.After furtheranalysis indicated that the merger was unlikely toharm competition, the FTC closed theinvestigation without requiring divestitures.Although the FTC had taken enforcement actionin a Las Vegas supermarket merger in 1999, itfound that substantial new competition in themarket reduced Raleys significance as acompetitive force. Nestle/Dreyers.The Commission last monthauthorized the staff to seek a preliminaryinjunction to block the $2.8 billion proposedmerger of Nestles and Dreyers ice creambusinesses.The FTC would allege that Nestleand Dreyers along with Unilever, the marketer ofBen & Jerrys ice cream, account for about 98percent of the sales of superpremium ice cream,and that acquiring Dreyers would give Nestlealone 60 percent of this market.This matterhighlights the importance of fact-intensiveproduct market analysis, including the use ofquantitative data, which in this case indicated theexistence of a distinct superpremium ice creammarket.The competitive importance of effective,not readily duplicatable distribution systems alsowas important in the staffs analysis. Vlasic/Claussen.The FTC last fall authorizedthe staff to seek a preliminary injunction to stopthe proposed combination of Claussen, thedominant firm in the market for refrigeratedpickles, with Vlasic, its most significantcompetitor in refrigerated pickles and also thelargest national brand of shelf-stable pickles.The FTCs complaint alleged that the mergercould reduce competition and raise prices in thepickle market because Vlasics products acted asprice constraints on Claussen.The partiesabandoned the transaction after theCommissions action.Federal Trade CommissionA Positive Agenda for Consumers - 10Premerger Notification.As part of an overallmovement to make government more accessibleelectronically, the FTC, working with the Departmentof Justice (DOJ), has accelerated efforts to completean electronic system for filing HSR premergernotifications.E-filing will reduce burdens for bothbusiness and the government and create a valuabledatabase of information on mergers to inform futurepolicy deliberations.The FTC also has madeavailable to the public a searchable database ofthousands of letters memorializing advice from theagency staff in response to inquiries aboutinterpretation of the HSR rules.Streamlined Investigations.In 2002, theBureau of Competition held a series of publicworkshops around the country on possibleimprovements in the merger investigation process.In December, the Bureau announced a new set ofGuidelines for Merger Investigations, whichincorporate the staffs learning from thoseworkshops.The new measures include a host ofreforms prompt release of investigational hearingtranscripts to testifying witnesses, simplification ofSecond Requests responses, more informationabout the standards used in evaluating SecondRequest compliance, and easier submission ofelectronic materials.The Bureau of Economics alsoreleased a statement on best practices for empiricalanalyses, encouraging those practices that facilitateeffective incorporation of empirical analyses, whilereducing the burden on parties in complying withdata requests.Further efforts to improve the mergerinvestigation process continue.Among otherreforms, the staff is completing work on a revisedModel Second Request, including industry-specificvariations.Transparency of Decision Making.Greatertransparency about the types of conduct likely to bechallenged helps to serve the FTCs objectivesthrough greater deterrence:understanding fully whatkinds of transactions or conduct the FTC is likely tochallenge and why facilitates antitrust counseling,and prevents the proposal or implementation ofmany anticompetitive mergers.In the past year, theOther Mergers.Although health care, energy,and food dominated agency merger investigationresources during the past year, the FTC alsoresolved through consent orders challenges toproposed mergers in other sectors of the economy. Bayer AG/Aventis CropScience Holdings.InBayers $6.2 billion proposed acquisition ofAventis CropScience, the Commission requireddivestitures in markets for new generationchemical insecticides, herbicides for springwheat, and other products. Shell Oil Company/Pennzoil-Quaker StateCompany.In this $1.8 billion acquisition, theFTC obtained a settlement requiring divestituresto preserve competition in the U.S. and Canadianmarket for a paraffinic base oil. Solvay/Ausimont.The FTC obtained asettlement requiring divestitures to modify atransaction that threatened competition in theworld market for a fluoropolymer used in a widevariety of applications. Dainippon/Bayer.In a proposed mergerbetween Bayers high performance pigmentbusiness and Dainippon Ink and Chemicals, theCommission required the divestiture ofDainippons perylene business to Ciba SpecialityChemicals.Bayer/Aventis and Solvay/Ausimont also raisedconcerns in both the U.S. and Europe, and the FTCworked closely with the European CommissionsCompetition Directorate and the merging parties toobtain remedies satisfactory to both competitionauthorities.3. Improving Merger Review and ResolutionA major undertaking in the Bureaus ofCompetition and Economics has been to streamlinethe merger review process to make it faster, lessburdensome, more transparent, and more effective.Federal Trade CommissionThe FTC Year in Review - 11FTC has sought new ways to expand publicawareness and understanding of its actions in waysbeyond the traditional adjudicative opinions, pressreleases, and analyses to aid public comment onconsent agreements.In particular, the FTC hasprovided more insight into Commission decisions notto intervene by issuing statements in matters inwhich the agency conducted a significant inquiry butbrought no enforcement action.Notable examples of the FTCs increasedcommitment to transparency include theCommission-issued statement in the investigationinto the competing proposed acquisitions of P & OPrincess Cruises, plc, the press release issued in theKroger/Raleys matter, the statements accompanyingthe decision not to prosecute in Synopsis/Avant!, andthe detailed responses to comments received inresponse to the proposed settlement (now finalized)in the WalMart/Supermercados Amigo acquisition.These explanations follow recent FTC statements (in2001) in the Phillips/Tosco and AmeriSource Health/Bergen Brunswig merger investigations.