The Role of Advertising and Advertising Regulation in the Free Market

The Turkish Association of Advertising Agencies, Conference on Advertising for Economy and Democracy

Istanbul, Turkey

Date:
By: 
Mary L. Azcuenaga, Former Commissioner

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

I am delighted to join you today and to participate in this conference on a very important subject. I am one member of the five-member United States Federal Trade Commission ("FTC" or "Commission"). Among other things, the FTC regulates deceptive advertising. Consistent with that mission, I will begin with a disclosure that is something of a tradition at the Commission, so you will not be misled. The views I express today are my own and are not necessarily those of the Commission or of any other commissioner.

The link between advertising and free markets is strong and multifaceted. Some might say that the very idea of regulation of advertising is incompatible with the concept of a free market. In fact, I believe, the opposite is true. One of the fundamentals of a market economy is the free flow of information about goods and services offered for sale. The underlying theory is that the more fully consumers are informed, the better equipped they will be to make purchase decisions appropriate to their own needs. The phrase "appropriate to their own needs" expresses an important point. The appropriateness of a purchasing choice in a free-market economy depends on consumer preference, not governmental fiat. It is the exercise of informed choice by consumers that ensures that unwanted goods and services eventually will disappear from the market, and that prices that are too high to induce purchase ultimately will be lowered as selling firms seek to attract buyers.

Most of the time, advertising enhances market performance by providing useful information to consumers and by enabling firms to promote the attributes of their products and services and, thereby, to compete better with each other. On the other hand, advertising may adversely affect market performance when businesses use it to transmit deceptive or fraudulent messages on which reasonable consumers are induced to rely to their detriment. When this happens, we tend to refer to the result as "market failure."

Even a well functioning market economy from time to time may suffer breakdowns, or limited failures, that require curative regulatory measures. Fraud or deception can inject into the market imperfect information that undermines consumers' ability to exercise appropriate purchasing choices. For curative measures to succeed in restoring market forces, these measures must focus as narrowly as possible on eliminating the causes of the market failure. Regulatory "cures" that extend beyond simply correcting the problem may upset the balance of forces in the rest of the market and, ultimately, may harm consumers.

In discussing the role of advertising regulation in a free market, I will, of necessity, be addressing primarily the darker side of advertising -- those promotional efforts by firms that do not convey truthful and nonmisleading information to consumers and that require some type of government intervention. Nevertheless, I see both advertising and the regulation of advertising in a more positive light, as a means of improving the ability of consumers to make informed purchasing choices. By recognizing that truthful and nondeceptive advertising is a powerful force for good in the market, government regulators can help ensure that the promotional efforts of firms increase the useful information available to consumers. At the very least, regulators should avoid discouraging firms from disseminating the kind of advertising that assists consumers.

It bears repeating that advertising in a free market is a principal means by which useful and material information is delivered to consumers. In considering the connection between advertising regulation and free markets, I would like to begin by going back to some of the fundamentals of a free market system. After setting the stage by discussing the relationship of information and markets, I will return to the process by which advertising influences consumer choices and how government regulation seeks to alter this process when the market fails. Here, I will focus particularly on the experience of the United States, with which I am most familiar.

I. THE ROLE OF INFORMATION IN THE FREE MARKET ECONOMY

The free enterprise system that exists in most western democracies is one in which individuals own the means of production and market decisions are made largely by individual businesses and consumers, all acting in their own self interest. This free market form of economic organization has convincingly demonstrated its superiority in satisfying consumer needs over alternative forms of economic organization. The most important of the competing systems is socialism, under which the government both owns the means of production and makes all definitive resource allocation decisions.(1)

A key element in the relative success of the free market system is its superior ability to generate and process the immense quantities of information that characterize the modern economy -- information, for example, about the tastes and incomes of consumers, about the outputs and costs of producers, and about their multitudinous interconnections.(2) As observed in a famous economics textbook often used in universities in the United States:

Without central intelligence or computation, [the market] solves a problem that the largest supercomputer could not solve today, involving millions of unknown variables and relations. Nobody designed the market; yet it functions remarkably well.(3)

