Faulkner University Federal Trade Commission Act Discussion

Review Chapter 48 of the course textbook.

Between 1966 and 1975, the Orkin Exterminating Company, the world’s largest termite and pest control firm, offered its customers a “lifetime” guarantee that could be renewed each year by paying a definite amount specified in its contracts with the customers. The contracts gave no indication that the fees could be raised for any reasons other than certain narrowly specified ones. Beginning in 1980, Orkin unilaterally breached these contracts by imposing higher-than-agreed-upon annual renewal fees. Roughly 200,000 contracts were breached in this way. Orkin realized $7 million in additional revenues from customers who renewed at the higher fees. The additional fees did not purchase a higher level of service than that originally provided for in the contracts. Although some of Orkin’s competitors may have been willing to assume Orkin’s pre-1975 contracts at the fees stated therein, they would not have offered a fixed, locked-in “lifetime” renewal fee such as the one Orkin originally provided.

Discuss each element of the three-part test and how it applies to the Orkin case.

CHAPTER 48
The Federal Trade Commission Act and Consumer
Protection Laws
D
oan’s is a brand name used for more than 100 years for back pain medication sold on an
over-the-counter basis. Shortly after its purchase of the Doan’s trademark and the right to produce
the underlying product, Ciba-Geigy Corporation (Ciba) conducted a marketing study concerning
consumer perceptions of the Doan’s medication for back pain. The study revealed that this
medication had a weak image in comparison to the leading brands of analgesics, and indicated that
Ciba would benefit from positioning Doan’s as a more effective product that was strong enough
for the types of pain typically experienced by persons susceptible to backaches.
In an effort to strengthen the image of Doan’s, Ciba mounted a television and newspaper
advertising campaign that lasted for eight years. The advertisements characterized Doan’s as an
effective remedy specifically for back pain and stated that the product contained a special
ingredient (magnesium salicylate) not found in other over-the-counter analgesics. Some of the
advertisements displayed images of competing over-the-counter pain remedies. The Federal Trade
Commission (FTC) instituted an administrative proceeding against Ciba’s successor-in-interest,
Novartis Corporation, on the ground that the advertisements for Doan’s were deceptive, in
supposed violation of § 5 of the Federal Trade Commission Act. The FTC’s theory was that even
though the Doan’s advertisements were truthful in stating that the product was effective for back
pain and that it contained a special ingredient not present in other over-the-counter analgesics, the
combination of the two literally true statements created an implied representation for which there
was no substantiation: that because of its special ingredient, Doan’s was superior to other
analgesics in relieving back pain. It was this implied representation that the FTC alleged to be
deceptive. Consider the following questions as you study this chapter:
• In FTC administrative proceedings, what legal test controls the determination of whether an
advertisement was deceptive?
• May the FTC validly base a deceptive advertising proceeding on the theory that an
advertisement consisting of literally true statements may nevertheless be deceptive in what it
implies?
• If the theory just noted is valid, were the Doan’s advertisements deceptive?
• If the Doan’s advertisements were deceptive, what potential legal consequences could follow
for Novartis? In particular, may that firm be ordered to engage in corrective advertising, or
would a corrective advertising order violate the firm’s right to freedom of speech?
page 48-2
LO
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1.
48-1Identify the powers granted to the Federal Trade Commission (FTC) by § 5 of the FTC Act.
2.
48-2Describe key features of an FTC adjudicative proceeding.
3.
48-3Identify and explain the elements of the deception and unfairness tests employed by the FTC.
4.
48-4Describe the types of orders that the FTC may issue against a party held, in an adjudicative proceeding,
to have engaged in deceptive or unfair commercial behavior.
5.
48-5Identify key features of the Telemarketing and Consumer Fraud and Abuse Prevention Act.
6.
48-6Identify key features and effects of the Do-Not-Call Registry established by federal agency regulations.
7.
48-7Explain the basic provisions of the Magnuson—Moss Warranty Act and related regulations.
8.
48-8Describe the purpose and major provisions of the Truth in Lending Act.
9.
48-9Describe the purpose and major provisions of the Fair Credit Reporting Act.
10.
48-10Explain major ways in which the FACT Act seeks to deal with the problem of identity theft.
11.
48-11Explain what the Equal Credit Opportunity Act seeks to prevent.
12.
48-12Identify the purpose of the Fair Credit Billing Act.
13.
48-13Identify major consumer-protection features in the Dodd—Frank Act.
14.
48-14Explain the purpose of the Fair Debt Collection Practices Act and describe its major requirements.
15.
48-15Describe ways in which the Consumer Product Safety Commission may act in order to address product
safety issues.
DURING THE PAST several decades, direct government regulation of consumer matters has
become a prominent feature of the legal landscape at the federal and state levels. This chapter
addresses federal consumer protection regulation. It begins with a general discussion of America’s
main consumer watchdog, the Federal Trade Commission (FTC). After describing how the FTC
operates, the chapter examines its regulation of anticompetitive, deceptive, and unfair business
practices. Then we discuss various federal laws that deal with consumer credit and other consumer
matters.
The Federal Trade Commission
The Federal Trade Commission (FTC) was formed shortly after the 1914 enactment of the Federal
Trade Commission Act (FTC Act).1 Because the FTC is an independent federal agency, it is
outside the executive branch of the federal government and is less subject to political control than
agencies that are executive departments. The FTC is headed by five commissioners appointed by
the president and confirmed by the Senate for staggered seven-year terms. The president designates
one of the commissioners as chair of the FTC. The FTC has a Washington headquarters and several
regional offices located throughout the United States.
The FTC’s Powers
The FTC’s principal missions are to keep the U.S. economy both free and fair. Congress has given
the commission many tools for accomplishing these missions. By far the most important, however,
is § 5 of the FTC Act, which empowers the commission to prevent unfair methods of
competition and unfair or deceptive acts or practices. We examine these bases of FTC authority
later in this chapter. The commission also enforces a number of the consumer protection and
consumer credit measures discussed in the last half of the chapter. Finally, the FTC enforces
numerous other federal laws relating to specific industries or lines of commerce.
