The PMAA Promotion Law/Marketing Conference, Promotion Marketing Association of America, Hyatt Regency Washington on Capitol Hill
The views expressed are those of the Commissioner and do not necessarily reflect those of the Federal Trade Commission or the other Commissioners.
Good afternoon. I am very happy to be here for this Promotion Law/Marketing Conference. Today, "reinvention of government" is much in vogue. It is always important to be stylish, and I would like to spend my time today telling you about some of the new things the Commission has been doing to try to function more effectively and, if you will, to serve our "customers" better. But let me start with an old-fashioned caveat, which is that the views I express today are mine and do not necessarily represent those of the Commission or any other commissioner.
What do I mean by pleasing or satisfying the customer in the context of a federal law enforcement agency? Presumably, the principal way in which we can achieve customer satisfaction is to run a well oiled enforcement machine that fairly administers the laws committed to our charge. The FTC continues to try and perfect its efforts in this area, and I will begin by telling you about some of our recent law enforcement activities.
But an important adjunct to our enforcement efforts is to educate both consumers and members of the business community about the law. This is an activity in which I think the Commission also has excelled and in which we have had the frequent cooperation and assistance of those in the private sector, like the PMAA. With the help and leadership of a very fine Bureau Director, Jodie Bernstein, and a very fine staff, the Commission has taken several other steps toward reinventing itself.
The Commission's enforcement endeavor in the consumer protection area that perhaps has received the most publicity this year has been our intensive effort to target those committing consumer fraud. In August 1995, acting under the specific Congressional mandate of the Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994, 15 U.S.C. 6101, the Commission adopted the Telemarketing Sales Rule, 16 C.F.R. Part 310 (1996). During the rulemaking process that led to adoption of the Rule, the Commission received assistance from a number of trade associations, including the PMAA. The thoughtful input of these organizations and others was an invaluable resource to the Commission in shaping the Rule, and since the adoption of the Rule, in educating legitimate telemarketers in how to comply with the Rule. Most legitimate businesses have complied voluntarily. This has enabled the Commission to concentrate its efforts on the fraudulent operators, hardcore noncomplying businesses and individuals. As we approach the first anniversary of the Rule's effective date, which was December 31, 1995, it is a good time to review the Commission's enforcement of the Rule.
Because the Rule is enforceable by both the Commission and state agencies, the Commission considered it imperative to coordinate its efforts with those of the states to avoid inconsistent interpretations. We have worked closely with the states and with other federal agencies, such as the Postal Inspection Service, that have their own authority to attack telemarketing fraud.
Our efforts at coordinated enforcement led to use of what we now refer to as "sweeps." Sweeps comprise multiple, simultaneous state and federal actions against a number of targets all independently engaged in similar, often basic law violations. The idea is to have a large number of cases or other enforcement actions filed or announced on the same day to ensure the greatest possible media exposure. The sweep approach produces maximum results with the minimum resource expenditure. In the five separate sweeps in 1996 to date, the Commission's Telemarketing Sales Rule enforcement project has resulted in almost 200 federal and state law enforcement actions against telemarketers operating in violation of the Rule.
In addition, each sweep has provided a springboard from which to launch a coordinated consumer education campaign with state agencies and the private sector focused on the specific problem targeted in the sweep. In each of these campaigns the Commission has joined with the private sector in a Partnership for Consumer Education. Through the Partnership, the Commission has sought to leverage its resources and to bring the sophistication and expertise of the private sector to bear on the problem of telemarketing fraud.
The Partnership has proved to be a dynamic enterprise that generates results. One of the most important contributions, made by Publishers Clearinghouse, is attractive, professionally produced camera-ready print advertisements in a wide array of sizes and styles, on the theme "You don't have to pay to play -- sweepstakes must be free." Since last January when the Partnership for Consumer Education was launched, over 30 million consumers have received educational messages about how to protect themselves from telemarketing fraud.
In the wake of the initial sweeps and the formation of the Partnership, it is encouraging that the number of complaints about telemarketing fraud listed in the FTC-NAAG database has decreased. The National Association of Attorneys General recently announced that telemarketing fraud has dropped from number 3 to number 10 on the list of most common subjects of consumer complaints.