The ability of a market economy to make use of information results from decentralized decisionmaking and from incentives stemming from private property rights. In contrast, so-called "command" or "managed" economies have proved far less capable of handling the huge information demands of a modern economic system. It is especially difficult for economies based on centralized decisionmaking to alter course in response to changing conditions of demand and supply. In particular, after the government in a command system has developed a plan to manage the economy based on certain assumptions about current market conditions, it often finds it difficult to respond to changed conditions that may arise from shifts in consumer preferences, or from improved production technologies, that may invalidate its initial assumptions. The result is a degree of rigidity in the planning process in which the constant and inevitable flow of new information is either ignored or processed incorrectly. As Janos Kornai has written: "Assembly and processing of that huge mass of information, and coordination based on this information, is too enormous and difficult a task to be undertaken efficiently through centralized planning and management."(4)

One example will illustrate how informed consumers can have an impact in the market: Some years ago, many producers in the United States conducted both their manufacturing and packaging processes without particular regard to their effect on the air, water and other aspects of the environment, and they sometimes made products that themselves were harmful to the environment. Spurred on by public interest groups and others, consumers became aware of the harm that some of these products and processes were inflicting on the environment. Their newly acquired knowledge fueled concern that, in turn, became reflected in their purchasing decisions. Within a relatively short time, products changed, production and packaging methods were altered, and today, markets throughout the United States and much of the rest of the world are filled with products touting their "environmentally friendly" attributes.(5)

These changes in products and methods of production and packaging occurred almost entirely because consumers began to demand products less likely to damage the environment, and market forces compelled manufacturers to respond to that demand. Such changes are likely to be rare and, at best, much slower to occur in a managed economy. Under that kind of system, decisions made, perhaps years ago, may have been based on assumptions that protecting the environment was not important, or was too costly, and neither consumers nor producers could exercise sufficient influence to compel the changes absent government fiat.(6)

It is difficult to overstate the importance and interrelationship of information and private incentives in the functioning of modern market economies. Information and private incentives also are closely related to advertising. Firms convey information to consumers, who, in turn, provide feedback through their reactions to advertising and other information and through their purchasing decisions.

II. ADVERTISING AND INFORMATION

Let us return now to the usefulness of information that advertising conveys. Let me begin with two very different quotations about advertising: The first is from one of the founding fathers and early presidents of the United States, Thomas Jefferson, who said, "Advertisements contain the only truth to be relied on in a newspaper." The second is from a noted British author, H.G. Wells, who said, "Advertising is legalized lying."

As these quotations suggest, controversies over advertising are not a recent phenomenon and, at times, have been both heated and extreme. The modern view of advertising, thankfully, has narrowed the range of opinions somewhat and reduced their emotional content. In particular, there is a considerable body of work in economics and marketing science that has outlined the conditions under which advertising is more likely to provide useful information and those conditions where it most likely will not.(7) I will discuss the costs of advertising later in my discussion of regulation. At this point, let me elaborate on the beneficial effects of advertising.

One unifying theme that characterizes the advertising literature is the recognition that there are important instances in which advertising can and does provide the kind of information to consumers that considerably improves the functioning of markets. This improvement is manifested in a number of different ways. Advertisements providing truthful information about the price of a product and its attributes reduce the time and effort that consumers need to expend searching for the products that best satisfy their needs. Advertising can also provide for greater rivalry among firms because the greater flow of information brings more firms into competition with each other. Finally, the ability to advertise new products and services encourages innovative activity by firms.

The impact of advertising on the market depends, of course, on the institutional setting. In the United States, for example, the economy is based largely on the freedom to negotiate and agree to enforceable private contracts. We allow the interplay of consumer demand and producer supply incentives to determine what and how much is produced and who buys it. To a large extent, the market relies on the interest of producers in protecting their reputations to enforce their promises to consumers. If producers do not keep these promises, their customers will search out alternative suppliers, and the original firm eventually will lose both its reputation and its profits. As long as consumers can judge the quality of products, as long as firms require repeat purchases and good reputations with consumers to remain in business (and most legitimate firms do), and as long as rival suppliers exist or can enter the market without undue cost, the forces of the market itself can punish poor quality and deception without any great need for government intervention.

