Archives For privacy regulation

Last year, real estate developer Alastair Mactaggart spent nearly $3.5 million to put a privacy law on the ballot in California’s November election. He then negotiated a deal with state lawmakers to withdraw the ballot initiative if they passed their own privacy bill. That law — the California Consumer Privacy Act (CCPA) — was enacted after only seven days of drafting and amending. CCPA will go into effect six months from today.

According to Mactaggart, it all began when he spoke with a Google engineer and was shocked to learn how much personal data the company collected. This revelation motivated him to find out exactly how much of his data Google had. Perplexingly, instead of using Google’s freely available transparency tools, Mactaggart decided to spend millions to pressure the state legislature into passing new privacy regulation.

The law has six consumer rights, including the right to know; the right of data portability; the right to deletion; the right to opt-out of data sales; the right to not be discriminated against as a user; and a private right of action for data breaches.

So, what are the law’s prospects when it goes into effect next year? Here are ten reasons why CCPA is going to be a dumpster fire.

1. CCPA compliance costs will be astronomical

“TrustArc commissioned a survey of the readiness of 250 firms serving California from a range of industries and company size in February 2019. It reports that 71 percent of the respondents expect to spend at least six figures in CCPA-related privacy compliance expenses in 2019 — and 19 percent expect to spend over $1 million. Notably, if CCPA were in effect today, 86 percent of firms would not be ready. An estimated half a million firms are liable under the CCPA, most of which are small- to medium-sized businesses. If all eligible firms paid only $100,000, the upfront cost would already be $50 billion. This is in addition to lost advertising revenue, which could total as much as $60 billion annually. (AEI / Roslyn Layton)

2. CCPA will be good for Facebook and Google (and bad for small ad networks)

“It’s as if the privacy activists labored to manufacture a fearsome cannon with which to subdue giants like Facebook and Google, loaded it with a scattershot set of legal restrictions, aimed it at the entire ads ecosystem, and fired it with much commotion. When the smoke cleared, the astonished activists found they’d hit only their small opponents, leaving the giants unharmed. Meanwhile, a grinning Facebook stared back at the activists and their mighty cannon, the weapon that they had slyly helped to design.” (Wired / Antonio García Martínez)

“Facebook and Google ultimately are not constrained as much by regulation as by users. The first-party relationship with users that allows these companies relative freedom under privacy laws comes with the burden of keeping those users engaged and returning to the app, despite privacy concerns.” (Wired / Antonio García Martínez)

3. CCPA will enable free-riding by users who opt out of data sharing

“[B]y restricting companies from limiting services or increasing prices for consumers who opt-out of sharing personal data, CCPA enables free riders—individuals that opt out but still expect the same services and price—and undercuts access to free content and services. Someone must pay for free services, and if individuals opt out of their end of the bargain—by allowing companies to use their data—they make others pay more, either directly or indirectly with lower quality services. CCPA tries to compensate for the drastic reduction in the effectiveness of online advertising, an important source of income for digital media companies, by forcing businesses to offer services even though they cannot effectively generate revenue from users.” (ITIF / Daniel Castro and Alan McQuinn)

4. CCPA is potentially unconstitutional as-written

“[T]he law potentially applies to any business throughout the globe that has/gets personal information about California residents the moment the business takes the first dollar from a California resident. Furthermore, the law applies to some corporate affiliates (parent, subsidiary, or commonly owned companies) of California businesses, even if those affiliates have no other ties to California. The law’s purported application to businesses not physically located in California raises potentially significant dormant Commerce Clause and other Constitutional problems.” (Eric Goldman)

5. GDPR compliance programs cannot be recycled for CCPA

“[C]ompanies cannot just expand the coverage of their EU GDPR compliance measures to residents of California. For example, the California Consumer Privacy Act:

  • Prescribes disclosures, communication channels (including toll-free phone numbers) and other concrete measures that are not required to comply with the EU GDPR.
  • Contains a broader definition of “personal data” and also covers information pertaining to households and devices.
  • Establishes broad rights for California residents to direct deletion of data, with differing exceptions than those available under GDPR.
  • Establishes broad rights to access personal data without certain exceptions available under GDPR (e.g., disclosures that would implicate the privacy interests of third parties).
  • Imposes more rigid restrictions on data sharing for commercial purposes.”

