Extra Business Law Chapters

49.1.1 The Federal Trade Commission: Powers and Law Governing

The Common Law traditionally prohibited various trade practices deemed unfair to either competitors or consumers. These encompassed actions such as passing off one's products as if they were produced by another entity, employing trade names that closely resembled those of others, engaging in the theft of trade secrets, and various forms of misrepresentation. The Federal Trade Commission (FTC) Act of 1912 marked a pivotal moment, as it granted a federal agency the authority to investigate and prevent acts of unfair competition.

Within the FTC Act, Section 5 bestowed upon the FTC the power to enforce a law declaring "unfair methods of competition in commerce" as unlawful. Originally, Congress intended this to cover acts violating the Sherman and Clayton Antitrust Acts. However, the FTC commissioners adopted a broader perspective from the outset, particularly concerning false and deceptive advertising practices. The initial wording of Section 5 appeared to limit FTC intervention to cases where deceptive advertising harmed a competitor of the responsible company.

In 1931, the Supreme Court affirmed this interpretation, ruling that the FTC's jurisdiction only extended to deceptive advertising if a competitor suffered from the misrepresentation as well. Responding to this, Congress enacted the Wheeler-Lea Amendments to the FTC Act in 1938. These amendments expanded the scope of Section 5 by adding the words "unfair or deceptive acts or practices in commerce." This modification clarified that the FTC had a more extensive role beyond merely enforcing antitrust laws. Henceforth, the FTC became a guardian of consumers, empowered to address unfair or deceptive practices that could adversely affect the public.

Deceptive practices, which the FTC prosecutes, can also be subject to legal action under common law. For instance, if a tire manufacturer falsely advertises a "special tire" as "new" when it is actually a retread, this constitutes a common-law misrepresentation, and a buyer could potentially sue for rescission of the contract or damages. However, relying solely on individual lawsuits for misrepresentation is insufficient to deter determined fraudsters. These legal actions are not only costly but typically result in relatively small damages awards.

Enter Section 5 of the FTC Act, which provides the FTC with a powerful tool to combat fraudulent practices on a broader scale. Unlike common law actions, the FTC is not confined to proving damages on a case-by-case basis. The agency can issue cease and desist orders and employ various sanctions against deceptive practices. State-level counterpart agencies also possess similar authority.

As an administrative agency, the FTC wields more extensive powers compared to standard prosecutorial bodies like the Department of Justice. It can initiate administrative proceedings under the Administrative Procedure Act to enforce the statutes it administers. Beyond cease and desist orders and court enforcement, the FTC can pursue temporary and permanent injunctions, fines, monetary damages, and the formulation of trade regulation rules (TRRs).

While the FTC had long assumed the authority to issue TRRs, Congress formally recognized this in 1975 through the FTC Improvement Act, which was part of the Magnuson-Moss Warranty Act. This legislation explicitly granted the FTC the authority to prescribe rules defining unfair or deceptive acts or practices, reinforcing the agency's capacity to combat deceptive practices in a comprehensive and proactive manner.

A Trade Regulation Rule (TRR) functions akin to a statutory provision, offering a comprehensive outline of both procedural guidelines and substantive regulations. Prior to promulgating a TRR, the Federal Trade Commission (FTC) is obligated to publish its intent in the Federal Register and conduct public hearings on the proposed regulations. Draft versions of the TRR are made available for public scrutiny and comment. Once finalized, the TRR is published in the Code of Federal Regulations, establishing it as a permanent component of the legal framework, unless modified, repealed by the FTC, Congress, or overturned by a court on grounds of arbitrariness, procedural irregularity, or similar issues.

A breach of a TRR is treated with the same gravity as a violation of a federal statute. Once the FTC successfully demonstrates that a defendant contravened a TRR, no further evidence is required to establish the unfair or deceptive nature of the act. Examples of TRRs include the Retail Food Store Advertising and Marketing Practices Rule, Games of Chance in the Food Retailing and Gasoline Industries Rule, Care Labeling of Textile Wearing Apparel Rule, Mail Order Merchandise Rule, Cooling-Off Period for Door-to-Door Sales Rule, and Use of Negative Option Plans by Sellers in Commerce. These rules collectively serve as crucial tools in the FTC's arsenal to regulate and maintain fairness in various industries.