Studies have been done of the impact of state (as opposed to federal) restrictions on advertising that provide persuasive evidence of the importance of informative advertising in improving market performance. These regulations imposed by various states throughout the country provide something of a natural experiment regarding the influence of advertising, since researchers can compare the price and quality of a particular product or service in states in which advertising is restricted to those in states in which advertising is subject to few, if any, restraints. Most of these studies -- regarding subjects as diverse as legal services, prescription drugs, gasoline price posting, cigarettes and eyeglasses -- find that prices are significantly lower in states that allow advertising.(8)

The federal courts in the United States increasingly have recognized the importance of advertising as a source of useful information to consumers, especially in regard to professional activities. The United States Supreme Court has ruled(9) that the First Amendment to the United States Constitution, which guards freedom of speech, protects advertising that conveys truthful, non-deceptive messages to consumers.(10) In language that echoes my earlier discussion about the role of information in free market economies, the Supreme Court noted that "the free flow of commercial information is indispensable to the proper allocation of resources in a free enterprise system because it informs the numerous private decisions that drive the system." Id., at 765. The Court went on to observe that a "particular consumer's interest in the free flow of commercial information . . . may be as keen, if not keener by far, than his interest in the day's most urgent political debate." Id., at 763.(11)

Another important influence of advertising is its ability to spur innovative activity by providing firms with an effective way of informing consumers about the availability of new products, or new applications of existing products. Clearly, a firm will be more likely to invest in improving its product if it has the means of informing consumers about the existence of the improved product and of its advantages. Let me give you an example. Recent research has indicated that advertising has inspired the development and acceptance of healthier foods. A study by the FTC's Bureau of Economics found that after the introduction of advertising claims discussing the relationship between fiber and cancer, the number and the fiber content of new product introductions in the high fiber cereal market increased.(12)The information contained in the fiber-related advertisements led, in turn, to greater consumption of high fiber cereals and to greater consumer awareness of the benefits of fiber in the diet. These are important findings about the value of advertising. I will return to the issue of health claims in advertising.

III. THE REGULATION OF INFORMATION FLOW

Let me turn now to problem advertising: that is, advertising that distorts the market by disseminating false or deceptive claims. These claims may induce consumers to purchase goods or services that, had the consumers not been misled by the deceptive advertising, they would not have chosen to buy. When this happens, the government may need to step in to restore the integrity of the market. It may take various steps, including case-by-case law enforcement to prevent false and deceptive advertising and issuance of regulations to address particular practices that mislead consumers about material attributes of goods and services in the market.

In the United States, the Federal Trade Commission, or FTC, is the primary federal consumer protection agency. The FTC has responsibility (along with the Department of Justice) for enforcing the nation's competition laws, and it is the only agency that administers the nation's most comprehensive federal statute designed to protect consumers from unfair or deceptive practices, the Federal Trade Commission Act.(13) Under this statute, the chief substantive provision of which is Section 5, the FTC works to ensure that advertisers do not disseminate false, unsubstantiated or otherwise deceptive advertising claims. When such unlawful claims are identified, the FTC, after a formal proceeding, may impose orders, enforceable through the courts, requiring the advertisers to halt their false or deceptive advertising. In some instances, the FTC's cease and desist orders also may require the respondents to make affirmative disclosures in future advertisements to prevent further harm to consumers,(14) or to make corrective statements about their earlier claims to eliminate lingering false impressions they may have caused.(15) An advertiser who violates such an order may be required to pay monetary civil penalties, which can be substantial.

In addition to case-by-case law enforcement action against advertisers who disseminate false or deceptive claims about their products or services, the FTC influences the level and content of information reaching consumers in two principal ways: by issuing regulations requiring disclosure of information and by issuing regulations setting standards for certain products or services that cannot easily be evaluated by ordinary consumers. Let me say a few words about each of these activities.

A. Regulations Requiring Disclosure of Information

As a practical matter, markets may not always produce the optimal amount of consumer information to ensure that consumers will be fully informed before making their purchasing choices. For the most part, however, the FTC tries simply to ensure, through its case-by-case enforcement activities, that information provided by sellers to consumers is accurate, not that it is complete. As a general rule, the Commission does not require that sellers provide particular information, or that information be provided in a particular way. Nevertheless, with respect to some industries, the Commission has concluded that because of a lack of accessible information, or an inability on the part of consumers to evaluate information that is available, it is appropriate to issue rules(16) that require industries to provide particular information in particular ways.