Let me mention one of the sweeps to give you some flavor. "Operation Jackpot," was launched in July, and it targeted those who might well give your businesses an undeserved bad name, telemarketers employing fraudulent sweepstakes prize promotions. Operation Jackpot included 56 enforcement actions against 79 defendants in 17 states. The FTC filed eight actions, the State Attorneys General filed 43, and the U.S. Postal Service filed five. For the second time in the Commission's experience, Operation Jackpot included an enforcement action against a company located in Canada. The Commission filed a complaint against a corporation and two individual defendants, all located in Canada, alleging that they were conducting deceptive telemarketing prize promotions directed at United States residents.(1) According to the complaint, the defendants promised consumers enticing prizes such as cars, boats, vacations in the Bahamas, and large sums of cash, but they demanded that consumers pay between $500 and $5000 in processing fees, taxes, or to purchase products they did not necessarily want, such as air filters. In return for their hard-earned dollars, these consumers received only certificates, inexpensive radios, or other cheap items worth a fraction of what they had paid to the Canadian telemarketers. The victims, many of whom are elderly or infirm, are residents of small towns like Elephant Butte, New Mexico; Emigrant, Montana; Hana, Hawaii; and Chillicothe, Ohio; hardly areas of the country where one would expect to find big time fraud.
Assuming it obtains a judgment in the United States federal court, the Commission will work with the Department of Justice to have that judgment recognized and enforced in Canada. This case sends an important message. Stepping across the border into Canada to defraud consumers in the United States by phone will not be a successful strategy to evade FTC enforcement action.
Following Operation Jackpot, the Commission took several additional steps to highlight this point. First, the Commission hosted two conferences on cross-border fraud and met with Canadian officials to discuss mutual enforcement concerns. These conferences have led to concrete results. For example, attendees have established working groups on cross-border criminal law enforcement, civil law enforcement, and information-sharing. At the same time, the Federal Trade Commission and Industry Canada have signed an agreement establishing a joint Task Force on Cross-Border Fraud, and the National Association of Attorneys General has announced a task force headed by the Attorneys General of the states of Vermont and Washington.
In the future, the Commission expects to see greater bilateral cooperation and increased cross-border enforcement action with Canada as well as with Mexico.(2) Greater attention to cross-border fraud already has begun to pay off. The National Fraud Information Center reports a decrease in the number of complaints related to Canadian-based telemarketing. Also, in Canada where penalties under the consumer protection laws are often criminal, officials recently have asked to review the Commission's Telemarketing Sales Rule and have started to consider how to strengthen Canadian civil enforcement powers. Indeed, I understand that legislation recently has been introduced in Parliament toward this end.
Each of the Commission's sweeps has targeted a particular type of deceptive telemarketing.(3) As of the time of Operation Jackpot, prize promotions were the number-one source of complaints reported to the telemarketing complaint database operated jointly by the FTC and the National Association of Attorneys General. Between 1995 and June, 1996, fully half of all complaints reported were prize-promotion scams. In fact, about a third of the telemarketing cases we brought before adoption of the Telemarketing Sales Rule related to deceptive prize promotions.
Prize promotions conducted properly and fairly are harmless and may benefit consumers. Like many other tools and techniques, however, in the hands of unscrupulous operators, prize promotions can be a potent source of consumer harm.
Over the years, we have learned that some of the marks of a deceptive or fraudulent prize promotion are fairly easy to spot. The Commission has identified two red flags that can help consumers identify and avoid sweepstakes offers that are likely to be deceptive or fraudulent. The first red flag should go up when consumers hear or see a requirement to make a payment or a purchase in order to be eligible for a chance to receive a prize. A prize offer that includes both an element of chance and a requirement for payment of consideration is likely to be an unlawful lottery under federal and some state laws, and this may be reason enough to question the offer.
A second red flag should go up if there is any express or implied representation that an individual consumer is assured, or "guaranteed," to win the best, or one of the best, prizes offered. If prizes are truly allocated by chance, such representations can only be false.
