Advertising and Unfair Competition: FTC Enforcement

The ALI-ABA Eleventh Annual Advanced Course on "Product Distribution and Marketing"

Snowbird, Utah

Date:
By: 
Christine A. Varney, Former Commissioner

* Commissioner, Federal Trade Commission. The views expressed are those of the Commissioner and do not necessarily reflect the views of the Federal Trade Commission or any other Commissioner or staff.

Introduction

Thank you. I am delighted to be here and share my thoughts on the FTC's enforcement role with respect to consumer protection issues, particularly in the area of advertising and unfair competition. As we shape our policies for the 21st Century, it is appropriate to step back for a moment to assess our past performance. The agency's consumer protection mission -- promoting a well-functioning marketplace by eliminating deceptive and unfair practices that impede consumers' ability to make informed purchase decisions -- remains as vital today as when the agency was first created. But the tools we use to accomplish our mission must evolve to reflect the changing marketplace. The Commission faces the challenge of adapting the basic principles of the Federal Trade Commission Act to the dynamic realities of today's marketplace.

To improve the operation and performance of the agency, we must use creative approaches to effectively protect consumers and competition without unduly burdening business. We will place greater reliance on consumer education, industry self-regulation, expanded public input, and, where appropriate, cooperative working relationships with businesses.

We are continuing to streamline our rules and guides, and we have approved a comprehensive sunset policy for both consumer protection and competition orders that are more than 20 years old. These initiatives ease the regulatory burdens on companies, and, I believe, also yield a tangible benefit for enforcement and compliance. Clearing away regulatory underbrush makes our current guidance more likely to be followed, and companies can focus their compliance activities in the areas of greatest need. These reforms also allow the agency to anticipate and encourage marketplace developments that can benefit consumers.

Advertising

The Commission continues to focus its law enforcement resources on practices that cause the greatest consumer harm. As a result, the majority of our national advertising cases will involve health and safety claims. For example, during the past year, the Commission brought actions alleging false and unsubstantiated advertising claims for various frozen desserts. These cases frequently involved claims that were not permitted under the FDA's labeling regulations under the Nutrition Labeling and Education Act. The Commission's Food Policy Statement recognizes the sometimes different functions of advertising and labeling, but nonetheless attempts to harmonize our approach with the FDA's. We regard false health claims as among the most egregious advertisements. One of our recent cases settled allegations that a manufacturer of frozen ices falsely claimed its products were "naturally low in calories." We also settled charges against a frozen yogurt maker that misrepresented the fat and calorie content of its products, and falsely claimed its frozen yogurt was lower in fat than ice cream. We have also brought actions involving false advertising claims for nutritional supplements and diet products. In addition, this past year we brought cases to halt the fraudulent marketing of weight loss and smoking cessation hypnosis seminars, varicose and spider vein treatments and impotence and fertility "cures." We attacked the use of fraudulent telemarketing tactics to sell durable medical equipment such as scooters to consumers. In settling a case with a major advertising agency, we reiterated the Commission's policy of holding advertising agencies liable, along with their clients, when the agencies knew or should have known the claims they helped disseminate were deceptive.

Our advertising enforcement actions in 1996 will continue to reflect this emphasis. We will also continue to monitor advertising directed toward children, and we hope to develop a program to combat deceptive advertising directed to non-English speaking groups. Also, as in the past, we will continue to support voluntary industry programs that protect consumers and ensure a level playing field for affected businesses. We will encourage greater self-regulation by the media in screening advertising for fraud and deception. By the same token, however, the core of the Commission's advertising program is law enforcement, and we intend to move vigorously against deceptive and unsubstantiated claims. We owe it to both consumers and honest competitors to give advertisers enough general guidance for them to know what is expected. We will then back that guidance with serious enforcement.

In all of our enforcement work, we will look for opportunities to fashion remedies that adequately correct consumer problems caused by deceptive and unfair trade practices. It's especially important to explore appropriate and innovative remedies in advertising cases. Deceptive and unsubstantiated advertising undermines the quality of information available in the marketplace, and marketers who disseminate false advertising obtain an unfair competitive advantage. Although corrective advertising and other consumer education remedies have been used sparingly in the past, the Commission will not hesitate to use them in appropriate cases. For example, in a recent case settling misrepresentations made by a franchise promotor, we required that the respondent reproduce and distribute copies of our Franchise brochure to attendees at future franchise shows sponsored by the respondent. Requiring parties to distribute consumer education materials can effectively heighten overall consumer knowledge. This is particularly appropriate where a party's course of conduct has contributed to widespread consumer misinformation. Look for other Commission cases that use innovative remedies, with an eye to increased consumer education.

We will also be looking for ways to make our consumer protection orders more effective. Our Enforcement Division staff will focus on increased civil penalty order enforcement cases, while our Service Industry Practices staff will focus on effective compliance monitoring. Where appropriate, criminal contempt will be recommended for parties in violation of our orders. Finally, with respect to redress orders, we plan to invest greater resources into collection efforts, and to better utilize other federal collection resources to increase consumer refunds.