For example, one of the biggest and most costly decisions the average American must make concerns borrowing money to help pay for the purchase of a home. The FTC enforces laws and regulations that require lenders to disclose fully the terms of loans offered for this purpose to ensure that the consumer knows precisely what obligations he or she is incurring by "purchasing" the loan. In this connection, the Commission has promulgated a regulation defining certain practices in connection with extending credit as unlawful "unfair acts or practices." (17)

The FTC also has used its rulemaking authority to require disclosures of information in other markets in which consumers traditionally received relatively little information, and where the cost of providing the additional information is thought to be offset by the additional benefits flowing from the increased information. These markets include, for example, those for funeral goods and services and for used cars.

B. Standards

At times, private markets may not provide enough useful information on product performance. Consumers may need some common standard or benchmark for comparing the claims of sellers, particularly if the claims involve technical or highly complex subjects or products and if those products tend to be costly. For example, in the home insulation market, the Commission found that consumers often were unable to determine what kind of insulation to use because they lacked the requisite expertise to enable them to make such judgments. The Commission established standards in making labeling and advertising claims about the efficacy of home insulation.

In some instances, Congress has become sufficiently concerned about apparent market failures caused by the lack of useful information that it has enacted special statutes directing the Commission to issue rules requiring disclosures of particular information in specific ways. Examples of such statutes and their implementing rules include those concerning the use of smokeless tobacco; those concerning the labeling of wool, fur and textile products; and, more recently, those governing the growing 900-number (or pay-per-call) telephone information service industry under the Telephone Disclosure and Dispute Resolution Act.(18)

IV. MARKET FAILURE AND ADVERTISING REGULATION

A. Deception

Advertising claims offer to provide to the consumer a product that will perform as advertised. The FTC Act requires not only that advertising claims be truthful, but also, that they not mislead reasonable consumers about material and objective aspects of the product or service to which they relate. As the Commission's Policy Statement on Deception states: "[T]he Commission will find deception 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."(19)

Although, in principle, the FTC may challenge any deceptive advertising claim, it is the Commission's long established practice not to challenge claims that are purely subjective (e.g., "best", "brightest", "great taste", "feels and looks great"). This type of claim generally is considered "puffery." Instead, the FTC concentrates on challenging false or misleading claims about objective facts (e.g., "fat-free," "proven effective by scientific tests"), especially if in particular instances, those claims are expensive for consumers to verify, or are beyond the competence or expertise of ordinary consumers to verify.

For most inexpensive products that consumers can evaluate themselves without unusual expertise, market forces will correct for consumer dissatisfaction. Once dissatisfied with an inexpensive product, the consumer need only choose not to buy it again and will suffer only the relatively insignificant cost of a single purchase. Because sellers of such products usually depend heavily on repeat purchase of their goods, serious misrepresentations about the attributes of those goods are unlikely to occur, and if they do occur, they likely will be short lived.

Other goods and services may be more difficult for consumers to evaluate. These are known as "credence" goods and services. Because of their lack of susceptibility to consumer assessment, they are subject to more intense scrutiny by the FTC. Examples of such products include such varied goods as fire safety warning systems and over-the-counter (nonprescription) drugs and medical devices. Ordinary consumers are unable to evaluate efficacy claims for such products, and the FTC has adopted a policy that efficacy claims must be supported by what it terms a "reasonable basis."

Briefly, if a seller claims that 50% of doctors surveyed agree that a particular drug product will eliminate the pain of arthritis for 12 hours, or that in 90% of all household fires, a particular fire-detection and warning system will sound early enough to provide at least 15 minutes for occupants of a building to escape safely, the seller must be able to produce survey or test data showing that those specific claims are true. If, on the other hand, an advertisement specifies no precise level of substantiation, for example, "Fat Master -- Eliminates unsightly fat from the body without exercise or starvation diets," the Commission will assume that the claim promises what experts in the particular field would consider appropriate. In such an instance, therefore, the seller must produce medical or scientific research of a caliber recognized as authoritative by the relevant scientific or medical community demonstrating that the product works as promised.