(IAPP / Lothar Determann)

6. CCPA will be a burden on small- and medium-sized businesses

“The law applies to businesses operating in California if they generate an annual gross revenue of $25 million or more, if they annually receive or share personal information of 50,000 California residents or more, or if they derive at least 50 percent of their annual revenue by “selling the personal information” of California residents. In effect, this means that businesses with websites that receive traffic from an average of 137 unique Californian IP addresses per day could be subject to the new rules.” (ITIF / Daniel Castro and Alan McQuinn)

CCPA “will apply to more than 500,000 U.S. companies, the vast majority of which are small- to medium-sized enterprises.” (IAPP / Rita Heimes and Sam Pfeifle)

7. CCPA’s definition of “personal information” is extremely over-inclusive

“CCPA likely includes gender information in the “personal information” definition because it is “capable of being associated with” a particular consumer when combined with other datasets. We can extend this logic to pretty much every type or class of data, all of which become re-identifiable when combined with enough other datasets. Thus, all data related to individuals (consumers or employees) in a business’ possession probably qualifies as “personal information.” (Eric Goldman)

“The definition of “personal information” includes “household” information, which is particularly problematic. A “household” includes the consumer and other co-habitants, which means that a person’s “personal information” oxymoronically includes information about other people. These people’s interests may diverge, such as with separating spouses, multiple generations under the same roof, and roommates. Thus, giving a consumer rights to access, delete, or port “household” information affects other people’s information, which may violate their expectations and create major security and privacy risks.” (Eric Goldman)

8. CCPA penalties might become a source for revenue generation

“According to the new Cal. Civ. Code §1798.150, companies that become victims of data theft or other data security breaches can be ordered in civil class action lawsuits to pay statutory damages between $100 to $750 per California resident and incident, or actual damages, whichever is greater, and any other relief a court deems proper, subject to an option of the California Attorney General’s Office to prosecute the company instead of allowing civil suits to be brought against it.” (IAPP / Lothar Determann)

“According to the new Cal. Civ. Code §1798.155, companies can be ordered in a civil action brought by the California Attorney General’s Office to pay penalties of up to $7,500 per intentional violation of any provision of the California Consumer Privacy Act, or, for unintentional violations, if the company fails to cure the unintentional violation within 30 days of notice, $2,500 per violation under Section 17206 of the California Business and Professions Code. Twenty percent of such penalties collected by the State of California shall be allocated to a new “Consumer Privacy Fund” to fund enforcement.” (IAPP / Lothar Determann)

“[T]he Attorney General, through its support of SB 561, is seeking to remove this provision, known as a “30-day cure,” arguing that it would be able to secure more civil penalties and thus increase enforcement. Specifically, the Attorney General has said it needs to raise $57.5 million in civil penalties to cover the cost of CCPA enforcement.”  (ITIF / Daniel Castro and Alan McQuinn)

9. CCPA is inconsistent with existing privacy laws

“California has led the United States and often the world in codifying privacy protections, enacting the first laws requiring notification of data security breaches (2002) and website privacy policies (2004). In the operative section of the new law, however, the California Consumer Privacy Act’s drafters did not address any overlap or inconsistencies between the new law and any of California’s existing privacy laws, perhaps due to the rushed legislative process, perhaps due to limitations on the ability to negotiate with the proponents of the Initiative. Instead, the new Cal. Civ. Code §1798.175 prescribes that in case of any conflicts with California laws, the law that affords the greatest privacy protections shall control.” (IAPP / Lothar Determann)

10. CCPA will need to be amended, creating uncertainty for businesses

As of now, a dozen bills amending CCPA have passed the California Assembly and continue to wind their way through the legislative process. California lawmakers have until September 13th to make any final changes to the law before it goes into effect. In the meantime, businesses have to begin compliance preparations under a cloud of uncertainty about what the says today — or what it might even say in the future.

In an October 25 blog commentary posted at this site, Geoffrey Manne and Kristian Stout argued against a proposed Federal Communications Commission (FCC) ban on the use of mandatory arbitration clauses in internet service providers’ consumer service agreements.  This proposed ban is just one among many unfortunate features in the latest misguided effort by the Federal Communications Commission (FCC) to regulate the privacy of data transmitted over the Internet (FCC Privacy NPRM), discussed by me in an October 27, 2016 Heritage Foundation Legal Memorandum:

The growth of the Internet economy has highlighted the costs associated with the unauthorized use of personal information transmitted online. The federal government’s consumer protection agency, the Federal Trade Commission (FTC), has taken enforcement actions for online privacy violations based on its authority to proscribe “unfair or deceptive” practices affecting commerce. The FTC’s economically influenced case-by-case approach to privacy violations focuses on practices that harm consumers. The FCC has proposed a rule that that would impose intrusive privacy regulation on broadband Internet service providers (but not other Internet companies), without regard to consumer harm.  If implemented, the FCC’s rule would impose major economic costs and would interfere with neutral implementation of the FTC’s less intrusive approach, as well as the FTC’s lead role in federal regulatory privacy coordination with foreign governments.

