Advertising Alcohol and the First Amendment
Prepared Remarks of
Roscoe B. Starek, III, Commissioner
Federal Trade Commission
presented before the
American Bar Association
Section of Administrative Law and Regulatory Practice Committee
on Beverage Alcohol Practice
San Francisco, California
August 4, 1997
Good afternoon. I'm pleased to have the opportunity to talk with you about alcoholic beverage advertising and the Federal Trade Commission.(1) Since many of you are probably not familiar with the Commission and its law enforcement powers, I'll provide a brief introduction in the context of current concerns about alcohol advertising that, by placement or content, may appear to be directed to minors.
Deception and Unfairness Authority
Section 5 of the Federal Trade Commission Act ("FTC Act") prohibits both unfair and deceptive acts or practices in or affecting commerce.(2) The FTC's deception standard is set forth in the Commission's Deception Policy Statement.(3) It asks whether the challenged representation or practice would likely deceive a consumer acting reasonably under the circumstances in a material way -- that is, in a way that affects the consumer's conduct or choice regarding a product or service. In assessing advertising or other marketing practices that affect or are directed primarily to a particular audience, the Commission considers the effect of the ad or practice on that audience.(4) Thus, when we look at the impact of advertising on children, we consider the limited ability of children to detect exaggerated or untrue statements.(5) It is possible that a child might reasonably interpret an ad in a way that an adult would not. Claims tend to be taken literally by young children. For example, an ad showing a toy ballerina standing alone and twirling may reasonably be understood by children to mean that the ballerina can really dance by herself.(6)
Under the FTC Act, we can also challenge unfair acts and practices -- those that cause or are likely to cause substantial injury to consumers, when that injury is not reasonably avoidable by the consumers themselves and is not outweighed by countervailing benefits to consumers or competition.(7) Although injury must be both substantial and likely, unwarranted health or safety risks can suffice. For example, the distribution of free sample razor blades without protective packaging in home-delivered newspapers poses a direct risk of injury to young children and others who might handle the papers.(8)
In any unfairness inquiry, the issue that is apt to be most difficult is causation. In 1994, a majority of the Commission -- 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."(9) 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.
Congress amended the FTC Act later that year 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.(10) Essentially, Congress codified the Commission's injury test for unfairness as set forth in the Unfairness Policy Statement.(11) At the same time, Congress expressly barred the Commission from relying on public policy considerations as the primary basis for an unfairness determination.(12)
The Commission still alleges deception far more frequently than unfairness, but we recently pursued unfairness allegations in several cases.(13) I supported all of them, except for issuance of a revised complaint against R.J. Reynolds alleging that the Joe Camel advertising campaign is unfair. I voted against that complaint because the evidence, including new evidence not before the Commission in 1994, did not give me reason to believe that there is a likely causal connection between the Joe Camel campaign and smoking by children. I also stated that it is not in the public interest for the Commission to expend its scarce resources on this litigation while other developments might largely duplicate any remedies the Commission might obtain.
It would be a mistake to underestimate the possibility of additional unfairness enforcement actions by the Commission, including possible enforcement against alcohol advertising that may appear, by placement or content, to be targeted to children. I want to emphasize that the Commission is applying the codified injury requirement with scrupulous care. Of course, in any particular case individual Commissioners may disagree as to the level of evidence needed to satisfy the requirement that an alleged unfair act or practice "causes or is likely to cause substantial injury."
The Commission has a variety of tools available to attempt to prevent future harm to consumers, including law enforcement actions in federal court or before an administrative law judge, rules or guidelines, and consumer education. Court or administrative orders sought by the Commission prohibit deceptive or unfair claims and almost always impose "fencing-in" relief that covers claims or products beyond those that were the subject of the complaint. In appropriate cases, disclosures may be required to correct or prevent deception. Corrective advertising is warranted in the rare case in which the challenged ads substantially contributed to the development and maintenance of a false belief that lingers in the minds of a substantial portion of consumers.(14)
The Commission also may seek redress for consumers or disgorgement in cases involving dishonest or fraudulent conduct. For instance, a Commission consent order issued last year required a toy manufacturer to refund to consumers the purchase price of toy vehicles deceptively shown in television ads performing such feats as driving and flying under their own power.(15) In fact, the toys did not have these capabilities and were manipulated off-screen with wires and other hidden devices to make them appear to be moving. As fencing-in relief, the Commission also required the company to send a letter to every television station that aired the commercials, advising them of the settlement and of the availability of self-regulatory guidelines used by many industry members to screen advertising directed to children. Once a Commission order is in effect, violations of the order may result in the imposition of civil penalties.