Earlier, I quoted a standard for identifying deception that relies on the perceptions of reasonable consumers "in the [relevant] circumstances." In cases where advertising is targeted to specific groups, the FTC considers characteristics of the target audience that make that audience more or less likely to be deceived by advertisements. On the one hand, for example, the FTC is likely to examine with special care advertising that appears to have particular appeal to children because children might be more susceptible than adults to being deceived by certain kinds of claims. Conversely, the FTC would be less likely to scrutinize nonprescription drug advertising aimed at doctors and published in medical journals, than advertising aimed at children or sick or elderly individuals, because the physicians are presumed to have the knowledge and ability necessary to evaluate such claims.

B. Unfairness

The Commission has referred to the unfairness doctrine as "the FTC's general law of consumer protection, for which deception is one specific but particularly important application."(20) The concept of unfairness potentially is so expansive that it could include virtually any practice that Commissioners do not like for one reason or another. Because of the potential breadth of unfairness, it is important that the Commission have a well-articulated standard for delineating this authority. Otherwise, the law could result in having the government make choices it thinks are good for consumers, instead of allowing consumers to make decisions for themselves.

The FTC's definition of unfairness has evolved over its history. Since its early days, the United States Supreme Court has upheld the authority of the FTC to challenge conduct that was not specifically deceptive or violative of the antitrust laws.(21) The Commission's first formal articulation of its unfairness standard was set forth in 1964 as one of the justifications for a rule that would have required cigarette manufacturers to include a warning of health risks in all cigarette advertising and on each cigarette pack.(22)

As noted by our Supreme Court in 1972,(23) the Commission had by then identified three elements of unfairness: whether the practice offends public policy; whether it is immoral, unethical, oppressive, or unscrupulous; and whether it causes substantial injury to consumers (or competitors or other businessmen)."(24)

In 1980, the FTC elaborated and shifted the emphasis in its unfairness analysis and set forth the standard that we still have today.(25)The Commission issued an unfairness policy statement in which it focuses primarily on the injury portions of the earlier standard. Under this policy statement, an act or practice is considered unfair if: (1) it causes substantial consumer injury; (2) the injury is not outweighed by offsetting benefits to consumers or to competition; and (3) the injury is not reasonably avoidable by consumers.

Congress apparently liked the Commission's policy statement because, in 1994, it codified the standards in the policy statement and made them part of the law. Congress cited with approval the Commission's unfairness policy statement and the reasoning articulated in that document. Therefore, it is now mandatory that the Commission adhere to these requirements in exercising its unfairness jurisdiction.

The first step of our unfairness analysis is to determine whether an apparently unfair practice causes substantial consumer injury: that is, causes distortion of consumer choice. Most often the Commission finds substantial injury in the form of monetary harm. Sales practices that impose health or safety risks, however, also can support a finding of unfairness. Injury may be "substantial" if the practice causes large injury to a small number of people, or a small injury to a great number of people. The Commission does not concern itself with trivial or merely speculative harms.

The second step of our unfairness analysis is to see if the practice provides benefits that offset the harm to consumers or to competition that offset the harm. The Commission recognizes that most business practices provide a mixture of costs and benefits for consumers. In considering whether a practice causes net injury, the Commission considers not only costs to the parties directly before the agency, but also the procompetitive aspects of a particular practice, which is a benefit that would be lost if the government takes regulatory action.

The third step in the Commission's unfairness analysis is to consider whether consumers reasonably could avoid the injury. This step acts as a check on regulatory action. For example, if a consumer is able to switch to another product without incurring substantial cost, there might be no need for the Commission to intervene.

In another sense, this third step recognizes that ensuring informed consumer choice is one of our primary goals. We look at whether a challenged practice unreasonably inhibits consumers from making independent and informed purchasing decisions, regardless of whether someone else might think that a so-called "better" choice might be available. In a very real sense, the best choice for a consumer is that consumer's informed and independent choice. The term "better" choice, in this sense, simply refers to the choice that someone else would make.