My analysis concludes with the following recommendations:

The FCC’s Privacy NPRM is at odds with the pro-competitive, economic welfare enhancing goals of the 1996 Telecommunications Act. It ignores the limitations imposed by that act and, if implemented, would harm consumers and producers and slow innovation. This prompts four recommendations.

The FCC should withdraw the NPRM and leave it to the FTC to oversee all online privacy practices under its Section 5 unfairness and deception authority. The adoption of the Privacy Shield, which designates the FTC as the responsible American privacy oversight agency, further strengthens the case against FCC regulation in this area.

In overseeing online privacy practices, the FTC should employ a very light touch that stresses economic analysis and cost-benefit considerations. Moreover, it should avoid requiring that rigid privacy policy conditions be kept in place for long periods of time through consent decree conditions, in order to allow changing market conditions to shape and improve business privacy policies.

Moreover, the FTC should borrow a page from former FTC Commissioner Joshua Wright by implementing an “economic approach” to privacy.  Under such an approach, FTC economists would help make the commission a privacy “thought leader” by developing a rigorous academic research agenda on the economics of privacy, featuring the economic evaluation of industry sectors and practices;

The FTC would bear the burden of proof in showing that violations of a company’s privacy policy are material to consumer decision-making;

FTC economists would report independently to the FTC about proposed privacy-related enforcement initiatives; and

The FTC would publish the views of its Bureau of Economics in all privacy-related consent decrees that are placed on the public record.

The FTC should encourage the European Commission and other foreign regulators to take into account the economics of privacy in developing their privacy regulatory policies. In so doing, it should emphasize that innovation is harmed, the beneficial development of the Internet is slowed, and consumer welfare and rights are undermined through highly prescriptive regulation in this area (well-intentioned though it may be). Relatedly, the FTC and other U.S. government negotiators should argue against adoption of a “one-size-fits-all” global privacy regulation framework.  Such a global framework could harmfully freeze into place over-regulatory policies and preclude beneficial experimentation in alternative forms of “lighter-touch” regulation and enforcement.

Although not a panacea, these recommendations would help deter (or, at least, constrain) the economically harmful government micromanagement of businesses’ privacy practices in the United States and abroad.  The Internet economy would in turn benefit from such a restraint on the grasping hand of big government.

Stay tuned.

Next week the FCC is slated to vote on the second iteration of Chairman Wheeler’s proposed broadband privacy rules. Of course, as has become all too common, none of us outside the Commission has actually seen the proposal. But earlier this month Chairman Wheeler released a Fact Sheet that suggests some of the ways it would update the rules he initially proposed.

According to the Fact Sheet, the new proposed rules are

designed to evolve with changing technologies and encourage innovation, and are in harmony with other key privacy frameworks and principles — including those outlined by the Federal Trade Commission and the Administration’s Consumer Privacy Bill of Rights.

Unfortunately, the Chairman’s proposal appears to fall short of the mark on both counts.

As I discuss in detail in a letter filed with the Commission yesterday, despite the Chairman’s rhetoric, the rules described in the Fact Sheet fail to align with the FTC’s approach to privacy regulation embodied in its 2012 Privacy Report in at least two key ways:

  • First, the Fact Sheet significantly expands the scope of information that would be considered “sensitive” beyond that contemplated by the FTC. That, in turn, would impose onerous and unnecessary consumer consent obligations on commonplace uses of data, undermining consumer welfare, depriving consumers of information and access to new products and services, and restricting competition.
  • Second, unlike the FTC’s framework, the proposal described by the Fact Sheet ignores the crucial role of “context” in determining the appropriate level of consumer choice before affected companies may use consumer data. Instead, the Fact Sheet takes a rigid, acontextual approach that would stifle innovation and harm consumers.

The Chairman’s proposal moves far beyond the FTC’s definition of “sensitive” information requiring “opt-in” consent

The FTC’s privacy guidance is, in its design at least, appropriately flexible, aimed at balancing the immense benefits of information flows with sensible consumer protections. Thus it eschews an “inflexible list of specific practices” that would automatically trigger onerous consent obligations and “risk[] undermining companies’ incentives to innovate and develop new products and services….”

Under the FTC’s regime, depending on the context in which it is used (on which see the next section, below), the sensitivity of data delineates the difference between data uses that require “express affirmative” (opt-in) consent and those that do not (requiring only “other protections” short of opt-in consent — e.g., opt-out).

Because the distinction is so important — because opt-in consent is much more likely to staunch data flows — the FTC endeavors to provide guidance as to what data should be considered sensitive, and to cabin the scope of activities requiring opt-in consent. Thus, the FTC explains that “information about children, financial and health information, Social Security numbers, and precise geolocation data [should be treated as] sensitive.” But beyond those instances, the FTC doesn’t consider any other type of data as inherently sensitive.