(See alsoBox 3.)Remedies.Several of the merger best practicesworkshops held last spring focused on issuesinvolved in fashioning remedies, especially in mergercases.Topics about which the FTC sought thepublics views included identifying which assetsshould be divested and the terms of a proposeddivestiture; criteria for evaluating proposed buyers;when up front divestiture is necessary or desirable;use of crown jewels provisions; third-party rights;pre-divestiture risks to competition; and divestituresuccess.The workshops provided further insightson the crafting of remedies in merger cases, whichare included in a recent paper on merger remedybest practices.C. Part 3 Administrative ProcessA unique feature of the FTCs antitrust lawenforcement portfolio is its ability to bring casesbefore its administrative law judges.FTCadministrative adjudication offers the opportunity forextensive analysis of complicated policy questions,often involving cutting-edge issues, by a body withspecialized expertise in how markets work.Theresulting adjudicative opinions by the Commission,based on a thorough record and full briefing on theapplicable legal issues, help to improve transparencyin the Commissions decision-making and can giveconsiderable guidance to the bar and the businesscommunity on applicable standards and enforcementpolicy.The FTCs administrative docket expanded in thepast year, and the recent trend toward moreintensive use of this mechanism is expected tocontinue.Since last April, the Commission heardoral arguments in two competition cases, the stafflitigated one merger before an administrative lawjudge, and the Commission voted out two newadministrative complaints. Schering-Plough.The Commission heardarguments in Schering-Plough Corporation inJanuary after FTC complaint counsel appealedthe ALJs Initial Decision to dismiss the complaintafter a trial.The complaint alleges that Scheringillegally paid Upsher-Smith Laboratories andAmerican Home Products millions of dollars todelay marketing generic versions of K-Dur 20, aprescription potassium chloride supplement usedEfficiencies in Antitrust ReviewIn a speech in November 2002, CommissionerThomas Leary discussed the treatment of efficienciesin antitrust law, providing a historical perspective onhow antitrust policy concerning efficiencies hasevolved over the past 25 years based on academiclearning, rather than fluctuating as a result of politicalchange.Commissioner Leary stated that the mostsignificant issues in current efficiency analysis are theproblems of quantifying and comparing predictionsabout the offsetting effects of higher concentrationand greater efficiencies.He expressed concern thatsignificant efficiencies may tend to be ignoredbecause, while significant, they may be hard toquantify, or even identify.He concluded that therehas been immense, continuing improvement by theantitrust agencies in efficiencies analysis over the last25 years and there currently is near-universalagreement that efficiencies are important.Box 3Federal Trade CommissionA Positive Agenda for Consumers - 12to treat patients with low blood potassium levels.In the spring of 2002, the Commission settled itscharges against American Home Products. Three Tenors.The Commission heard oralargument in November 2002 in PolygramHolding, Inc. (The Three Tenors), which involvesallegations that music distribution companiesentered into an illegal agreement not to advertiseor discount earlier albums and video recordingsof concerts featuring the Three Tenors in aneffort to promote the the recording of their mostrecent concert.The ALJ upheld the FTCscharges and ordered the respondents to ceaseand desist from entering into any agreement onprice with wholesale producers or sellers of audioor video products.The Commission settledthese charges with Warner Communications inJuly 2001. Chicago Bridge.During the past year, the FTCstaff litigated this case, which involves aconsummated merger, before an ALJ.This caseinvolves the combination of two firms thatconstruct field-erected specialty industrial storagetanks.A decision is expected later this year. Rambus.Last June, the FTC issued anadministrative complaint charging that Rambus,a participant in an electronics industry standards-setting organization, failed to disclose inviolation of the organizations rules that it had apatent and several pending patent applicationsfor technologies that eventually were adopted aspart of the industry standard.The hearing isexpected to begin this spring. Unocal.Last month, the FTC issued anadministrative complaint charging that Unocalsubverted the process under which the CaliforniaAir Resources Board (CARB) adoptedregulations on phase 2 reformulated gasoline.Chapter 2Consumer Protection LawEnforcement and RulemakingThe FTCs consumer protection missionpromotes the agencys positive agenda by protectingconsumers against fraud, deception, and unfairpractices in the marketplace.The agency addressescurrent issues of importance to consumers, includingidentity theft, telemarketing fraud, Internet fraud, andcredit reporting.The FTC uses targeted lawenforcement and consumer and business educationto ensure that consumers have accurate informationfor their purchasing decisions.More and more, theFTC is acting to safeguard consumer privacy.The FTC uses various policy tools to set prioritiesfor its consumer protection mission.TheCommissions rich complaint databases inform theagency about consumer experiences in themarketplace; Internet surfs help single out the mostserious online fraud and deception; and workshops,hearings, and conferences advance the public policydebate.As the FTC tracks trends using state-of-the-art technology, its fundamental mission remains thesame: to identify the most egregious fraud anddeception; to enforce the law acting alone and withother government authorities; and to educate theagency about emerging issues, industry aboutcomplying with the law, and consumers aboutprotecting themselves against fraud and deception.A. Fraud and Deception1. Tools to Identify Fraud and DeceptionOver the past year, the agency continued toimprove its methods for identifying fraud anddeception, thereby enhancing the implementation ofits positive agenda for consumers.The FTC addedthousands of consumer complaints to its internaldatabases, reached more groups of consumers, andrecruited more law enforcement partners at homeand abroad.The agency continued to use electronictools extensively to ferret out fraud, especially in thecyberworld.For example, the FTC teamed up withlaw enforcement authorities nationwide to conductFederal Trade CommissionThe FTC Year in Review - 13Internet surfs to find the latest frauds that afflictconsumers.Consumer Response Center (CRC).The CRCresponds to complaints and inquiries submitted byconsumers using the FTCs toll-free number (1-877-FTC-HELP), filing complaints online, and sendingletters.In fiscal year 2002, the CRC added 680,000complaints and inquiries to the FTCs database,raising the total number of entries to 2.3 million.Consumer Sentinel.Created by the FTC in1997, Consumer Sentinel has grown to contain overone million fraud complaints.It is now availableonline to over 650 enforcementagencies across the United States,Canada, and Australia.ConsumerSentinel is the richest source ofconsumer fraud data available to lawenforcement agencies.