The FTC's Consumer Protection Agenda: Continuity and Change

The Promotional Marketing Association Annual Meeting

Date:
By: 
J. Howard Beales, Former Director

The views expressed are those of Director Beales and do not necessarily represent the views of the Federal Trade Commission or of any individual Commissioner

I am delighted to have the opportunity to talk to you about the direction of the FTC Consumer Protection program during the next year. As many of you know, this is my second stint at the FTC. I had actually planned to retire to the Riviera, but I never could get that last game piece. So, when Chairman Muris called me, I figured a return to the FTC was the next best thing to winning the sweepstakes - and I have not been disappointed.

Today I want to discuss both what we are doing as well as how we are doing it. As the Chairman has emphasized, there will be a great deal of continuity in the FTC's consumer protection program. Stopping fraud will remain a top priority. We will stress vigorous enforcement in our advertising program, and we will continue to emphasize the importance of compliance with rules and orders. In all these areas, we will continue the Commission's focus on careful case selection. Just as important is our careful review of proposed orders to ensure that the remedies obtained are sufficient to protect consumers and deter future misconduct.

On the other hand, there are obviously areas where we are changing our emphasis or our approach. Indeed, the major challenge of any consumer protection program is to ensure that it focuses its resources on the most pressing consumer problems and is constantly looking for better ways to do things. Today I would like to talk to you about several of the priorities on the Commission's consumer protection agenda.

Privacy

The first priority area is the our recently announced privacy agenda. It is no secret that consumers' concerns about privacy have increased as we have moved to an increasingly information driven economy. In response, the Federal Trade Commission's role in privacy issues has also evolved. When the Chairman and I joined the agency, we launched a thorough review of the agency's privacy program. That review led to a new agenda, with new resources, new enforcement initiatives, and proposals for new rules. Overall, we plan to add new initiatives and resources.

However, we have also, to some extent, changed the focus of the program. For example, in the past the Commission's privacy program was focused primarily on information collection. In contrast, we believe that the focus should be on misuse of information. Although consumers say they are troubled by the extent to which their information is collected, because that is what surveys often ask, consumers really worry about the potential adverse consequences of various uses of that information. These concerns reflect a variety of very real risks. There can be physical consequences. That is why parents do not want information on the whereabouts of their children to be out there - freely available to anyone, and why many people list their telephone numbers using just a first initial and last name. There are also economic consequences, ranging from identity theft to erroneous denial of credit, insurance, or employment based on inaccurate or incomplete information. And there are unwanted intrusions - phone calls that disrupt the dinner hour or computers littered with "spam".

Although the Commission's past focus was primarily directed to online privacy, our focus on consequences leads us to view privacy through a broader lens. Adverse consequences can occur whether the information was originally collected online or off. The risk of identity theft is real, and the consequences are the same, whether the thief steals your information from an online website with a list of credit card numbers or from your mailbox. Thus, many of our initiatives attack the misuse of personal information collected and used offline.

Finally, our approach recognizes the trade-offs involved in privacy regulation. The events of September 11 make it clear that privacy is not, and cannot be, an absolute right. We are all willing to make practical compromises between privacy and other desirable goals such as greater security. The commercial arena is not fundamentally different. The free flow of information that powers the information age produces tremendous benefits that should not be sacrificed needlessly. Consider, for example, what the Chairman calls the miracle of instant credit. If we have good credit, we can borrow $10,000 or more from a complete stranger, and drive away in a new car - in less than an hour. It may take longer to negotiate the price than it does to arrange the financing! Instant credit and the credit reporting system make extra-ordinary events routine. And the credit reporting system works because, without notice and without consent, very sensitive information about a person's credit history is routinely given to the credit reporting agencies. Lack of consent is crucial to this system. If deadbeats could choose not to have their history reported, the system would lose much of its value. Of course, this information is extremely sensitive. It should be carefully protected, as it has been since the passage of the earliest Federal privacy statute, the Fair Credit Reporting Act, in 1970. But the credit protections are not based on notice and choice.

Our new privacy agenda emphasizes increased enforcement, business education efforts, and where appropriate, new rulemaking. Let me highlight a few areas of interest to your industry.

First, we want to help consumers do something about unwanted telemarketing. Despite widespread concern about unwanted telemarketing, there is no simple, national, one stop way for consumers to stop these calls. We will recommend an amendment to the Commission's Telemarketing Sales Rule that would create, for the first time, that national, one-stop, "do not call" list.

Second, we are concerned about misuse of "pre-acquired" credit card numbers. When telemarketers obtain a list of consumers credit card numbers before they contact the consumer, there is a risk of both fraud and mis-billing. We will recommend an amendment to the Telemarketing Sales Rule to curtail the availability and misuse of account numbers.

Third, we think it is time for a systematic attack on deceptive "spam." Since 1998, the FTC has maintained a special mail box to which internet users can forward spam. We currently receive 10,000 a day, many of which are chain letters, pyramid schemes, and other forms of deceptive, "get-rich-quick" frauds - even schemes to get rich by spamming. Of particular interest to me are allegations that some spammers deceptively include "unsubscribe" links in their spam that in fact appear to result in increased spam for consumers that click them. These are unwanted intrusions that, when made on a large scale, cost consumers' time and money. We are going to systematically target these deceptive spams for law enforcement actions. Expect to see our first round of cases soon.