The validity of these two rules of thumb was confirmed by PMAA in its comments and oral presentations during the rulemaking proceeding leading to adoption of the Rule.(4) The final Telemarketing Sales Rule addresses both red-flag practices.
The Rule also addresses abuses that consumers cannot spot in advance. One of these is the touting of a "prize" that requires undisclosed expenditures in order to enjoy its benefits. For example, an offer of a "free vacation" might turn out to be a travel certificate redeemable for airfare, but only if the consumer also purchases expensive accommodations at a specified hotel. The Rule prohibits misrepresentation of the nature or value of a prize and requires disclosure of all material costs or conditions to receive or redeem a prize that is the subject of a prize promotion.
The Commission will continue to combat telemarketing fraud through sweeps and otherwise. Membership in the Partnership for Consumer Education continues to increase, having grown from 40 founding members to its current level of over 80. As its next project, the Partnership is planning a year-long educational initiative, "Spreading the Word About Telemarketing Fraud," that is scheduled to be launched in January 1997.
Deceptive advertising traditionally has been and remains an important focus of our attention. We have a strong enforcement program, but rather than describing our recent cases, I would like to talk about another aspect of our advertising program. Not only does the Commission want to stop deceptive advertising, we also hope, through our law enforcement program, to enhance the credibility of truthful advertising. Truthful advertising is useful to consumers and improves the efficiency of the market for goods and services. This proposition has been supported by a number of studies conducted by our staff. The Commission's latest study on this topic, written by FTC staff economist Pauline Ippolito and former staff economist Alan Mathios, now at Cornell University, is an excellent example. This study(5) examines changes in consumers' consumption of fat, saturated fat, and cholesterol from 1977 through 1990. The main question was: How did changes in the regulatory environment, which allowed an expansion of health claims by food producers, affect consumers' knowledge of diet-disease relationships and the quality of their diets? Some critics argue that health claims in advertising confused consumers, and made it harder for them to improve their diets. The marketing community would like to believe that their efforts have helped consumers improve their diets. Who was right, the marketers or their critics?
It is hard to sort out cause and effect in a complex world, but here is what the study found: From 1977 to 1985, when health claims were highly restricted, fat consumption fell approximately 5%. But between 1985 and 1990, when health-related claims became more explicit and more frequent, fat consumption fell more than twice as much, for both men and women. Consumption of total fat, saturated fat, and cholesterol all dropped at a far faster rate when health claims were more prevalent. At the same time, knowledge of diet-disease relationships improved, and fat and cholesterol reductions were widely shared across the adult population.
There are many reasons why consumers' diets may have improved faster during the late 1980's. Some of the improvement may well result from the efforts of government and others interested in public health to inform consumers and from general media coverage of the issues. The authors of the study, however, were able to conclude that
[t]he available evidence is certainly consistent with the view that the relaxation in rules governing producer health claims contributed to a better information environment, leading to improvements in consumers' food choices. The data do not support the alternative view that producer health claims in advertising and labeling had adverse effects on consumer food choices on average. . . .
These conclusions should not be surprising. While the public health community has greater expertise regarding scientific issues than the marketing community, the marketing community has an advantage in communication. Advertising, by providing comparative information on a product-specific basis, and targeting it directly to the consumers who care, is more likely to reach and affect a large audience. The study, therefore, supports the Commission's continued campaign against deceptive advertising.
CONSUMER AND BUSINESS EDUCATION
Although law enforcement is necessary, arguably an even more important function is what we can do to make enforcement actions unnecessary. Our consumer education program is an effort to do just that. I have already described the Partnership for Consumer Education in the context of telemarketing fraud. Let me tell you a little about the Commission's other consumer and business education efforts.
In the last fiscal year, although our materials were done in traditional formats, brochures, bookmarks, flyers, radio public service announcements, posters and the like, the dissemination mechanisms were broad based and often unconventional. Our messages are in the media, on the FTC's Web site, on billing statements, in the classifieds as public service messages, and even in grocery stores. You may read them in your community newspaper or your professional association's newsletter. Or you may be directed, or hyper linked, to them when you are surfing the Internet.
