Unfairness, Internet Advertising and Innovative Remedies

The American Advertising Federation Government Affairs Conference

Washington, D.C.

Date:
By: 
Roscoe B. Starek, III, Former Commissioner

Thank you for the opportunity to discuss a few current issues which I suspect could cause some concern to the advertising community. This is an interesting time to be a Commissioner, and I predict that as the weather gets warmer over the next several months, some of the matters we will address will become hotter as well. Most of you follow the FTC closely, and I know you like to hear what we think about the most controversial issues that we are facing. And we are wrestling with several. So I thought I would discuss three issues today: the FTC's unfairness authority, looking specifically at alcohol and tobacco advertising; our activities concerning Internet advertising and online privacy; and our approach to innovative remedies for deceptive advertising.(1)

Unfairness

Everyone in this room knows that Section 5 of the Federal Trade Commission Act ("FTC Act") prohibits both unfair and deceptive acts or practices in or affecting commerce.(2) Everyone knows that the FTC promulgated an Unfairness Policy Statement in 1980, which we apply when we address issues raising unfairness concerns.(3) We all know that Congress amended the FTC Act in 1994 to specify that an unfair act or practice is one that causes or is likely to cause substantial injury to consumers that is not reasonably avoidable and is not outweighed by countervailing benefits to consumers or competition.(4) And we all know that the Commission alleges deception far more frequently than unfairness. What you may not know is that in the past year the Commission has pursued unfairness allegations in several court actions.(5)

The ongoing public policy debates on tobacco and alcohol advertising have raised new questions about the relationship between advertising and underage consumption of these products. The proper role of government regulation of advertising, including the applicability of the Commission's unfairness authority, has been called into question. The last time the Commission publicly visited similar issues was in 1994, when a majority -- including me -- decided to close an investigation of whether the R.J. Reynolds Tobacco Company had engaged in unfair practices through its use of the "Joe Camel" campaign to promote Camel cigarettes. We said then that "[a]lthough it may seem intuitive to some that the Joe Camel advertising campaign would lead more children to smoke or lead children to smoke more, the evidence to support that intuition is not there."(6) As the statement said, the record did not show a link between the Joe Camel advertising campaign and increased smoking among children sufficient to justify a charge of unfairness in violation of the FTC Act. Since then, Congress has expressly barred the Commission from relying on public policy considerations as the primary basis for an unfairness determination.(7)

The recent decision by the Distilled Spirits Council of the United States ("DISCUS") to end its forty-year voluntary ban on liquor advertising on radio and television suggests that the Commission may again find itself weighing in on the relationship between advertising and underage consumption. Although DISCUS's action has precipitated this debate, there really is no basis to distinguish the concerns raised by distilled spirits advertising from those raised by advertising of other types of alcoholic beverages.

The Commission testified to Congress in 1990 that the evidence of a link between advertising and alcohol consumption was inconclusive and failed to show that a causal relationship did or did not exist.(8) The Commission suggested that these studies and their underlying research methodology were perhaps incapable of accurately measuring any relationship that might exist. At that time, we called for further research. Two years ago, the National Institute of Alcohol Abuse and Alcoholism ("NIAA") issued a similar call based on a review of existing studies of the effects of alcohol advertising, promotion activities, and mass media presentations on attitudes toward drinking, actual consumption, and alcohol-related problems. According to NIAA, existing studies were inconclusive for methodological reasons and the lack of sufficient data.(9)

Of course, all members of the Commission would be deeply concerned about ads for alcohol or tobacco directed at children. Concern, however, is not in itself sufficient for the Commission to initiate an enforcement action based on our unfairness authority. Even if alcohol or tobacco advertising appears to be targeted at an underage audience, the Commission cannot act unless it determines that there is reason to believe that the advertising is likely to cause substantial injury. If intuition and concern for children's health were enough, we would have already acted.

It may seem obvious and noncontroversial to some that an increase in advertising and promotional efforts by a manufacturer will lead to increased consumption of its product. Firms spend a lot of money on advertising -- why else would they do it? But there are two important issues to keep in mind.

First, advertising and promotions frequently are undertaken simply to induce consumers to switch from one brand to another.(10) When this occurs, there may be little or no net increase in total consumption, because one brand's gain is another's loss.