By contrast, and without explanation, Chairman Wheeler’s Fact Sheet significantly expands what constitutes “sensitive” information requiring “opt-in” consent by adding “web browsing history,” “app usage history,” and “the content of communications” to the list of categories of data deemed sensitive in all cases.

By treating some of the most common and important categories of data as always “sensitive,” and by making the sensitivity of data the sole determinant for opt-in consent, the Chairman’s proposal would make it almost impossible for ISPs to make routine (to say nothing of innovative), appropriate, and productive uses of data comparable to those undertaken by virtually every major Internet company.  This goes well beyond anything contemplated by the FTC — with no evidence of any corresponding benefit to consumers and with obvious harm to competition, innovation, and the overall economy online.

And because the Chairman’s proposal would impose these inappropriate and costly restrictions only on ISPs, it would create a barrier to competition by ISPs in other platform markets, without offering a defensible consumer protection rationale to justify either the disparate treatment or the restriction on competition.

As Fred Cate and Michael Staten have explained,

“Opt-in” offers no greater privacy protection than allowing consumers to “opt-out”…, yet it imposes significantly higher costs on consumers, businesses, and the economy.

Not surprisingly, these costs fall disproportionately on the relatively poor and the less technology-literate. In the former case, opt-in requirements may deter companies from offering services at all, even to people who would make a very different trade-off between privacy and monetary price. In the latter case, because an initial decision to opt-in must be taken in relative ignorance, users without much experience to guide their decisions will face effectively higher decision-making costs than more knowledgeable users.

The Chairman’s proposal ignores the central role of context in the FTC’s privacy framework

In part for these reasons, central to the FTC’s more flexible framework is the establishment of a sort of “safe harbor” for data uses where the benefits clearly exceed the costs and consumer consent may be inferred:

Companies do not need to provide choice before collecting and using consumer data for practices that are consistent with the context of the transaction or the company’s relationship with the consumer….

Thus for many straightforward uses of data, the “context of the transaction,” not the asserted “sensitivity” of the underlying data, is the threshold question in evaluating the need for consumer choice in the FTC’s framework.

Chairman Wheeler’s Fact Sheet, by contrast, ignores this central role of context in its analysis. Instead, it focuses solely on data sensitivity, claiming that doing so is “in line with customer expectations.”

But this is inconsistent with the FTC’s approach.

In fact, the FTC’s framework explicitly rejects a pure “consumer expectations” standard:

Rather than relying solely upon the inherently subjective test of consumer expectations, the… standard focuses on more objective factors related to the consumer’s relationship with a business.

And while everyone agrees that sensitivity is a key part of pegging privacy regulation to actual consumer and corporate relationships, the FTC also recognizes that the importance of the sensitivity of the underlying data varies with the context in which it is used. Or, in the words of the White House’s 2012 Consumer Data Privacy in a Networked World Report (introducing its Consumer Privacy Bill of Rights), “[c]ontext should shape the balance and relative emphasis of particular principles” guiding the regulation of privacy.

By contrast, Chairman Wheeler’s “sensitivity-determines-consumer-expectations” framing is a transparent attempt to claim fealty to the FTC’s (and the Administration’s) privacy standards while actually implementing a privacy regime that is flatly inconsistent with them.

The FTC’s approach isn’t perfect, but that’s no excuse to double down on its failings

The FTC’s privacy guidance, and even more so its privacy enforcement practices under Section 5, are far from perfect. The FTC should be commended for its acknowledgement that consumers’ privacy preferences and companies’ uses of data will change over time, and that there are trade-offs inherent in imposing any constraints on the flow of information. But even the FTC fails to actually assess the magnitude of the costs and benefits of, and the deep complexities involved in, the trade-off, and puts an unjustified thumb on the scale in favor of limiting data use.  

But that’s no excuse for Chairman Wheeler to ignore what the FTC gets right, and to double down on its failings. Based on the Fact Sheet (and the initial NPRM), it’s a virtual certainty that the Chairman’s proposal doesn’t heed the FTC’s refreshing call for humility and flexibility regarding the application of privacy rules to ISPs (and other Internet platforms):

These are complex and rapidly evolving areas, and more work should be done to learn about the practices of all large platform providers, their technical capabilities with respect to consumer data, and their current and expected uses of such data.

The rhetoric of the Chairman’s Fact Sheet is correct: the FCC should in fact conform its approach to privacy to the framework established by the FTC. Unfortunately, the reality of the Fact Sheet simply doesn’t comport with its rhetoric.

As the FCC’s vote on the Chairman’s proposal rapidly nears, and in light of its significant defects, we can only hope that the rest of the Commission refrains from reflexively adopting the proposed regime, and works to ensure that these problematic deviations from the FTC’s framework are addressed before moving forward.