FTC Enforcement Procedures The FTC has various legal means for ensuring compliance
with the page 48-3 statutes it administers. Three important FTC enforcement devices are its
procedures for facilitating voluntary compliance, its issuance of trade regulation rules, and its
adjudicative proceedings.
Voluntary Compliance The FTC promotes voluntary business behavior by issuing advisory
opinions and industry guides. An advisory opinion is the commission’s response to a private
party’s query about the legality of proposed business conduct. The FTC is not obligated to furnish
advisory opinions. The commission may rescind a previously issued opinion when the public
interest requires. When the FTC does so, however, it cannot proceed against the opinion’s recipient
for actions taken in good faith reliance on the opinion, unless it gives the recipient notice of the
rescission and an opportunity to discontinue those actions.
Industry guides are FTC interpretations of the laws it administers. Their purpose is to
encourage businesses to abandon certain unlawful practices. To further this end, industry guides
are written in lay language. Although industry guides lack the force of law, behavior that violates
an industry guide often violates one of the statutes or other rules the commission enforces.
Sometimes FTC guidelines that are designed to shape behavior in a particular industry depend
not only on voluntary compliance by affected businesses, but also on the notion that an informed
citizenry will expect such compliance. For instance, in a widely publicized 2011 effort to address
the problem of childhood obesity, the FTC announced proposed guidelines for the advertising of
certain food products when the ads are directed toward children and the food products possess high
levels of sugar, fat, or salt. The voluntary nature of the guidelines would mean that a violator of
them would not face legal liability. However, active promotion of the guidelines by the FTC and
resulting public awareness of them could operate to cause companies to conclude that following
the guidelines would be the “right” thing to do or would otherwise make good business sense.
Trade Regulation Rules Unlike industry guides, FTC trade regulation rules are written in
legalistic language and have the force of law. Thus, the FTC can proceed directly against those
who engage in practices forbidden by a trade regulation rule. This may occur through
the adjudicative proceedings discussed immediately below. For each knowing violation of a trade
regulation rule, the FTC can ask a federal district court to impose a monetary penalty on the
violator.
FTC Adjudicative Proceedings
LO48-2
Describe key features of an FTC adjudicative proceeding.
Often, the FTC proceeds against violators of statutes or trade regulation rules by administrative
action within the commission itself. The FTC obtains evidence of possible violations from private
parties, government bodies, and its own investigations. If the FTC decides to proceed against the
alleged offender (the respondent), it enters a formal complaint. The case is heard in a public
administrative hearing called an adjudicative proceeding. An FTC administrative law judge
presides over this proceeding.2 The judge’s decision can be appealed to the FTC’s five
commissioners and then to the federal courts of appeals and the U.S. Supreme Court.
The usual penalty resulting from a final decision against the respondent is an FTC cease-anddesist order. This is a command ordering the respondent to stop its illegal behavior. As you will
see later in the chapter, however, FTC orders may go beyond the command to cease and desist.
The civil penalty for noncompliance with a cease-and-desist order is up to $40,000 per violation.
Where there is a continuing failure to obey a final order, each day that the violation continues is
considered a separate violation.
Many alleged violations are never adjudicated by the FTC. Instead, they are settled through
a consent order. This is an order approving a negotiated agreement in which the respondent
promises to cease certain activities. For instance, a 2014 consent order resolved a case in which
the FTC alleged that a Nissan television commercial violated FTC Act § 5’s prohibition on
deceptive commercial practices. (Discussion of § 5 will follow shortly, as will discussion of the
case against Nissan.) Consent orders normally provide that the respondent does not admit any
violation of the law. The failure to observe a consent order is punishable by civil penalties.
Actions in Court An adjudicative proceeding is not the only way the FTC can take action,
however. The commission can file suit in federal court against violators of trade regulation rules
or § 5 of the FTC Act (discussed below). If the commission prevails, the court can issue injunctions
and other related relief, such as consumer redress taking the form of monetary recovery. Recent
signs suggest that the FTC may be resorting to actions in court more frequently than was the
practice for a number of years. One example is the 2014 filing page 48-4 of a suit against T-Mobile
over alleged “cramming”— supposedly billing customers for premium texting services that they
never requested.
FTC v. Ross, which follows, provides an illustration of an FTC decision to litigate in court
rather than by way of an adjudicative proceeding. Ross also explores courts’ authority to order
consumer redress in FTC cases regarding deceptive commercial practices, as well as key questions
to which corporate executives should pay careful attention: whether they can be held individually
liable for FTC Act transgressions their companies committed, and, if so, under what circumstances.
Federal Trade Commission v. Ross743 F
The Federal Trade Commission (Commission) filed suit in a federal district court against Innovative Marketing Inc. (IMI) and
several of its high-level executives for violating the deceptive advertising prohibition set forth in the Federal Trade Commission
Act (FTC Act). Kristy Ross, a vice president at IMI, was among the executives named as defendants. The Commission alleged that
the defendants operated “a massive, Internet-based scheme that trick[ed] consumers into purchasing computer security software,”
referred to as “scareware.” Under this scheme, Internet advertisements would advise consumers that a scan of their computers
had detected various dangerous files, such as viruses, spyware, and “illegal” pornography. In reality, however, no scans were
ever conducted.
The defendants other than Ross either settled with the Commission or did not appear in the case and had default judgments
entered against them. As the case against Ross proceeded, the district court granted summary judgment in favor of the Commission
on the issue of whether the IMI advertisements were deceptive. However, the court set for trial the issue of whether Ross could be
held individually liable under the FTC Act. After a bench trial, the court ruled in favor of the Commission, enjoining Ross from
participating in similar deceptive marketing practices and holding her jointly and severally liable (i.e., along with other defendants)
for consumer redress in the amount of $163,167,539.95. Ross appealed to the U.S. Court of Appeals for the Fourth Circuit.
Davis, Circuit Judge
On appeal, Ross challenges the district court’s judgment on [these] bases: the court’s authority to award consumer redress; the legal
standard the court applied in finding individual liability under the FTC Act; [and] the soundness of the district court’s factual
findings.