One of the Commission's most successful education efforts is an activity booklet for middle school students produced with the National Association of Attorneys General. Over 150,000 copies of the booklet, which is entitled The Real Deal, have been distributed since last January to students who will be the targets of the advertising and promotions of tomorrow. It is designed to teach students how to spot a scam, figure out a fraud and recognize a rip-off.
Attorneys General, school districts and individual teachers, banks, radio stations and extension agents have distributed the booklet in bulk quantities, alerting us to the fact that we need to do more to reach young consumers. The Commission has logged in over 13,000 requests to an 800 number for nearly 50,000 copies of the booklet. Radio public service announcements aired on at least five major radio networks and at least 40 different radio stations, some in markets as large as New York and Los Angeles: the Commission gets some 150 calls a week on its 800-number line. Listener impressions, the number of times a listener hears a public service announcement, have been estimated at 28,740,000. All this was free as a public service, yet had the Commission paid for the same results we would have spent some $214,500.
The Commission's consumer education office also has tried to reach new audiences. For example, in a pilot project with the American Council for the Blind, the Commission has started Brochures on Tape for people who are visually impaired. Through the Federal Communications Commission, the Commission learned that these persons often fall victim to fraudulent schemes that involve high tech communications equipment. In addition, a number of brochures particularly targeted to senior citizens have been reprinted in large type.(6)
Finally, I should mention that the Commission recently released a report on the accuracy of price scanners. During National Consumers Week, the FTC authorized release of a staff report that concluded that scanners are accurate more than 95% of the time, and that undercharges were somewhat more prevalent than overcharges. This report, hopefully, will reassure consumers that they are not being systematically cheated by scanners, and perhaps lay to rest persistent mistrust of scanners. At the same time, the results were not uniform across stores or store type. Some retailers need to reexamine their pricing practices and make sure that they have adequate procedures in place to ensure the shelf or advertised price matches the price in the computer. And consumers should remain alert, of course; overcharges still can and do occur.
As I mentioned, the Commission has its own home page on the World Wide Web: http://www.ftc.gov, and it logged 2,033,507 hits during Fiscal 1996. This includes special pages we promoted for each of our major campaigns.
In Fiscal 1996, the Commission wrote 39 new brochures and revised 22. Our aggressive outreach efforts resulted in record distribution numbers in FY 1996: 4,125,000 brochures; and FY 1997 is off to a great start: 701,563 brochures were distributed in October alone.
REGULATORY AND OTHER REFORM
The Commission has also made some impressive strides in the area of regulatory reform. Starting in 1992, the Commission adopted a policy of systematic and comprehensive review of the rules the Commission promulgates that have the force and effect of law. Over the last three years, as a result of the regulatory review program, the Commission has repealed 25 rules and guides and revised another 19 as partly or entirely obsolete in light of technological advances or market forces. The repealed and revised rules and guides accounted for 50% of those in effect three years ago. Of the remaining rules and guides, some have been streamlined and modernized to make them more useful and effective for consumers and businesses, and all continue to be reviewed on a regular basis to ensure that they remain effective adjuncts to our law enforcement program. I think this is an impressive record of which the Commission may be proud.
Also, in the nature of reform, last year, after studying the question of the appropriate duration of its cease and desist orders, the Commission adopted a "sunsetting" policy. Under this policy, administrative orders will terminate after 20 years. Before the change, Commission orders to cease and desist extended into perpetuity.
The Commission also has been using a new approach to encourage public participation in its proceedings and to enable it to respond more effectively to feedback from its "customers." Increasingly, when considering rules, guidelines and other actions, the Commission staff has held public workshop-conferences at which interested parties may engage the staff in face-to-face discussion of the issues.
This technique was first used in 1993 to promulgate the Commission's 900-number rule, and we now have used it over a dozen times, not just for rulemakings, but for regulatory reform, examination of complex policy issues and the launching of cooperative initiatives. The workshops have several advantages. First, they enable us to bring together and get input from a wide variety of interested groups: industry representatives, consumer groups, government agencies, academics and other members of the public. The workshops help us learn how industry really operates. They allow us to obtain large amounts of information in a short period of time. They provide an opportunity for interested persons who have submitted written comments to expand on those comments and respond to the views of others. They open up new dialogue, permitting an exchange of ideas not possible under traditional agency procedures. Workshops are even more valuable when interested persons are divided in their views, because the sessions usually are moderated by a neutral, third-party "facilitator." They also are useful when an initiative is on a fast track, as was the case, for example, when the Commission was formulating its 900-number rule. The statutory deadline for publication of a final regulation left no time for conventional procedures that entail written comment and rebuttal.
