The FTC vs. the FTC

by S. M. Oliva
Mises Institute
Feb. 10, 2011

The Federal Trade Commission has two principal components: the Bureau of Competition and the Bureau of Consumer Protection. These bureaus have seemingly contradictory objectives. The "competition" side of the FTC complains when there are too few firms in a given industry vying to serve customers. Meanwhile, the "consumer-protection" side works frantically to reduce the number of firms by presuming a one-size-fits-all vision of what the hypothetical consumer should want.

The contradiction tends to grow exponentially when the FTC is exposed to other acts of government intervention. Sometimes the FTC claims to protect the businessman against aggression. For example, the Bureau of Competition recently issued a complaint against the North Carolina State Board of Dental Examiners, alleging the state agency improperly expanded its regulatory monopoly by declaring "teeth whitening" services a form of "dentistry" subject to the Board's control. The FTC's competition overseers declared the Carolina board's action an unjustified power grab, even though the state said it had evidence of actual customers injured by "unregulated" teeth-whitening providers.

Yet while the Bureau of Competition takes on aggressive state regulators, the Bureau of Consumer Protection enables even more aggressive federal regulators.

Witness a recent "consent decree" issued against Da Young Kim, an Atlanta woman who sold cosmetic (noncorrective) contact lenses online. The Bureau of Consumer Protection — acting through a small army of Justice Department lawyers — rushed to court to declare this woman a criminal. Why? Because several years earlier, Congress issued decrees giving the FTC a regulatory franchise to control the sale of contact lenses, and a subsequent declaration expanded the definition of "contact lenses" to include the purely cosmetic types sold by Kim.

In turn, these regulatory controls were meant to bolster government-licensed optometrists and ophthalmologists, whose prescriptions are required to obtain any type of contact lens — a "restricted medical device" subject to the control of not just the FTC but also the Food and Drug Administration.

Paradoxically, Congress deemed the FTC's role in the contact-lens industry necessary because of concerns that government-licensed optometrists and ophthalmologists were unfairly restricting competition for the sale of contact lenses. In 2003, Congress said that customers had a right to their government-mandated prescriptions for contact lenses, and eye doctors could not "force" individuals to buy contact lenses from them as a precondition of receiving an eye exam. Again, the goal was to promote competition.

But on the other hand, Congress was unwilling to allow individuals and contact-lens sellers to simply opt out of the government-mandated prescription scheme. So the 2003 law further required that all contact-lens sellers must receive — and verify — a prescription from a government-licensed optometrist or ophthalmologist. Failure to do so, and to keep detailed records of such activities, constituted a violation of the FTC's now-supreme power to regulate contact-lens retailers.

This trap ensnared Da Young Kim and her business, Gothic Lens LLC. According to the FTC,

In numerous instances, in connection with the advertising and sale of [decorative] contact lenses, [Kim and Gothic Lens LLC] have sold [decorative] contact lenses to consumers without obtaining the consumers' contact-lens prescription or verifying the prescription by direct communication with the prescriber.

The FTC declined to provide further details about these "numerous instances." It's quite likely these were actually commission-induced events. The Bureau of Consumer Protection routinely directs its employees to troll the Internet for small businesses that will make easy prey for regulatory aggression. These "investigators" will make purchases using false identities and credit cards to generate a pretext for FTC intervention.

Indeed, the FTC's case against Kim mentioned no complaints from dissatisfied customers or any suggestion that anyone received defective or unsafe cosmetic lenses. The sole issue was Kim's failure to honor the congressional decree that she receive and verify permission from a third party — an eye doctor — before engaging in a voluntary transaction with a willing customer.

Kim's punishment was not inconsequential. The FTC fined her $50,000, which the Commission acknowledged she did not have. So instead the Commission seized her car. Kim was literally forced to auction off her car and surrender all of the proceeds to the FTC as a "civil penalty." This was in addition to a litany of other restrictions on her future business practices and recordkeeping requirements that will last several more years. (At the time of this writing, Kim's website is no longer operational.)