The FTC Act authorizes the Commission to sue in federal district court so that “in proper cases the Commission may seek,
and after proper proof, the court may issue, a permanent injunction.” 15 U.S.C. § 53(b). Ross contends that the district court did
not have the authority to award consumer redress—a money judgment—under this provision of the statute.
Ross takes the position, correctly, that the statute’s text does not expressly authorize the award of consumer redress, but
precedent dictates otherwise. The Supreme Court has long held that Congress’s invocation of the federal district court’s equitable
jurisdiction brings with it the full “power to decide all relevant matters in dispute and to award complete relief even though the
decree includes that which might be conferred by a court of law.” Porter v. Warner Holding Co., 328 U.S. 395, 399 (1946). Once
invoked by Congress in one of its duly enacted statutes, the district court’s inherent equitable powers cannot be “denied or limited
in the absence of a clear and valid legislative command.” Id. Porter and its progeny thus articulate an interpretive principle that
inserts a presumption into what would otherwise be the standard exercise of statutory construction: we presume that Congress, in
statutorily authorizing the exercise of the district court’s injunctive power, “acted cognizant of the historic power of equity to
provide complete relief in light of statutory purposes.” Mitchell v. Robert DeMario Jewelry, Inc., 361 U.S. 288, 291—92 (1960).
Applying this principle to the present case illuminates the legislative branch’s real intent. That is, by authorizing the district
court to issue a permanent injunction in the FTC Act, Congress presumably authorized the district court to exercise the full measure
of its equitable jurisdiction. Accordingly, absent some countervailing indication sufficient to rebut the presumption, the court had
sufficient statutory power to award “complete relief,” including monetary consumer redress, which is a form of equitable
relief. Porter, 328 U.S. at 399.
Ross makes a series of arguments about how the structure, history, and purpose of the FTC Act weigh against the conclusion
that district courts have the authority to award consumer redress. Her arguments are not entirely unpersuasive, but they have
ultimately been rejected by every other federal appellate court that has considered this issue. [Citations omitted.] We adopt the
reasoning of those courts and reject Ross’s attempt to obliterate a significant part of the Commission’s remedial arsenal. A ruling
in favor of Ross would forsake almost thirty years of federal appellate decisions and create a circuit split, a result that we will not
countenance in the face of powerful Supreme Court authority pointing in the other direction.
page 48-5
The FTC Act makes it unlawful for any person, partnership, or corporation “to disseminate, or cause to be disseminated, any
false advertisement” in commerce, 15 U.S.C. § 52(a), and it authorizes the Commission to bring suit in federal district court when
it finds that any such person, partnership, or corporation “is engaged in, or is about to engage in, the dissemination or the causing
of the dissemination of any” false advertisement. 15 U.S.C. § 53(a)(1). The district court ruled that one could be held individually
liable under the FTC Act if the Commission proves that the individual (1) participated directly in the deceptive practices or had
authority to control them, and (2) had knowledge of the deceptive conduct, which could be satisfied by showing evidence of actual
knowledge, reckless indifference to the truth, or an awareness of a high probability of fraud combined with intentionally avoiding
the truth (i.e., willful blindness).
Ross contends that the district court’s standard was wrong and asks us to reject it. She proposes [in her brief] that we import
from our securities fraud jurisprudence a standard that requires proof of an individual’s “authority to control the specific practices
alleged to be deceptive,” coupled with a “failure to act within such control authority while aware of apparent fraud.” Any other
standard, argues Ross, would permit a finding of individual liability based on “indicia having more to do with enthusiasm for and
skill at one’s job [rather] than authority over specific ad campaigns, and [would] allow fault to be shown without any actual
awareness of” a co-worker’s misdeeds. Ross maintains that she would not have been held individually liable under her proposed
standard.
Ross’s proposed standard would permit the Commission to pursue individuals only when they had actual awareness of
specific deceptive practices and failed to act to stop the deception, i.e., a specific intent/subjective knowledge requirement. Her
proposal would effectively leave the Commission with the “futile gesture” of obtaining “an order directed to the lifeless entity of a
corporation while exempting from its operation the living individuals who were responsible for the illegal practices” in the first
place. Pati-Port, Inc. v. FTC, 313 F.2d 103, 105 (4th Cir. 1963).
We hold that one may be found individually liable under the FTC Act if she (1) participated directly in the deceptive practices
or had authority to control those practices, and (2) had or should have had knowledge of the deceptive practices. The second prong
of the analysis may be established by showing that the individual had actual knowledge of the deceptive conduct, was recklessly
indifferent to its deceptiveness, or had an awareness of a high probability of deceptiveness and intentionally avoided learning the
truth.
Our ruling maintains uniformity across the country and avoids a split in the federal appellate courts. Every other federal
appellate court to resolve the issue has adopted the test we embrace today. [Citations omitted.] Ross’s proposed standard, by
contrast, invites us to ignore the law of every other sister court that has considered the issue, an invitation that we decline.
Ross’s last contention is that the district court clearly erred in finding that she had “control” of the company, participated in
any deceptive acts, and had knowledge of the deceptive advertisements. The district court did not clearly err in finding that Ross
had “authority to control the deceptive acts within the meaning” of the FTC Act. In an affidavit in Canadian litigation [against one
of her co-defendants], Ross swore that she was a high-level business official with duties involving, among other things, “product
optimization,” which the district court could reasonably have inferred afforded her authority and control over the nature and quality
of the advertisements. Moreover, there was evidence that other employees requested Ross’s authority to approve certain
advertisements, and that she would check the design of the advertisements before approving them.
Nor did the district court clearly err in finding that Ross “directly participated in the deceptive marketing scheme.” Ross’s
statements to other employees, as memorialized in chat logs between her and other employees were evidence that she served in a
managerial role, directing the design of particular advertisements. Ross was a contact person for the purchase of advertising space
for IMI, and there was evidence that Ross had the authority to discipline staff and developers when the work did not meet her
standards. Given these facts, the district court could have reasonably inferred that Ross was actively and directly participating in
multiple stages of the deceptive advertising scheme.