The Commission is fortunate to have numerous partners in the task of eliminating deceptive practices from the market in the form of industry self-regulatory agencies.(7) Recently, the Commission held a conference, co-sponsored by the advertising industry at which members of the print media and cable television operators were encouraged to make themselves aware of the substance of the advertising they are called on to disseminate and to use their good offices to try and prevent the dissemination of deceptive claims and the practice of fraud. The cable industry has addressed these concerns in a set of guidelines issued last June. The government, the advertising industry and consumers all have a strong mutual interest in its future success.
Speaking of the future, let me look forward for a moment to future challenges. It is difficult to overstate the rapid evolution that is occurring in the communications marketplace. These changes, principally the growing ascendency of computers and the Internet, can provide enormous benefits to consumers in terms of choice, convenience and the ability to obtain information about products or services. They also present some significant challenges for law enforcement.
Interactive marketing on the Internet will rely heavily on attracting consumers to particular websites. This can be accomplished in many ways, including contests, games and sweepstakes. One company even announced last week a proposal to begin paying consumers to watch advertising. Other Internet advertisers may seek new audiences by trying to enhance the content on their websites. One of the potential challenges of Internet marketing that may loom ahead and is reason for some concern is the very real possibility of a further blurring of the lines between editorial content and advertising.
This blurring already has occurred in traditional media. Newsweek referred to the problem as the "New Hucksterism." The Commission has just announced final issuance of a consent order in a case that presented a novel form of marketing(8). The company sent mailings to several million consumers across the country. Inside the envelope was what appeared to be an article torn from a magazine, printed on glossy, magazine stock and complete with a ragged margin, a byline, and a page number and month and year at the bottom of the page. The article, entitled "Applause, Applause," appeared to be a favorable review of a $300 book on how to be a successful speaker. To complete the picture, a self-adhesive, yellow note was attached to the article with the following handwritten notation directed to the name of the individual recipient: "Try this. It works! J."
In fact, the Commission alleged, this mailing was a promotion designed to sell the book. The supposed book review was written by the marketer and never had appeared in a magazine. The attached note was not from a friend or acquaintance, the mysterious "J," but again, was part of the promotion. In short, the entire solicitation was designed to fool consumers into believing that it was not just another promotion, but rather an independent review of the book mailed to the consumers by some acquaintance vouching for its quality.
This case is a good illustration of an important principle of law. It is deceptive for an advertiser to disguise a promotion as an independent review, editorial content, or something other than an advertisement. We have applied this principle in several contexts in recent years, including our guides for the use of endorsements and testimonials, "infomercials," those feature-length advertisements appearing in news report format that imply an independent review of the virtues of a product, and, more recently, the "advertorial," the term often used to describe an advertisement made up to look like an editorial. Consumers should be able to tell when a message comes to them as a paid advertisement. Only then can they evaluate the message critically.
"Micro targeting" of solicitations and advertising to individual consumers presumably will continue to increase. It likely will thrive on the Internet, where interactive sites will facilitate the process. This development raises other questions about Internet marketing. Where does the information used in the micro targeting process come from? How is it used? And what do consumers know about its collection, storage and use? These privacy issues are of course not new but have taken on more prominence with the increased use of the Internet. Recently, the Commission and its consumer protection staff have hosted workshops to discuss these issues. Although there are limitations on our jurisdiction in this area, I believe that the Commission can usefully continue to promote debate on this and other Internet marketing issues.
Beyond promoting debate, it is important, of course, that we proceed with care. New communication technologies are developing rapidly, and the Commission should not lightly undertake initiatives that may inhibit technological growth. Our motto for the near future, perhaps, should be "festina lente," or "make haste slowly."