The "Conflict" Is by Design

As noted above, the Bureau of Competition tends to look down upon other regulatory bodies that mimic the behavior of the Bureau of Consumer Protection. In its pending case against North Carolina's dental regulators, for instance, the FTC has cried foul because state officials attempted to do exactly the same thing to nondentist teeth-whitening providers that the FTC did to Ms. Kim and her "illegal" contact-lens business. When a non-FTC body engages in such monopolistic behavior, it's anticompetitive; when the FTC does it, it's for the good of consumers.

The FTC sees no contradiction of course. The difference between the Kim and North Carolina cases is so plainly visible that one doesn't need corrective lenses. As the Commission sees things, Congress made a wise, deliberate decision to delegate to the FTC full power over contact-lens retailers. In contrast, the North Carolina dental board simply assumed for itself a power that it never expressly received from the North Carolina legislature. Furthermore, since professional, license-holding dentists dominate the dental board, there's an inherent conflict of interest that subverts the best interests of consumers.

It never occurs to the FTC lawyers that they possess the greater conflict of interest. Their very livelihoods depend on the constant expansion of the regulatory state. The greater their franchise, the more others must spend to retain the services of "experts" who understand the FTC and its Byzantine operations. There is never a case where it is in the FTC's interest to limit its jurisdiction or exercise caution before proceeding.

Nor does the FTC see any conflict between its "competition" and "consumer-protection" mandates. And indeed there is no real conflict. Both halves support the same whole idea: That the commission and its staff can, in all cases, successfully substitute their own judgment for that of buyers and sellers on the market.

The Roots of Intervention

Intervention begets intervention. Every present government action has an infinite number of corresponding future government actions. Regulation expands to employ the available number of regulators.

Individuals attempting to engage in peaceful exchange face these realities every day. At every level of government there are individuals who wish only to engage in aggression. Every fiber of their being is devoted to asserting power over others — oftentimes people they neither know nor have legitimate grievance with. It really is a full-time endeavor. Besides the actual aggression there's the expenditure of time and energy on rationalizing the aggression, obtaining the passive consent of the populace to the aggression, and maintaining the necessary institutions to preclude any serious resistance to the aggression.

This is why individuals like Da Young Kim must accept the Federal Trade Commission and Department of Justice's "consent decrees" without question or objection. Even if one has the financial resources to mount a defense against regulatory attack, there's little honor in waging a solo battle. The entire system is rigged in favor of the regulator, so the only true "victory" scenario is one where there's a successful attack on the source of regulatory power. And that is simply impossible without a larger resistance movement.

What prevents such a movement is rent-seeking — i.e., lobbying — by nominally private constituencies who aid and abet regulators, sometimes publicly but more often in the background. Consider the contact-lens rule. Congress did not act in a vacuum. It has the support of established players in the contact-lens industry — the licensed medical professionals and the large, well-established contact-lens suppliers. Far from serving as a hindrance, these groups welcomed the FTC's expanded role in the industry, because most of the burden of complying with new decrees would fall upon the smaller, less established, and "unlicensed" operators like Da Young Kim.

The same is true of the FTC's crusade against North Carolina dental regulators. While the Commission claims to support small providers of teeth-whitening services, the Commission's real constituents are the companies that produce the teeth-whitening chemicals. These firms begged the FTC to intervene on their behalf and veto state rules that limit the sales of their products. The Commission obliged, in no small measure because the FTC's sister agency, the FDA, already maintains extensive controls over these chemicals. Far from removing oppressive government regulation, the FTC merely wants to substitute (and reassert) federal exclusivity over this market.

Conclusion

The FTC's motto is "Protecting America's Consumers," but it is consumers who are in need of protection from the commission. Stealing a woman's car for the imagined crime of failing to seek third-party permission to engage in a voluntary transaction does not protect consumers. It simply reaffirms consumers' unwilling dependence on a group of Washington-based lawyers — and those who pay the most to retain their services.

There is no reform here. The only way to truly protect buyers and sellers — and their natural right to engage in peaceful exchange — is to remove the Commission from the equation entirely. Abolishing the FTC would instantly do more to benefit free markets than the agency has claimed to have done over its near-century of existence.
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S.M. Oliva is the editor of the National Antitrust Hall of Fame, an online project that catalogs abuses of the Federal Trade Commission and the antitrust establishment. See his website. Send him mail. See S. M. Oliva's article archives.