C. Fraud

The ultimate in market failure attributable to imperfect information flow is that resulting from fraud. Fraud by the producer or seller violates an implicit or explicit offer to provide for a price, goods or services with particular attributes that have been advertised to attract consumer interest. When a seller induces the purchase of products or services that, notwithstanding his or her claims to the contrary, he or she knows, or should know, are unlikely to perform as claimed or to meet the consumer's needs as promised, the seller perverts the system and causes consumer injury.

The FTC tries to rectify fraud by moving quickly to seek court injunctions against the fraudulent operator and by seeking to recover the seller's ill gotten gains for return to consumers as redress or to the United States Treasury as disgorgement. Most frauds are conducted by firms that have little or no reputation to protect and few fixed assets that are at risk should they be caught. Unfortunately, their operations are increasingly international.

Returning to the theme of the usefulness of information, one effective way to combat fraud is to inform consumers about the ways in which fraud can be practiced and about particular fraudulent schemes that have been identified. Armed with this information, consumers can protect themselves. To this end, the FTC has a consumer and business education office that produces publications and public service radio and television spots designed to provide information in an easily understandable format.

V. ADVERTISING REGULATION: THE CASE OF HEALTH CLAIMS

I would now like to discuss in a little more detail one important area of advertising in the United States that I mentioned earlier in passing -- deceptive health claims -- and to describe how the FTC approaches the task of monitoring such claims to ensure that they are truthful and not misleading. A key characteristic of advertisements for health-related products and services is that they may contain either informative or deceptive elements and, in some instances, both. The regulatory challenge is to develop policies that discourage the deceptive claims without restricting the truthful ones.

The FTC's "reasonable basis" standard or "advertising substantiation" doctrine, which the Commission announced in its 1972 decision in a case called Pfizer, Inc.,(26) comes close to achieving both these goals. Under this doctrine, advertisers need not have absolute proof that their objective claims are true before making those claims, but they must have a "reasonable basis" for believing the claims are true. Objective claims for which the advertiser can provide no reasonable basis are considered deceptive and are unlawful under Section 5 of the FTC Act.

Using the advertising substantiation doctrine, the Commission considers six factors before deciding whether an advertiser possesses a reasonable basis for an objective claim. The first factor is the type of product being advertised. If the product is a familiar item the use of which presents little risk of harm to consumers, a lower level of substantiation is required. The second factor is the type of claim. Claims that refer to specific facts or figures require a higher level of substantiation than claims that contain more generalized descriptions of performance or effectiveness. Claims that are difficult or impossible for consumers to evaluate by themselves -- such as a claim that eating a certain food will lower your risk of cancer or heart disease -- are also held to a higher standard.

The third factor to consider is how much consumers will benefit if the claim proves to be true. The likelihood that this factor would ever be important may seem counter-intuitive to people who consider advertising to be generally distasteful and of no redeeming social value. The study of cereal advertising by the Commission's Bureau of Economics, to which I alluded earlier, demonstrates that advertising can indeed contain information of real value to consumers.(27) The fourth factor considered in evaluating whether an advertising claim has been sufficiently substantiated is the seriousness of the harm that will result if the claim proves to be false. The economic consequences of a false claim are more serious for expensive products than for products for which the cost is cheap. In addition, health consequences of a false claim are more grave if the advertisement represents that a product will prevent or cure a serious disease, particularly if the advertised product is chosen instead of an alternative product or treatment that, in fact, would be effective.

The fifth factor is the cost of developing substantiation for the claim. All else being equal, the Commission requires a higher level of substantiation for claims that are less expensive to evaluate, particularly if the potential profits from sale of the product are relatively large. The sixth and final factor is how much substantiation is considered reasonable by experts in the field. This may vary from field to field. Although the FTC consults outside experts, it does not delegate to such experts its responsibility to decide the appropriate level of substantiation.

The crucial factors in evaluating health claims are often numbers three and four on the list of factors I have just described: that is, the potential benefit if the claim is true and the potential harm if a claim is false. It is especially important to give full consideration to both of these factors.