(See Box 4.)Consumers also can access publiclyavailable sections of this Web site andfind a wealth of statistics about fraud.This past year, Consumer Sentinelwas one of 25 finalists to receive theExcellence.Gov award, whichrecognizes government programs thatdemonstrate excellence in E-Government innovation.Identity Theft Tools.The FTCstoll-free number (1-877-ID-THEFT) isthe central clearinghouse for ID theft complaints andprovides a valuable source of consumer complaintdata.Calls to the FTC have increased, from morethan 100,000 calls in fiscal year 2001 to more than185,000 in fiscal year 2002.The ID theft databasenow holds more than 430,000 entries.Building on itsexperience with Consumer Sentinel, the FTC beganmaking the data available to law enforcementpartners through an online database, and now morethan 540 law enforcement agencies access the data.Working with the Secret Service, FTC investigatorsdevelop preliminary investigative reports that arereferred to regional Financial Crimes Task Forces forpossible prosecution.Spam Database.Spam, the popular name forunsolicited commercial e-mail, is a growing problemfor consumers and businesses alike.Since 1998,the FTC has maintained an electronic mailbox towhich Internet customers are encouraged to forwardspam (uce@ftc.gov).This database currentlyreceives an average of 100,000 new pieces of spamdaily.The total number of spam has grown from700,000 in the first year to more than 30 milliontoday.(See Figure 2.)The database is searchable,allowing the FTC staff to track trends and identify lawenforcement targets.Top 10 Consumer Fraud ComplaintsCalendar Year 20021. Identity Theft - 43%2. Internet Auctions - 13%3. Internet Services & Computer Complaints - 6%4. Advance-Fee Loans & Credit Protection - 5%5. Shop-at-Home/Catalog Sales - 5%6. Foreign Money Offers - 4%7. Prizes, Sweepstakes & Lotteries - 4%8. Business Opportunity & Work-at-Home Plans - 3%9. Telephone Services - 2%10. Health Care - 2%Box 4Unsolicited Commercial E-mail Forwarded to Spam Database0.71.31.717.435.14.00.05.010.015.020.025.030.035.040.01998 1999 2000 2001 2002 2003*Calendar YearIn Millions*Projected: Based on 6.2 million for January 1 to March 5, 2003.Figure 2Federal Trade CommissionA Positive Agenda for Consumers - 14Military Sentinel.In September 2002, the FTCand the Department of Defense (DOD) launchedMilitary Sentinel, the first online consumer complaintdatabase specifically tailored to the militarycommunitys unique needs.The system offersmembers of the military and their families a way tofile complaints and gain immediate access to theFTCs large collection of educational materials andinformation.It also gives DOD and law enforcementofficers secure access to the complaints entered.Cross-Border Fraud Web Site.In September2002, the FTC launched its redesignedeconsumer.gov Web site. The complaints filedthrough econsumer.gov are accessible to the 17member countries, which use this information todecide whether to take further action.This pastJanuary, the FTC unveiled a new Web site,www.ftc.gov/crossborder, to help consumers spot,stop, and avoid cross-border fraud.New features onboth Web sites make it easier for consumers tonavigate the site and file their complaints.Internet Surfs.The law enforcement Internetsurf continues to be an essential tool for the FTCand other agencies to identify online scams.In thetypical surf, the FTC first identifies a type ofdeceptive practice that warrants investigation.TheFTC then recruits partners to search the Web for aspecified time using a protocol tailored to the surfssubject matter.Surfs achieve two goals: theyprovide a window into online practices, and anopportunity to alert new Web site providers someof whom are new entrepreneurs unaware of existinglaws if their sites appear to violate the law.In thelast year, the agency conducted five surfs, focusingon claims about unsubscribing from spam, e-tailerholiday shopping, medical test kits, energy savingproducts, and on the harvesting of e-mail addressesfor the purpose of sending spam to those addresses.2. Law EnforcementDrawing heavily on data obtained from ConsumerSentinel and Internet surfs, the FTC promotes itspositive agenda for consumers by filing enforcementactions in federal court to stop fraud and deception.While numbers tell only part of the story, they areimpressive.Since April 2002, the FTC has brought120 cases targeting fraud and deception.Of these,66 cases resulted from eight sweeps conducted withover 100 law enforcement partners.The eightsweeps targeted Internet scams, telemarketingfraud, work-at-home opportunities, deceptive weightloss products, and advance-fee credit-related fraud.In the past year, the FTC obtained more than 55judgments ordering more than $650 million inconsumer redress.In addition, the FTC is awaitingcourt approval of its settlement with The AssociatesFirst Capital Corporation and its successor,Citigroup, Inc., which requires the defendant to pay$215 million to consumers to resolve allegations ofdeceptive lending practices and other law violations.