United States: FTC Report Seeks Congressional Review Of Data Broker Industry

As the advent of "big data" increasingly takes center stage in the data and privacy sphere, data brokers—companies that compile and resell or share consumers' personal data—have come under increased scrutiny.  On May 27, 2014, the Federal Trade Commission ("FTC") issued a report titled "Data Brokers: A Call for Transparency and Accountability," as part of its efforts to educate the public about the industry and its practices.  In its report, the FTC renewed its call to Congress to enact legislation that would increase industry transparency on the methods used by data brokers to collect consumer data, and increase consumer access to the data itself.  While recognizing the value the data broker industry provides to companies and consumers alike, the report also urges caution for the potential consumer harm posed by the misuse of such data, offering legislative recommendations and industry best practices to ensure consumer data is adequately protected.

The Basics of the Business

The report explains that data brokers compile incredible amounts of information on practically every U.S. consumer, with one featured broker estimating that it currently holds about 3,000 data points for each individual U.S. consumer.  Certainly, some of the information sources are massive: one of the featured data brokers maintains about 700 billion data elements, adding roughly 3 billion more per month.  In the ever-expanding world of "big data," where new and diverse sources of data provide enormous amounts of information for collection and analysis, the data brokers have found themselves to be collecting and storing more data than can actually be used.

None of the data brokers surveyed obtained this information directly from consumers.  Rather, the data sources varied, and included both government and private sources, such as state tax records, voter records, court records, press and news reports, social media posts and social networking connections, and transaction data from retailers, magazines, and travel sites.  Further, nearly all data brokers collect or trade data from other data brokers, thereby weaving an incredibly tangled web and making tracing the source of the data a nearly impossible task.  This includes data sources that overlap, which affords data brokers some ability to verify the accuracy of the data they collect.

The benefits of the collection and use of consumer data are considerable, and bring a host of efficiencies and new practices to the table.  The analytics products offered by some data brokers enable companies to more accurately target consumers for advertising campaigns, refine product and campaign messages, and gain insights about consumer preferences.  Other uses are less obvious to the average consumer, such as banks' use of big data analytic products to comply with "know your customer" identity verification requirements under the USA Patriot Act.1

Categories of Data Products

Once the data brokers have obtained the data, they then analyze and convert it into a marketable product.  Data brokers generally package data into two forms: (i) data elements such as age, marital status, interests, etc. and (ii) data segments, which combine interests to create lists of individuals with similar characteristics (examples cited in the report include "African-American Professional," "Allergy Sufferer," and "Bible Lifestyle").  Data brokers use these packaged data sets to create products that fall into one of three categories: (1) marketing, (2) risk mitigation, and (3) people search.  Together, the nine data brokers surveyed reported approximately $426 million in annual revenue derived from these products.

Marketing Products. Marketing products, the largest revenue generator (totaling over $196 million in 2012), are designed to enhance direct marketing campaigns (postal mail, telemarketing, and email marketing), steer online marketing campaigns (ads on the Internet, television, and mobile devices), and provide market analytics.  Companies provide data brokers with limited consumer information, such as a consumer's name and email address, and based on those limited data points, data brokers aggregate data elements and data segments to identify information that a client might need, such as the consumer's home address and telephone number.

Risk mitigation products.  Risk mitigation products, the second largest revenue generator ($177 million in 2012), are generally split into identity verification products and fraud detection products, which both use aggregated data to provide safeguards that ensure the actual identity of the consumer.

People Search Products.  People search products, the smallest revenue stream ($52 million in 2012), are generally intended to be used by consumers, and allow for searches of data such as court records, email addresses, education information, and ancestry, among others.  Data brokers provide these products as both free and fee-based services, and generally instruct users that they cannot use such products for purposes governed by the Fair Credit Reporting Act of 1970 ("FCRA") (such as credit, insurance, or housing eligibility determinations).

The Legal Landscape

The report noted that the existence of companies selling consumer data for credit in a nontransparent fashion has long existed, and in fact was the impetus behind the FCRA, which regulates consumer credit reporting agencies and their handling of sensitive consumer data.2  While some data brokers fall under the scope of the FCRA, most do not, particularly those that aggregate marketing data and individual location data.3  In the absence of a comprehensive federal legislative framework governing the collection and use of consumer data, the report noted the handful of laws that do exist and require written agreement affirming that the data broker will only use the data for a specified purpose, or prohibit the resale or illegal use of the data.  These include the Graham Leach-Bliley Act, the Child's Online Privacy Protection Act (COPPA) of 1998, the Driver's Privacy Protection Act, and the Health Insurance Portability and Accountability Act (HIPAA) of 1996.

The FTC also recognized that contracts between data brokers and their sources offer some protection.  Most data brokers utilize contracts that require their sources to agree that the data was legally obtained, and/or that consumers were notified that their data would be shared with third parties or provided the opportunity to opt out of that sharing.  Restrictions are likewise applied by the data sources themselves.  For example, certain social media sites (such as Facebook) restrict third parties' ability to collect data from their sites in an automated fashion, although this was beyond the ken of the report.

