The Federal Trade Commission (FTC) is seeking public comment on a petition by Sears Holding Management requesting that the FTC reopen and modify a 2009 FTC order settling charges that Sears failed to disclose adequately the scope of consumers' personal information it collected via a downloadable software app.
Order Modification Process
Under the FTC Act and the commission's Nonadjudicative Procedures, a company subject to an FTC order can petition to have the order reopened and modified based on changes that have, over time, eliminated the need for the order's provisions.1 If the respondent shows that a significant change in law or fact makes certain provisions unnecessary, inequitable, or harmful to competition, the commission may reopen the order to determine whether the requested modification is warranted.2 The FTC also may modify an order if it determines that the public interest requires it.3
To rely on factual changes for an order modification, the petitioner must "make a satisfactory showing" of changed circumstances, which is accomplished if the petition sets forth "specific facts demonstrating in detail the nature of the changed conditions and the reasons why they require the requested modifications."4 Mere assertions that circumstances have changed, or reliance on conditions that existed at the time the order was entered, will not justify modification.5 For example, in 1986, the FTC reopened and modified its 1979 order against Beneficial Corp., which, among other things, prohibited the use of the term "instant tax refund" to advertise their tax preparation services. The FTC found that there had been a change in fact in that the petitioners were now able to participate with the IRS in an electronic filing program that greatly reduced the time for issuing refunds. More recently, in 2014, the commission reopened and modified its 1998 order against Toys "R" Us, which found that the retailer had market power in the toy industry as both a buyer and seller of toys, and that it had used its market power to obtain a series of unlawful agreements from toy manufacturers to stop selling the same toys to club stores. The FTC removed provisions in the order that were based on Toys "R" Us having market power, because the commission found that Walmart and Target now both had equal or greater share in the market.
Changes in law can also warrant an order modification. For example, in 2000, the FTC reopened and modified its 1969 order against dietary supplement manufacturer GNC in light of a change in FDA regulations governing disclosures on dietary supplements. The commission found that the order's required disclosures were rendered unreasonable by the change in law, and could chill permissible advertising. In contrast, in 2011, the FTC denied Union Carbide's petition to reopen and modify a 2009 order prohibiting exclusive dealing arrangements based on a change in law, because the law in that case was subject to a flexible rule of reason analysis. The changes asserted by Union Carbide merely reflected a "shift in focus among the several factors traditionally considered under a rule of reason analysis as applied to exclusive dealing."6
Even if there is no material change in law or fact, the FTC may determine that it is in the public interest to reopen and modify an order. Under this scenario, the party under order must demonstrate that modification would serve the public interest because, for example, the order is impeding effective competition. The commission will then weigh the benefits of setting aside certain order provisions against the continuing need for them. For example, in 1994, the FTC reopened and modified an order requiring the divestiture of supermarkets, allowing respondents to divest an alternate supermarket in the same market. The commission found that the alternative divestiture was more likely to restore competition, and therefore modification was in the public interest.7
Sears' 2009 Order
On August 31, 2009, the FTC entered a final order in In the Matter of Sears Holdings Management Corporation after determining that, from approximately April 2007 to January 2008, Sears disseminated a desktop software application through its websites that contained inadequate disclosures regarding the scope of the application's data collection.8 Among other things, the order required Sears to disseminate all future "tracking applications" in a specified manner, including by making certain disclosures and obtaining express opt-in consent using processes stipulated by the order, for a twenty-year term.
Sears' Petition
Sears' petition states that it has complied with its obligations under the FTC's order, and there has been no allegation otherwise since the order took effect eight years ago. Sears does not seek to modify or set aside the order's core continuing requirements: to clearly and prominently provide notice and obtain consent regarding applications that may not align with consumer expectations.
The petition requests "modest changes that would align the Order with the Commission's more recent consent orders, reports, and guidance materials, which include carve-outs for certain commonly accepted practices." Specifically, Sears requests that the FTC modify the definition of "tracking application" as follows (proposed addition in underlined text):
"Tracking Application" shall mean any software program or application disseminated by or on behalf of respondent, its subsidiaries or affiliated companies, that is capable of being installed on consumers' computers and used by or on behalf of respondent to monitor, record, or transmit information about activities occurring on computers on which it is installed, or about data that is stored on, created on, transmitted from, or transmitted to the computers on which it is installed, unless the information monitored, recorded, or transmitted is limited solely to the following: (a) the configuration of the software program or application itself; (b) information regarding whether the program or application is functioning as represented; or (c) information regarding consumers' use of the program or application itself.
Sears contends that its requested order modification is necessary on the grounds of: (1) changed circumstances, because the definition of "tracking application" has become impracticable and forbids intra-application activities that are now consistent with both consumer expectations and FTC guidance; and (2) the public interest, because the order's current definition unnecessarily restricts Sears' ability to compete in the mobile application marketplace. Specifically, Sears contends that the definition of "tracking application" in the order applies to nearly all software on all platforms, including those that bear little relation to the desktop software application that gave rise to the order. According to the petition, the company's requested modification would enable Sears to "keep step with current market practices" related to retail online tracking applications.9
Order Modification in the Privacy and Data Security Space
While modifications of consumer protection orders are not as common as modifications of antitrust orders, Sears' petition may pave the way for more privacy and data security order modification petitions that address burdens to competition. For example, since 1996, the FTC has required companies signing administrative orders to agree to an order that lasts for 20 years, and federal court orders that last in perpetuity. The ABA Section of Antitrust Law's 2016 Presidential Transition Report called for shorter sunset periods, stating that "especially in areas where technology is rapidly evolving, order provisions that make sense when they are entered may no longer be appropriate in 10 years, let alone 20 years later, and may serve to chill innovative and useful corporate practices."10 This reasoning may also support modifications of orders that, due to their lengthy duration, are stifling competition by making it difficult for companies to pivot or pursue emerging opportunities.
The FTC also has signaled a commitment to focus on economic harm in the privacy and security space, most recently through an upcoming workshop on December 12, 2017, that will focus on how to characterize and measure injuries consumers may suffer when information about them is misused, and by calling for research exploring economic questions in privacy and data security to present at the agency's third PrivacyCon conference on February 28, 2018. With this new focus in mind, the FTC may be more willing to consider petitions that demonstrate a real economic harm stemming from unduly burdensome or inequitable orders.
Next Steps
The FTC will have 120 days to decide whether to approve Sears' petition following the expiration of a 30-day public comment period. Public comments may be submitted until December 8, 2017.