(See Figure 3.)Key areas of consumer protectionlitigation have included:Deceptive Billing Practices.In FTC v. AccessResource Services, the Commission chargedpromoters of Miss Cleo psychic services withdeceptive advertising, billing, and collectionpractices.The defendants stipulated to a court orderstopping all collection efforts on accounts or claimsfrom consumers who purchased or purportedlypurchased their pay-per-call or audiotext servicesand forgiving an estimated $500 million inoutstanding consumer charges.Netforce Regional Sweeps.Last year, the FTCcreated a series of regional Netforces composed oflaw enforcement agencies that participated in theagencys Internet Fraud Investigations TrainingProgram.This year, the FTC announced tworegional Netforce sweeps.In the Midwest sweep,announced in July 2002, the FTC, the FederalBureau of Investigation (FBI), the U.S. PostalInspection Service (USPIS), the Securities andExchange Commission (SEC), and the CommodityFutures Trading Commission (CFTC) joined ten stateattorneys general and 11 other state and local lawenforcement agencies to target scams on theInternet.Together, these agencies brought 19 civiland criminal law enforcement actions againstcyberscammers who have bilked tens of thousandsFederal Trade CommissionThe FTC Year in Review - 15of consumers out of millions ofdollars.The Northeast Netforce,announced in November 2002, alsotargeted various Internet frauds anddeceptive spamming practices. Thesweeps lead case marked the firsttime the FTC has attacked thepractice of deceptively gatheringsensitive financial information fromconsumers via spam.International Drivers PermitSweep.Operation License forTrouble is a nationwide lawenforcement sweep targetingspammers and Web site operatorswho deceptively market fakeinternational driving permits (IDPs).Authentic IDPs, which cost about $10, are intendedsimply to help ease language barriers for those whohave a license and who want to drive while travelingabroad.The sellers of fake IDPs falsely representthat their alternative (which cost between $65 and$375) can be used to drive legally in the UnitedStates; to avoid sanctions for traffic violations; and asan identification document.The FTC filed six federalcourt actions against sellers of fake IDPs andobtained preliminary injunctions in all six matters.Deceptive Lending Practices.Someunscrupulous lenders deceive consumers about loanterms, rates, or fees.The results can be severe,including the loss of a home.The FTC initiatescases to root out deception and other unlawfulpractices by lenders, especially in the subprimemarket (i.e., borrowers whose credit ratings do notqualify them for prime loans).Last year, the FTCobtained settlements for nearly $300 million inconsumer redress for deceptive lending practicesand other law violations. The Associates/Citigroup.As noted above, theFTC last September announced a settlement ofits litigation with The Associates and itssuccessor, Citigroup, Inc.The FTCs complaintcharged that The Associates had deceptivelypacked credit insurance into its loans,misrepresented loan terms, and engaged inviolations of the Truth in Lending and fair creditstatutes.The settlement, which requires courtapproval, compels the defendants to returnapproximately $215 million to injured consumers. First Alliance Mortgage.The FTC finalized itssettlement with First Alliance Mortgage Co.(FAMCO) and its principal, Brian Chisick, for thedefendants alleged deception in representingloan terms and origination fees.The settlementprovides for injunctive relief as well asapproximately $60 million in consumer redress,$20 million of which is to be contributed by theprincipals. Mercantile Mortgage.The FTC entered into asettlement with Mercantile Mortgage Co. forallegedly deceiving consumers about loan terms,including the existence of balloon payments.Inaddition to requiring $250,000 in consumerredress, the settlement gives hundreds ofconsumers the opportunity to refinance loans atlow or no cost.This case marks the first time theFTC has held a lender responsible for amortgage brokers misconduct.Significant Redress OrdersApril 2002 - March 2003Miss Cleo(12/02) $505mThe Associates/Citigroup (9/02) $215m*Other Matters$65m FAMCO(9/02) $60mSkybiz.com(1/03) $20m *pending court approvalFigure 3$865 millionFederal Trade CommissionA Positive Agenda for Consumers - 16Health and Safety Claims.Truthful andsubstantiated health benefit claims in advertising canbe an important source of information for consumers.For that reason, combating deceptive health claims,both online and off, continues to be a major focus ofthe FTCs positive agenda.In the past year, theagency sued in federal court marketers of dietarysupplements, cosmetics, devices, and services, all ofwhich purportedly improve the health or appearanceof consumers.Highlights include: Project ABsurd.In May 2002, the FTC filedactions in federal court (still pending) tochallenge advertising claims for three popularelectronic abdominal (abs) exercise belts.Inthree of the most frequently aired infomercials ofearly 2002, the abs belt promoters allegedlypromised that users would get six-pack orwashboard abs without exercise.Thecomplaints allege false advertising for a variety ofclaims, including that the belts were safe for allusers, could cause fat or weight loss, and couldeliminate cellulite. Rexall Sundown.In March 2003, RexallSundown, which manufactures and markets avariety of nutritional supplements and consumerhealth products, agreed to pay up to $12 millionto resolve charges that it made unsubstantiatedclaims about Cellasene, a purported cellulitetreatment product.The settlement also prohibitsunsubstantiated claims regarding cellulite, bodyfat, or weight loss for drugs or dietarysupplements. Blue Stuff.In November 2002, the FTCannounced a $3 million settlement with BlueStuff, Inc.The FTC alleged that, throughnationally-televised infomercials and on theInternet, the defendants made unsubstantiatedsevere pain relief claims for two topical creams,Blue Stuff and Super Blue Stuff.The settlementalso bars the defendants from makingunsubstantiated health claims about dietarysupplements and related products. Mark Nutritionals.In December 2002, a federalcourt entered a preliminary injunction againstMark Nutritionals, Inc. to enjoin its allegedlydeceptive ads for Body Solutions Evening WeightLoss Formula and to prohibit unsubstantiated useof the term weight loss in the product name.The FTCs complaint alleged that the defendantsfalsely claimed that Evening Formula wouldresult in consumers losing as much as 20 to 40pounds without the need to diet or exercise.Theinjunctions also freeze the defendants assets topreserve them for potential refunds forconsumers. FTC v. Dr. Clark Research Association.InJanuary of this year, the FTC filed a federalcomplaint against a Switzerland-based companyand its U.S. counterpart, alleging that thedefendants made unsubstantiated efficacy claimsfor various dietary supplements and devicesmarketed on the Internet for the treatment andcure of advanced and terminal cancers, AIDS,and other serious diseases.The ad also said thedefendants products rendered surgery andchemotherapy unnecessary for patients withadvanced cancer.International Pyramid Scheme.In January2002, the FTC obtained a permanent injunction inFTC v. SkyBiz against an alleged massiveinternational pyramid