Second, much of this advertising is also undertaken to differentiate one brand from another -- to convince consumers that rival products are actually poor substitutes for the advertised brand. To the extent that firms in a market can successfully differentiate their products, price competition between rival brands may actually decrease, allowing each brand to raise its price. Although each firm may actually sell less than if no firms had advertised, the ability to raise prices makes this strategy profitable. Thus, an increase in brand advertising could actually result in lower overall consumption, especially by underage consumers who are likely to be particularly sensitive to price increases.(11)

Methodologically sound studies are the best way to determine whether a particular ad campaign for a particular product causes consumers to switch brands, attracts consumers who have not used the product before, increases consumption by existing consumers, or results in some combination of these effects. Without these studies, it is difficult to determine the real relationship between alcohol or tobacco advertising and underage consumption.

Nonetheless, the absence of conclusive scientific evidence on the effect of a particular advertising campaign on consumption is not dispositive of every unfairness inquiry. The unfairness standard requires us to find that substantial injury is likely, not that it has actually occurred. We look at the entire record and consider the flaws or limitations of every piece of evidence in assessing how much weight it deserves and, ultimately, whether a preponderance of the evidence indicates that an ad campaign is unfair.

The most recent Supreme Court decision regarding whether restraints on alcohol advertising survive First Amendment scrutiny(12)indicates that Court's unwillingness to rely on anything other than the evidence when considering the relationship between advertising and consumption. In 44 Liquormart, a plurality opinion confirmed that, in the absence of evidence, courts cannot assume that an advertising restraint will significantly reduce consumption.(13) Instead, the government must establish a causal relationship between its speech restriction and the asserted state interest that the restriction is intended to directly advance.(14) The Court also found that its earlier decision in Posadas -- a case which involved a ban on advertising casino gambling(15) -- gave too much deference to the legislature when assessing whether a speech restriction directly advances the asserted governmental interest.(16)

However, 44 Liquormart could also be read to leave open the possibility that even without evidence that the advertising restriction directly advances the government's interest, the Court could defer to the government's judgment when the restriction concerns advertising about unlawful behavior.(17) Because alcohol or tobacco advertising directed to children promotes unlawful behavior, deference to a legislative judgment according to this reasoning may be warranted.

The difficulty, of course, is that when it is directed to adults, alcohol or tobacco advertising concerns legal behavior. Without evidence that a restriction on this advertising will significantly reduce consumption by minors, the speech restriction may not survive First Amendment scrutiny.(18)

Advertising and Marketing on the Internet

Section 5 of the FTC Act applies to online commerce -- a medium that may present problems and opportunities not found in other media. The Commission has worked hard to educate itself about the Internet and online services in order to assess the implications for its consumer protection mission. The ease with which consumers can surf the Web also enables law enforcers to seek out potentially deceptive online advertisements. Commission staff regularly monitor the Internet and online services, and some of our investigations have come about as the result of online solicitations received or found by our staff.

Our online cases so far have involved fraud, including credit repair schemes, business opportunities, and pyramid scams. Just last month, the Commission obtained a temporary restraining order, followed by a stipulated preliminary injunction, shutting down a scam that relied on online technology to work. Ads on the Internet enticed consumers to download a program to view the defendants' "adult entertainment" Web sites that -- without the consumers' knowledge -- disconnected their computers from their own local Internet service providers and reconnected the computers to a phone number in Moldova.(19) Even after consumers who downloaded this program left the defendants' Web sites, their computers remained connected to the international long distance number until the consumers turned off their computers. The defendants failed adequately to disclose that consumers would be billed for an international long distance call to Moldova or that they had to turn off their computers to end the call. As more advertising occurs online, you can expect to see a more active FTC role with respect to non-fraudulent advertising.

The Commission also is actively examining online advertising to assess the implications for consumers' privacy interests. Last June, the Commission hosted a workshop on online privacy issues in which your organization participated. Consistent with its usual market-oriented approach, the Commission is looking first to businesses to address privacy issues through voluntary measures, rather than assuming that an expanded government role is necessary. There are no plans now for the Commission to issue privacy guidelines or regulations.

We recently announced that we are hosting another privacy workshop this June. One session will gather information as part of a Commission study of the collection, compilation, sale, and use of computerized databases that contain what consumers may perceive as sensitive information. This study will address questions that arose following the highly publicized availability of sensitive information on computerized research services last fall. The remaining two sessions will gather new information -- including empirical evidence -- about online privacy generally and children's online privacy. The four-day workshop will also cover the use of unsolicited commercial E-mail. Commission staff will consider the comments filed to help determine what, if any, further action to recommend in the area of online privacy protections.

