Laws Addressing Deceptive Marketing and Advertising- Module 4 of 5

Laws Addressing Deceptive Marketing and Advertising- Module 4 of 5


Module 4: Laws Addressing Deceptive Marketing and Advertising

 

          Who knew that candy could cause so much controversy? The first paragraph of a 2017 New York Post article read, “A Manhattan woman who bought a 3.5-ounce package of Junior Mints felt cheated after claiming to find that the candy filled just 57 percent of the box.”[1]

          The woman filed a class-action lawsuit claiming that the maker of Junior Mints intentionally deceives candy fans by using “disproportionately-large” candy boxes. The case of the junior mints isn’t the first lawsuit filed by a disgruntled candy consumer. Another aggrieved customer sued Nestle over half-filled Raisinets boxes, claiming that the candy maker “purposefully deceives” customers by “recklessly” underfilling Raisinets candy boxes.[2]

In this module, we’ll learn about how the federal government has responded to false advertising and marketing to protect American consumers from deceptive practices in various industries. We’ll look at deceptive unfair acts and practices, how the government classifies an action as deceptive or unfair, and telephone solicitations.


The Evolution of Law Addressing Deceptive Practices

In the early 20th century, the Federal Trade Commission did not possess the power to stop deceptive advertising. The Supreme Court ruled that the FTC lacked authority to stop false advertising without proof of injury to actual or potential competitors.[3]  For example, the FTC failed to stop merchants selling what amounted to desiccated thyroid as an obesity cure and promoting it as perfectly safe,[4] or calling underwear natural wool, even though it was partly or mostly cotton.[5]  The Commission’s authority fell short of protecting consumers from false or misleading advertising and marketing.[6] 

During the Great Depression, lawmakers recognized the need for increased consumer protection due to “abuses of advertising; the imposition upon the unsuspecting; and the downright criminality of preying upon the sick as well as the consuming public through fraudulent, false, or subtle misleading advertisements.”[7]

In response, Congress amended the Federal Trade Commission Act in 1938. Under the original 1914 Act only “unfair methods of competition” were unlawful.  The 1938 Amendment made “unfair or deceptive acts and practices in commerce” unlawful. Moreover, the Commission no longer has to offer evidence establishing injury to an actual or potential competitor to succeed in a false advertising claim.[8]   The FTC’s authority grew to protect consumers from unfair or deceptive marketing and since then, the FTC has become the federal agency charged with maintaining a marketplace free from such practices.[9]

Additionally, every state has adopted laws to address unfair and deceptive practices.  Many states modeled their acts after the Federal Trade Commission Act and state regulatory agencies or the state attorneys general enforce these laws. Almost all states also grant residents the right to file civil actions to enforce advertising rules.[10]

Federal laws enacted in 2010 give state attorneys general the authority to enforce violations of federal law for unfair, deceptive, or abusive practices.[11] Additionally, the Consumer Financial Protection Bureau recently announced its intention to rely more heavily on state attorneys general and state regulators to enforce these laws.[12]


Defining Unfair and Deceptive Acts and Practices

The FTC Act set forth three elements to establish an unfair business method or practice:

·       A method that causes or is likely to cause substantial injury to consumers;

·       not reasonably avoidable by consumers themselves; and

·       not outweighed by countervailing benefits to consumers or to competition.[13]

False advertising is automatically classified as an unfair or deceptive practice. Furthermore, materially misleading advertisements violate the law. Material omissions as well as material misstatements can be the basis for false advertisement actions.[14]  

The Commission’s policy statement on deception describes criteria for deceptive advertising. It must be a representation, omission or practice likely to mislead the consumer, viewed from the perspective of a reasonable consumer under the circumstances. The representation, omission, or practice must be “material,” meaning likely to affect the consumer’s conduct or decision regarding the product or service.[15]

To identity false advertising, the Commission considers the “net impression” of the advertisement.  It asks the following three questions during net impression analysis:

(1) What claims are conveyed in the ad?;

(2) Are those claims false or misleading?; and

(3) Are those claims material to prospective consumers?[16]  

Let’s consider a case that involved Kraft Singles, which are processed cheese food slices. In the early 1990’s, Kraft began losing market share to imitation slices that were advertised as cheaper and equally nutritious as dairy slices like Singles. Kraft responded with the “Five Ounces of Milk” advertising campaign. The ads focused on the calcium content of Kraft Singles. The FTC found that Kraft violated Sections 5 and 12 of the FTC Act by “misrepresenting information” regarding the amount of calcium contained in Kraft Singles.[17]

After a lengthy trial, the judge sided with the FTC. It analyzed the advertisement’s “net impression” that Kraft Singles contain as much calcium as five ounces of milk. Even though each slice may be made from five ounces of milk, processing results in a thirty percent loss of calcium.[18] The juxtaposition of references to milk and calcium, along with failure to mention processing loss, implied that each Kraft Single contained the same amount of calcium as five ounces of milk. Because the actual amount of calcium is lower, the claim could cause substantial injury to consumers and was not outweighed by any consumer benefits.