scheme.The final settlementincludes $20 million in consumer redress which willbe distributed to both domestic and foreign victims.The settlement also bars the principal individualdefendants for several years from multi-levelmarketing.Advance-Fee Credit Scheme.In FTC v. Assail,the FTC alleged that the defendants operated anadvance-fee credit card scam through a network ofdozens of telemarketing boiler rooms, Canadianfront men, and outsourced fulfillment and customerservice centers.In this action filed in January 2003,the FTC has identified and shut down the hub of thisfraudulent empire, which generated at least $100million in fraudulent revenues.Federal Trade CommissionThe FTC Year in Review - 17Deceptive Charitable Telemarketing.Twomonths ago, the FTC announced settlements withfive individual defendants in FTC v. Mitchell Gold.The FTC alleged that these defendants engaged indeceptive telephone solicitations for nonprofitorganizations purporting to support police, firefighters, veterans, and sick children.According tothe FTCs complaint, between 1995 and 1999 thedefendants raised more than $27 million, butprovided less than three percent of it to thenonprofits.The settlement bans further fundraisingand further telemarketing(while still allowing onedefendant to telemarketonly upon posting a bond).Defendant Gold hasagreed to a $10 millionjudgment.He wasindicted, pled guilty, andsentenced to 96 months inprison for his involvementin this and anotherfraudulent telemarketingscheme.Project Scofflaw.The FTC created Project Scofflaw in 1996 to targetindividuals who flout Commission orders andcontinue to prey upon consumers.Since itsinception, Project Scofflaw has resulted in 33 civiland/or criminal contempt actions; 54 years ofincarceration or home detention for 14 defendants;and a total of $58 million in penalties, fines, andredress.Individuals who have been sentenced thispast twelve months include: Robert Ferrara.Sentenced last October to 125months in prison for criminal contempt andordered to pay over $100,000 in restitution to thevictims. Dennis W. Vaughan.Sentenced last August to84 months in jail for criminal contempt of the finalorder in FTC v. Parade of Toys, conspiracy tocommit wire fraud, and money laundering, andordered to pay over $13 million to the victims ofthese criminal activities. Robert Febre.Sentenced last May to 14 monthsfor criminal contempt of the final order in FTC v.Robert Febre for operating a new identity creditrepair scam in direct violation of the order.B. Consumer PrivacyConsumer privacy is a key focus of the FTCspositive consumer protection agenda.As mentionedabove, the FTC justlaunched its most far-reaching privacy initiativeever, the National Do NotCall Registry.(See Box5.)The registry and otheramendments to theTelemarketing Sales Rulewill redefine the nature oftelemarketing for bothconsumers andbusinesses.Theseamendments will protectconsumers privacy intheir homes by puttingthem in charge of the number of telemarketing callsthey receive.The amendments also will give theagency new tools in the fight against fraudulent anddeceptive telemarketing.1. Law EnforcementIn the last year, the FTC continued its aggressiveenforcement of existing laws to protect consumerprivacy.Law enforcement actions ranged from asettlement with Microsoft addressing the privacy andsecurity of its Passport single sign-on service, tocases attacking deceptive spam, to the largest civilpenalties obtained in Childrens Online Privacycases.Personal Information.In the past year, the FTCcompleted two matters involving the protection ofpersonal information.From the White HouseThe President commends the Federal TradeCommission for voting to create a national Do NotCall registry to allow consumers the option to stopunwanted telephone solicitations. Time with family is aprecious commodity, and families should be given thetools they need to help prevent unwanted calls fromtelemarketers. Todays action by the FTC to approvethe creation of a national Do Not Call registry willmake it easier for consumers to stop getting the salescalls they do not want.White House Press Secretary, December 18, 2002Box 5Federal Trade CommissionA Positive Agenda for Consumers - 18 Microsoft.In December 2002, the FTC finalizeda consent agreement with Microsoft Corporationresolving charges about the privacy of personalinformation collected from consumers through itsPassport web services.The complaint allegedthat Microsoft misrepresented the security ofconsumers personal information collectedthrough the Passport services, the amount ofinformation collected by the Passport system,and the control that the Kids Passport programprovided parents over what informationparticipating Web sites could collect from theirchildren.The consent order bars anymisrepresentation of information practices inconnection with Passport and other similarservices and requires Microsoft to implement acomprehensive information security program.Microsoft also must have its security programcertified as meeting or exceeding the standardsin the consent order by an independentprofessional every two years. Eli Lilly.In May 2002, the Commission accepteda final consent order resolving charges that EliLilly and Company unintentionally disclosed thee-mail addresses of users of its Prozac.com andLilly.com Web sites by failing to take appropriatesteps to protect the confidentiality and security ofthat information.The consent order requires Lillyto establish a security program to protectconsumers personal information againstreasonably anticipated threats to its security,confidentiality, or integrity.Spam.The FTC has brought 47 lawenforcement actions targeting deceptive spam, halfof them since February 2002.The following mattersindicate the range of the Commissions spam-relatedenforcement measures.In BTV Industries, the FTCtook action against a promoter of spam that claimedconsumers had won a free Sony PlayStation 2 buthijacked them when they responded to an adultInternet site via a 900-number modem connectionthat charged up to $3.99 a minute.Other spamcases challenge senders of spam for deceptivelycollecting sensitive financial information.In GlobalMortgage Funding, the FTC alleged that thedefendants used the logos of well-known financialinstitutions (Radian Bank, Prudential, Fannie Mae) toinduce victims to disclose sensitive financialinformation, such as income, mortgage balances,rates, and type.This was the first spam casechallenging e-mail spoofing (forging the from orreply-to lines in email to disguise the emails