The district court did not clearly err in finding that Ross “had actual knowledge of the deceptive marketing scheme” and/or
that she was “at the very least recklessly indifferent or intentionally avoided the truth.” There was evidence that she edited and
reviewed the content of multiple advertisements. At one point, she ordered the removal of the word “advertisement” from a set of
ads. A co-defendant, the Chief Technology Officer of IMI and its sole shareholder and director, attested that Ross assumed some
of his duties during his long-term illness. And although there was some indication that Ross acted in a manner suggesting that she
personally did not perceive (or believe) that the advertisements were deceptive, Ross was on notice of multiple complaints about
IMI’s advertisements, including that they would cause consumers to automatically download unwanted IMI products.
All of this evidence paints a picture that the district court was wholly capable of accepting as a matter of fact: Ross made
“countless decisions” that demonstrated her authority to control IMI. [Citation omitted.] Although a different fact-finder may have
come to a contrary conclusion from that reached by the experienced district judge in this case, the rigorous clear error standard
requires more than a party’s simple disagreement with the court’s findings.
District court’s decision in favor of Commission affirmed.
Anticompetitive Behavior
Section 5 of the FTC Act empowers the commission to prevent “unfair methods of competition.”
This language allows the FTC to regulate anticompetitive practices made unlawful by the Sherman
Act. The commission also has statutory authority to enforce the Clayton and Robinson—Patman
Acts.3
For the most part, § 5’s application to anticompetitive behavior involves the orthodox antitrust
violations discussed in the following two chapters. Section 5, however, also reaches
anticompetitive behavior not covered by other antitrust statutes. In addition, § 5 enables the FTC
to proceed against potential or incipient antitrust violations.
Deception and Unfairness
LO48-3
Identify and explain the elements of the deception and unfairness tests employed by the FTC.
Section 5 of the FTC Act also prohibits “unfair or deceptive acts or practices” in commercial
settings. This language enables the FTC to regulate a wide range of activities that disadvantage
consumers. In doing so, the commission may seek to prove that the activity is deceptive or that it
is unfair. Here, we set out the general standards that the FTC uses to define each of these § 5
violations. Much of this discussion involves FTC regulation of advertising, but the standards we
outline apply to many other misrepresentations, omissions, and practices. Although their details
are beyond the scope of this text, the commission also has enacted numerous trade regulation rules
defining specific deceptive or unfair practices.
Deception The FTC determines the deceptiveness of advertising and other business practices on
a case-by-case basis. Courts often defer to the commission’s determinations. To be considered
deceptive under the FTC’s Policy Statement on Deception, an activity must (1) involve
a material misrepresentation, omission, or practice (2) that is likely to mislead a consumer (3) who
acts reasonably under the circumstances.
Representation, Omission, or Practice Likely to Mislead Sometimes, sellers expressly make
false or misleading claims in their advertisements or other representations. As revealed in
the Kraft case, which appears shortly, an advertiser’s false or misleading claims of
an implied nature may also be challenged by the FTC. The same is true of a seller’s
deceptive omissions. Finally, certain deceptive marketing practices may violate § 5. In one such
case, encyclopedia salespeople gained entry to the homes of potential customers by posing as
surveyors engaged in advertising research.
In all of these situations, the statement, omission, or practice must be likely to mislead a
consumer. Actual deception is not required. Determining whether an ad or practice is likely to
mislead requires that the FTC evaluate the accuracy of the seller’s claims. In some cases, moreover,
the commission requires that sellers substantiate objective claims about their products by showing
that they have a reasonable basis for making such claims.
The “Reasonable Consumer” Test To be deceptive, the representation, omission, or practice
must also be likely to mislead reasonable consumers under the circumstances. This requirement
aims to protect sellers from liability for every foolish, ignorant, or outlandish misconception that
some consumer might entertain. As the commission noted many years ago, advertising an
American-made pastry as “Danish Pastry” does not violate § 5 just because “a few misguided souls
believe . . . that all Danish Pastry is made in Denmark.”4 Also, § 5 normally is not violated by
statements of opinion, sales talk, or “puffing”; statements about matters that consumers can easily
evaluate for themselves; and statements regarding subjective matters such as taste or smell. Such
statements are unlikely to deceive reasonable consumers.
Materiality Finally, the representation, omission, or practice must be material. Material
information is important to reasonable consumers and is likely to affect their choice of a product
or service. Examples include statements or omissions regarding a product’s cost, safety,
effectiveness, performance, durability, quality, or warranty protection. In addition, the commission
presumes that express statements are material.
Kraft v. FTC, a classic decision that follows, illustrates the application of the FTC’s deception
test to an advertising claim of an implied nature. Kraft also reveals the commission’s broad
discretion in fashioning appropriate orders once deceptive advertising has been proven.
page 48-7
Kraft, Inc. v. Federal Trade Commission970 F.2d 311 (7th Cir. 1992)
Individually wrapped slices of cheese and cheeselike products come in two major types: process cheese food slices, which must
contain at least 51 percent natural cheese according to a federal regulation, and imitation slices, which contain little or no natural
cheese. Kraft Inc.’s “Kraft Singles” are process cheese food slices. In the early 1980s, Kraft began losing market share to other
firms’ less-expensive imitation slices. Kraft responded with its “Skimp” and “Class Picture” advertisements, which were designed
to inform consumers that Kraft Singles cost more because each slice is made from 5 ounces of milk. These advertisements, which
ran nationally in print and broadcast media between 1985 and 1987, also stressed the calcium content of Kraft Singles.
In the broadcast version of the Skimp advertisements, a woman stated that she bought Kraft Singles for her daughter rather
than “skimping” by purchasing imitation slices. She noted that “[i]mitation slices use hardly any milk. But Kraft has 5 ounces per
slice. Five ounces. So her little bones get calcium they need to grow.” The commercial also showed milk being poured into a glass
that bore the label “5 oz. milk slice.” The glass was then transformed into part of the label on a package of Singles. In March
1987, Kraft added, as a subscript in the television commercial and as a footnote in the print media version, the disclosure that
“one 3/4 ounce slice has 70% of the calcium of five ounces of milk.”