General Principles of Law Governing Deceptive Acts and Practices

Empowered by a workforce of approximately sixteen hundred and ten, spread across regional offices, the Federal Trade Commission (FTC) emerges as a dynamic regulatory agency, its enforcement activity influenced by the undulating tides of the economic climate. Critics, however, have questioned the rationale behind some of the FTC's investigations, contending that many cases appear to involve trivial or relatively inconsequential offenses. They ponder whether a federal agency is truly necessary to safeguard against pronouncements, such as those by singer Pat Boone on the efficacy of acne medication, or to authenticate certain crafts marketed to tourists in Alaska as "native." Yet, a compelling response lies in the fact that these seemingly minor cases serve as vehicles for declaring and affirming significant legal principles.

While readers of this book, typically less susceptible to false claims, may view FTC enforcement with a touch of Alice-in-Wonderland surrealism, the foundational principle of FTC action is rooted in evaluating deceptive acts and practices from the perspective of the general public, not the more sophisticated observer. As articulated by a US court of appeals, the FTC Act was crafted "not for the protection of experts, but for the public—that vast multitude which includes the ignorant, the unthinking, and the credulous."

The criteria for FTC action against deceptive advertising evolved over time. Before 1983, it was deemed sufficient if a statement had the "capacity to deceive." However, a standard adopted in 1983 altered this approach. The FTC now intervenes in cases of deceptive advertising "if there is a representation, omission, or practice that is likely to mislead the consumer acting reasonably in the circumstances, to the consumer’s detriment." Critics of this revised standard argue that proving deception may become more challenging, requiring the FTC to demonstrate that an advertisement is "likely to mislead" rather than simply having the "capacity to deceive." Additionally, the burden may extend to showing that consumers reasonably interpreted and relied on the advertisement. The ultimate impact of this standard on the volume of FTC actions against deceptive advertising remains uncertain.

The FTC possesses the jurisdiction to take action against "unfair...acts or practices." Unlike deceptive practices, these actions need not involve deception but rather must exhibit a character that offends common sense notions of propriety, justice, or an honest way of conducting oneself. Refer to the chart above for depiction of this chapter.

49.2 Deceptive Acts and Practices

Failure to Disclose Pertinent Facts

Businesses are not universally bound to disclose every detail. Advertisers have the latitude to present a positive image of their products, provided they refrain from making direct material misrepresentations or misstatements. However, certain circumstances may necessitate businesses to divulge additional information to avoid engaging in unfair or deceptive acts and practices.

For instance, in situations where the failure to disclose the cost of a service could be construed as deceptive, businesses may find themselves compelled to provide such information. A notable example is a federal court ruling that deemed it deceptive for a telephone service not to disclose a charge of fifteen dollars per call for customers dialing a special 900 number advertised in newspapers offering jobs (FTC v. Transworld Courier Services, Inc., 59 A&TR Rpt. 174, N.D. Ga. 1990). Similarly, if the omission of a certain fact could have a substantial impact on a consumer's decision to purchase a product, such non-disclosure may be considered deceptive, aligning with the precedent set by J. B. Williams Co. v. FTC.

Descriptions of Products

While certain words are commonly regarded as mere puffery, such as "greatest" or "best," others with more precise connotations can lead to trouble if misused. Take, for instance, the word "new." The Federal Trade Commission (FTC) has consistently maintained that if a product is over six months old, advertising it as "new" is not lawful.

One of the most frequently advertised aspects of products is their efficacy. Claims in advertisements asserting that a product can achieve more than it realistically can are generally deemed deceptive, especially when the claim is specific. The FTC frequently contends with misleading assertions, such as the promise that a cream, pill, or substance will "rejuvenate" the body, "cure" baldness, "permanently remove" wrinkles, or "restore" the vitality of hair.