origin),deceptive remove me promises, and allegedpretexting in violation of the Gramm-Leach-Bliley Act.In 30 Minute Mortgage Inc., the FTC alleged similardeceptive practices.Because the companyrepresented itself as a national mortgage broker, theFTC also alleged another first that the companyhad violated the Gramm-Leach-Bliley Privacy Rule.Childrens Privacy.Since April 2001, the FTChas brought eight cases to enforce the ChildrensOnline Privacy Rule, which requires Web sites toobtain parental consent before collecting, using, ordisclosing personal information from children under13.The companies under order agreed to pay civilpenalties totaling $360,000.Most recently, Mrs.Fields Cookies and Hershey Foods Corporationagreed to settle charges that their Web sites violatedthe COPPA Rule by collecting personal informationfrom children without first obtaining parental consent.Mrs. Fields will pay civil penalties of $100,000, andHershey Foods will pay civil penalties of $85,000.The separate settlements, announced in February2003, bar the companies from violating the Rule inthe future and represent the biggest COPPApenalties awarded to date.Students Privacy.Since October 2002, theFTC has announced settlements with threecompanies that allegedly collected extensivepersonal information from millions of high schoolstudents and then sold that information tocommercial marketers, despite promising that theinformation would be shared only with colleges,universities, and other education-related serviceproviders.The consent agreements bar thesecompanies from using student information for non-education-related marketing purposes and prohibitany further deceptive statements.Moreover, theFederal Trade CommissionThe FTC Year in Review - 19consent agreements will require these companies todisclose how the information will be used if they wishto employ it for non-education-related marketingpurposes.Credit Reporting and Debt CollectionPractices.The FTC brought two important privacy-related credit cases last year.In D.C. CreditServices, the company and its co-owner, DavidCohen, agreed to pay a $300,000 civil penalty aspart of a settlement of charges that they violated theFair Credit Reporting Act (FCRA) and the Fair DebtCollection Practices Act (FDCPA).The consentdecree permanently bans defendant David Cohenfrom engaging in debt collection activity.In QuickenLoans, the FTC acted against a Michigan mortgagelender for allegedly failing to comply with FCRAprovisions that require credit grantors who takeadverse action to notify the consumer when theaction is based wholly or partly on the consumerscredit report.The proposed consent agreementwould require Quicken to provide consumers with theadverse action notices, as required by FCRA.2. RulemakingCongress has directed the FTC to issue rules toimplement a number of statutes that are critical toprotecting the privacy of consumers.In the pastyear, the FTC exercised this authority in twoparticularly noteworthy instances.Telemarketing Sales Rule.In addition tocreating the National Do Not Call Registry, theCommission adopted other significant changes to theTSR that give consumers added protection againstdeceptive telemarketing and unwanted intrusions.The Rule requires telemarketers to transmitinformation to consumers caller ID systems toincrease accountability in telemarketing and assist inlaw enforcement.It also will greatly reduceabandoned calls that result in dead air.This changewill help alleviate the obvious concerns that arisewhen a consumer picks up the phone and no one isthere.The TSR now will apply to for-profittelemarketers who solicit contributions for charitableorganizations.These telemarketers will have todisclose promptly the identity of the charity for whichthey are calling and also state that they are solicitinga contribution, providing consumers with theinformation they need to determine whether tocontinue with the call.Gramm-Leach-Bliley Safeguards Rule.InAugust 2002, the FTC finalized the Safeguards Ruleto implement the GLBs security provisions andestablish standards for financial institutions tomaintain the security of customers financialinformation.In October, the FTC issued a newpublication, Financial Institutions and CustomerData: Complying with the Safeguards Rule, to helpbusinesses understand and comply with the Rule.Chapter 3Special Policy Instruments forAssisting and Complementing LawEnforcementCongress has given the FTC a distinctive mix oflitigation and non-litigation policy instruments toexercise its competition and consumer protectionresponsibilities.Consequently, the Commissionperforms numerous roles in addition to its lawenforcement activities.(See Figure 4.)In the pastyear, the FTC has been especially active in holdinghearings and workshops to study specific sectors,issuing reports of its findings, and providingadvocacy comments on competition issues.Theagencys consumer protection work has featuredmany business and consumer education projects.A. CompetitionPolicy1. Hearings, Workshops, Studies, andReportsAlthough the Commission has a rich tradition ofperforming research and preparing studies, the pastdecade has witnessed a true renaissance of theFTCs role in building the foundation of knowledgethat supports the formulation of competition policy.The past year has continued and extended recentefforts along these lines.Federal Trade CommissionA Positive Agenda for Consumers - 20 Health Care.Last September, the FTC held aworkshop on competition law and policy in healthcare, featuring presentations by academics,providers, insurers, employers, patient groups,and representatives of the FTC, DOJ, and stateattorneys general.The workshop, featuring fivepanels and more than a dozen speakers, focusedon clinical integration, payor/provider issues,group purchasing organizations, generics andbranded pharmaceuticals, and direct-to-consumer advertising of pharmaceuticals.Participants presented a broad range of views tothe several hundred attendees.The workshopmade clear there is a range of views on the roleof enforcement agencies in improving thedelivery of health care services.The workshopdemonstrated the value of more extensiveexamination of these complex andinterdependent issues, and the FTC and DOJhave undertaken an extended set of health carehearings.The hearings, which began inFebruary and will run through the fall of 2003, willexamine the state of the health care marketplaceand the role of antitrust and consumer protectionin satisfying the preferences of Americans forhigh-quality, cost-effective