The televised version of the Class Picture advertisements cited a government study indicating that “half the school kids in
America don’t get all the calcium recommended for growing kids.” According to the commercial, “[t]hat’s why Kraft Singles are
important. Kraft is made from five ounces of milk per slice. So they’re concentrated with calcium. Calcium the government
recommends for strong bones and healthy teeth.” The commercial also included the subscript disclaimer mentioned above.
The Federal Trade Commission instituted a deceptive advertising proceeding against Kraft under § 5 of the FTC Act.
According to the FTC’s complaint, the Skimp and Class Picture advertisements made the false implied claim that a Singles slice
contains the same amount of calcium as 5 ounces of milk (the milk equivalency claim). The FTC regarded the milk equivalency
claim as false even though Kraft actually uses 5 ounces of milk in making each Singles slice because roughly 30 percent of the
calcium contained in the milk is lost during processing.
The administrative law judge (ALJ) concluded that the Skimp and Class Picture advertisements made the milk equivalency
claim, which was false and material. He concluded that Kraft’s subscript and footnote disclosures of the calcium loss were
inconspicuous and confusing and therefore insufficient to dispel the misleading impression created by the advertisements. The ALJ
ordered Kraft to cease and desist making the milk equivalency claim regarding any of its individually wrapped process cheese food
slices or imitation slices. In addition, the ALJ ordered Kraft not to make other calcium or nutritional claims concerning its
individually wrapped slices unless Kraft had reliable scientific evidence to support the claims.
Kraft appealed to the FTC commissioners (referred to here as the Commission). The Commission affirmed the ALJ’s decision
but modified it. According to the Commission, the Skimp and Class Picture advertisements made the false and material milk
equivalency claim. The Commission modified the ALJ’s orders by extending their coverage from Kraft’s individually wrapped
slices to “any product that is a cheese, related cheese product, imitation cheese, or substitute cheese.” Kraft appealed to the U.S.
Court of Appeals for the Seventh Circuit. (In a portion of the opinion not set forth here, the Seventh Circuit concluded, as had the
ALJ and the Commission, that some of the Kraft advertisements made a further false claim of an implied nature: that Kraft Singles
slices contain more calcium than imitation slices. The following portion of the Seventh Circuit’s opinion addresses the milk
equivalency claim.)
Flaum, Circuit Judge
[A]n advertisement is deceptive under [ § 5 of the FTC Act] if it is likely to mislead consumers, acting reasonably under the
circumstances, in a material respect.
In determining what claims are conveyed by a challenged advertisement, the Commission relies on two sources of
information: its own viewing of the ad and extrinsic evidence. Its practice is to view the ad first and, if it is unable on its own to
determine with confidence what claims are conveyed . . . , to turn to extrinsic evidence. The most convincing extrinsic evidence is
a [consumer] survey . . . , but the Commission also relies on other forms of extrinsic evidence including consumer testimony, expert
opinion, and copy tests of ads.
Kraft has no quarrel with this approach when it comes to determining whether an ad conveys express claims, but contends
that the FTC should be required . . . to rely on extrinsic evidence rather than its own subjective analysis in all cases involving
allegedly implied claims. The Commissioners, Kraft argues, are simply incapable of determining what implicit messages
consumers are likely to perceive. Kraft [also] asserts that the Commissioners are predisposed to find implied claims because the
claims have [already] been identified in the complaint.
Here, the Commission found implied claims based solely on its own intuitive reading of the ads (although it did reinforce
that conclusion by examining the proffered extrinsic evidence). Had page 48-8 the Commission fully and properly relied on
available extrinsic evidence, Kraft argues it would have conclusively found that consumers do not perceive the milk equivalency .
. . claim in the ads. Kraft’s arguments . . . are unavailing as a matter of law. Courts, including the Supreme Court, have uniformly
rejected imposing such a requirement on the FTC. We hold that the Commission may rely on its own reasoned analysis to determine
what claims, including implied ones, are conveyed in a challenged advertisement, so long as those claims are reasonably clear from
the face of the advertisement.
[Kraft relies on] the faulty premise that implied claims are inescapably subjective and unpredictable. In fact, implied claims
fall on a continuum, ranging from the obvious to the barely discernible. The Commission does not have license to go on a fishing
expedition to pin liability on advertisers for barely imaginable claims. However, when [implied] claims [are] conspicuous, extrinsic
evidence is unnecessary because common sense and administrative experience provide the Commission with adequate tools to
make its findings. The implied claims Kraft made are reasonably clear from the face of the advertisements, and hence the
Commission was not required to utilize consumer surveys in reaching its decision.
Alternatively, Kraft argues that substantial evidence does not support the FTC’s finding that the Class Picture ads convey a
milk equivalency claim. We find substantial [supporting] evidence in the record. Although Kraft downplays the nexus in the ads
between milk and calcium, the ads emphasize visually and verbally that five ounces of milk go into a slice of Kraft Singles; this
image is linked to calcium content, strongly implying that the consumer gets the calcium found in five ounces of milk. Furthermore,
the Class Picture ads contained one other element reinforcing the milk equivalency claim, the phrase “5 oz. milk slice” inside the
image of a glass superimposed on the Singles package.
Kraft asserts that the literal truth of the . . . ads—[Kraft Singles] are made from five ounces of milk and they do have a high
concentration of calcium—makes it illogical to render a finding of consumer deception. The difficulty with this argument is that
even literally true statements can have misleading implications. Here, the average consumer is not likely to know that much of the
calcium in five ounces of milk (30 percent) is lost in processing, which leaves consumers with a misleading impression about
calcium content.
Kraft next asserts that the milk equivalency . . . claim, even if made, [is] not material to consumers. A claim is considered
material if it involves information that is important to consumers and, hence, likely to affect their choice of, or conduct regarding,
a product. In determining that the milk equivalency claim was material to consumers, the FTC cited Kraft surveys showing that 71
percent of respondents rated calcium content an extremely or very important factor in their decision to buy Kraft Singles, [and that
a substantial percentage of respondents] reported significant personal concerns about adequate calcium consumption. [The
Commission] rationally concluded that a 30 percent exaggeration of calcium content was a nutritionally significant claim that
would affect consumer purchasing decisions. This finding was supported by expert witnesses who agreed that consumers would
prefer a slice of cheese with 100 percent of the calcium in five ounces of milk over one with only 70 percent. [T]he FTC [also]
found evidence in the record that Kraft designed the ads with the intent to capitalize on consumer calcium deficiency concerns.