Deceptive claims concerning the composition of goods also abound. For instance, a product advertised as "wool" must genuinely be 100 percent wool; a blend of wool and synthetic fabrics cannot be marketed as pure wool. The FTC maintains lists of numerous descriptive terms along with their appropriate definitions.

Certain products fall under stringent regulations governed by specific statutes. The disclosure of artificial colors and flavors, for instance, is mandated by the Food, Drug, and Cosmetic Act. Other federal statutes, including the Wool Products Labeling Act, the Textile Fiber Products Identification Act, the Fur Products Labeling Act, and the Flammable Fabrics Act, are enforced by the FTC. In 1966, Congress introduced the Fair Packaging and Labeling Act, granting the FTC the authority to issue regulations for proper labeling of various consumer products. This statute aims to standardize quantity descriptions, such as "small," "medium," and "large," facilitating consumers in comparing the value of competing goods in stores.

Misleading Price and Savings Claims

The advertising landscape is saturated with claims like "Buy one, get another for half price," "Suggested retail price: $25. Our price: $5.95," and "Yours for only $95. You save $50." However, unless these advertisements are entirely accurate, they run afoul of Section 5 of the FTC Act. In an effort to regulate deceptive price and savings claims, the FTC has established a set of Guides against Deceptive Pricing. These guides articulate principles that the commission uses to evaluate the validity of price claims. While these guides do not carry the force of law themselves, they serve as crucial indicators of how the FTC will approach cases involving price claims. Additionally, they may offer valuable insights for state courts adjudicating claims related to deceptive pricing advertisements.

The guides provided by the FTC address five specific claims:

Comparisons to a Former Price: When comparing the sale price to a previous price, the former price must have been offered for a substantial period in the recent past. For instance, claiming a product was previously priced at $50 when it never sold for more than $40 is deceptive. The FTC guides require a genuine reduction of at least 10 percent to validate such a claim.

Comparable Products: Claims like "This same mattress and box spring would cost you $450 at retail" are only true if the seller is genuinely offering the same merchandise at the quoted price.

"Suggested" Retail Price: Similar rules apply as in the previous cases. However, when dealing with a "manufacturer's suggested" price, deception can occur if the manufacturer lists a suggested price significantly higher than the going rate in the retailer's trading area. Whether it's the manufacturer or retailer, claiming a bargain is deceptive if the product doesn't sell for the listed price anywhere.

Bargains Based on Purchase of Something Else: Statements like "Buy one, get one free" must adhere to literal accuracy. Any attempt to alter the original selling price, reduce the size or quantity of the bargain product, constitutes deception.

False Claims to Explain a "Sale" Price: Phrases like "Giant clearance sale," "going out of business," or "limited offer" are common advertising tactics. While legitimate if true, they can easily become deceptive. For instance, a "limited offer" that persists indefinitely or a sale price charged beyond the stated end date is deceptive. False claims suggesting the manufacturer is charging a small price, such as "wholesale price," "manufacturer's closeouts," "irregulars," or "seconds," are also deemed illegitimate.

Bait-and-Switch Advertisements

In the realm of retail, an unfortunately common tactic known as the bait and switch prevails. Here's how it unfolds: a retailer entices potential customers with an enticing offer, only to have that offer vanish or be criticized upon the customer's arrival. Picture this: an advertisement proclaiming a "Steinway Grand Piano—only $1,000." Yet, upon reaching the store, the customer discovers the advertised piano has mysteriously "sold out." What follows is an attempt to upsell the disappointed customer on a pricier alternative. Alternatively, the salesperson may possess the advertised product but takes a discouraging stance, highlighting its alleged shortcomings and persuading the customer to opt for the supposedly "superior," more expensive model.

It's crucial to note that these maneuvers run afoul of Section 5 of the FTC Act. The Federal Trade Commission (FTC), through its Guides Against Bait Advertising, explicitly condemns various unfair practices associated with such tactics. These include:

Refusing to demonstrate the advertised product.

Disparaging the product, for instance, by showcasing an evidently lower-grade version next to higher-priced merchandise.

Failing to maintain sufficient stock of the advertised product to meet anticipated demand (even if the advertiser claims "supplies limited").

