Dissenting Statement of
The Commission has issued a final order against Shell Oil Company ("Shell") to settle complaint allegations that Shell provided its customers, who purchased from Shell an ingredient used in their fuel treatment additive products, with the "means and instrumentalities" with which two of these customers deceived consumers. I agree with my colleagues that there is reason to believe that two of Shell's customers made deceptive acceleration claims to consumers about their fuel treatment additive products. However, I do not think that Shell made deceptive acceleration claims to consumers through the promotional materials and test results that Shell provided to these two customers. I therefore do not have reason to believe that Shell is liable under a means and instrumentalities theory.
Shell manufactures a chemical substance marketed to fuel treatment additive companies under the trade name "VEKTRON." Shell supplies VEKTRON to Castrol (the marketer of Castrol Syntec), Blue Coral/Slick 50 (the marketer of Slick 50), and to other companies which market fuel treatment additive products to consumers. Each fuel treatment additive company determines the particular amount of VEKTRON to include in its own product. The specific concentration of VEKTRON that has been included differs among each of these fuel treatment additive products. Each fuel treatment additive company also determines the other chemical substances (such as detergents and solvents) to include in its product.
Shell provided fuel treatment additive companies with advertising and promotional materials to persuade them to purchase VEKTRON. Shell's advertising and promotional materials claim that VEKTRON significantly increases acceleration when used in motor vehicle engines. Specifically, these materials report that when gasoline bulk treated with VEKTRON was used in an engine continuously for 5,000 miles ("the bulk treatment test"), a 32-foot improvement (two car lengths) was recorded in accelerating from 15 mph to 70 mph. Both in its promotional materials and through other methods, Shell made the disclaimer that the information it provided concerning the VEKTRON ingredient, including the bulk treatment test result, was "furnished upon the express condition that [the customer] shall make its own assessment to determine the product's suitability for a particular purpose."
It makes sense that Shell would make this disclaimer. VEKTRON is but one ingredient (albeit an active ingredient) in fuel treatment additive products. In addition, the amount of VEKTRON varies with each fuel treatment additive product. Many fuel treatment additive products further are claimed to work when added to a single tank of gasoline (roughly 300 miles of use) rather than when included in bulk treated gasoline used over thousands of miles. Because the acceleration results that were obtained in the bulk treatment test of the VEKTRON ingredient thus clearly would not necessarily apply to fuel treatment additive final products, it makes sense that Shell would have informed its customers that they must make their own assessment of the acceleration benefits attributable to their own products.
Castrol and Blue Coral/Slick 50 purchased VEKTRON from Shell for use in their fuel treatment additive products and both paid Shell to conduct product-specific acceleration tests.
In my view, clearly none of the tests of either of these products reported a significant increase in acceleration. Nevertheless, the two fuel treatment additive companies allegedly made the deceptive claim to consumers that their respective fuel treatment additive products would significantly improve acceleration in motor vehicles generally.(1) The Commission has accepted a consent agreement with Shell that would hold Shell responsible for the allegedly deceptive claims made to consumers by the two fuel treatment additive companies. The basic complaint allegation is that Shell provided these companies with the "means and instrumentalities" (in the form of advertising and promotional materials concerning the VEKTRON ingredient and test reports concerning their specific products) with which these companies deceived consumers.
Means and instrumentalities is a form of primary liability, and a respondent is primarily liable only for its own misrepresentations to consumers. See, e.g., In re JWP Inc. Securities Lit., 928 F. Supp. 1239, 1256 (S.D.N.Y. 1996) (defendant "may not be held primarily liable unless it has actually made a misrepresentation") (emphasis in original); In re Kendall Square Research Corp. Sec. Lit., 868 F. Supp. 26, 28 (D. Mass. 1994) (primary violators are "those who make a material misstatement") (emphasis in original); Vosgerichian v. Commodore Int'l., 862 F. Supp. 1371, 1378 (E.D. Pa. 1994) (no primary liability because the alleged misrepresentations were made by a party other than the defendant).(2) In contrast, a respondent who has provided assistance to another party that has made misrepresentations is at most secondarily liable - - in particular, for aiding and abetting another's misrepresentations. Wright v. Ernst & Young LLP, 152 F.3d 169, 175 (2d Cir. 1998), cert. denied, 119 S.Ct. 870 (1999); Shapiro v. Cantor, 123 F.3d 717, 720 (2d Cir. 1997); Anixter v. Home-Stake Production Co., 77 F.3d 1215, 1225 (10th Cir. 1996) ("[t]he critical element separating primary from aiding and abetting violations is the existence of a representation * * * made by the defendant"). Regardless of the nature and extent of the assistance that a respondent may have provided to a party who made deceptive claims to consumers, the respondent cannot be held primarily liable unless it has itself made misrepresentations to consumers. Wright, 152 F.3d at 175; Shapiro, 123 F.3d at 720.
