United States: U.S. Senate Duo And California Ballot Initiative Propose To Radically Alter U.S. Consumer Internet Privacy And Upend Digital Advertising

Last Updated: April 23 2018
Article by Alan L. Friel

Amid growing concerns over the improper use of user information and data breaches, and in the same week as the Senate examines the Cambridge Analytica controversy, a duo of U.S. senators who have long advocated for federal consumer privacy legislation seized the moment to propose a bill that would give the Federal Trade Commission (FTC or Commission), for the first time, the authority to promulgate regulations to govern internet publishers' and service providers' privacy practices regarding adults and proposes seemingly European Union (EU)-inspired privacy protections, including opt-in consent to broad categories of data use and sharing. If passed, the law, and the FTC regulations to be promulgated under it, could radically alter the internet economy by making it significantly harder for publishers to monetize data to provide more relevant advertising to users, so-called interest-based advertising (IBA), which is the economic underpinning of the business model of the publishers and services that provide their content and services to users for free on an advertiser-supported basis. The proposal actually goes further in some ways than EU law, in that it would prohibit limiting services to users who consent to data use and sharing necessary for IBA, and would give the FTC the authority to determine whether pricing based on "discounts or other incentives in exchange for express affirmative consent" is "reasonable." Although scores of prior attempts by Congress to pass broad federal consumer privacy legislation have gone nowhere, the circumstances of the moment may have created a tipping point. And even if a federal consumer privacy law fails to get through Congress, a California advocacy group is attempting to qualify a ballot initiative for EU-style privacy laws for the November general election that could also threaten ad-supported digital media.

Toward Strict Federal Regulation?

On April 10, Sens. Edward Markey, D-Mass., and Richard Blumenthal, D-Conn., introduced the Customer Online Notification for Stopping Edge-provider Network Transgressions (CONSENT) Act (or the Bill). The FTC's privacy and data security authority is largely limited to regulating deception and unfairness under Section 5(a) of the FTC Act, with the standard for unfairness requiring a showing of actual harm not offset by benefit to consumers or competition. This effectively restrains the FTC to deception cases when it comes to collection and use of data for digital advertising, though the Obama administration's FTC was expanding unfairness into tracking and targeting in its Vizio action as we reported on here. Congress did give the FTC more specific authority to regulate children's privacy, and the CONSENT Act would similarly provide the FTC with new authority to establish regulations aimed at protecting the privacy of information belonging to customers of edge providers. Historically, "edge providers" is a term used to refer to the content and content-enabling services that use the internet – websites, web services, search engines, social media platforms, online advertising services, web and mobile applications, and content-hosting and content-delivery services. In other words, edge providers provide the content and services that flow through the "pipes" of the internet. The Bill defines both an "edge provider" and an "edge service," and regulates edge providers only to the extent they provide edge services. An edge service is an online service with subscribers or users that register an account, that sell their service, that search for and identify data at a user's request, or that collect any of the following "sensitive" information from a user: financial (not defined); health (not defined); information pertaining to children (not defined); Social Security numbers; precise geolocation; content of communications; call details; web browsing history, application usage history and the functional equivalents of either; and any other information the FTC determines to be "sensitive." Edge services are further broadly interpreted in the Bill to also include any such services provided through software, including mobile applications, or provided over the internet via connected devices (which would include IoT devices). Most notably, the Bill regulates the collection and use of online service usage data, which is deemed sensitive regardless of its nature and without being tied to a personally identifiable person. The Bill, if passed in this form, would require:

  • Transparency notice about the types of "sensitive" data collected, how and for what purposes such data is used, and the types of entities with which such data is shared. A number of states have similar disclosure laws as related to personal information. The Bill would expand that approach but is consistent with the kind of privacy transparency the FTC already recommends, and failure to provide it could potentially be deception by omission under current law.
  • Notice to customers if privacy practices regarding the regulated data change in a significant way. This is consistent with current FTC interpretation of Section 5 requirements.
  • "Require an edge provider to obtain opt-in consent from the customer to use, share or sell" the sensitive data. This would require EU-style consent to tracking, but there is no exception, as there is under the EU's General Data Protection Regulation (GDPR) when there is a legitimate basis for or interest in collecting and using the data, such as to provide the service requested. While that might be cleaned up in the regulations through a concept of implied consent (though the Bill describes opt-in as "express affirmative consent"), consent to develop customer profiles such as to enable IBA seems to be the very type of activity for which express affirmative consent is intended to be required.
  • Expands the U.S. approach to personally identifiable information to data identifiable not just to a person, but also to a specific browser, mobile phone or other device. The language of the Bill also seems to suggest that what the Bill deems "sensitive data" are also categories of personally identifiable information even if they are not linked to a person or device. However, it does seem to contemplate use and sharing of deidentified data without consent if certain efforts are made to prevent reidentification and downstream recipients are contractually committed to the same obligation.
  • Prohibits requiring consent to use and sharing for "commercial purposes" as a condition of service, and gives the FTC the authority to determine whether price discounts or incentives to customers in exchange for consent are reasonable. Although this is an evolving question, it appears the EU regulators are not going to interpret the GDPR as prohibiting "take it or leave it" offers of service tied to consent, at least where the service is free ad-supported media and the consent is tied to accepting IBA. The Bill, as currently drafted, would not be as permissive.
  • Requires reasonable security practices. This is already a well-established requirement under Section 5 unfairness authority. However, the Bill has a broad breach notification requirement that applies to all the categories of so-called sensitive data, including usage history. The notification requirement is, however, tied to a likelihood-of-harm standard.
  • Allows the FTC to regulate telecommunications carriers, generally governed by the Federal Communications Commission, to the extent that they are acting as edge providers.
  • The Bill proposes that only the FTC, certain other federal agencies and state attorneys general may enforce the law. There is no express private right of action.