Asserting that delivery of the advertised product will take an excessive amount of time.

Demonstrating a defective product.

Deliberately dissuading potential buyers from purchasing the advertised product.

Stay informed and empowered as a consumer—know your rights and make informed choices.

Free Offers

Advertisers navigating the intricate landscape of promotions soon realize that the term "free," while a potent force in advertising, is not exempt from consequences. It's a lesson underscored by the realization that a product isn't genuinely free when it hinges on the purchase of another item, and the cost of the supposedly "free" product is discreetly embedded in the overall purchase ("Buy one tube and get another tube free").

The extent to which this principle is rigorously applied is evident in the legal precedent set by F.T.C. v. Mary Carter Paint Co., 382 U.S. 46 (1965). In this landmark case, the company had consistently offered a two-for-one deal, promoting "every second can FREE, gallon, or quart" since its inception. However, the predicament arose from the fact that the company had never individually priced and sold single cans of paint. The Federal Trade Commission (FTC), in response, presumed that the cost of the second can was indeed included in the first. Mary Carter contended that it had established single-can prices comparable to those of competing manufacturers for paint of similar quality. Despite this claim, the Supreme Court upheld the commission's determination of deceptive practices.

This case serves as a noteworthy illustration of the vigilance exercised by regulatory bodies in ensuring the transparency and integrity of advertising claims, particularly when the allure of "free" is wielded in marketing strategies.

Product Comparisons and Disparagements

Disparaging a competitor's product, a practice known as product disparagement, constitutes a common-law tort actionable under state law and falls within the purview of Section 5 of the FTC Act. The Federal Trade Commission (FTC) deems the making of specific false statements about a competitor's product as disparagement, while an indirect form is labeled "comparative misrepresentation," involving false claims of one's own product's superiority.

Although the common-law puffing rule allows general statements such as "Our pill is the best," specific claims like a pill "working three times as fast as the leading competitor's" are subject to Section 5 scrutiny if proven untrue.

While truth traditionally served as a defense against product disparagement claims, the significance doctrine has, in recent years, eroded this defense. A technically true statement may be deemed insignificant and misleading when presented in a certain manner. An illustrative case, P. Lorillard Co. v. Federal Trade Commission, involved a comparative study on tar and nicotine in cigarettes published in Reader's Digest. The company with the lowest tar and nicotine levels touted its product's health benefits, despite the study suggesting inconsequential differences.

In the 1970s, to bolster rules against comparative misrepresentations, the FTC began demanding advertisers fully document quantitative claims of product superiority. Advertisers are now required to possess evidence of accuracy before making such claims, ensuring compliance even before any regulatory intervention. Failure to do so renders the claim presumptively deceptive.

Beyond the FTC Act and state laws, the Trademark Law Revision Act of 1988 is a significant federal law addressing product comparisons. Amending the Lanham Act, which safeguards trademarks as intellectual property, the revisions broadened the scope of false statement provisions. Previously limited to an advertiser's false statements about its own goods or services, the amended law now encompasses false statements about someone else's goods or services. It also prohibits misleading claims about another company's commercial activities, permitting a company affected by a competitor's false advertising to directly sue in federal court. This legislative evolution underscores the ongoing commitment to maintaining fairness and transparency in product comparisons.

Endorsements

How enchanting it is to witness a superstar, perhaps a luminary of yesteryear, passionately extolling the virtues of your product on television. The idea that millions might flock to purchase a throat spray endorsed by Lady Gaga, don jeans worn by Justin Bieber, or indulge in a face cream graced by Paris Hilton is a marketer's dream. Testimonials, whether overt or subtly woven into advertising, saturate the market daily, claiming everything from “Three out of four doctors recommend…” to “Drivers across the country use…”

In this realm, the landscape is rife with potential deception.

While it's not inherently deceptive for a prominent figure to endorse a product without disclosing compensation, the crucial element is that the endorser genuinely uses the product. The deception arises if the endorsement lacks this authenticity. Consider an astronaut returning from an orbital mission who, on televised shots, appears to wear and endorse suspenders with the tagline “They keep your pants from floating away.” If the astronaut routinely wears these suspenders, the endorsement is justified. However, if he switches to another brand or reverts to belts, any reruns of TV commercials featuring the outdated endorsement must promptly be removed from the airwaves to maintain transparency and uphold the integrity of the advertising process.

