318
Legal Developments
Unfairness Developments in FTC
Advertising Cases
Ivan L. Preston
T
he most interesting issue I found in the Federal Trade
Commission's (FTC) (1994a) new "Enforcement
Policy Statement on Food Advertising" was that it
does not mention unfairness. The absence appears as an
early section that states the "Legal Framework for Commission Action" as an introduction to procedures for harmonizing the FTC's food advertising decisions with the recent
food labeling regulations of the Food and Drug Administration (FDA) (1993).
The legal framework opens with the comment that the
Commission "regulates food advertising under its statutory
authority to prohibit deceptive acts or practices under Section 5 of the FTC Act" (FTC 1994a, p. 28389) In contrast,
the Commission's statutory jurisdiction actually entails both
"unfair or deceptive acts or practices" (FTC Act 1938, Section 5). The omission appears to represent the most recent
reflection of the lessened use of unfairness in advertising
cases.
However, Congress amended the FTC Act (1994) to create (among other things) a statutory definition of unfairness
and new rules for its use. I analyze the possibility that this
treatment could retum unfairness to a greater degree of importance in regulating advertising.
Background—The Trend in Use Over
Time
Although the FTC's original jurisdiction was solely to prohibit unfair competition (FTC Act 1914), it creatively
stretched that authority in the early years to cover consumer
protection actions even when injury to competitors was absent. Eventually, however, the Supreme Court told the FTC
not to consider consumers except in cases in which injury to
competitors was a factor {FTC v. Raladam 1931). Congress
then gave the FTC an explicit role in consumer protection in
the Wheeler-Lea Amendments (FTC Act 1938), which produced today's familiar prohibition against "unfair or deceptive acts or practices."
After applying the unfairness concept on a case-by-case
basis over many years, the Commission integrated the results in a summary, the Unfairness Statement (FTC 1980),
using criteria first specified in its Cigarette Statement (FTC
1964). There were three cigarette criteria, which are also
known as the S&H criteria after being recognized by the
Supreme Court in FTC v. Sperry & Hutchinson (1972) (for
an extensive historical discussion, see Rice 1983, 1984).
They held that commercial acts could be found unfair by (1)
causing consumer injury, (2) violating established public
policy, or (3) being unethical or unscrupulous (in the numerical re-ordering of the FTC (1980) statement).
The 1980 statement used the reordering to reflect changed
specifications of importance. Thus, it assigned the greatest
importance to consumer injury, which existed for the rule's
purpose if the injury was substantial and was neither out-
weighed by countervailing benefits nor reasonably avoidable by consumers. Substantial means that the injury could
not be trivial or speculative. In most cases it is monetary; it
might also involve health or safety, but not emotional impact
or other subjective harms. Countervailing benefits means,
where they are present, that a practice might not be injurious
in its net effects, determined by assessing both benefits and
costs, and so would not be unfair. The costs of a remedy are
also used to assess such net effects. Nor reasonably avoidable means that consumers must not have simply failed to
avoid the injury, but must also have been prevented from
doing so by high costs or other effects of unreasonable seller behavior: "Most of the Commission's unfairness matters
are brought... to halt some form of seller behavior that unreasonably creates or takes advantage of an obstacle to the
free exercise of consumer decisionmaking" (FTC 1980, p.
1074).
The second cigarette criterion was downgraded; it could
now be used to provide additional evidence of the first and
could also be an independent basis for finding unfairness,
but only when the pertinent policy was formally stated in
laws or judicial decisions covering jurisdictions broader
than isolated states or courts. The Commission later added,
however, that it did not believe such conditions allowing
public policy to be an independent basis were ever likely to
be met (Miller 1982).
The third cigarette criterion was dismissed. It was recognized as having existed earlier, but was duplicative of the
first two, and therefore was declared not independently usable. In this way the FTC's (1980) Unfairness Statement reduces the earlier criteria to (1) showings of consumer injury
and (2) use of public policy considerations as additional evidence of such injury.
These and other events indicate that the FTC has treated
unfairness as an active concept over the years. There was an
extensive early application, from which the original
cigarette criteria were derived. That early history involved,
among other things, using unfairness as the original foundation for the reasonable basis rule (Pfizer 1972), though deceptiveness became the prevailing foundation with National
Dynamics (1973). The writing of the Unfairness Statement
and its application in a prominent litigated case {International Harvester 1984) have extended the use of unfairness
in more recent times.