Risks to Consumers

While some legislation and industry practices exist to protect consumer data, the report stressed the attendant risks associated with the data broker industry.  Lack of consumer access to big data is an overarching theme of the report.  Not all data brokers who provide services ensure that consumers may access the information compiled about them; those who do may only provide limited access.  Nor are consumers usually provided access to the inferences made about them based on that data.  For example, a data broker may identify a consumer as an extreme sports fan for marketing purposes, but that identification may simultaneously cause insurance companies to identify that consumer as higher risk.  Categorizing may also occur by focusing on a combination ethnicity and/or income levels, and thus create avenues for discrimination or other wrongful uses.

To the extent consumers are able to access such information, they must navigate a lengthy privacy policy statement and often must submit additional information to confirm their identity, such as a scanned government photo ID.  It is likewise difficult for consumers to correct erroneous information.  Such concerns led FTC Commissioner Julie Brill to issue a concurring statement to the report, in which she identified two data broker practices that demonstrate the need for additional transparency and accountability measures.  First, she noted that the types of consumer information now being collected by data brokers often fall outside of the heavily regulated categories of health, financial, and racial data.  Data brokers can use seemingly innocuous data to predict or infer sensitive characteristics that closely follow these categories. Commissioner Brill gave two such examples cited in the FTC report: "Metro Parents" (single parents who are "primarily high school or vocationally educated" and are "handling the stresses of urban life on a small budget") and "Timeless Traditions" (immigrants who "speak[] some English, but generally prefer[] Spanish").  She stressed the need for more comprehensive legislation to prevent the discriminatory use of such data.  Second, Commissioner Brill called for further legislative accountability requirements on risk mitigation products.  The danger in these types of products occurs when "inaccurate information wrongly leads to a consumer being identified as a risk that needs to be mitigated."  Commissioner Brill called for increased consumer access and consumer visibility in order to correct such erroneous data.

Legislative Recommendations

The Commission offered a series of legislative and best practices recommendations for the field, chiefly directed towards increasing transparency and access.  The Commission urged Congress to consider legislation including the following regulations of marketing data products:

  • Centralized Portal.  A centralized system, such as an online portal, should be required where data brokers can identify themselves, allow consumers to find out which brokers have data on them, and provide the easy opt-out ability and access to other tools.
  • Access and Inferences.  Require data brokers to give consumers access to their data at a reasonable level of detail, and to give consumers access to the related inferences which are drawn.
  • Opt-Outs.  Tools which allow consumers to effectively opt-out should be required.
  • Sources.  Require data brokers to list the sources from which their data was drawn.
  • Consumer Notice and Choice.  Require consumer-facing entities (e.g., retailers) to provide clear notice of data sharing and the ability to opt out of the same.
  • Sensitive Data. Require that additional protections be afforded by law to sensitive information, above and beyond the protections presently bestowed.

These suggestions were largely repeated for people search products.  For risk mitigation products, aside from the above, the report suggested legislation that would require that consumers be told when a company uses risk mitigation to limit access to a product or service, and that consumers be offered an ability to correct such information.

Industry Best Practices

The report also urged data brokers in all product categories to adopt a series of best practices.  In addition to urging industry to adopt the practices covered in an earlier 2012 report Protecting Consumer Privacy in an Era of Rapid Change: Recommendations for Business and Policy Makers, the Commission called for change in three areas.

First, it urged the implementation of privacy-by-design.  In particular, it requested that industry assess its collection practices to narrow their collection efforts to only the data which may be needed, and to properly dispose of data once its utility has ebbed, reasoning that these practices will reinforce data security by decreasing the risk of a data breach or unauthorized access, and by simultaneously decreasing the attendant harm should such an event occur.

Second, the Commission requested better protections for children and minors, particularly with respect to the information collected by marketing products.  It noted that industry should apply age-based collection restrictions to data collected offline as well as online, and that data brokers should more carefully vet their sources to ensure that any age-based restrictions are likewise observed at the data source levels.

Third, the Commission recommended that data brokers take precautions to prevent illegal data uses downstream – specifically to prevent the use of data in eligibility determinations or for unlawful discrimination, or otherwise used to "deny consumers credit, insurance, employment, or the like."4  Examples of related precautions include contractual limitations, "seeding" data for monitoring purposes, or auditing their clients to ensure acceptable use.

Conclusion

The data broker enterprise is complex, and involves multiple players collecting, sharing, aggregating, and using consumer profiles that contain a host of consumer information.  The Commission's legislative recommendations, if enacted, would add transparency across the industry and increase the ease of and opportunity for consumer access.

Footnotes

1 31 C.F.R. §1020.220.

2 15 U.S.C. §§ 1681 et seq.

3 In reaction to a 1997 FTC workshop on the personal identification data, industry participants more recently formed a regulatory body titled "Individual References Services Group," which was intended to bring more transparency to the matter, but which was ultimately terminated in 2001.

4 At an upcoming workshop on September 15, 2014, the Commission will examine the potential effects of "Big Data" on American consumers, at a workshop entitled "Big Data: A Tool for Inclusion or Exclusion?"

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