Notably, the Bill does not yet have bipartisan support. It is also likely to be tightened up and watered down during the legislative process. However, in evaluating the danger this bill poses to the internet economy, it is important to note what spawned the Bill – consumer profiling on social media and the use of that data other than as intended by the data subject or the edge provider. IBA, by its nature, depends on culling detailed profiles based on user data, albeit tied to a device or other unique identifier rather than to a specifically identified human being, in order to make inferences about them for the purpose of sending them ads likely to be of interest in the hopes of influencing their behavior. If the Bill does anything, it would seem to be seeking to require affirmative express consent to do so, and to prohibit making consent a requirement of access, though the door is left open for "reasonable" differential pricing. That might mean ad-supported media and services could require consent to IBA in exchange for free access, but an ad-free version of the service could be provided for a reasonable subscription fee.

As California Goes, so Does the Nation

The California Attorney General's Title and Summary for a California ballot initiative titled "The Consumer Right to Privacy Act of 2018" (the Initiative) that consumer privacy advocates are attempting to qualify for the November 2018 general election provides:

"ESTABLISHES NEW CONSUMER PRIVACY RIGHTS: EXPANDS LIABILITY FOR CONSUMER DATA BREACHES. INITIATIVE STATUTE. Gives consumers right to learn categories of personal information that businesses collect, sell, or disclose about them, and to whom information is sold or disclosed. Gives consumers the right to prevent businesses from selling or disclosing their personal information. Prohibits businesses from discriminating against consumers who exercise these rights. Allows consumers to sue businesses for security breaches of consumer data, even if consumers cannot prove injury. Allows for enforcement by consumers, whistleblowers, or public agencies. Imposes civil penalties. Applies to online and brick-and-mortar businesses ...."

The Initiative would regulate "personal information," broadly defined to include IP address, cookie or pixel tag ID, device ID, and other unique identifiers, as well as more traditional types of personal information, and "inferences drawn" from that data. Unlike the Bill, the Initiative is an opt-out rather than an opt-in scheme. However, like the Bill, it prohibits conditioning service on consent. While the Bill would charge the FTC with evaluating the reasonableness of incentives or discounts for providing consent, the Initiative bans such practices completely. Much like the current California Shine the Light Act, which gives consumers the right to learn about the sharing of their personal information with third parties for direct marketing purposes if they are not given choice regarding that sharing, the Initiative gives rights only to California residents. However, the scope of regulated activity and data is far more expansive than current California law, which is more about transparency than choice. Also, unlike the Bill and the Shine the Light Act, the Initiative provides an express private right of action, with no need to show injury beyond a violation of the statute for standing, and statutory damages of a minimum of $1,000 and up to $3,000 per violation, which would make this very attractive to class action lawyers if it were to pass. Further, a data security breach of the regulated data would also be subject to such statutory penalties. Like the Bill, the Initiative possesses a tremendous risk to digital advertising as we know it today. But unlike the Bill, which can be reworked during the legislative process, the Initiative would become law based on the current draft if California voters were to pass it.

A full copy of the initiative is available here.

The Future of Ad Tech

The adage "bad facts make bad law" is applicable here. The Cambridge Analytica scandal seems to be turning popular opinion against tracking and targeting of consumers as part of the bargain between consumers and publishers for free or low-cost content. While requiring transparency and choice regarding privacy practices through thoughtfully crafted regulation could be sound public policy, overregulation may have significant negative effects on our digital economy and cause consumers more harm than good. We will continue to follow and report on these and other legislative efforts that affect IBA, e-commerce and digital publishing.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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