Yet, there have been signs of a reduction of such activity.
The principal reason was the FTC's ill-fated consideration
of an industrywide rule that would have banned advertisements addressed primarily to children; the result was
Congress broadly decreeing that the FTC no longer could
issue rules regulating advertising based on unfairness (FTC
Act 1980). It could still use the concept in individual
cases—as in International Harvester (1984), Orkin (1986),
and C&D Electronics {192,1).
Whether or not the overall record shows a waning of the
concept, the use of unfairness has been minor in advertising
cases in the 1990s. Is it possible, though, that the recent codifying of the definition into the FTC Act may significantly
increase the usage?
Journal of Public Policy & Marketing
The 1994 Amendments and Their
Implications
Section 5 of the FTC Act (1994), which authorizes the prohibition of unfairness and deceptiveness, was amended to
state:
The Commission shall have no authority ... to declare unlawful
an act or practice on the grounds that [it] is unfair unless [it]
causes or is likely to cause substantial injury to consumers
which is not reasonably avoidable by consumers themselves and
not outweighed by countervailing benefits to consumers or to
competition. In determining whether an act or practice is unfair,
the Commission may consider established public policies as evidence to be considered with all other evidence. Such public policy considerations may not serve as a primary basis for such determination.
The statement obviously reflects the 1980 formulation, but
emphasizes the primacy of consumer injury. The original
third criterion is not mentioned at all, and the second is not
mentioned as an independent basis. The potential significance of the latter change is reflected by a complaint, quickly issued by a consumer activist, that the weakening of the
ability to treat unfairness by public policy is hurtful to a petition of the Center for Science in the Public Interest. The
petition, which asks for restrictions on alcohol advertising,
is based largely on public policy considerations and must
now be restated to rely on consumer injury issues (Silverglade 1994).
Altematively, however, the reduction in scope may not be
great, because the 1980 statement had already made the
third criterion no longer independently applicable and the
second applicable primarily in the way the new wording still
permits. Meanwhile, a result that seems more clearly significant is that the definition is now "set in stone" and, thus, is
no longer subject to further change by unilateral action of
the Commission.
The 1994 amendments also restore unfairness as a basis
for industrywide rulemaking, which points the concept toward its former breadth of scope. However, the change is
subject to the following provision:
The Commission shall issue a notice of proposed rulemaking
only where it has reason to believe that the unfair or deceptive
acts or practices which are the subject of the proposed rulemaking are prevalent [if] (A) it has issued cease and desist orders regarding such acts or practices, or (B) any other information
available ... indicates a widespread pattem of unfair or deceptive
acts or practices (FTC Act 1994, Section 5).
The privilege is not greatly narrowed by the requirement to
show prevalence, because the FTC has traditionally needed
to justify its actions as being in the public interest. The requirement for a "reason to believe," however, could be confining if challenges are raised, because, in the past, the FTC
occasionally appeared to have established its justification
primarily by self-assertion.
More provocative among the 1994 changes could be the
wording that unfairness may occur if the action not only
causes, but merely is "likely to cause," consumer injury. Sufficiency of a finding of likeliness was not acknowledged
specifically in the 1980 statement, and the difference could
be significant, because likeliness to injure precedes actual
injury and is easier to establish as a factual finding. Thus,
319
the change conceivably could lead to a greater use of unfairness.
I make this suggestion cautiously, however, because prior
statutes and interpretations have never blocked the FTC
from basing a finding of unfairness on mere likeliness. The
possibility of such use, along with the low incidence of
doing so, are both indicated in a prominent case comment:
"Unlike deception, which focuses on 'likely' injury, unfairness cases usually involve actual and completed harms....
[They] may also be brought on the basis of likely rather than
actual injury, although this is not the usual practice" {International Harvester 1984, p. 1061). Thus, the suggestion
here is not that likeliness to injure will arise as a brand new
concept, but that its use could move toward becoming a
usual practice.