The genuine enthusiasm of a consumer for a product, while undoubtedly valuable, does not absolve a false statement. Presenting a testimonial to the public, even one brimming with praise, becomes deceptive if there is a lack of factual support for the customer's claims. For instance, endorsing a cancer remedy with the assertion "I was cured by apricot pits" would not meet the standards set by the Federal Trade Commission (FTC).

Moreover, an endorser must refrain from providing testimonials on subjects known only to experts if the endorser lacks the expertise in that particular field. This requirement is underscored by the FTC's consent decree negotiated with singer Pat Boone, emphasizing the necessity for endorsers to possess the relevant expertise when giving testimonials involving specialized subjects.

Pictorial and Television Advertising

Navigating the realm of pictorial representations introduces unique challenges as images can contradict the accompanying caption or announcer's words. A photograph showcasing an extravagant car, for instance, might mislead if the dealership doesn't carry such vehicles or if the readily available cars are of different models. The potential for deception through false inferences created by pictures is virtually limitless, allowing for imaginative manipulation. White-coated individuals resembling doctors, official seals of the British monarchy, and opulent office settings can suggest various associations with a product, even without explicit claims in the advertisement about the person's profession, royal connections, or the company's operational location.

Television demonstrations, too, can imply nonexistent properties or qualities in a product. For instance, the Federal Trade Commission (FTC) once directed a manufacturer of a liquid cleaner to cease depicting its use near hot stoves and candles, as it falsely suggested non flammability. Similarly, a commercial featuring a knife effortlessly cutting through nails may be deceptive if the nails were pre-cut, and different knives were used for the before and after shots. The world of visual representation demands careful scrutiny to uphold truthfulness in advertising.

49.3.3 Unfair Trade Practices

We now delve into practices that not only harbor deceptive elements but also engage in unfair operations that extend beyond mere deception. Broadly, we identify three categories of unfair practices that warrant scrutiny:

Failure to Substantiate Material Representations: This entails neglecting to substantiate key claims made in advertisements before disseminating them. The Federal Trade Commission (FTC) has intervened in numerous instances where ads lack the necessary substantiation for their material representations.

Failure to Disclose Essential Information for Rational Comparisons: Unfairness arises when businesses omit vital information crucial for consumers to make informed comparisons regarding the price and quality of products. The FTC has responded to this by issuing a series of trade regulation rules (TRRs), specifying mandatory disclosures. For instance, the octane ratings of gasoline are stipulated to ensure transparency.

Unconscionable Exploitation of Consumers or Their Vulnerabilities: This category addresses the unethical exploitation of consumers or the capitalization on their vulnerabilities. Though briefly touched upon in this section, it remains a focal point of concern.

The FTC, as a guardian of fair business practices, actively intervenes to rectify and prevent these types of unfair practices, emphasizing the importance of transparency, disclosure, and ethical treatment of consumers.

Contests and Sweepstakes

In 1971, the Federal Trade Commission (FTC) secured a consent order from Reader’s Digest, prohibiting the promotion of a mail-order sweepstakes unless explicit disclosures were made. This particular sweepstakes, involving participants returning numbered tickets for a chance to win substantial prizes, faced scrutiny because Reader's Digest had heavily emphasized the size and quantity of prizes. The consent order mandated that the magazine disclose the exact number of prizes to be awarded and ensure the awarding of all promised prizes. The investigation revealed that despite the extensive promotion, few winning tickets were returned, resulting in a minimal distribution of prizes (Reader’s Digest Assoc., 79 F.T.C. 599, 1971).

In the 1960s, the retail food and gasoline industries embraced chance-based promotions, leading to investigations that exposed rigged practices. The FTC and a U.S. House of Representatives small business subcommittee discovered manipulations such as early planting of winning cards, selective distribution to specific geographic areas, failure to award all prizes, and local retailers exploiting winning cards. Consequently, the FTC responded by issuing the Trade Regulation Rule for Games of Chance in the Food Retailing and Gasoline Industries in 1969, imposing strict regulations on the operation and promotion of such games.

