[The following is a guest post from Neil Chilson, a senior research fellow with the Center for Growth and Opportunity at Utah State University and former chief technologist of the Federal Trade Commission.]
The Federal Trade Commission (FTC) last week held its first informal hearing in 20 years on Section 18 rulemaking. The hearing itself had a technical delay, which to us participants felt like another 20 years, but was a mere two hours or so.
At issue is a proposed rule intended to target impersonation fraud. Impersonation fraudsters hold themselves out as government officials or company representatives in order to defraud unsuspecting consumers.
I was one of 13 individuals who requested to speak at the informal hearing. My interest is as a consumer with a stake in efficient and effective fraud enforcement and as a former FTC employee proud of the anti-fraud work I contributed to. What follows is adapted from my remarks.
Imposter Fraud Deserves a Good Rule
As the record clearly shows, imposter fraud is a too-common occurrence and costs consumers and businesses millions of dollars a year. We need a good rule here—one that effectively targets fraud with minimal impact on lawful behavior and that it is legally sustainable.
To that end, two points. First, the rule as written, unlike every other Section 18 rule, is broader than Section 5 and ought to be narrowed. Second, the FTC caselaw is indefinite on the contours of means and instrumentalities. The record shows that this provision is already being misunderstood. The FTC should correct this misperception.
Together, these issues mean that this proceeding has likely failed to put potentially affected parties on notice, leaving a factual gap in the record and in the agency’s regulatory impact analysis.
The Text of the Rule Is Overly Broad
This proceeding is targeted at addressing impersonation frauds and scams in commerce—acts that clearly violate Section 5.
Yet the rule as written declares unlawful activities that would not violate Section 5’s prohibition on deceptive acts or practices. The rule does not reference “unfairness” or “deception” or note that prohibited activities must be in commerce.
On its face, the draft rule would prohibit a comedian from impersonating Elon Musk; John Ratzenberger from portraying a mailman; or a kid from dressing up as Abraham Lincoln. With the means and instrumentalities provision, it would appear to be “unlawful” to even provide an Abraham Lincoln costume to said child.
Of course, courts would not permit such overbroad applications of the rule. And it seems unlikely that this FTC would spend its resources pursuing cases that the courts would reject out of hand. But rules should be written assuming that some future leadership might seek to abuse them, perhaps to chill unflattering portrayals of national politicians.
The notice of proposed rulemaking (NPRM) states that Section 5 hems in the broad language of the rule. But that gets the purpose of FTC rulemaking backward. The text of the rule should clearly delimit a subset of practices prohibited by Section 5, not the other way around. Indeed, every one of the six past rules created through Section 18 has been written as a subset of Section 5. Every one of them specifies in text that the prohibited conduct is “in commerce.” Each one also describes the prohibited conduct as either an “unfair act or practice” or a “deceptive act or practice” or both.
For example, the Used Motor Vehicle Trade Regulation Rule states:
It is a deceptive act or practice for any used vehicle dealer, when that dealer sells or offers for sale a used vehicle in or affecting commerce as commerce is defined in the Federal Trade Commission Act … to misrepresent the mechanical condition of a used vehicle…
Adding similar language to the draft impersonation rule would be simple and would still achieve the goals of the proceeding. And it would better match the text of the rule to the NPRM’s description of the rule’s scope, helping to cure some of the notice concerns.
Means and Instrumentalities
The second matter is the “means and instrumentalities” provision. I echo the value of having a knowledge requirement. As former FTC Bureau of Consumer Protection (BCP) Director Jessica Rich has noted, there has been debate over the years about the contours of means and instrumentalities, with some commissioners saying that others are using it as a substitute for “aiding and abetting,” a form of secondary liability not within Section 5.
Indeed, some parties in this record have made this mistake. The FTC must clearly articulate the proper scope of the rule, potentially by putting the standard for means and instrumentalities in the rule itself.
To the extent the standard for applying means and instrumentalities liability under Section 5 is itself unclear, it is not a good candidate for rulemaking.