Another Commission policy includes a directive on “advertising substantiation.” An advertiser must possess a reasonable basis for all material claims made in its advertisements before disseminating them. Substantiation may, for example, require clinical trials before claims can be made about drugs.  If the ad claims “tests prove”, “doctors recommend”, or “studies show”, then the advertiser must retain and possess those tests, recommendations or studies.[19]


Federal Trade Commission Enforcement

Until 1973, the FTC could only enforce the Act through cease and desist orders.  In 1969, Ralph Nader and his so-called “Nader Raiders” published a report criticizing the Commission for failure to pursue serious consumer fraud.[20] The American Bar Association also published a report which generally supported Nader’s findings and urged Congress to pass laws giving the Commission greater consumer protection powers. [21]

Congress amended the Act in 1973 and 1975, enabling the Commission to obtain restraining orders and injunctions and to sue for consumer redress.[22] The Commission, after issuing a cease and desist order, may file a civil action. If the Commission successfully shows that an act or practice is one which “a reasonable man would have known under the circumstances was dishonest or fraudulent” then the Act provides for remedies, including a refund, rescission or reformation of a contract, payment of damages and public notice of the violation.[23]

In FTC v. Figgie Intern,[24] Figgie had manufactured and sold Vanguard heat detectors, which were mechanical devices equipped with a fuse which melted at high temperatures, setting off a spring-wound alarm.  In the 1970s, safety experts began to recommend smoke detectors over heat detectors since more fire fatalities were caused by smoke inhalation than by burns.

New National Fire Prevention Association standards adopted in 1978 required smoke detectors to be installed on each level of a home and outside each sleeping area. The Figgie company, although aware of the test results and new standards, represented in its promotional materials and direct sales pitches that its heat detectors were necessary for adequate home protection in event of fire. Door-to-door salesmen would “prove” to a customer that Figgie’s heat detectors were superior to smoke detectors by using a cardboard house with a tissue roof and a lighted candle to demonstrate how the heat detector alarm sounded before the tissue scorched.

The FTC filed a lawsuit alleging deceptive and misleading advertising. The court agreed, finding that the demonstration was misleading since the cardboard house channeled hot air from the candle directly to the fuse, which made it a poor comparison to the ways in which house fires actually behave. Moreover, Figgie required customers who bought fewer than four heat detectors for each smoke detector to sign a release acknowledging they purchased only “partial fire detection protection,” showing that Figgie knew that its demonstration was misleading.

First, the court ordered future Figgie promotional materials to include: "NOTICE: Smoke detectors give earlier warning than heat detectors in nearly all residential fires. That is because detectable amounts of smoke almost always develop before detectable levels of heat."[25] Second, the court awarded damages to redress harm to consumers. It ordered Figgie to pay millions of dollars into an escrow account to provide refunds to customers who purchased Vanguard heat detectors between 1980 and 1987. 


Abusive Acts and Practices

The Consumer Financial Protection Bureau also helps protects the American consumer from unscrupulous marketing and advertising practices. Service providers are required to refrain from committing unfair, deceptive or abusive acts or practices.[26]

An abusive act or practice materially interferes with a consumer’s ability to understand a term or condition of a product or service.[27]  The law prohibits taking unreasonable advantage of the consumer’s lack of understanding of material risks, costs or conditions of the product or service; or their reliance on the provider.[28]

The Bureau initiated its first enforcement action for abuse against American Debt Settlement Solutions, and its owner Michael DiPanni. Together, DiPanni and his company solicited and enticed consumers with debt relief solutions.  The company made numerous misrepresentations to lure consumers who were deeply in debt. The upfront fees and the company’s failure to provide the promised services often caused consumers to accrue even more debt.  In some cases, the upfront enrollment fees caused consumers to spend their last savings on fees for promised debt-relief services.  The company failed to settle consumers’ debts within the promised timeframes, retained “enrollment” fees and provided no debt-relief.  