And finally, we are increasing the resources for enforcing privacy promises - whether they are made online or off. One of the agency's great successes has been encouraging Internet sellers to post privacy notices. But promises are meaningless if they are not enforced. Our role is to ensure compliance, by holding companies to the standards they told consumers they would meet. One area of particular interest is data security. Ensuring the security of sensitive data is fundamental to privacy, because without security there is no privacy. Misrepresentations about security practices will be high on our enforcement priority list. We understand that no site will ever be 100% secure against all threats. But sites that promise consumers that they are "secure," at least should have taken steps that are appropriate under the circumstances to provide the promised security.

FTC's use of unfairness authority in high-tech fraud cases

Concern about personal privacy, of course is not the only reason consumers are concerned about using the internet. Another big concern is fraud. Fraud artists are adept at exploiting new technologies for their own gain. The FTC has brought over 200 Internet-related enforcement actions. Most are simply online variations of familiar, offline scams. However, we also see practices that exploit the very technology of the Internet, using consumers' Internet connections to take control of their computers. These practices often cause substantial consumer harm, and allowing such practices to go unchecked almost certainly plays a major role in undermining consumer confidence in the Internet. If consumers feel vulnerable to manipulation by third parties who take control of their computers, they will use the Internet less and be more guarded when they do.

This is an area where increased use of the Commission's unfairness jurisdiction can play a major role. For example, the Commission recently alleged unfairness in a federal court case, FTC v. Zuccarini, challenging the practice of excessive "mousetrapping." Zuccarini registered some 6,000 domain names that were misspellings of popular web sites. Once consumers arrived, Zuccarini's websites were programmed to take control of their Internet browser, and hold the consumers captive while they were forced to view dozens of websites advertising products such as online gambling, psychic and adult websites. The obstruction was so severe in this case that consumers were often forced to choose between taking up to twenty minutes to close out all of the Internet windows, or turning off their computers, and losing all of their "pre mousetrap" work. Moreover, the injury is especially substantial when multiplied by the many thousands of consumer that were subjected to these practices. Indeed such practices, inflicting unwarranted small injuries on large numbers of consumers, are the "meat" of consumer protection cases.

But the use of the Commission's unfairness jurisdiction is also important because it allows the Commission to distinguish between schemes like those of Mr. Zuccarini, that are clearly harmful to individual consumers, and legitimate business practices that may use the same technology. For example, the technology used to show an unsolicited advertising website by itself is not per se unfair, and techniques such as "pop-up" windows are widely used by legitimate businesses. Properly used, these techniques are relatively simple, cause virtually no injury, and benefit consumers in many of the same ways as the advertising in other media does. In contrast, when, as in the Zuccarini case, the obstruction is so serious that it significantly impedes consumers' ability to browse the Internet, the injury is substantial and unavoidable. Just imagine television advertising if you could not turn off the TV or change the channel. It is the magnitude of the unavoidable injury and the lack of countervailing benefits, not the mere presence of the technology, that makes the practice unfair.

Unsubstantiated health claims regarding diet supplements:

Another area of Internet fraud that particularly concerns us is fraudulent claims for dietary supplements. Since 1997, the Federal Trade Commission and other law enforcement authorities have been engaged in an ongoing and comprehensive effort to combat the fraudulent marketing of supplements, devices, and other health products on the Internet - "Operation Cure.All." Just this summer we announced our latest enforcement efforts in Operation Cure.All challenging eight Internet marketers making outlandish promises, including that the products could treat or cure Alzheimer's, arthritis, cancer, and HIV/AIDS. Some products were promoted to treat hundreds of diseases: cholera, tuberculosis, whooping cough, Gulf War Syndrome, lupus, leprosy, diabetes, even hypochondria and countless others. Two sites even went so far as to advise cancer patients that they should cancel their surgery, radiation or chemotherapy. When contacted, the marketers offered little or no support for any of these claimed health benefits.

We will step up our efforts to combat Internet health fraud. Already, FTC staff have conducted additional Internet surfs and issued e-mail advisories to many Web sites. Additional, larger scale monitoring activities are planned for the coming year. And more companies will find themselves the target of enforcement actions.

One characteristic of fraud is that it is very flexible. Since the anthrax terror mailings, the FTC, with over 30 state Attorneys General, the California Department of Health, and the FDA, conducted a surf of the world wide web to look for products and services that claim to prevent, detect, and treat biological and chemical agents, including anthrax. We identified about 200 sites selling such things as water filters and biohazard test kits; gas masks and protective suits; mail sterilizers; and of course, online pharmacies selling Cipro and other antibiotics. We are particularly concerned about the number of dietary supplements that have added anthrax or other biological agents to the list of conditions they treat. We found these claims for remedies such as colloidal silver, zinc mineral water, thyme, and oregano oil. We have sent warning letters to fifty of these sites and plan to target the most egregious for quick law enforcement actions.