Significantly, the FTC found further evidence of materiality in Kraft’s conduct. Before the ads even ran, ABC television
raised a red flag when it asked Kraft to substantiate the milk and calcium claims in the ads. Kraft’s ad agency also warned Kraft in
a legal memorandum to substantiate the claims before running the ads. Moreover, in October 1985, a consumer group warned Kraft
that it believed the Skimp ads were potentially deceptive. Nonetheless, a high-level Kraft executive recommended that the ad copy
remain unaltered because the “Singles business is growing for the first time in four years due in large part to the copy.” Finally, the
FTC and the California Attorney General’s Office independently notified the company in early 1986 that investigations had been
initiated to determine whether the ads conveyed the milk equivalency claims. Notwithstanding these warnings, Kraft continued to
run the ads and even rejected proposed alternatives that would have allayed concerns over their deceptive nature. From this, the
FTC inferred—we believe, reasonably—that Kraft thought the challenged milk equivalency claim induced consumers to purchase
Singles and hence that the claim was material to consumers.
The Commission’s cease and desist order prohibits Kraft from running the Skimp and Class Picture ads, as well as from
advertising any calcium or nutritional claims not supported by reliable scientific evidence. This order extends not only to the
product contained in the deceptive advertisements (Kraft Singles), but to all Kraft cheeses and cheese-related products.
Kraft argues that the scope of the order is not reasonably related to Kraft’s violation of the [FTC] Act because it extends to
products that were not the subject of the challenged advertisements. The FTC has discretion to issue multi-product orders, so-called
“fencing-in” orders, that extend beyond violations of the Act to prevent violators from engaging in similar deceptive practices in
the future.
[The Commission] concluded that Kraft’s violations were serious, deliberate, and easily transferable to other Kraft products,
thus warranting a broad fencing-in order. We find substantial evidence to support the scope of the order. The Commission based
its finding of seriousness on the size ($15 million annually) and duration (two and one-half years)
page 48-9 of the ad campaign and on the difficulty most consumers would face in judging the truth or falsity of the calcium
claims. [T]he FTC properly found that it is unreasonable to expect most consumers to perform the calculations necessary to compare
the calcium content of Kraft Singles with five ounces of milk given the fact that the nutrient information given on milk cartons is
not based on a five ounce serving.
As noted previously, the Commission [reasonably] found that Kraft’s conduct was deliberate because it persisted in running
the challenged ad copy despite repeated warnings from outside sources that the copy might be implicitly misleading. Kraft made
three modifications to the ads, but two of them were implemented at the very end of the campaign, more than two years after it had
begun. This dilatory response provided a sufficient basis for the Commission’s conclusion. The Commission further [made the
reasonable finding] that the violations were readily transferable to other Kraft cheese products given the general similarity between
Singles and other Kraft cheeses.
Commission’s order upheld and enforced.
Recent FTC Actions Recent FTC Actions indicate that the agency continues to make
regulation of deceptive advertising a key area of emphasis. Consider, for instance, the
2014 adjudicative proceeding against Nissan, which was noted in the earlier discussion
of consent orders. Visual images in the commercial appeared to show a Nissan truck
pushing a dune buggy up and over a steep, sandy hill on which the dune buggy had been
trapped. In reality, the FTC alleged, the truck neither performed that feat nor was
capable of performing it. Both the truck and the dune buggy were dragged up the hill
by cables that viewers of the commercial could not see. Moreover, the hill was made to
appear steeper than it really was. As noted earlier, the case was resolved in 2014 by way
of a consent order. As the second decade of the 21st century came to a close, the FTC
was engrossed in a variety of actions to rein in companies from a variety of industries,
including automobiles, fintech, social media influencers, data security, and
manufacturers allegedly deceiving consumers with claims that their products were
“Made in the USA.”
Technological and communications developments and trends have often been the
focus of FTC attention as the commission looks at new settings in which deceptive
advertising may occur. In a 2013 industry guide, the commission issued a reminder that
short-form advertisements communicated via Twitter or Facebook are no less subject
to FTC regulation on deception grounds than are advertisements that appear in more
traditional forms. The FTC has also expressed concern about, and has noted the possible
need for investigations concerning, the deception of consumers that may result from
advertisers’ increasingly common practice of using so-called sponsored content. Under
this practice, what is effectively an advertisement appears in a form that appears to be—
but is not—a regular newscast, news story on the Internet, or news item in a newspaper
or magazine. The coming years are likely to provide the FTC with opportunities to act
with regard to deception in such contexts if the agency opts to do so.
Another object of the FTC’s recent focus has been advertisers’ potentially
misleading claims that use of their products leads, or may lead, to certain beneficial
health effects. The POM Wonderful case, which follows, illustrates the commission’s
approach to determining whether such claims are deceptive and whether they are
adequately supported by reliable evidence. In addition, POM Wonderful examines the
commission’s power to issue remedial orders and explores the limits of the First
Amendment’s role when the FTC regulates advertising.
POM Wonderful, LLC v. Federal Trade Commission777 F.3d 478 (D.C. Cir. 2015)
Beginning in 1987, Stewart and Lynda Resnick acquired and planted thousands of acres of pomegranate orchards in California.
In 1998, they began collaborating with doctors and scientists to investigate the potential health benefits of pomegranate
consumption. They formed POM Wonderful, LLC to make, market, and sell pomegranate-based products. The products included
POM Wonderful 100% Pomegranate Juice and two dietary supplements that contained pomegranate extract in concentrated form.
The Resnicks were the sole owners of POM Wonderful and an affiliated company that provided advertising and other services to
POM. Those page 48-10 entities promoted POM products through magazine advertisements, newspaper inserts, billboards,
posters, brochures, press releases, and website materials.
POM’s promotional materials regularly referenced scientific support for the claimed health benefits of its pomegranate
products. By 2010, the Resnicks, POM, and Roll had spent more than $35 million on pomegranate-related medical research. The
case described below involved studies examining the efficacy of POM’s products with regard to three particular ailments: heart
disease, prostate cancer, and erectile dysfunction.