Advertising on the Internet raises complicated questions of choice of law and jurisdiction that can pose barriers to effective enforcement by governments and to effective compliance by advertisers. Legal requirements may differ depending upon the country in which a consumer accesses information. For instance, some prominent U.S. companies that market to children have received inquiries about their Web sites from Denmark, which prohibits children's advertising. Some nations do not permit comparative advertising, which, of course, is common in the United States. Similarly, some countries do not permit advertising certain products or using certain depictions that are permissible in the United States.

My concern is that once governments begin to regulate or try to enforce their own laws against advertising on the Internet, we may be left with a Net containing only that which violates no country's laws. Lots of people are thinking about this issue. In conjunction with its presidency of the European Union, the Republic of Ireland hosted a widely attended conference on electronic commerce last fall. Universities and other governments are looking at the legal and social issues raised by the expanding use of this medium in business. I have just returned from a two-day conference at the OECD that took an in-depth look at several aspects of the emerging global marketplace. Ira Magaziner is working on the U.S. government's proposals. DG XV at the EU expects to release its recommendations next month, and the Japanese government is preparing its thoughts on online commerce. International organizations and individual governments are reacting quickly, trying to outrace the evolving technology and formulate government's role. So far, we have found our laws quite adequate to address fraud. What else has to be addressed is an open question.

Innovative Remedies

The Commission is placing more emphasis on innovative remedies, especially informational or financial. For financial remedies, we have increasingly relied upon suspended judgments, security interests, and use of the Treasury Department to collect judgments. Informational remedies used by the Commission in the past year include a variety of disclosures(20) and direct notice to consumers.(21) We also issued administrative complaints in two advertising matters in which corrective advertising or other affirmative disclosures may be required if it is determined that a cease and desist order alone is inadequate to protect consumers.(22) These followed on the heels of the Commission's issuance of two consent orders -- in Eggland's Best and Unocal -- providing for corrective advertising remedies.(23)

I strongly support encouraging creative resolutions, including appropriate consumer education remedies. But the call to innovate should not become a charge to regulate without regard to prudential and jurisdictional restraints. In my view, the Commission recently has slipped over the boundaries of the fencing-in doctrine in the Coppertone(24) settlement and in the California Suncare(25) consent order.

So far, the Commission's most innovative informational remedy is a consumer education requirement in a consent agreement we accepted for comment last month, settling allegations that advertising for Coppertone Kids was deceptive. The complaint alleges that the respondent lacked a reasonable basis for the claim that a single application of Coppertone Kids provides six hours of sun protection for children engaged in sustained vigorous activity in and out of the water. As fencing-in relief, the proposed consent order requires the respondent to design, produce, and print a brochure about the importance of sunscreen usage by children. The order specifies numerous messages or themes to be included in the brochure, only one of which -- the need to reapply sunscreens after toweling or sustained vigorous activity -- seems likely to assist in the prevention of future deception like that alleged in the complaint. The other messages essentially advertise that consumers should use more sunscreen. They do not seem likely to help consumers avoid being misled by possible future violations by the respondent. Accordingly, I departed from the three-Commissioner majority by concluding that the remedy was not reasonably related to the violations alleged in the complaint.

In California Suncare, the consent order settled allegations that California Suncare, Inc. made deceptive claims about the health and safety of ultraviolet radiation ("UVR") exposure and about the benefits and efficacy of its tanning products. I opposed including in the consent order an untriggered disclosure that would appear in general advertising and promotional materials distributed to consumers,(26) because it constitutes corrective advertising and I was not convinced that the Warner-Lambert standard for imposing such relief was met.(27) The consent order provides for other, extensive informational remedies as fencing-in relief, including disclosures that would be triggered by claims about the safety or health benefits of UVR exposure.

There is no question that the informational remedies are reasonably related to the allegations against California Suncare. But the fact that the untriggered disclosure is required to appear in general advertising suggests that its purpose is far more consistent with corrective advertising than with fencing-in: it appears designed to reduce possible lingering false beliefs that may have been created or reinforced by the respondent's past claims that UVR exposure is beneficial.

The standard for imposing corrective advertising is significantly higher than that required for other forms of fencing-in relief. As I said inCalifornia Suncare, the Commission should not attempt to evade that standard where it is clearly applicable. Strangely enough, for articulating this view, one Commission-watcher dubbed me public enemy number one of corrective advertising. In fact, I see corrective advertising as a powerful weapon in our arsenal of remedies. It should be used prudently when the standard articulated in Warner-Lambert has been met.