Alcohol Advertising Issues
As you all know, last year the Distilled Spirits Council of the United States ended its forty-year voluntary ban on liquor advertising on radio and television, precipitating a public debate about the effect of alcohol advertising on children. In response, the Chairman of the Federal Communications Commission sought to hold hearings to inquire into whether the broadcast of distilled spirits advertising is in the public interest. The inquiry was scuttled when two of the four members of the FCC refused to support the Chairman's initiative because they believe that a memorandum of understanding between the FCC and the FTC places this issue within the FTC's jurisdiction.
As a Commissioner of the FTC, I would not presume to opine on the FCC's jurisdiction. I am confident, however, that the Federal Trade Commission has jurisdiction over deceptive or unfair advertising for alcoholic beverages and that we will exercise that jurisdiction in appropriate cases.(16) For example, in 1991 the Commission issued a consent order against the Canandaigua Wine Company for alleged deceptive marketing of Cisco, a fortified, flavored wine product.(17) The Commission charged that Cisco's packaging and advertising misrepresented that it was a low-alcohol wine cooler, despite a high alcohol content. The alleged misrepresentation resulted in alcohol poisoning of several consumers who believed the product to be low in alcohol. The order prohibited representations that Cisco is a low-alcohol, single-serving product and required other changes in marketing and packaging to distinguish the product more clearly from wine coolers.
Use of the Commission's unfairness jurisdiction to address alcoholic beverage advertising that may appear to be targeted to children requires showing that the advertising causes or is likely to cause substantial injury. It may seem obvious and noncontroversial to some that an increase in distilled spirits advertising and promotional efforts will lead to increased consumption of this 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.(18) 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.(19)
The Commission testified to Congress in 1990 that the evidence of a link between advertising and alcohol consumption in general was inconclusive and failed to show a causal relationship.(20) 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. Just two years ago, the National Institute of Alcohol Abuse and Alcoholism 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 this government agency, existing studies were inconclusive for methodological reasons and the lack of sufficient data.(21)
In my view, methodologically sound studies are the best way to determine whether and how alcohol advertising affects consumption. But the absence of reliable scientific evidence on the effect of a particular advertising campaign on consumption is not dispositive of every unfairness inquiry. Section 5 permits us to find that a practice is unfair if it is likely to cause substantial injury; we need not find that injury 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. Direct or circumstantial evidence of an intent to target children with advertising for a product they cannot legally consume is particularly relevant to this inquiry.
The Commission has looked at placement and content issues in the context of our 900-Number Rule. Shortly after I arrived at the Commission, we accepted several consent agreements settling allegations that advertisements for 900-number calls unfairly induced children to make calls to cartoon characters, resulting in expensive phone bills that their parents had no reasonable way to avoid.(22) The Commission required easy-to-understand disclosures and that parents be provided either with a reasonable means to avoid unauthorized calls or with one-time refunds for unauthorized calls by children.
Congress later expanded this relief with a statute, the Telephone Disclosure and Dispute Resolution Act of 1992, that directed the Commission to issue pay-per-call regulations. Among other things, the 900-Number Rule prohibits ads for non-educational, pay-per-call services directed to children under 12, requires clear and conspicuous disclosures about the need to obtain prior parental permission in ads directed to children under 18, and sets forth criteria for determining when a call is directed to a particular age group.(23) The Commission's Rule provides that ads are directed to a particular age group if competent and reliable evidence shows that more than 50% of the audience is composed of that age group. If such evidence is not available, other criteria include placement of the ad on a program directed to that age group, the nature of the programming in which the ad appears, and whether the ad, regardless of its location, is directed primarily at the relevant age group in terms of its subject matter, content, tone or the like. This Rule is currently under review by the Commission, and we will seek public comment on any changes we propose later this year.
The criteria set forth in the Rule for determining when ads are directed to children should be particularly interesting to companies seeking to avoid targeting children with ads for products they cannot legally consume. Self-regulation may be the best way to address advertising of beer, wine, or spirits that may be especially appealing to or directed to minors. In light of the governmental interest in the effect of alcoholic beverage advertising on children, industry might wish to forestall possible "fix-it-for-you" solutions by coming up with its own fix through industry codes and self-regulatory enforcement mechanisms.
The First Amendment
By now, you may be wondering where the First Amendment comes in. Well, in my view, the First Amendment needs to be considered when we assess appropriate remedies for unfair or deceptive practices and when we select cases for enforcement, so that our enforcement actions do not have the effect of chilling truthful, non-deceptive speech. Alcohol advertising poses particularly difficult First Amendment issues because this advertising concerns behavior that is legal when engaged in by adults.
