By Ryan Tracy and John D. McKinnon
WASHINGTON -- The record $5 billion fine and oversight
conditions federal regulators imposed on Facebook Inc. for privacy
violations put Big Tech on notice that any company failing to
protect consumer information may now face greater legal risks than
previously.
The penalty against Facebook, approved on a 3-2 vote by the
Federal Trade Commission, expands potential liability for the
social-media giant's chief executive, Mark Zuckerberg, and
restructures the company's board of directors to boost its
oversight of privacy practices.
While critics dismissed the financial penalty as a wrist-slap
for Facebook -- which reported second-quarter revenue of $16.9
billion Wednesday -- the structural changes imposed by the
commission are now likely to be seen as a measuring stick for other
companies.
"I expect a lot of board members and CEOs are chatting and
texting today about what exactly they need to do to ensure they are
within spitting distance of these new best practices," said Trevor
Hughes, president of the International Association of Privacy
Professionals.
Mr. Zuckerberg said he hopes the FTC-imposed mandates on
Facebook would "set a completely new standard for our
industry."
Facebook agreed to the settlement after a year-long FTC
investigation found the company had repeatedly used deceptive
disclosures and account settings to lure users into sharing
personal information, undermining their actual privacy
preferences.
The company's actions misled tens of millions of people about
the use of their phone numbers, photos of their faces and more --
while allowing app developers that were paying Facebook for ads to
gain special access to user information, the FTC said.
The Facebook penalties are "a message to [other companies] that
if you get yourself in Facebook's position, this is what you'll
get," FTC Chairman Joe Simons told reporters following the
announcement.
"The price of privacy violations just went up," said
Commissioner Noah Phillips.
Yet the FTC panel split along party lines, with Democrats
Rebecca Kelly Slaughter and Rohit Chopra contending that the
settlement isn't tough enough to prevent future violations by
Facebook. The company's business model relies on tracking online
user behavior to sell targeted advertising.
"If the market gets the message that it's profitable to violate
a law or order, it's very difficult for a deterrence message to be
effective," Ms. Slaughter said.
Congressional Democrats were generally critical. "This fig-leaf
deal releases Facebook without requiring any real privacy
protections -- no restraints on future data use, no accountability
for top executives, nothing more than chump change financial
fines," said Sen. Richard Blumenthal (D., Conn.).
Republicans were more supportive. Sen. Roger Wicker (R., Miss.),
the Commerce Committee chairman, praised the investigation and
settlement as exemplary work by the FTC. But he said the case
underscored the need for federal privacy legislation.
Sen. Josh Hawley (R., Mo.), a Big Tech critic, said on Twitter
that the settlement "does nothing to change Facebook's creepy
surveillance of its own users & the misuse of user data."
Still, Washington is raising its scrutiny of the industry.
The Justice Department -- which shares antitrust enforcement
authority with the FTC -- said this week it is opening a broad new
review examining whether dominant technology firms are unlawfully
stifling competition. That is adding to risks for Facebook as well
as Google parent Alphabet Inc., Amazon.com Inc. and Apple Inc.
In its second-quarter earnings report later Wednesday, Facebook
warned that the FTC had launched an antitrust investigation into
the company in June. Facebook is also facing privacy probes in
other countries, and confirmed another mistake this week that
allowed children to interact with unapproved users on its Messenger
Kids app.
Under the settlement, Mr. Zuckerberg will be required to certify
that the company is complying with new privacy strictures, and face
civil and criminal penalties for false statements. An independent
privacy auditor will be granted access inside Facebook, and the
company said it would assign more than 1,000 people to work on the
matter.
Facebook's board will create a new committee to more closely
monitor the company's privacy practices, and independent directors
will have more say over new members. At the same time, Mr.
Zuckeberg controls most of the company's voting shares.
Marc Rotenberg, president of the Electronic Privacy Information
Center advocacy group, said the internal changes at Facebook won't
give the public a way to check their effectiveness. "This is
internal reporting, not subject to public review," he said.
Users' experience on Facebook may not change much, but the
settlement should boost consumers' confidence that the company is
keeping its privacy promises, the FTC and Facebook said.
It will be up to other companies whether to follow Facebook's
lead. While FTC officials wanted to use the case to set an example,
they also made clear they saw Facebook's actions as distinctly
unacceptable.
The Securities and Exchange Commission announced separately on
Wednesday a settlement with Facebook -- including a $100 million
fine -- over claims it misled investors about the misuse of
customer data.
The federal probes began more than a year ago after disclosures
that data on tens of millions of Facebook users had been improperly
transferred to a political data-analytics firm, Cambridge
Analytica, that did work for Donald Trump's 2016 presidential
campaign. The FTC and SEC both filed complaints in federal court
detailing the results of their investigations, which Facebook
agreed to settle without admitting or denying.
Cambridge Analytica's data on Facebook users originated with a
University of Cambridge professor's app, "thisisyourdigitiallife,"
that quizzed users on their personalities and harvested other
information from them and their friends. The firm and professor
used the information to target U.S. voters, the FTC said in a
separate action announcing orders restricting future business
activities by the professor and Cambridge Analytica's former
CEO.
The FTC said that incident was part of a pattern: Facebook let
users think they had turned off certain types of data sharing, when
in fact the data was shared anyway -- in many cases because their
friends had allowed it. Even after Facebook said in 2015 it had
closed that loophole, it only did so partially -- still granting
access to "whitelisted" developers, the FTC said.
Facebook separately told users it wanted their phone numbers for
security purposes, without making it clear that information would
be used for advertising. It also told users they would have to opt
into the use of facial-recognition technology on their photos, when
in fact approximately 60 million users were subjected to it by
default, the FTC said.
The problems weren't a secret inside Facebook, regulators said.
As early as September 2015, some employees raised alarms about
Cambridge Analytica's practices and asked for an internal
investigation into whether it was "scraping" user data, the SEC
said.
Over time, more than 30 employees became aware of the data
firm's actions, yet Facebook made only generic disclosures to
investors in 2016 and 2017 about theoretical data-privacy risks,
and told journalists it hadn't uncovered any indications of
wrongdoing, the SEC said.
--Dave Michaels contributed to this article.
Write to Ryan Tracy at ryan.tracy@wsj.com and John D. McKinnon
at john.mckinnon@wsj.com
(END) Dow Jones Newswires
July 24, 2019 18:16 ET (22:16 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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