health care. Intellectual Property.In November 2002, theFTC and DOJ concluded 24 days of hearingsover nine months on Competition and IntellectualProperty Law and Policy in the Knowledge-BasedEconomy.The hearings responded to the growthof the knowledge-based economy, the increasingrole of dynamic, innovation-based considerationsin antitrust policy, and the importance ofmanaging the intersection of intellectual propertyand competition law to realize their common goalof promoting innovation.Later this year, the FTCand DOJ will issue a report that incorporates theinsights of business persons, consumeradvocates, inventors, practitioners, andacademics who participated in the hearings, aswell as other research. E-Commerce.The Internet boom, heralded asthe next industrial revolution, has great potentialas an engine for commerce and offersconsumers enormous freedom.Contrary to theperception of the Internet as an almost unfetteredfree market, the extension of new or existingstate regulations to the Internet may limit costsavings and convenience severely withoutproviding offsetting benefits.The FTCs InternetTask Force has been analyzing state regulationsthat may have pro-consumer or pro-competitionrationales, but that nevertheless mayrestrict the entry of new Internetcompetitors.It also is examiningbarriers that arise when private partiesemploy potentially anticompetitivetactics, such as when suppliers ordealers apply collective pressure tolimit online sales.This work hasresulted in several investigations intopossible anticompetitive curbs on e-commerce, and the Task Force hastaken the lead in drafting FTC staffcomments on several stateregulations that affect electroniccommerce.In October, the FTChosted a three-day public workshopexamining potential barriers to e-commerce in ten different industries.Significance of Non-Enforcement Competition ActivitiesAdvocacyPublicEducationCoordination with other AuthoritiesContinuing Learning(conferences, hearings, research projects, etc.)ProcessImprovementsPolicy makers more informed about market principlesUnderstanding law and policy facilitates more complianceMore Effective EnforcementMore Efficient EnforcementReduced Burdenon the PublicMore Competitive Economy / Improved Consumer WelfareACTIVITY INTERMEDIATE RESULT ULTIMATE OUTCOMEFigure 4Federal Trade CommissionThe FTC Year in Review - 21 Prescription Drugs.In July 2002, the FTCreleased a report, Generic Drug Entry Prior toPatent Expiration, focusing on certain aspects ofgeneric drug competition under the Hatch-Waxman Amendments.The study examinedwhether drug firm conduct that the FTC haschallenged in several enforcement actionsrepresents a typical pattern of behavior or only afew isolated instances.The study also examinedmore broadly how the process that Hatch-Waxman established to permit generic entrybefore the expiration of a brand-name drugproducts patents has worked between 1992 and2000.The report suggested certain changes toHatch-Waxmans attempt to balance competitionand intellectual property law, including permittingonly one automatic 30-day stay per drug productfor each Abbreviated New Drug Application(ANDA) to resolve infringement disputes overpatents listed in the Orange Book prior to thefiling date of the generic applicants ANDA.President Bush cited the FTC report last Octoberwhen he announced regulatory measures tofoster competition in the pharmaceutical industry.(See Box 6.) Energy.The FTC is pursuing a number ofprojects involving the petroleum industry.First, inlight of increased public concern about the leveland volatility of gasoline prices, the agency isstudying the main factors that may affect thelevel and volatility of prices of refined petroleumproducts and soon will publish findings from twopublic conferences.Second, a major revision ofthe 1982 and 1989 FTC Bureau of Economicsstaff reports on oil mergers is underway, as is anempirical study of the effects of various oilmergers of the past decade.Third, the agencycontinues to monitor wholesale and retail pricesof gasoline, by far, the largest single refineryproduct.The Bureau of Economics staff inspectswholesale gasoline prices for 20 cities and retailgasoline prices for 360 cities across the countryand seeks explanations of any pricing anomalies.2. AdvocacyWhen the FTC cannot use its enforcementauthority to challenge competitive restraints, it seeksto persuade policymakers of the benefits ofcompetition.Major advocacy efforts include: Professions.In many licensed professions,regulatory bodies and groups of practitionersregularly attempt to restrict advertising andprevent competition from those outside theprofession.These restrictions often result inhigher prices, less information, and fewer choicesfor consumers.The FTC and DOJ recentlysubmitted a joint letter to the American BarAssociation urging it to narrow substantially orreject a proposed model definition of the practiceof law, which likely would reduce or eliminatecompetition from non-lawyers in providing certainservices.Previously, the FTC submitted a jointletter with the Antitrust Division urging the NorthCarolina State Bar to approve a proposed opinionthat explicitly would permit non-lawyers tocompete in real estate and mortgage closingservices, and in January, the North Carolina StateBar adopted an opinion permitting non-lawyers toobtain signatures on closing documents andreceive and disburse funds for real estatetransactions.The FTC and DOJ also recentlyFTC Generic Drug StudyHas Prominent RoleFor more than a year, the Federal TradeCommission has investigated delays and abuses inthe process of bringing generic drugs to the market.Ihave reviewed the FTC findings and I am takingimmediate action to ensure that lower cost, effectivegeneric drugs become available to Americans withoutany improper delays.By this action, we will reduce the cost ofprescription drugs in America by billions of dollars andease a financial burden for many citizens, especiallyour seniors ... Remarks by President George W. Bush in theWhite House Rose Garden, Monday, October 21,2002Box 6Federal Trade CommissionA Positive Agenda for Consumers - 22provided comments to the Georgia State BarAssociation addressing concerns similar to thoseraised in the North Carolina proceeding. Otheradvocacy work involving professions during thepast year included comments to the AlabamaSupreme Court urging care in fashioning attorneyadvertising rules only to prevent unfair ordeceptive acts or practices and an amicus brief ina private case seeking to overturn an Oklahomalaw