POM sponsored a number of studies examining the capacity of its products to improve cardiovascular health. One such
study, led by Dr. Michael Aviram, examined the effect of pomegranate juice consumption by patients with carotid artery stenosis.
Carotid artery stenosis is the narrowing of the arteries that supply oxygenated blood to the brain, usually caused by a buildup of
plaque inside the arteries. The Aviram study, which was published in 2004, involved 10 carotid artery stenosis patients who
consumed concentrated pomegranate juice daily for a year and 9 carotid artery stenosis patients who consumed no pomegranate
juice and thus served as a control group. The investigators in the Aviram study measured the change in the patients’ carotid intimamedia thickness (CIMT), an indicator of plaque buildup. They found that patients who consumed pomegranate juice every day
experienced a reduction in CIMT of “up to 30%” after one year, while CIMT for patients in the control group increased by 9
percent after one year. As one of POM’s experts later testified in the legal proceedings described below, the Aviram study suggested
a benefit from pomegranate juice consumption for patients with carotid artery stenosis, but was “not at all conclusive,” in part
because of the study’s small sample size.
POM funded later—and larger—studies (referred to here as the “Ornish” and “Davidson” studies). The Ornish and
Davidson studies found no statistically significant difference between the overall treatment group and the placebo group in terms
of CIMT change. Although these studies were completed in 2005 and 2006, POM’s post-2006 advertisements and other
promotional materials made specific health-benefit claims based on the Aviram study, without any acknowledgment of the contrary
results from the Ornish and Davidson studies and the doubt they cast on the Aviram study’s findings.
For instance, POM distributed a 2007 brochure featuring a statement by Dr. Aviram that “POM Wonderful Pomegranate
Juice has been proven to promote cardiovascular health,” along with a description of his arterial thickness study, but with no
mention of the contrary Ornish and Davidson findings. That same year, POM published a newsletter in which it asserted that
“NEW RESEARCH OFFERS FURTHER PROOF OF THE HEART-HEALTHY BENEFITS OF POM WONDERFUL JUICE.” The
newsletter claimed a “30% DECREASE IN ARTERIAL PLAQUE” on the basis of Dr. Aviram’s limited study, but again omitted
any mention of the Ornish and Davidson findings. In 2008 and 2009, POM conducted a $1 million advertising campaign in which
it stressed Dr. Aviram’s findings—including the 30 percent figure—without any acknowledgment of the contrary Ornish and
Davidson studies.
In addition to the cardiovascular studies, petitioners sponsored research on the effect of pomegranate juice consumption in
prostate cancer patients. One study, led by Dr. Allan Pantuck, indicated that pomegranate juice consumption could be beneficial
to such patients, but there was no control group in the study. Moreover, as Dr. Pantuck noted, all of the patients studied had
already received medical treatment that could have provided an alternative explanation for the supposed health benefits. In
advertisements and promotional materials from 2006 through 2009, POM made prostate cancer—related health claims based on
the results of the Pantuck study, but without noting the limitations of that study and without acknowledging that medical treatments
given to the patients, rather than pomegranate juice consumption, could have been the reason for the supposed health benefits
revealed in the study.
POM also sponsored research on the effects of pomegranate juice consumption in men with mild to moderate erectile
dysfunction. A study led by Dr. Harin Padma-Nathan utilized two alternative methods for assessing the results. One non—
scientifically validated method offered some indication of a positive relationship, though it fell somewhat short of statistical
significance. The other method, which was scientifically validated, led to positive benefit results that fell far short of statistical
significance, given that there was a three-fourths likelihood that random chance would have produced the positive association.
POM’s promotional materials regarding the supposed benefits of pomegranate juice consumption by men with erectile dysfunction
highlighted the Padma-Nathan study’s assessment under the first method noted above, without any acknowledgment of the negative
results in that same study’s assessment under the second method.
In 2010, the Federal Trade Commission filed an administrative complaint alleging that POM, the affiliated company, the
Resnicks, and POM’s then-president had made false, misleading, and unsubstantiated representations in violation of § 5(a) of the
FTC Act. The complaint identified 43 advertisements or promotional materials containing claims alleged to be false, misleading,
or unsubstantiated. Following an administrative trial, the Commission’s chief administrative law judge (ALJ) found that 19 of
POM’s advertisements and promotional materials contained implied claims that POM products treat, prevent, or reduce the risk
of heart disease, prostate cancer, or erectile dysfunction. The ALJ further concluded that POM and the related parties lacked
sufficient evidence to substantiate those claims and that the claims were material to consumers. He therefore held the POM parties
liable under the FTC Act and ordered them to cease and desist from making further claims about the health benefits of any food,
drug, or dietary supplement unless the claims were non-misleading and supported by competent and reliable scientific evidence.
POM and the related parties appealed to the full Commission, which affirmed the ALJ’s decision to impose liability on POM
and the other parties. The Commission also broadened the scope of the ALJ’s order against POM and the other parties. Part I of
the Commission’s final order prohibited POM and the related parties from representing that any food, drug, or dietary supplement
“is effective in the diagnosis, cure, mitigation, treatment, or prevention of any disease”—including but not limited to heart disease,
prostate cancer, and erectile dysfunction—unless the representation is non-misleading and supported by “competent and reliable
scientific evidence that, when considered in light of the entire body of relevant and reliable scientific evidence, is sufficient to
substantiate that the representation is true.” The order went on to say that for purposes of Part I, “competent and reliable evidence”
would consist of “at least two randomized and controlled human clinical trials (RCTs)” that were double-blind in nature and
resulted in statistically significant results.
Part II of the Commission’s order prohibited POM and the related parties from misrepresenting the results of scientific
studies in their ads. Part III barred them from making any claim about the “health benefits” of a food, drug, or dietary supplement
unless the representation was non-misleading and supported by “competent and reliable scientific evidence.” Unlike Part I, which
applied specifically and solely to disease-related claims, Part III contained no requirement that randomized, controlled, human
clinical trials support more general claims about health benefits.