Primary liability, however, does not require that the respondent have made its misrepresentation directly to consumers. Instead, for a "misrepresentation to be actionable as a primary violation, there must be a showing that [the defendant] knew or should have known that his representation would be communicated [to purchasers]." Anixter, 77 F.3d at 1226 (emphasis added) (citations omitted); see also Wright, 152 F.3d at 175 (same); Shapiro, 123 F.3d at 720 (same). Clearly, the reason that primary liability is imposed even in the absence of a direct communication is that, otherwise, respondents could evade liability simply through the use of intermediaries (such as agents or downstream actors in a vertical chain of distribution) to convey misrepresentations to consumers.
Means and instrumentalities is a specific type of primary liability under which a respondent is held responsible for misrepresentations made indirectly to consumers. Liability under this theory is usually imposed against those who have provided an intermediary with an item (typically, a tangible item) that misleads consumers when that item is physically passed on to consumers. See, e.g., FTC v. Winsted Hosiery Co., 258 U.S. 483 (1922) (deceptive labels on knit goods sold to consumers); Waltham Watch Co. v. FTC, 318 F.2d 28, 32 (7th Cir. 1963) (deceptive trade name on face or dial of clocks sold to consumers); Globe Cardboard Novelty Co. v. FTC, 192 F.2d 444, 446 (3d Cir. 1951) (push cards and punch boards distributed to consumers); Jaffe v. FTC, 139 F.2d 112 (7th Cir. 1943) (same); International Art Co. v. FTC, 109 F.2d 393 (7th Cir. 1940) (same); FTC v. Magui Publishers, Inc., 1991-1 Trade Cas. (CCH) ¶ 69,425 (C.D. Cal. 1991) (deceptive certificates, promotional brochures, and signed prints provided to retailers who passed these items on to consumers), aff'd, 9 F.3d 1551 (9th Cir. 1993).
Means and instrumentalities liability also has been imposed where the intermediary has not passed on a tangible item to consumers, but instead has simply repeated to consumers the specific misrepresentations claims that were contained in the tangible item. For example, liability has been imposed under a means and instrumentalities theory where an intermediary made misrepresentations that were contained in the respondent's telemarketing scripts. See, e.g., Regina Corp. v. FTC, 322 F.2d 765, 768 (3d Cir. 1963) (deceptive prices from price lists repeated in advertisements to consumers); National Housewares, Inc., 90 F.T.C. 512, 590 (1977) (telemarketing scripts and sample letters). All of these cases reflect the fundamental notion that means and instrumentalities is a form of primary liability in which the respondent was using another party as the conduit for disseminating the respondent's misrepresentations to consumers.
Shell's liability under a means and instrumentalities theory thus turns on the role that Shell played with regard to the deceptive acceleration claims that were contained in the advertising and packaging that its customers created and disseminated to consumers. If Shell was making deceptive acceleration claims to consumers through its customers, then there is reason to believe that Shell violated Section 5 of the FTC Act under a means and instrumentalities theory. But if Shell was providing assistance to its customers, who were making their own deceptive acceleration claims to consumers, then at most Shell could be some sort of aider and abettor.(3) It is often difficult to distinguish between these two theories of liability in particular factual contexts. However, it is critical to do so because the Commission certainly has the authority to bring Section 5 cases under a means and instrumentalities theory but may well be precluded from bringing Section 5 cases under an aiding and abetting theory in the aftermath of Central Bank of Denver.