The Cure.All effort, however, is only one component of a larger agency commitment to policing more mainstream health-related products and services promoted both online and in other media. Marketers should be aware that the agency's monitoring and enforcement efforts extend beyond the extreme online health scams that have been the target of Cure.All. Although we, appropriately, give a priority to stopping fraud, all marketers must present their claims in a way that is truthful, accurate and does not mislead consumers. All advertising claims about the efficacy or safety of a health-related product must be supported by competent and reliable scientific evidence. The agency is involved in advertising substantiation cases and investigations against a number of mainstream marketers. We will continue to investigate and, where necessary, litigate these cases.

Mail Order Rule

Consumers' confidence in the Internet can also be adversely affected when Internet sellers fail to make timely delivery. At this time of the year it is especially important to remind sellers about the Mail Order Rule. During the holiday season consumers are particularly attuned to claims made by catalogers or online sellers that they can quickly ship ordered goods. Imagine, then, finding out that the Barbie or Hotwheels computer you ordered for your children is not going to be shipped on time to be under the tree, and instead you get a hotwheels car and a certificate to give your kids saying the elves are still working on their computer. Or imagine that after the holidays you learned that the ham you ordered for your Grandmother to serve at Christmas dinner did not show up, leaving a gaping hole in the menu.

Just recently we announced the results of our latest surf called "HolidaySmarts.com, " where we again looked to see if sites were making "quick ship" claims. Although the Mail Order Rule applies to all shipment claims, it is particularly important for companies to understand that if they say they will ship in 24 or 48 hours, but unexpectedly cannot, they need to send consumers a notice within that same short time period - not within 30 days. As a result of our surf, 52 sites got letters reminding them of their obligations under the Rule. If these reminders do not work, you can expect to see a round of enforcement actions after the new year.

Testimonials

The internet raises many new consumer protection problems, and poses others in new guises. Some important problems, however, are virtually identical to those that have faced the Commission for years, but still need attention. One important advertising issue that we want to re-examine is the use of testimonial claims. These frequently use extreme, occasionally false, individual experiences to illustrate the potential benefits of a product. You have all seen the advertisements for weight loss products featuring testimonials from individuals that claim to have lost effortlessly tens and sometimes hundreds of pounds in a matter of weeks, accompanied by a disclaimer that "results may vary." We have even seen testimonials about dietary supplements that allegedly cured the endorser's cancer - accompanied by the brief disclaimer that "results may vary." In many such cases the problem is not that "results may vary"- the real problem is that results may not exist at all. In fact, the use of testimonials to make deceptive or unsubstantiated claims is a rapidly growing source of cases.

The traditional FTC approach, reflected in our testimonial guides, has been to require that any "typicality" representation made by a testimonial be supported by competent and reliable scientific evidence or accompanied by a clear and prominent disclosure of the limited applicability of the endorser's experience to what consumers may generally expect to receive. Given the choice between doing studies or research to substantiate the "typicality" of the claim implied by the testimonial, or simply disclaiming its applicability, advertisers have widely chosen the latter. Thus, the current approach to testimonials may have had the perverse effect of discouraging efforts to develop meaningful substantiation, while encouraging advertisers to rely on potentially misleading testimonials accompanied by disclaimers of their typicality. Indeed, many FTC respondents appear to misinterpret our guides, arguing - incorrectly - that, as long as they disclaim the typicality of the testimonial, they are not required to have substantiation showing their product works. Of course, this is not the case, and a respondent may be held liable if they use testimonials to make a false or unsubstantiated claim - even if typicality disclosures are made.

I think it is time to review this approach to testimonials. Assessing consumer expectations is central to establishing a more rational approach to testimonials. For example, I think it is unlikely that consumers understand testimonials to claim that all consumers will receive the same quantitative results obtained by the testimonialist. On the other hand, consumers surely expect that they will likely achieve a significant portion of the advertised benefits. What consumers actually expect from testimonials should provide the anchor for our approach.

Conclusion

I have outlined some of the FTC's top consumer protection priorities, but it is by no means an exhaustive list. We will, of course, continue to enforce our trade rules, review national advertising, investigate unfair and deceptive financial practices, and bring federal court fraud actions against deceptive telemarketers, pyramid schemes and unfair and deceptive billing schemes, among others. In short, we will continue to aggressively protect American consumers, continue to work with industry, and continue to educate consumers and businesses.

At the same time, we must acknowledge that the Internet has already changed the world as we knew it. It has raised privacy concerns, but at this point, the best way to address those concerns is aggressive law enforcement, not new regulatory requirements on a medium that is still evolving rapidly. The Internet would be more useful if consumers had more confidence in it. Confidence can best be enhanced by rooting out fraud wherever we find it, particularly hi-tech trickery that exploits the very fabric of the Internet itself. And, the Internet makes possible a new kind of responsive fraud that exploits current consumer concerns. It requires a responsive law enforcement to address these problems as they arise.