The FTC's §5(n) Unfairness Balancing Test

Federal Trade Commission ("FTC") has to do a balancing test to determine whether they can take action to enforce unfair practices. Under that balancing test, the FTC has to consider whether the service or action benefits others or whether it has a benefit on competition as a whole. According to privacy and technology law expert, Prof. Neil Richards, under such a test even a product that caused significant harm to millions would be off limits for FTC regulation if it gave a boost to competition or if it benefits more people than it harms. ► http://www.talksonlaw.com for more legal explainers and interviews with the titans of law. ► Facebook: http://www.facebook.com/talksonlaw ► Instagram: http://www.instagram.com/talksonlaw ► Twitter: http://www.twitter.com/talksonlaw ____________________ TRANSCRIPT (Redacted due to YouTube constraints) Right now, the FTC has to go through a torturous balancing test in subsection N of section 5 requiring to show not just substantial harm to consumers before something is unfair, but to make sure that the the harm is not outweighed by the benefit to consumers or to commerce. In other words, current law allows substantial harm to individual consumers, if it helps consumers in the aggregate, and it allows substantial harm to all consumers if it enhances competition. And I think that has the calculus entirely the wrong way around; I think unfairness should be expanded to include significant injuries that don't meet the very high statutory threshold. TalksOnLaw (Host): What do you mean by valuing the group of individuals over a subgroup? Neil Richards: So, the FTC Act was amended in order to bring this balancing test in. So the text of subsection N basically creates this balancing test that in order for something to be an unfair trade practice, the substantial injury cannot be outweighed by a benefit to consumers or to commerce. Host: So, what's an example? Neil Richards: So you could imagine the Facebook mental health allegations. I'm deliberately making up the numbers here as an example here, rather than accusing Facebook of this. So, let's say you have Instagram, and Instagram the company knows that one third of its users are going to be made sad and suffer mental health problems as a result of the service, but it learns that two-thirds of its consumers are going to really really enjoy it. That would, under the text of subsection N, that would not constitute an unfair trade practice, because of the balancing test. So, I would call for scrapping the balancing test. An unfair trade practice is one that is unfair, is one that causes significant or substantial injury to consumers with no corresponding benefit to them. Host: Let's take a real-life example: let's say that ten percent of tennis players found the sport made them very sad and ninety percent enjoyed it. Would you ask the state to close the public courts? Neil Richards: Of course not. If you have a health club using a surface on its indoor tennis courts that causes 10% of people to slip and sprain their ankles needlessly, I think it's perfectly reasonable to require them to use a different paint on the surface, so it's a safe environment for all of the customers, all of the customers who are paying them to make, to provide these tennis or search or social networking services, that's all I'm saying. Host: So you're saying it's more akin to the wet aisle in a grocery store, where someone might slip and seriously injure themselves, while others may maintain balance. That person who fell has a cause of action against the grocery store. Neil Richards: Yes, and I would say on the social media example, if the engagement model causes a significant mental health problem in a significant fraction of their customers, then maybe the model should be regulated. That maybe allowing companies to take engagement as the only metric by which they build their services should be inappropriate. I think it's certainly okay to build in safeguards, so limits on notification practices. So maybe you can play the game as long as you want, but the company is prohibited from reminding you “hey, you haven't played Clash of Clans or Tetris or Halo in the last six hours. Your friends are waiting for you.” Host: Check back in, your dragon is about to hatch. Neil Richards: Exactly, well, so that was the next thing is I would love the FTC to seriously look in the context of games at real time timers. Those are deeply problematic because they're purely designed to make the technology more addictive, not through better gameplay but through manipulation and design. So if you take those off the table, then game designers don't get to compete on manipulation and how to promote advertisement in an addictive game. They have to compete on game play, game design, graphics, character, and story, and that's really cool.