Should that happen, the concept of likeliness to injure
could regularly function similarly to the way such likelihood
is used in deceptiveness cases. The ease of finding deceptiveness, rather than actual deception, has played an essential role in the interpretation of the statutory term deceptive,
by giving the FTC a far greater chance of finding violations.
It also accurately reflects the FTC's mandate to prevent deceptive acts before they occur, which in tum reflects the
FTC Act's status as civil law, intended to set matters right—
in contrast to criminal law, which is intended to punish.
An absolute requirement to prove actual deception would
greatly reduce the FTC's findings of deceptive acts and less
adequately reflect its goal of prevention. In parallel, the tendency in unfaimess actions toward needing to prove actual
injury could help explain why unfaimess has been less used
than deceptiveness, whereas the new encouragement to find
likeliness to injure could increase its usage in the future.
In terms of the Commission's ability to produce the needed factual findings, there is no guarantee that the use of likeliness to injure is as feasible as the use of likeliness to deceive. It appears, for example, that the causal connection of
the challenged act to consumer injury will still need to be
proved, and will be difficult to prove. Furthennore, there are
constraints that apply to the likeliness to injure, though not
to the likeliness to deceive; they are the provisions that the
threat of injury must not be outweighed by countervailing
benefits or cost considerations and that consumers are not
reasonably able to avoid the injury. The role of such factors
can be only speculated on at present, because Commission
cases to date reveal no comprehensive identifications and assessments of required evidence of the sort that have long
since been available for deceptiveness (Preston 1990).
The prospects are mixed; the greater use that seems possible in theory may be restrained in application. To illustrate
such chances, consider that prior to the 1994 amendments,
the FTC investigated but did not act on the possible relationship of the Joe Camel cartoon figure to children's smoking (FTC 1994b). Had that investigation followed, rather
than preceded, the new statutory definition, the FTC might
have felt more confident of proving likeliness to injure even
if it could not prove actual injury.
On the other hand, as the majority said in deciding against
issuing a complaint, the agency would still have had to show
"a link between the Joe Camel advertising and increased
smoking among children" (FTC 1994b, p. 2). It would also
320
Legal Developments
have had to overcome any countervailing benefits and costs
of the regulation that might be found, as well as the possibility that consumers might reasonably be able to reject the
persuasive impact of the Joe Camel messages. Given the
challenges of these various tests, the new definition might or
might not have made a difference.
On the whole, however, the addition of a strengthened unfaimess violation to the existing deceptiveness violation is
more than trivial in its regulatory impact, because unfaimess
can reach activity that may cause consumer injury, though it
is not deceptive. Deceptive acts are unfair, but are treated by
the FTC as a subset of unfaimess, with unfaimess being a
more general principle {International Harvester 1984, p.
1060). Thus, any increase in the use of unfaimess would
likely lead to an increase in regulation overall.
A valuable device, for example, that might be strengthened by a rebirth of unfaimess is the remedy of affirmative
disclosure. Although the usual result of finding a claim deceptive is to prohibit it, the FTC also recognizes that some
claims can convey useful information without the accompanying deceptiveness. Rather than imposing an outright prohibition in such conditions, the FTC may let a claim continue if it is accompanied by a disclosure that eliminates its deceptiveness. Thus, the harmful part is removed without also
removing the useful provision of information.
To such purpose, affirmative disclosure has been widely
used, and yet it is subject to the limitation of being applied
only when it cures deceptiveness. As the FTC's Policy Statement on Deception explains, "A misleading omission occurs
when qualifying information necessary to prevent a practice,
claim, representation, or reasonable expectation of belief
from being misleading is not disclosed. Not all omissions
are deceptive...." (Miller 1984, note 4). The statement then
shows how to distinguish the difference:
The test is simple and pragmatic: Is it likely that, unless such
disclosure is made, a substantial body of consumers will be misled to their detriment...? [D]eception occurs only if consumers
could actually be misled by a seller's inaction. In other words,
the Commission must fmd that consumers have erroneous expectations that are contrary to an undisclosed material fact
(Miller 1984, note 37).