While sweepstakes were a focus, many marketers turned to contests in their product merchandising during the same period. Contests differ from sweepstakes as participants are required to take specific actions beyond ticket return, such as completing a bingo card or generating specific words. It is deemed an unfair practice if the sponsoring company fails to adhere to its own rules in determining contest winners. The regulatory landscape surrounding these promotional activities underscores the FTC's commitment to transparency and fairness in consumer engagements.

Door-to-Door, Direct Mail, and Unsolicited Merchandise

In 1974, the Federal Trade Commission (FTC) established a Trade Regulation Rule (TRR) mandating a three-day cooling-off period for door-to-door sales contracts. During this period, buyers have the right to cancel the contract, and this provision must be explicitly stated in the contract itself.

Addressing a different concern, legislation enacted by Congress in 1970 declared unsolicited mailings and subsequent dunning (persistent requests for payment) to be an unfair trade practice under Section 5 of the FTC Act. This law empowers recipients of unsolicited merchandise to treat it as a gift, absolving them of any obligation to return or pay for it.

Further regulation in the realm of mail-order sales comes from the FTC's TRR concerning mail-order merchandise. According to this rule, any direct-mail merchandiser is obligated to deliver the promised goods within thirty days. Alternatively, the consumer is given the option to accept delayed delivery, prompt refund of their money, or cancellation of the order if it hasn't been prepaid. These regulations aim to protect consumers from deceptive practices and ensure fair treatment in door-to-door and mail-order transactions.

Negative-Option Plans

The concept of the "negative option" originated in the 1920s with the Book-of-the-Month Club, evolving into a marketing strategy where the consumer communicates with the seller only if they wish not to receive the product. Particularly employed by book clubs and other distributors of periodic goods, customers, upon "joining," agree to accept and pay for all items unless they explicitly express, before delivery, their desire to reject them. If no action is taken, payment is expected. Challenges emerge when negative-option notices arrive late or when a former member, having quit, continues to receive monthly notices. Contemporary internet users will recognize this model in the prevalent "opt-out" process, wherein individuals are automatically included unless they actively choose to opt out.

In response to potential abuses of this practice, the Federal Trade Commission (FTC) issued a Trade Regulation Rule (TRR) in 1974, governing the use of negative-option plans by sellers. This rule imposes specific notice requirements, including granting subscribers ten days to notify sellers of their rejection of upcoming items. If a customer cancels their membership, the seller is obligated to take back any merchandise mailed after cancellation and cover the former member's mailing expenses. Beyond one shipment after cancellation, the former member may consider subsequent deliveries as unsolicited merchandise and retain them without the obligation to pay or return. These regulations aim to provide consumers with fair and transparent processes when engaging in negative-option plans.

Breach of Contract

In specific circumstances, a company's deliberate breach of contract can be deemed an unfair trade practice, thereby violating Section 5 of the FTC Act. A notable case illustrates this, involving a termite and pest exterminating company that had guaranteed "lifetime" protection against termite damage for structures it treated. The contract stipulated annual renewal through payment of a fixed annual fee. However, five years later, the company informed 207,000 customers of an increase in the annual fee due to inflation. The FTC contested this fee hike, asserting that it amounted to a breach of contract, constituting an unfair trade practice. The FTC's charges were upheld on appeal, with the Eleventh Circuit approving the FTC's three-part test for determining unfairness: (1) the injury must be substantial, (2) it must not be outweighed by countervailing benefits to consumers, and (3) it must be an injury that consumers themselves could not reasonably have avoided. In the termite case, all three criteria were met: consumers were compelled to pay significantly higher fees, received no additional benefits, and could not have foreseen or prevented the price hike, as the contract explicitly precluded such anticipation (Orkin Exterminating Co. v. FTC, 849 F.2d 1354, 11th Cir. 1988, cert. denied, 488 U.S. 1041, 1989).