The Bureau asserted that DiPanni and his company engaged in “‘abusive acts or practices’” by knowingly enrolling and collecting exorbitant enrollment fees from consumers ‘whose financial conditions make it highly unlikely that they can complete the program.’” The case was “particularly significant because it marked the first time the Consumer Financial Protection Bureau prosecuted a service provider for engaging in “abusive acts or practices.”[29] The company and owner entered into a Stipulated Final Judgment and Order which permanently enjoined them from participating in debt relief operations and to pay monetary damages of nearly $500,000.[30]


Telephone Solicitations

We’ve all answered calls with telemarketers on the other end of the lines, selling products or services. Telemarketing includes a plan, program or campaign designed to induce the purchase of a product or service via the telephone.  Such a telemarketing call is classified as an “abusive practice” when a call’s recipient previously stated that she does not want to receive a call from or on behalf of a seller of the goods or services offered.[31]

Federal laws addressing this annoying sales practice have evolved in the last 30 years. In 1991, Congress passed the Telephone Consumer Protection Act, which bans the use of prerecorded voice message calls, also known as “robocalls”, to emergency phone lines (such as “911”, or the emergency lines of hospitals or doctors’ offices), to phone lines in hospital or nursing home patients’ rooms and to cell phone numbers for which calls the recipient may be charged.[32]

Another federal law, the Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994,[33] placed limitations on time, manner and place of telemarketing calls. Furthermore, the FTC issued regulations known as the Telemarketing Sales Rule.[34] Under the Rule, telemarketers are:

·       required to make disclosures of material information;

·       prohibited from making misrepresentations;

·       subject to time limits as to when they may call consumers;

·       not allowed to call consumers who previously asked not to be called; and

·       required to comply with payment restrictions for the sale of certain goods and services.[35]

In 2003, the Commission established a national “do-not-call” registry.   A consumer who doesn’t want to receive telephone solicitations can register a telephone number on the registry. Telemarketers are required to access and download the numbers on the registry every 31 days. Businesses with an established relationship with a customer, political organizations, and charitable organizations are exempt from compliance.[36]

Despite the plethora of clear regulations, some businesses still run afoul of the laws. Satellite television provider Dish Network violated the telemarketing rules and faced major consequences. Dish telemarketers called numbers on the National Do Not Call Registry and violated the prohibition on abandoned calls and assisted telemarketers when it knew or “consciously avoided knowing” that the telemarketers were violating the law.

The U.S. Department of Justice and the Federal Trade Commission coordinated a lawsuit with the Attorneys General from California, Illinois, North Carolina and Ohio.[37] A court found Dish liable for millions of calls that violated the Telemarketing Sales Rule, the Telephone Consumer Protection Act and state laws. They alleged more than 66 million Telemarketing Sales Rule violations.[38]  The court awarded a total civil penalty of $280 million and entered an injunction to require future compliance with telemarketing laws and rules.[39]

The Federal Trade Commission notes a substantial increase in robocalls over the last several years. It attributes the increase to the widespread use of Internet-powered phone systems which allow scammers to easily make illegal calls from anywhere in the world.  A scammer can avoid law enforcement detection by using fake caller IDs.  The Commission is aggressive in enforcing laws against such companies and it has sued over six hundred companies and individuals responsible for billions of illegal robocalls and Do Not Call violations. The FTC also hopes to find technology-based solutions and hosted a robocall contest to encourage industry experts to create new technology to curb this practice.[40]

In our final module on consumer protections laws, we’ll cover numerous mandatory disclosures intended to notify consumers of their rights and arm them with information to make informed decisions.  



[1] Lisa Fickenscher, Woman Fed Up With Unfilled Boxes Sues Candy Company, New York Post, (Oct. 5, 2017), https://nypost.com/2017/10/05/woman-fed-up-with-unfilled-boxes-sues-candy-company/.

[2] Lawsuit Alleges Nestle ‘Recklessly’ Underfills Boxes of Raisinets, Fox News, (Jan. 9, 2017), http://www.foxnews.com/food-drink/2017/01/09/lawsuit-alleges-nestle-recklessly-underfills-boxes-raisinets.html.

[4] Id. at 645.