Although the Policy Statement on Deception was advisory, these points were more solidly established and given additional analysis in a subsequently litigated case {International Harvester 1984, pp. 1057-60). Despite the consequent attention and importance of such application, however, there might also be instances in which the absence or inadequacy of infonnation hurts consumers' ability to cope,
though the situation involves no deceptiveness. In such instances, a remedy that assures retention of the useful information would seem equally valuable, but is not readily
available, despite the legislative intent that the FTC Act prevent harm to consumers.
Although the use of unfaimess to undergird affirmative
disclosures in advertising technically has always been possible, it has happened infrequently in recent times. In International Harvester {\9M), failure to disclose was found to be
unfair, but no order was issued, because changes in the company's provision of information and the nature of its products were found to render further disclosure unnecessary. In
C&D Electronics (1987), a requirement for disclosure by
the seller directly to the buyer at the point of sale was supported by unfaimess, and in Consumer Direct (1990), a requirement for disclosure in advertising was similarly
supported.
Consumer Direct illustrates the role unfaimess plays and
could play more often in the absence of deceptiveness. The
complaint referred to a risk of injury from the snapping or
breaking of the spring in an exercise device and charged that
failure to disclose such fact in advertising and selling "has
caused substantial and ongoing injury to consumers" and,
thus, was unfair. The complaint also made several charges of
deceptiveness, but its drafters, though possibly they could
have done so, did not include the failure to disclose among
them.
Although this case shows how unfaimess can be an alternative violation, the low level of its use means this has not
often happened. It seems, therefore, that a significant increase of such activity, in affirmative disclosure matters, and
elsewhere in advertising cases, could occur should it be encouraged by recent developments.
Conclusion
If the new statutory definition of unfaimess encourages
greater use of the concept, the scope of FTC regulation
could become broader than it currently has been. Accordingly, interested parties should keep an eye on the impact of
the 1994 amendments.
References
Alberty {194S), 44 ETC. 475.
Alberty v. FTC (1950), 182 F.2d 36 (D.C. Cir).
C&D Electronics {im), 109 F.T.C. 72.
Consumer Direct {1990), 113 FT.C. 923.
FDA (1993), "Food Labeling Regulations," 21 C.F.R. §101, implementing the Nutrition Labeling and Education Act of 1990, 104
Stat. 2353, 21 U.S.C. §343.
FTC (1964), "Statement of Basis and Purpose, Unfair or Deceptive
Advertising and Labeling of Cigarettes in Relation to the Health
Hazards of Smoking" (Cigarette Statement), 29 Fed. Reg. 8355.
(1980), "Commission Statement of Policy on the Scope of
the Consumer Unfairness Jurisdiction" (Unfairness Statement),
letter to Senators Ford and Danforth, December 17; reprinted in
104 ETC. 1072(1984).
(1994a), "Enforcement Policy Statement on Eood Advertising," 59 Fed. Reg. 28388 (June 1).
(1994b), "Joint Statement of Commissioners" in R. J.
Reynolds (Camel Cigarettes), File 932 3162, June 7.
FTC Act (1914), 15 U.S.C §41 et seq.
(1938), amended, 15 U.S.C. §41 et seq.
(1980), amended, 15 U.S.C. §41 et seq.
(1994), amended, 15 U.S.C. §41 et seq.
FTC V. Raladam (1931), 283 U.S. 643.
FTC V. Sperry & Hutchinson Co. (1972), 405 U.S. 223.
International Harvester {\9M), 104 ETC. 949.
Journal of Public Policy & Marketing
Miller, James C. (1982), letter from FTC Chairman to Senators
Packwood and Kasten, March 5.
(1984), "Policy Statement on Deception," appendix to
Cliffdale Associates, 103 F.T.C. 174 (originally an enclosure in
letter to Congressman John D. Dingell, October 14, 1983).
National Dynamics {\913), 82 F.T.C. 488.
Orkin (1986), 108 F.T.C. 263, affirmed, 849 F.2d 1354 (llth Cir.
1988).
Pfizer (1972), 81 F.T.C. 23.
Preston, Ivan L. (1990), "The Definition of Deceptiveness in Advertising and Other Commercial Speech," Catholic University
Law Review, Vol. 39, 1035-79.
Rice, David A. (1983), "Consumer Unfaimess at the FTC: Misadventures in Law and Economics," George Washington Law Review, 52, 1-66.