As the Supreme Court recently reaffirmed in 44 Liquormart, Central Hudson(24) remains the standard for assessing whether restrictions on commercial speech are permissible under the First Amendment.(25) Under the Central Hudson standard for commercial speech, neither deceptive speech nor speech that proposes an illegal transaction is protected by the First Amendment.(26) A restriction on commercial speech that is not misleading and concerns lawful activity must pass three additional tests: the asserted governmental interest in the speech restriction must be substantial; the restriction must directly advance the governmental interest asserted; and the restriction must not be more extensive than necessary to serve that interest.(27)
Commission orders that require marketers to stop making false or unsubstantiated statements do not tread on First Amendment rights. When the Commission compels speech as part of a remedy for deception, however, the analysis becomes more complicated. Disclosures that remedy deceptive omissions of material information are correctly viewed as restraints on deceptive speech. Corrective advertising or affirmative disclosures that prevent future deception or correct past deception do not raise First Amendment concerns, unless they in fact go beyond the prevention or correction of deception.(28) Broad fencing-in remedies, for example, that compel general consumer education or other speech not directly related to the prevention of deception are unlikely to survive First Amendment scrutiny.
Restrictions on unfair advertising also are subject to First Amendment scrutiny under the Central Hudson standard. In 44 Liquormart, a plurality opinion written by Justice Stevens confirmed that, in the absence of evidence, courts cannot assume that an advertising restraint will significantly reduce consumption.(29) 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.(30) The Court found that its earlier decision in Posadas(31) -- a case that involved a ban on advertising casino gambling -- gave too much deference to the legislature when assessing whether a speech restriction directly advances the asserted governmental interest.(32)
In 44 Liquormart, the Court struck down under the First Amendment a legislative ban on price advertising of alcoholic beverages. The Stevens plurality reasoned that the ban did not significantly advance the asserted governmental interest and was not narrowly tailored. Both the plurality opinion and Justice O'Connor's concurring opinion in 44 Liquormart agreed that a total ban on price advertising of alcohol -- when there were other effective ways for government to achieve its goal -- failed to satisfy the Central Hudson requirement that a speech restriction not be more extensive than necessary.
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.(33) Because alcohol advertising directed to children promotes unlawful behavior, deference to a legislative judgment according to this reasoning may be warranted.
Following 44 Liquormart, the Supreme Court vacated and remanded the Fourth Circuit's two decisions upholding district court rulings against First Amendment challenges to a Baltimore city ordinance banning stationary outdoor advertising of alcoholic beverages in certain areas where children were likely to walk to school or play.(34) These cases, often referred to as the "Baltimore billboard cases," raise more questions than they answer about how 44 Liquormart applies to restrictions on alcohol advertising that might affect children. The district court reached its decisions by relying on Posadas and deferring to the Baltimore City Council's legislative record and findings. On remand following 44 Liquormart, the Fourth Circuit stated that it did not continue to rely on Posadas or "defer blindly to the legislative rationale," but rather reached its conclusion based on its independent assessment of the fit between the City Council's objective and the regulation used to achieve it.(35) Judge Butzner dissented, stating that the district court decisions should have been vacated and the cases remanded for evidentiary hearings in light of 44 Liquormart. The Supreme Court denied certiorari of the Fourth Circuit's decisions on remand, so the issue has not been joined. My view is that without evidence that a restriction on alcohol advertising will significantly reduce consumption by minors, the speech restriction should not survive First Amendment scrutiny.
How does the First Amendment apply to the Commission's consideration of alcohol advertising? 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 implicates First Amendment rights, the Commission -- as a government agency acting in the public interest -- should resist the temptation to compel speech through negotiation that it has no colorable chance of obtaining in litigation. As I have stated on several occasions, the Commission should seek relief that is no more extensive than necessary to prevent future violations by a Commission respondent.(36) We must not impose relief that has the potential to chill truthful and non-deceptive advertising or to deprive consumers of useful information.
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. Alcoholic beverage advertising that is targeted to or may affect children presents critical public policy concerns that should be addressed first through industry self-regulation. Only when the market fails should the government resort to narrowly tailored action consistent with the First Amendment.
1. The views that I express here today are my own, and do not necessarily reflect those of the Commission or any other Commissioner.
2. 15 U.S.C. 45(a).
3. Letter from the Federal Trade Commission to Hon. John D. Dingell, Chairman, Committee on Energy and Commerce, U.S. House of Representatives (Oct. 14, 1983), reprinted in Cliffdale Assoc., Inc., 103 F.T.C. 110, 174 (1984).
4. Deception Policy Statement at 178-79.
5. See Ideal Toy, 64 F.T.C. 297, 310 (1964).
6. See Lewis Galoob Toys, Inc., 114 F.T.C. 187 (1991).
7. 15 U.S.C. 45(n).
8. See Philip Morris, Inc., 82 F.T.C. 16 (1973).
9. R.J. Reynolds Tobacco Co., File No. 932-3162 (Joint Statement of Commissioners Mary L. Azcuenaga, Deborah K. Owen, and Roscoe B. Starek, III) (June 6, 1994).
10. 15 U.S.C. 45(n).