Indeed, all informational remedies -- whether they involve corrective advertising, affirmative disclosures, consumer notice, consumer education, or restrictions on non-deceptive speech -- should receive particularly close scrutiny from the Commission. These remedies should either address what is alleged in the complaint or fence in the respondent from engaging in future violations like those alleged in the complaint. The potential to chill other types of advertising and to deprive consumers of useful information is real.

Conclusion

How does this apply to the work of the Commission? It requires us to take a hard look at evidence of causation in unfairness cases that may involve restrictions on advertising. Beyond that, when a remedy in any type of case implicates First Amendment rights, the Commission should resist the temptation to obtain through negotiation what it has no colorable chance of obtaining in litigation.

Finally, I would like to emphasize that the natural complement of government restraint is self-regulation -- to the extent permitted by the antitrust laws, of course. Alcohol and tobacco advertising present critical public policy concerns that should be addressed through industry self-regulation and, if necessary, narrowly-tailored government action consistent with the First Amendment. The best of intentions cannot justify excessive intervention or regulation.

1. The views that I express here are my own and do not necessarily reflect those of the FTC or any other Commissioner.

2. 15 U.S.C. § 45(a).

3. See Letter from the Federal Trade Commission to Hon. Wendell Ford and Hon. John Danforth, Senate Committee on Commerce, Science and Transportation (Dec. 17, 1980) ("Unfairness Policy Statement"), appended to International Harvester Co., 104 F.T.C. 949 (1984).

4. 15 U.S.C. § 45(n).

5. The Commission recently obtained a consent decree in federal district court that settled allegations that a defendant's practice of submitting multiple entries on behalf of his clients in the State Department's green card lottery was unfair. Another unfairness count alleged that the same defendant violated Section 5 by failing timely to forward to lottery winners the materials necessary for them to apply for visas. FTC v. David L. Amkraut, Civ. 97-054-RSWL(BQRx) (C.D. Cal. 1997). The Commission obtained two litigated preliminary injunction orders in which courts found it likely that the FTC would establish that unauthorized bank debits, credit card charges, or billings were unfair. FTC v. Diversified Marketing Service Corp., Civ. 96-0388M (W.D. Okla. 1996); FTC v. Windward Marketing, Ltd., 1:96-CV-615-FMH (N.D. Ga. 1996). Both of these cases subsequently settled as to the majority of the defendants.

6. R.J. Reynolds, File No. 932-3162 (Joint Statement of Commissioners Mary L. Azcuenaga, Deborah K. Owen, and Roscoe B. Starek, III)(June 6, 1994).

7. 15 U.S.C. § 45(n).

8. Health Warnings on Alcoholic Beverage Advertisements: Hearings on H.R. 4493 Before the Subcomm. on Transportation and Hazardous Materials of the Committee on Energy and Commerce, United States House of Representatives, 101st Cong., 2d Sess. 35-41 (1990)(statement of Janet D. Steiger, Chairman, FTC).

9. U.S. Dept. of Health and Human Services, Public Health Service, National Institutes of Health, National Institute of Alcohol Abuse and Alcoholism, The Effects of the Mass Media on the Use and Abuse of Alcohol, at v (1995).

10. J. Fisher, Advertising, Alcohol Consumption, and Abuse: A Worldwide Survey 24 (1993).

11. The proposition that product differentiation may give firms the power to raise price and reduce output is discussed in § 2.21 of the federal antitrust enforcement agencies' 1992 horizontal merger guidelines. U.S. Dept. of Justice and Federal Trade Commission, Horizontal Merger Guidelines, 4 Trade Reg. Rep. (CCH) ¶ 13,104, at 20,573-8.

12. In Central Hudson Gas & Electric Corp. v. Public Service Commission of New York, 447 U.S. 557 (1980), the Court developed a four-part test for assessing the constitutionality of regulations of commercial speech:

For commercial speech to come within [the First Amendment], it at least must concern lawful activity and not be misleading. Next, we ask whether the asserted governmental interest is substantial. If both inquiries yield positive answers, we must determine whether the regulation directly advances the governmental interest asserted, and whether it is not more extensive than is necessary to serve that interest.