(1984), "Toward a Theory and Legal Standard of Consumer Unfaimess," Joumal of Law and Commerce, 5, 111-54.
Silvergiade, Bruce (1994), "Comment," FTC:Watch, 421 (October
24), 8.
'Unfair'Advertising and the FTC:
Structural Evolution of the Law and
Implications for Marketing and Public
Policy
Alexander Simonson'
The Federal Trade Commission's power over 'unfair'advertising (and other marketing practices) is of major importance to marketers, advertising agencies, and public policymakers. This power has undergone two major structural
changes. First, the definition of unfairness is now codified.
Second, the ban on industry-wide regulations is now lified.
The author analyzes the structural evolution of the law,
namely, the background, debate, and changes to the law, and
concludes with implications for public policy and
marketing.
T
he Federal Trade Commission Act Amendments of
1994 codified what may be the most significant
changes in over a decade to the Federal Trade Commission's (FTC) power in policing "unfair" marketing.
These amendments grew out of protracted debate involving
numerous industry and advertising associations and consumer organizations. The legislation containing the amendments and reauthorizing the FTC was signed into law on August 26, 1994, toward the close of the Democratically controlled 103d Congress (Federal Trade Commission Act
Amendments of 1994).
The FTC's authority over unfair marketing stems from
Section 5 of the Federal Trade Commission Act (FTC Act),
which states that "unfair or deceptive acts or practices in
321
commerce are declared unlawful" (codified in 1938, 15
U.S.C. §45). Advertising is a key act or practice subject to
FTC policing. The FTC is responsible for enforcing the
statute and has two distinct mandates: (1) to prevent deception and (2) to prevent unfaimess. The authority provided in
Section 5 of the FTC Act enables the FTC to adjudicate
cases one-by-one. Section 18 of the Act gives the FTC broad
rulemaking power (i.e., the power to create federal regulations) to prevent unfair or deceptive acts or practices (codified in 1975, 15 U.S.C. §57a).
Because advertisers can fmd themselves subject to the potentially unpredictable and politically motivated decisions of
the FTC, there are questions conceming the FTC's adjudicatory and regulatory power over marketers' unfair acts and,
in particular, whether the FTC's authority should be limited
to protect the rights of advertisers. Ironically, the amendments received only limited media attention (Fisher 1994),
but they were passionately debated, with hundreds of pages
of testimony and input gamered from numerous entities,
ranging from the Association of National Advertisers to the
Consumers Union.
I analyze the FTC's evolving authority over unfaimess
and explain the major changes that have taken place in unfaimess jurisprudence. Finally, I conclude with implications
for public policy and marketers.
Prior Framework
What is "Unfair"?
What is unfair advertising? Is it unfair to advertise to vulnerable groups, such as children? Is it unfair to advertise
products that are harmful, such as cigju"ettes?
Numerous fundamental legal concepts, such as due process and equal protection, are left undefined by statute or
constitution. Therefore, courts are left to interpret these
terms in the common-law tradition. Because faimess is
linked to highly charged domains of morality, personal values, cultural norms, and public policy, its conceptualization
and operationalization might vary accordingly.
In 1914, recognizing the highly subjective nature of the
term unfair. Congress purposefully failed to provide a definition when it declared "unfair methods of competition" unlawful (15 U.S.C. §45). The House Conference report
stated:
[I]t is impossible to frame definitions which embrace all unfair
practices. There is no limit to human inventiveness in this field.
Even if all known unfair practices were specifically defined and
prohibited, it would be at once necessary to begin all over again.
If Congress were to adopt the method of definition, it would undertake an endless task (U.S. Congress. House 1914, pp.
18-19).
Again, in 1938, Congress failed to define unfaimess when it
added that "unfair or deceptive acts or practices" are unlawful. The legislative history to the 1938 amendments also provides no substantial guidance (Rice 1983).
Three-Prong Test
'ALEXANDER SIMONSON is Assistant Professor of Business, School of
Business Administration. Georgetown University. He received his J.D.
from New York University. School of Law and his Ph.D. in marketing from
Columbia University, Graduate School of Business.
In 1964 (in cigarette labeling and advertising rulemaking
proceedings), the FTC voluntarily presented a test to determine whether an act or practice is "unfair." The test is re-