11. See Letter from the Federal Trade Commission to Hon. Wendell Ford and Hon. John Danforth, Committee on Commerce, Science and Transportation, United States Senate (Dec. 17, 1980) ("Unfairness Policy Statement"), appended to International Harvester Co., 104 F.T.C. 949, 1070 (1984).
12. 15 U.S.C. 45(n).
13. Sears, Roebuck and Co., File No. 972-3187 (consent agreement accepted for public comment) (June 3, 1997) (unlawful collection of debts that were legally discharged in bankruptcy proceedings); FTC v. David L. Amkraut, Civ. 97-054-RSWL(BQRx) (C.D. Cal. 1997) (submitting disqualifying, multiple entries on behalf of his clients in State Department's green card lottery; failing timely to forward to lottery winners the materials necessary for them to apply for visas); FTC v. Diversified Marketing Service Corp., Civ. 96-0388M (W.D. Okla. 1996) (unauthorized bank debits and credit card charges); FTC v. Windward Marketing, Ltd., 1:96-CV-615-FMH (N.D. Ga. 1996) (same). See also R.J. Reynolds Tobacco Co., Docket No. 9285 (complaint issued May 28, 1997) (allegedly inducing children to smoke or continue smoking through advertising campaign).
14. See Warner Lambert Co. v. FTC, 562 F.2d 749 (D.C. Cir. 1977), cert. denied, 435 U.S. 950 (1978).
15. Azrak-Hamway International, Inc., Docket No. C-3653 (1996).
16. The Commission shares jurisdiction with the Bureau of Alcohol, Tobacco and Firearms ("BATF") over deceptive alcohol advertising. The Federal Alcohol Administration Act authorizes the BATF to prevent false, misleading, obscene, or indecent statements in advertisements of distilled spirits, wine, or malt beverages. 27 U.S.C. 205(f). BATF also has authority over alcohol product labeling and pre-approves package labels. 27 U.S.C. 205(e).
An agreement between the FTC and the FCC recognizes that the FTC has primary responsibility with respect to unfair or deceptive advertising in all media, including the broadcast media. Liaison Agreement Between Federal Communications Commission and Federal Trade Commission (Apr. 27, 1972), 4 Trade Reg. Rep. (CCH) 9852.
17. Canandaigua Wine Co., 114 F.T.C. 349 (1991).
18. J. Fisher, Advertising, Alcohol Consumption, and Abuse: A Worldwide Survey 24 (1993).
19. 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.
20. 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).
21. 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).
22. Phone Programs, Inc., 115 F.T.C. 977 (1992); Teleline, Inc., 114 F.T.C. 399 (1991); Audio Communications, Inc., 114 F.T.C. 414 (1991). See also Fone Telecommunications, Inc., 116 F.T.C. 426 (1993).
23. 16 C.F.R. 308.3(e), (f).
24. Central Hudson Gas & Electric Corp. v. Public Service Commission, 447 U.S. 557 (1980).
25. 44 Liquormart, Inc. v. Rhode Island, 116 S. Ct. 1495 (1996).
26. See Central Hudson, 447 U.S. at 563; Virginia Board of Pharmacy v. Virginia Citizens Consumer Council, 425 U.S. 748, 771-72 (1976).
27. Central Hudson, 447 U.S. at 566.
28. See Warner Lambert, 562 F.2d at 758; Beneficial Corp. v. FTC, 542 F.2d 611, 620 (3d Cir. 1976), cert. denied, 430 U.S. 983 (1977).
29. 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 significantly reduce market-wide consumption." 44 Liquormart, 116 S. Ct. at 1509 (emphasis in original) (citations omitted).
30. "[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).
31. 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).
32. 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.
33. 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.
34. See Anheuser-Busch, Inc. v. Mayor of Baltimore, 855 F. Supp. 811 (D. Md. 1994), aff'd, Anheuser-Busch, Inc. v. Schmoke, 63 F.3d 1305 (4th Cir. 1995), vacated and remanded, 116 S. Ct. 1821 (1996); Penn Advertising v. Mayor of Baltimore, 862 F. Supp. 1402 (D. Md. 1994), aff'd, Penn Advertising v. Mayor & City Council of Baltimore City, 63 F.3d 1318 (4th Cir. 1995), vacated and remanded, 116 S. Ct. 2575 (1996).
35. Anheuser-Busch v. Schmoke, 101 F.3d 325, 327 (4th Cir. 1996), cert. denied, 117 S. Ct. 1569 (1997). See also Penn Advertising v. Mayor of Baltimore, 101 F.3d 332 (4th Cir. 1996), cert. denied, 117 S. Ct. 1569 (1997).
36. See, e.g., Statement of Commissioner Roscoe B. Starek, III, Concurring in Part and Dissenting in Part in America Online, Inc., File No. 952-3331 (consent agreement accepted for comment) (May 1, 1997).