I think that the better view here is that Shell was not making deceptive acceleration claims to consumers through the advertising that Castrol created and disseminated for its fuel treatment additive product. The advertising and promotional materials that Shell disseminated to its customers concerning the VEKTRON ingredient made the claim that the ingredient had improved acceleration in the bulk treatment test (specifically, a 32-foot improvement in going from 15 mph to 70 mph), and depicted the benefits of improved acceleration in common driving situations, such as a vehicle passing another vehicle on a two-lane road or a vehicle merging into freeway traffic. The advertising that Castrol created and disseminated to consumers concerning their fuel treatment additive products contained similar acceleration claims and depictions of the benefits of improved acceleration in common driving situations. Notwithstanding the similarities between Shell's advertising and promotional materials concerning VEKTRON and the advertising that Castrol created and disseminated to consumers,(4) I do not think that Shell was making deceptive acceleration claims to consumers through Castrol's advertisements.(5)
Both in its promotional materials and through other methods, Shell informed its customers that they could not rely on the results of Shell's bulk treatment test of the VEKTRON ingredient and other information in Shell's promotional materials in making claims for their fuel treatment additive products. Because Castrol paid Shell to conduct product-specific single tank treatment tests, it certainly understood that such tests were necessary. None of the test results for Castrol Syntec, however, supported the claim that a significant increase in acceleration occurs when it was used in a single tank treatment.(6)
Castrol is a relatively large and sophisticated company with substantial experience in the fuel treatment additive business, which is characterized by vigorous competition through advertising claims. As such, Castrol employs or retains those with a technical background in fields relating to fuel treatment additives and those with advertising expertise. After Castrol received from Shell the acceleration test results of its product, it determined the acceleration claims that it wanted to make and it disseminated advertising with these claims to consumers. There is no allegation that Shell reviewed or approved any of the advertising or the advertising claims that Castrol created and disseminated. There also is no allegation that Shell reimbursed or otherwise compensated Castrol for any costs associated with its advertising. Given the respective roles played by Shell and Castrol with regard to the advertising for Castrol Syntec, Shell clearly was not making deceptive acceleration claims to consumers through this advertising.(7)
A much closer question is presented by the claims on product packaging. Both Castrol and Blue Coral/Slick 50 made the specific claim on their packaging that use of their fuel treatment additive products would cause a 32-foot improvement (two car lengths) in accelerating from 15 mph to 70 mph. Given that the bulk treatment test of the VEKTRON ingredient yielded exactly this improvement in acceleration, the claim of a 32-foot improvement in acceleration found on the product packaging almost certainly had its genesis in the VEKTRON bulk treatment test. Nevertheless, through its promotional materials and through other methods, Shell instructed its customers that they could not use this information to make claims for their fuel treatment additive products.(8) Both this instruction and other actions by Shell indicate to me that Shell was trying to some extent to prevent its customers from making a 32-foot-improvement-in-acceleration claim, and, therefore, the better view is that Shell was not making this deceptive claim through packaging created and disseminated by its customers.
I do not have reason to believe that Shell can be held liable under a means and instrumentalities theory (or any other form of primary liability) for the deceptive claims that Shell's customers - - rather than Shell - - made to consumers. Holding Shell liable under a means and instrumentalities theory in this factual context raises concerns as to how far the Commission intends to expand the theory in future cases involving input suppliers and testing laboratories. I hope that no such expansion occurs.
1. The Commission has issued a final order against Castrol to settle the allegations that it made deceptive acceleration claims concerning Castrol Syntec, and I have voted in favor of issuing that final order. Castrol North America, Inc., C- _______.
2. The cases cited in the text involved allegation of securities fraud in violation of SEC Rule 10b-5. The cases are instructive because of the similarities between securities fraud and deception under Section 5 of the FTC Act. Moreover, there have been a significant number of Rule 10b-5 cases distinguishing between the concepts of primary liability and aiding and abetting liability in the aftermath of Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164 (1994).
3. The elements of aiding and abetting are: (1) the existence of an independent primary wrong; (2) actual knowledge by the alleged aider and abettor of the wrong and his role in furthering the wrong, and (3) substantial assistance in the commission of the wrong. Magui Publishers, Inc., 1991-1 Trade Cas. (CCH) ¶ 69,425 at 65,727.
4. Although both Shell and Castrol used very similar depictions of the benefits from improved acceleration in common driving situations, this does not demonstrate that Shell was making the claims to consumers because the depictions are an obvious means for any advertiser to demonstrate the practical benefits of increased acceleration, much in the same way that an obvious means for any advertiser to depict weight loss from the use of any diet program is through "before-and-after" pictures of program participants.
5. Shell's promotional materials and test results concerning VEKTRON were not passed on to consumers. These materials would have been meaningless to consumers because VEKTRON was never sold to them.
6. While there may be some dispute as to whether the appropriate methodology was used to conduct these tests, in my view, the results reported on their face do not support the claims of a significant increase in acceleration that were made in Castrol's advertisements.
7. I agree with the majority's statement that the interposition of a sophisticated intermediary is not necessarily a defense to liability under a means and instrumentalities theory. The sophistication of the alleged intermediary, however, may well be relevant in determining whether the alleged intermediary was making its own claims to consumers or it was simply passing along the claims of another to consumers. Here, based on Castrol's role in connection with the deceptive claims made in advertising that it created and disseminated to induce sales of its own product, I do not think that Castrol - - a company with sophistication in the fuel treatment additive business - - was simply passing on Shell's claims to consumers.
8. Like Castrol, Blue Coral/Slick 50 clearly understood that product-specific tests were necessary because it paid Shell to conduct such a test. Moreover, given its experience in the fuel treatment additive business and the expertise of its employees or agents, in my view it was clear to Blue Coral/Slick 50 that the limited test result reported would not support the acceleration claim that it decided to place on its packaging.