Although the general principles of the FTC Act apply with full force to these new media, we have been urged to consider whether their technological capabilities lend themselves to different approaches to resolving consumer protection concerns. For example, it has been suggested that the same technologies being developed to filter the Internet of otherwise objectionable speech could be adopted to allow consumers to select privacy preferences. Similarly, we have been told that such filtering technologies might be particularly useful in providing parents with a means to control the kinds of personal information their children are allowed to disclose to others on the Internet. Such technology might be used to address some of the concerns about the collection of marketing data from young children on the Internet. The sponsor of one children's site has reacted to concerns about confusion between advertising and content, by creating an "ad bug" that appears on screen whenever the child is in a promotional section of the site. Although we do not know exactly how well some of these approaches will work, their availability certainly provides a greater range of options for us to consider than is true for traditional media.
I believe the Commission can play an important role in the examination of these kinds of issues with its unique blend of responsibility for both protecting consumers and ensuring that markets function freely and competitively. The basic principles of truth, substantiation, and fairness, have proved over time to be both flexible and effective at providing consumers a blend of consumer protection and rigorous competition that best serves their interests. The Commission's role since its creation has been to apply these general principles to an constantly evolving marketplace, and I am confident that we will continue to maintain the right balance in applying these principles in the future.
As you can see, the Commission has been busy, and I hope that you will agree that we have built an impressive record both in law enforcement and in meeting new challenges. I look forward to continuing our efforts in the coming year.
1. FTC v. 9013-0980 Quebec Inc. d/b/a Incentive(s) Int'l or Pegasus Industries, Civ. No. 96-CV-1567, (filed July 18, 1996 N.D. Ohio).
2. Other international cooperative ventures include the Commission's participation in a semiannual law enforcement seminar that includes representatives of the United States, Canada and Mexico interested in health fraud. In addition, the Commission has been active in various initiatives sponsored by the Organization for Economic Cooperation and Development ("OECD"). The Commission also monitors the activities of the International Standards Organization ("ISO") and participates in about 95% of ISO technical committees and subcommittees. Finally, in recent months, the Commission has taken enforcement actions in two other matters, one of which is likely to result in the repatriation from the Bahamas of substantial amounts of ill gotten gains. The other action was a pyramid scheme that resulted in a court order requiring, among other things, the repatriation of funds from Antigua. When the defendants failed to comply with this order, the court found them in contempt. Litigation continues.
3. The other sweeps conducted to date include: Operation Payback, targeting fraudulent credit repair operations (4 FTC cases and 16 state actions); Operation Loan Shark, targeting telemarketers of advance fee loan (5 FTC cases and 8 state actions); Operation CopyCat, targeting fraudulent sellers of office and cleaning supplies (5 FTC cases, 5 state actions and 5 USPS actions); and Operation Missed Fortune, targeting fraudulent get-rich-quick schemes (11 FTC cases and 75 state actions in 25 states).
4. Another Rule recently adopted by the Commission under statutory mandate, the "Pay-Per-Call" or "900-Number Rule," also contains provisions embodying these principles.
5. Pauline Ippolito and Alan Mathios, Information and Advertising Policy: A Study of Fat and Cholesterol Consumption in the U.S., 1977-1990. Copies of the study are available from the FTC's Public Reference Branch, Room 130, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580. (202) 326-2222.
6. Other examples include a brochure for college students entitled Cybershopping: Protecting Yourself When Shopping Online and Ready, Set, Credit. Both of these were done in conjunction with American Express. A Business Checklist for Direct Marketers, which the Commission developed with the FCC and the Direct Marketing Association, has been popular, as have Fraudulent Health Claims: Don't Be Fooled (with the Food and Drug Administration); Credit Repair: Self-Help May be Best (with Associated Credit Bureaus); and Border-Line Scams are the Real Thing (with the U.S. Postal Inspection Service and the National Fraud Information Center).
7. Among these organizations are the National Advertising Division of the Council of Better Business Bureaus and its appellate unit, the National Advertising Review Board. In addition, the broadcast networks long have had their own network reviewers of the advertising presented for broadcast.
8. Georgetown Publishing House, File No. 952 3388, consent order issued November 22, 1996.