that permits only funeral directors to sellcaskets. Energy.The FTC undertook three noteworthyadvocacy initiatives involving energy.First, theCommission authorized its staff to providecomments to the Environmental ProtectionAgency in connection with its study of the impactof different environmental regulations on productdistribution and, ultimately, on supply and price ofproducts in various markets.Second, at theinvitation of state officials, the FTC staffsubmitted comments on Hawaiis law establishinggasoline price controls and on proposed NewYork legislation that would have prohibited belowcost gasoline pricing and would have bannedconstruction of new company-operated gasstations within a certain distance of existingstations operated by franchised dealers.Third,the FTC staff addressed competition issuesraised by the deregulation of electricity in fourseparate comments filed with the Federal EnergyRegulatory Commission. Connecticut Board of Examiners forOpticians.In March 2002, the FTC filed a staffcomment before the Connecticut Board ofExaminers for Opticians, which currently isconsidering whether to require stand-alonesellers of replacement contacts to obtainConnecticut optician and optical establishmentlicenses.Working with the Connecticut AttorneyGenerals Office, the FTC staff comment arguedthat such a requirement would likely increaseconsumer costs while producing no offsettinghealth benefits, and that such a requirement infact could harm public health by raising the costof replacement contact lenses, inducingconsumers to replace the lenses less frequentlythan doctors recommend.In June 2002, theFTC staff testified before the Board to discuss itscomment.3. Competition Policy Research andDevelopmentAs the Supreme Court noted in the 1997 Khancase, Congress intended the antitrust laws to beevolutionary, adapting to changed circumstancesand the lessons of accumulated experience.Therapid changes in many markets require competitionpolicymakers to conduct competition policy researchand development to analyze these trends and derivenew competitive strategies.Many activitiesdescribed above, such as the generic drug study, areimportant examples of the FTCs investment incompetition policy R&D.These initiatives are part ofa larger set of R&D projects the FTC has undertakento inform its decision making on antitrust issues.Forexample, to assess the efficacy of mergerenforcement, the FTC is analyzing the effects of pastenforcement actions, including non-enforcementdecisions, and industry and firm-specific conditionsrelating to the potential for both procompetitive andanticompetitive effects.In December, the Bureau of Economics held aRoundtable discussion assembling experts onmergers from economics departments, businessschools, M&A consulting firms, antitrust law, andbusiness.The goals included a better understandingof the M&A process in its entirety and obtaining abroader perspective on factors that make mergerssucceed or fail.BE economists also publishedpapers on topics such as the use of econometricevidence in merger investigations and thedevelopment of various policy issues under theMerger Guidelines.B. ConsumerProtection1. Workshops and ReportsIn addition to using electronic databases andWeb sites to track consumer fraud, the FTC holdshearings and workshops to study marketplacedevelopments and to learn from the experiences ofFederal Trade CommissionThe FTC Year in Review - 23consumers, business persons, representatives fromother government agencies, academics, and a hostof other experts in various fields.The agency alsoconducts numerous studies of marketplace issuesaffecting consumers and publishes its findings inreports. Weight-Loss Advertising Report andWorkshop.Last September, the FTC releasedits staff report, Weight-Loss Advertising: AnAnalysis of Current Trends, which analyzed 300weight-loss ads that ran in 2001.The reportconcluded that the use of false or misleadingclaims is rampant in weight-loss productadvertising.To prepare the report, the FTCworked with the Partnership for Healthy WeightManagement, a coalition of representatives fromscience, academia, the health care profession,government, commercial enterprises, and otherorganizations whose mission is to promote soundguidance for achieving and maintaining a healthyweight.To follow up, the FTC held a workshop inNovember 2002 in which participants scientificand medical experts, industry members, andrepresentatives of media organizations andoutlets discussed the current science of weightloss, deceptive weight-loss advertising, andpossible ways for the media to screen weight-loss ads more effectively.(See Box 7.) Cross-Border Fraud Workshop.In February2003, the FTC held a public workshop on Public/Private Partnerships to Combat Cross-BorderFraud.Participants from Australia, Canada,Germany, the United Kingdom, the Organizationfor Economic Cooperation and Development(OECD), and the International ConsumerProtection and Enforcement Network (ICPEN)joined American law enforcement officials,business representatives, and consumeradvocates to discuss how the private and publicsectors can cooperate to choke the growth ofcross-border fraud.The workshop generatedseveral proposals for the private and publicsectors to work together to identify, stop, andbring effective enforcement actions againstcross-border fraud operators and produced ideasfor other measures that the private sector cantake to help FTC combat cross-border fraud. Advertising Nutrition & Health:Evidencefrom Food Advertising 1977-1997.The Bureauof Economics staff produced a report thatreviews data on the types of nutrition and healthclaims made in over 11,000 advertisements takenfrom a sample of eight leading magazinesbetween 1977 and 1997.The study documentsan increased focus on diet and health advertisingin the late 1980s and reviews how nutrition-related claims in advertising changed before andafter the passage of the Nutrition, Labeling andEducation Act of 1990 (NLEA).The results forheart disease and serum cholesterol claims areillustrative.At their peak in 1989, heart diseaseand serum cholesterol claims were made in 8.2percent of advertisements, before droppingsubstantially in the early 1990s following theNLEAs passage.By 1997, heart disease andserum cholesterol claims had again risensomewhat, but still well below one-half of 1989levels.(See Figure 5.)Together with otherresearch on consumer food choices, this studyshould contribute to more informed policychoices on advertising and labeling policy.The Need for aBroad-B