[6] FTC v. R. F. Keppel & Bro., Inc., 291 U.S. 304, 310 (1934)

[7] Address of Hon. R. E. Freer, Commissioner, Federal Trade Commission, Before the Annual Convention of the Proprietary Association, (May 17, 1938), https://www.ftc.gov/system/files/documents/public_statements/676351/19380517_freer_whe_wheeler-lea_act.pdf

[8] Id.

[9] James Wrona, False Advertising and Consumer Standing Under Section 43(A) of The Lanham Act: Broad Consumer Protection Legislation or a Narrow Pro-Competitive Measure?, 47 Rutgers L. Rev. 1085, 1094-95 (1995).

[10] Carolyn L. Carter, A 50-State Report on Unfair andDeceptive Acts and Practices Statutes, National Consumer Law Center (February 2009).

[12] Timothy Butler & Stephen C. Piepgrass, Mulvaney: The CFPB Will Rely Much More on State Attorneys General, Consumer Financial Services Law Monitor, (March 5, 2018), https://www.consumerfinancialserviceslawmonitor.com/2018/03/mulvaney-the-cfpb-will-rely-much-more-on-state-attorneys-general/

[16] Kraft, Inc.v. F.T.C., 970 F.2d 311, 3114 (Cir. 1992)

[17] Id. at 313-14.

[18] Id. at 315.

[19] FTC Policy Statement Regarding Advertising Substantiation, Federal Trade Commission (March 11, 1983), https://www.ftc.gov/public-statements/1983/03/ftc-policy-statement-regarding-advertising-substantiation.

[21] Remarks of J.Thomas Rosch Commissioner, FTC at the Symposium in Honor of Robert PitofskyGeorgetown University Law Center Washington, DC, (May 30, 2012); Richard A. Posner, The Federal Trade Commission, 37 U. Chi. L. Rev. 47, 47 (1969).

[22] Arthur B. Cornell, Jr., Federal Trade Commission Permanent Injunction Actions Against Unfair and Deceptive Practices: The Proper Case and the Property Proof, 61 St. John’s L. Rev. 503, 519 (1987).

[24] F.T.C. v. Figgie Intern, Inc., 994 F.2d 595, 598-600 (9th Circuit 1993).

[25] Id. at 600.

[27] 12 U.S.C. 5531(d)(1).

[28] CFPB Bulletin 2013-07, Prohibition of Unfair, Deceptive, or Abusive Acts or Practices in the Collection of Consumer Debts, Consumer Financial Protection Bureau, (July 10, 2013),  https://files.consumerfinance.gov/f/201307_cfpb_bulletin_unfair-deceptive-abusive-practices.pdf.

[29] The CFPB Brings Landmark Enforcement Action for Abusive Acts or Practices, Lexology, (June 5, 2013),

https://www.lexology.com/library/detail.aspx?g=a45bda21-7b80-4b55-a567-0065553d2ff6.

[30] Stipulated Final Order and Judgment, CFPB v. American Debt Settlement Solutions, Inc. and Michael Dipanni, Case No. 9:13-cv-80548-DMM at *9 (S.D. Fla. June 6, 2013), https://files.consumerfinance.gov/f/201306_cfpb_finalorder_adss_signed-judgment.pdf

[35] 16 C.F.R. §§ 310.3-310.4.

[36] National Do Not Call Registry, Federal Trade Commission, https://www.donotcall.gov/ (last visited June 28, 2018); Do-Not-Call Implementation Act, Pub. L. 108-10, 117 Stat. 557 (Mar. 11, 2003).

[37]United States v. Dish Network LLC,256 F.Supp.3d 810, (C.D. Ill. 2017).

[38] Lesley Fair, Court Orders $280 Million From Dish Network Largest Ever DO Not Call Penalty, Federal Trade Commission, (June 8, 2017), https://www.ftc.gov/news-events/blogs/business-blog/2017/06/court-orders-280-million-dish-network-largest-ever-do-not.

[39] FTC and DOJ Case Results in Historic Decision Awarding $280 Million in Civil Penalties Against Dish Network and Strong Injunctive Relief for Do Not Call Violations, Federal Trade Commission, (June 6, 2017),  https://www.ftc.gov/news-events/press-releases/2017/06/ftc-doj-case-results-historic-decision-awarding-280-million-civil

[40] Robocalls, Consumer Information, Federal Trade Commission, https://www.consumer.ftc.gov/features/feature-0025-robocalls (last visited June 28, 2018).