Insignificant, contradictory or poorly designed studies would not satisfy the "reasonable basis" standard, especially as applied to a health-related product, where the standard is applied with particular rigor. For example, in a case called Thompson Medical Co.,(28) the Commission prohibited, among other things, use of the product name "Aspercreme" for a pain-relief ointment on labels or in advertisements that did not have an accompanying clear and prominent disclosure that the product does not contain aspirin. The Commission found that the name of the ointment, Aspercreme, sounded like the name of another well known medication, aspirin. But aspirin was not contained in Aspercreme, and the Aspercreme name, therefore, could mislead consumers into assuming that the product would have the effectiveness of aspirin.

In the same case, the Commission also required substantiation for pain-relief claims in the form of "at least two adequate and well-controlled, double-blinded clinical studies which conform to acceptable designs and protocols and are conducted by different persons." The "reasonable basis" standard may even require an absolute consensus in some instances.(29)

In a famous dissenting opinion in the case of Abrams v. United States,(30) noted United States Supreme Court Justice, Oliver Wendell Holmes, observed that "[e]very year if not every day we have to wager our salvation upon some prophecy based upon imperfect knowledge." Many of the decisions government agencies are asked to make in the health claims area are "prophecies based upon imperfect knowledge." Scientists rarely know for certain that a particular nutrient or food component exerts a particular effect on a particular disease or condition. More commonly, the Commission is faced with a body of studies, each with its own limitations, that suggest certain relationships but do not prove causal links between diet and health. I would like to think that all the Commission's future decisions on health claims will be the right ones, but it would be foolish to choose a policy that works only when we are able to predict the future with complete certainty. Some of our "prophecies," no doubt, will turn out to be mistaken, but, given the analysis we use, any mistakes we make should not be too costly.

I have tried today to highlight the benefits of taking the positive approach toward advertising that I mentioned at the beginning of my remarks. Once we acknowledge the potential for advertising to provide useful information to consumers that they otherwise would not have, then it is incumbent on regulators to seek solutions that preserve the valuable information content of advertisements yet limit misleading impressions from being conveyed. To do this, we always need to keep in mind the incentives that drive firms to advertise in the first place. Thank you.

 

1. The free market and socialist models to which I refer are, of course, polar cases between which are many variations: market systems with varying degrees of government ownership and control, and socialist systems in which market elements are present. Nevertheless, the key differences relating to ownership rights and decisionmaking serve to distinguish the two systems appropriately for my purposes.

2. See "In Praise of Hayek," The Economist 75 (March 28, 1992).

3. P. Samuelson and W. Nordhaus, Economics, 14th ed., New York: 1992, p. 36.

4. The Socialist System, Princeton: 1992, p. 127. For a general discussion of the economic problems arising under socialism, see Kornai, op. cit.

5. Although the FTC issued guidelines articulating how it would identify environmental marketing claims that are likely to be deceptive, these guidelines are not themselves enforceable as law. 16 C.F.R. Part 260.

6. The environmental policies followed in the Soviet Union and their effects are documented in E. Neuberger, Ecocide in the USSR: Health and Nature Under Siege, New York: 1994.

7. The research is summarized in D. Carlton and J. Perloff, Modern Industrial Organization, New York: 1989, pp. 593-616. See also the discussion in J. Calfee and J. Pappalardo, How Should Health Claims for Foods be Regulated?, FTC Report, September 1989.

8. Carlton and Perloff, op. cit. pp. 602-603.

9. Virginia State Bd. of Pharmacy v. Virginia Citizens Consumer Council, Inc., 425 U. S. 748 (1976).

10. In contrast, the Court has ruled that the First Amendment does not protect deceptive or misleading commercial speech -- speech that only proposes a business transaction. See, e.g., Rubin v. Coors Brewing Co., 63 U.S.L.W. 4319 (April 19, 1995); Bolger v. Youngs Drug Products Corp., 463 U.S. 60 (1983); Virginia State Bd. of Pharmacy v. Virginia Citizens Consumer Council, Inc., supra.

11. Rubin v. Coors, supra.

12. P. Ippolito & A. Mathios, Health Claims in Advertising and Labeling: A Study of the Cereal Market (1989) (FTC Bureau of Economics Staff Report).