Fraud Program

The heart of our consumer protection mission will continue to focus on fraud and protecting consumers from losing hard-earned money to scam artists. Although many of our cases involve the familiar problems of telemarketing and investment fraud, the Commission continues to develop new strategies and techniques for dealing with these age-old problems. For example, we worked with state and local law-enforcement officials from across the nation to launch a major enforcement sweep -- entitled "Project Telesweep"-- against the perpetrators of business opportunity fraud. As part of this joint crackdown, the Commission, the Department of Justice, and state officials filed more than 100 cases against defendants located throughout the United States. We also developed new tools for dealing with telemarketing fraud in the form of our Telemarketing Sales Rule. This Rule will make telemarketing fraud much more expensive by prohibiting certain practices that, through our enforcement experience, we have found fraudulent telemarketers use to separate consumers from their money. In addition, the Rule enables the 50 state Attorneys General to go into federal district court and get injunctions, effective nationwide, against fraudulent telemarketers.

We've found that sharing information about new scams, investigatory targets and potential witnesses with other law enforcement authorities is an extremely effective tool to combat telemarketing fraud. This was particularly evident in our participation in the Senior Sentinel project, a nationwide multi-agency criminal crackdown against telemarketing scams that prey on senior citizens. The Commission brought five cases as part of this project, but our real contribution to the project was to provide two major sources of evidence. First, much of the key evidence in the Senior Sentinel cases came from audiotapes collected by the San Diego Boilerroom Task Force, a project that we have been involved with since its inception. Second, Senior Sentinel relied on evidence obtained from the NAAG/FTC Telemarketing Complaint Database, a joint state and federal database developed and maintained by our staff.

Joint Enforcement/Private Partnerships

As we move forward into the future, we will continue to work closely with the state attorneys general and other federal and state law enforcement agencies. In addition, we will commit greater resources to communicating with trade associations and other groups to highlight areas of special enforcement concern or opportunities for better consumer education. As I mentioned earlier in the context of advertising and media screening, we will continue to support guides, voluntary industry standards, and self-regulatory programs in appropriate areas as effective means to protect consumers. Good government and effective consumer protection demand this type of cooperative approach, particularly in this era of dwindling government resources.

Regulatory Reform/Improved Processes

As I've indicated, the FTC must maintain a strong enforcement presence. The FTC must also continuously review its policies and rules. Even flexible guidance can become obsolete with the passage of time. In response to the President's regulatory reform initiative, and in continuation of work previously begun at the Commission, we are rescinding 25% of our industry guides and 25% of our trade regulation rules (including my personal favorite, the Frosted Cocktail Glass Rule).

The FTC will continue to expand industry and consumer participation in our consideration of both antitrust and consumer protection issues. Increasingly, the Commission uses workshops and informal forums to solicit public input on agency initiatives. For example, we recently held a two-day workshop to review the 1993 Environmental Advertising and Labeling Guidelines (Green Guides). In March, we will be holding a two-day workshop on our policies for "Made in the USA" claims. As many of you may know, these policies were formulated years ago in a very different world. We are affirmatively doing testing to see how the meaning of these terms have changed over time, and in our review of the Green Guides, we are reviewing the results of a number of consumer perception studies completed since the guides were issued.

New Technology

The Federal Trade Commission has been paying increasing attention to consumer protection in Cyberspace. Last year, we brought the first case involving an on-line credit repair scam. With the cooperation of the commercial on-line service provider (in this case America Online) we were able to shut down the scam quickly and achieve 100% redress for consumers.

The Bureau of Consumer Protection's various divisions are actively monitoring the Net for deceptive advertising. Unfortunately, we're finding that it's not too hard to find plenty of very troubling examples of questionable advertising. In this monitoring effort, we have joined state attorney's general across the country in order to use our combined resources most efficiently. Finally, we are working closely with the commercial online service providers. They share our desire to remove fraudulent advertising from their systems promptly, and have indicated that they will cooperate in this effort.

The Federal Trade Commission is developing its own ability to use the Net to protect consumers. For example, the Commission now has a home page on the World Wide Web. Using the home page, consumers can access consumer protection information electronically and participate in online seminars regarding specific consumer protection topics. Our goal is to develop an interactive system to respond to consumer complaints. In connection with the Bureau of Consumer Protection's Privacy Initiative, we have undertaken our first experiment in conversational government. You can participate in a lively, interactive discussion with FTC staff about online consumer privacy by subscribing to the FTC's Privacy List Serve.

Finally, we have begun building the intellectual capital needed to deal with emerging consumer protection concerns in the electronic medium. This year, for example, the Commission initiated discussion with the online community to learn more about how consumer issues arise on the Internet and to learn what kind of consumer protection policies should apply in a fully networked communications environment. In April, the Bureau of Consumer Protection held a two-day public workshop on consumer protection in Cyberspace. In November, as part of the Commission's extensive hearings on the increasingly global and technology-based character of commerce, we also devoted several days to new media and associated consumer protection concerns.

During the workshop, representatives of government, industry and consumer groups discussed five areas of special concern to the FTC: advertising on the Net, marketing of online services, electronic payment systems, privacy and governance.

In some ways, Cyberspace is just another advertising medium and, as I mentioned, the same basic rules apply to electronic marketing that apply to any other form of consumer advertising or marketing. So it's tempting to approach consumer protection in Cyberspace in the same way we approach more familiar consumer concerns.

Cyberspace is also different from other advertising media, in ways that force us to ask whether our traditional approach to consumer protection has continuing vitality in the information age. During our April workshop, the FTC learned a lot about the critical differences between Cyberspace and traditional media.

Creation of a regulatory environment that facilitates private development of the information infrastructure should be a top regulatory priority in the remaining years of the twentieth century. That regulatory environment must be flexible enough to accommodate the dizzying pace of technological change, predictable enough to attract private investment, competitive enough to encourage innovation, and responsive to consumer protection concerns.