447 U.S. at 566.

13. 44 Liquormart v. Rhode Island, 116 S. Ct. 1495 (1996). The Court stated that "[w]ithout any findings of fact, or indeed any evidentiary support whatsoever, we cannot agree with the assertion that the price advertising ban will significantly advance the State's interest in promoting temperance. Although the record suggests that the price advertising ban may have some impact on the purchasing patterns of temperate drinkers of modest means, the State has presented no evidence to suggest that its speech prohibition will significantlyreduce market-wide consumption." Id. at 1509 (emphasis in original) (citations omitted).

14. "[A]ny conclusion that elimination of the ban would significantly increase alcohol consumption would require us to engage in the sort of 'speculation or conjecture' that is an unacceptable means of demonstrating that a restriction on commercial speech directly advances the State's asserted interest. Such speculation certainly does not suffice when the State takes aim at accurate commercial information for paternalistic ends." Id. at 1510 (citations omitted).

15. Posadas de Puerto Rico Assoc. v. Tourism Co. of Puerto Rico, 478 U.S. 328 (1986) (upholding legislature's decision that its interest in reducing residents' demand for legal casino gambling would be advanced by limiting casino advertising).

16. In 44 Liquormart, the Court stated that "[t]he reasoning in Posadas does support the State's argument [that Rhode Island's ban on liquor price advertising would promote temperance], but, on reflection, we are now persuaded that Posadas erroneously performed the First Amendment analysis. . . . [T]he advertising ban served to shield the State's antigambling policy from public scrutiny that more direct, nonspeech regulation would draw." 116 S. Ct. at 1511.

17. The Court distinguished the Rhode Island ban on retail price advertising of liquor, which targeted information about entirely lawful behavior, from the prohibition upheld in United States v. Edge Broadcasting Co., 509 U.S. 418 (1993), on the airing of lottery advertising by broadcasters located in states in which lotteries were illegal. 116 S. Ct. at 1510-11.

18. But see Anheuser-Busch v. Schmoke, 63 F.3d 1305 (4th Cir. 1995), vacated and remanded, 116 S. Ct. 1821, aff'd on reconsideration, 101 F.3d 325 (4th Cir. 1996); Penn Advertising of Baltimore, Inc. v. Mayor of Baltimore, 63 F.3d 1318 (4th Cir. 1995),vacated and remanded, 116 S. Ct. 2575, aff'd on reconsideration, 101 F.3d 332 (4th Cir. 1996).

19. FTC v. Audiotex Connection, Inc., No. CV-97 0726 (E.D.N.Y., filed Feb. 13, 1997).

20. See, e.g., Premier Products, Inc., Docket No. C-3720 (Feb. 26, 1997) (consent order) and Comtrad Industries, Inc., Docket No. C-3719 (Feb. 25, 1997) (consent order) (respondents required to disclose the potential risk of harmful or unsafe bacteria buildup associated with use of thawing trays and thermo electric cooler); Conopoco, Inc., dba Van Den Bergh Foods Co., Docket No. C-3706 (Jan. 23, 1997) (consent order that prohibits unsubstantiated heart healthy claims also requires disclosure of total grams of fat per serving whenever claim is made about cholesterol in any margarine or spread that contains a significant amount of fat).

21. See, e.g., Azrak-Hamway International, Docket No. C-3653 (May 2, 1996) (consent order).

22. Ciby-Geigy Corp., Docket No. 9279 (June 26, 1996) (complaint issued); Quaker State - Slick 50, Inc., Docket No. 9280 (July 12, 1996) (complaint issued).

23. Eggland's Best, Inc., Docket No. C-3520 (August 14, 1994) (consent order); Unocal Corp., Inc., Docket No. C-3493 (April 28, 1994) (consent order).

24. Schering-Plough Healthcare Products, Inc., File No. 9423-341 (Feb. 18, 1997) (consent agreement subject to final approval).

25. California Suncare, Inc., Docket No. C-3715 (Feb. 11, 1997)(consent order).

26. The untriggered disclosure reads: "CAUTION: tanning in sunlight or under tanning lamps can cause skin cancer and premature aging -- even if you don't burn."

27. Warner-Lambert Co. v. FTC, 562 F.2d 749, 762 (D.C. Cir. 1977) (finding that corrective advertising is appropriate "if a deceptive advertisement has played a substantial role in creating or reinforcing in the public's mind a false and material belief which lives on after the false advertising ceases"), cert. denied, 435 U.S. 950 (1978).