13. 15 U.S.C. § 45. In addition to the FTC Act and other federal laws governing a range of consumer-related areas including the efficacy of prescription drugs, the safety of children's toys and the protection of the environment, all, or nearly all, the states have enacted what are commonly known as "little FTC Acts." These state-enacted consumer protection statutes often are modeled on the federal law, and they are enforced by state courts, which often give great weight to the decisions and policies of the FTC. Consumers in the United States, therefore, are protected by a web of laws and regulations that seek to maintain and preserve the functioning of the free market for the benefit of consumers and business.

14. See, e.g., Campbell Soup Co., F.T.C. Dkt. No. 9223 (Aug. 18, 1992)(consent order).

15. See, e.g., Warner-Lambert Co., 86 F.T.C. 1398, 1503, aff'd as modified, 562 F.2d 749, 762 (D.C. Cir. 1977), cert. denied, 435 U.S. 950 (1978).

16. Section 18 of the FTC Act, 15 U.S.C. § 57a, empowers the Commission to promulgate trade regulation rules with the force and effect of law that "define with specificity" acts or practices that the Commission finds, based on substantial evidence in the rulemaking record, are prevalent and are unfair or deceptive.

17. Trade Regulation Rule on Credit Practices, 16 C.F.R. Part 444.

18. Comprehensive Smokeless Tobacco and Health Education Act, 15 U.S.C. § 4401, 16 C.F.R. Part 307; Wool Products Labeling Act, 15 U.S.C. § 68, 16 C.F.R. Part 300; Fur Products Labeling Act, 15 U.S.C. § 69, 16 C.F.R. Part 301; Textile Fiber Products Identification Act, 15 U.S.C. § 70, 16 C.F.R. Part 303; and Telephone Disclosure and Dispute Resolution Act, 15 U.S.C. §§ 5711-14, 5721-24, 16 C.F.R. Part 308.

19. Policy Statement on Deception, appended to Cliffdale Associates, Inc., 103 F.T.C. 110, 174 (1984).

20. International Harvester, Inc., 104 F.T.C. 949, 1064 (1984).

21. FTC v. Keppel & Bros. Inc., 291 U.S. 304 (1934) (holding that the merchandising of penny candy to children by lottery unfairly exploited consumers to the prejudice of the respondent's competitors).

22. 16 C.F.R. § 408.1. Congress subsequently preempted the Cigarette Rule by enacting its own cigarette warning scheme. See 15 U.S.C. §§ 1331-1340 (1976). The statute specifically stated, however, that it was not intended to cast doubt on the Commission's jurisdictional authority to have promulgated the rule. Id. § 1336. See S. Rep. No. 566, 91st Cong., 1st Sess. 2652, 2664 (1969); H.R. Rep. No. 222, 91st Cong., 1st Sess. 93, 95 (1969).

23. FTC v. Sperry & Hutchinson, 405 U.S. 223, 244-45 n.5.

24. Id. at 8354-55.

25. Letter to Consumer Subcommittee of the Senate Committee on Commerce, Science and Transportation, Commission Statement of Policy on the Scope of Consumer Unfairness Jurisdiction, 4 Trade Reg. Rep. (CCH) ¶ 13,203 (Dec. 17, 1980), reprinted in International Harvester, Inc., 104 F.T.C. 949, 1064 (1984) (hereafter "Unfairness Policy").

26. 81 F.T.C. 23 (1972).

27. P. Ippolito & A. Mathios, supra.

28. 104 F.T.C. 648, 844 (1984).

29. Congress incorporated a "consensus" standard in the Nutrition Labeling and Education Act of 1990 ("NLEA"), Pub. L. No. 101-535, 104 Stat. 2353 (codified in part at 21 U.S.C. § 343(i), (q) and (r)), but left its interpretation and application to the Food and Drug Administration. The FTC has a parallel responsibility, under the FTC Act, for preventing and eliminating deceptive advertising for food and nutrition products, the labeling of which is governed by the NLEA. As the Commission has explained, its "reasonable basis" substantiation measure "shares many elements with" the NLEA consensus standard. FTC Enforcement Policy Statement on Food Advertising, 18-28, May 13, 1994. Both demand significant support for objective claims about food and nutrition products, and neither would tolerate proffered substantiation for health claims about such products consisting merely of anecdotal accounts, or otherwise unreliable evidence, that would not produce reliable data from which generalized conclusions could be drawn to support the claims.

30. 250 U.S. 616, 624 (1919).