POM and the related parties petitioned for review by the U.S. Court of Appeals for the District of Columbia Circuit. They
contested the Commission’s finding that they had violated the FTC Act and argued that the Commission’s remedial order ran afoul
of the statute and the First Amendment.
Srinivasan, Circuit Judge
[W]e first address petitioners’ statutory challenges to the Commission’s order before turning to their constitutional claims. On
review of an order under the FTC Act, “[t]he findings of the Commission as to the facts, if supported by evidence, shall be
conclusive.” FTC Act § 5(c). The Commission “is often in a better position than are courts to determine when a practice is
”deceptive’ within the meaning of the [FTC] Act,” and that “admonition is especially true with respect to allegedly deceptive
advertising since the finding of a § 5 violation in this field rests so heavily on inference and pragmatic judgment.” FTC v. ColgatePalmolive Co., 380 U.S. 374, 385 (1965).
In determining whether an advertisement is deceptive in violation of section 5 of the FTC Act, the Commission engages in a
three-step inquiry, considering: (i) what claims are conveyed in the ad, (ii) whether those claims are false, misleading, or
unsubstantiated, and (iii) whether the claims are material to prospective consumers. At the first step, the Commission “will deem
an advertisement to convey a claim if consumers acting reasonably under the circumstances would interpret the advertisement to
contain that message.” [Citation omitted.]
In identifying the claims made by an ad, the Commission distinguishes between efficacy claims and establishment claims.
An efficacy claim suggests that a product successfully performs the advertised function or yields the advertised benefit, but includes
no suggestion of scientific proof of the product’s effectiveness. An establishment claim, by contrast, suggests that a product’s
effectiveness or superiority has been scientifically established.
The distinction between efficacy claims and establishment claims gains salience at the second step of the Commission’s
inquiry, which calls for determining whether the advertiser’s claim is false, misleading, or unsubstantiated. If an ad conveys an
efficacy claim, the advertiser must possess a “reasonable basis” for the claim. See Pfizer Inc., 81 F.T.C. 23, 26 (1972). The FTC
examines that question under the so-called “Pfizer factors,” including “the type of product,” “the type of claim,” “the benefit of a
truthful claim,” “the ease of developing substantiation for the claim,” “the consequences of a false claim,” and “the amount of
substantiation experts in the field would consider reasonable.”
For establishment claims, by contrast, the Commission generally does not apply the Pfizer factors. Rather, the amount of
substantiation needed for an establishment claim depends on whether the claim is “specific” or “non-specific.” [Citation omitted.]
If an establishment claim “states a specific type of substantiation,” the “advertiser must possess the specific substantiation claimed.”
[Citation omitted.] If an ad instead conveys a non-specific establishment claim—e.g., an ad stating that a product’s efficacy is
“medically proven” or making use of “visual aids” that “clearly suggest that the claim is based upon a foundation of scientific
evidence”—the advertiser “must possess evidence sufficient to satisfy the relevant scientific community of the claim’s truth.”
[Citation omitted.]
page 48-12
Even if the Commission concludes at the first step that an advertiser conveyed efficacy or establishment claims and
determines at the second step that the claims qualify as false, misleading, or unsubstantiated, it can issue a finding of liability only
“if the omitted information would be a material factor in the consumer’s decision to purchase the product.” [Citation omitted.]
Here, petitioners do not dispute the materiality of POM’s disease-related claims. We therefore confine our analysis to the first and
second steps of the Commission’s determination: its findings that petitioners’ ads conveyed efficacy and establishment claims and
that those claims were false, misleading, or unsubstantiated.
At the first step of its inquiry, the Commission determined that thirty-six of petitioners’ advertisements and promotional
materials conveyed efficacy claims asserting that POM products treat, prevent, or reduce the risk of heart disease, prostate cancer,
or erectile dysfunction. The Commission further concluded that thirty-four of those ads also conveyed establishment claims
representing that clinical studies substantiate the efficacy of POM products in treating, preventing, or reducing the risk of the same
ailments. The Commission set forth the basis for those findings in considerable detail in an appendix to its opinion, with a separate
explanation for each ad.
Those ads repeatedly claimed the benefits of POM’s products in the treatment or prevention of heart disease, prostate cancer,
or erectile dysfunction, and consistently touted medical studies ostensibly supporting those claimed benefits. The question whether
“a claim of establishment is in fact made is a question of fact the evaluation of which is within the FTC’s peculiar expertise.”
[Citation omitted.] [W]e perceive no basis for setting aside the Commission’s carefully considered findings of efficacy and
establishment claims as unsupported by substantial evidence.
As the Commission separately set forth for each ad, “these ads drew a logical connection between the study results and
effectiveness for the particular diseases.” Moreover, they invoked medical symbols, referenced publication in medical journals,
and described the substantial funds spent on medical research, fortifying the overall sense that the referenced clinical studies
establish the claimed benefits. As the Commission explained, “[w]hen an ad represents that tens of millions of dollars have been
spent on medical research, it tends to reinforce the impression that the research supporting product claims is established and not
merely preliminary.”
At the second stage of its analysis, the Commission found petitioners’ efficacy and establishment claims to be deceptive due
to inadequate substantiation. “In reviewing whether there is appropriate scientific substantiation for the claims made, our task is
only to determine if the Commission’s finding is supported by substantial evidence on the record as a whole.” [Citation omitted.]
When conducting that inquiry, we are mindful of the Commission’s “special expertise in determining what sort of substantiation is
necessary to assure that advertising is not deceptive.” [Citation omitted.]
For both petitioners’ efficacy claims and their establishment claims, the Commission found that “experts in the relevant
fields” would require one or more “properly randomized and controlled human clinical trials (RCTs)” in order to “establish a causal
relationship between a food and the treatment, prevention, or reduction of risk” of heart disease, prostate cancer, or erectile
dysfunction. Without at least one such RCT, the Commission concluded, POM’s efficacy claims and its non-specific establishment
claims were inadequately substantiated.
The Commission examined each of the studies invoked by petitioners in their ads, concluding that the referenced studies fail
to qualify as RCTs of the kind that could afford adequate substantiation. Petitioners’ claims therefore were deceptive. Moreover,
in light of petitioners’ selective touting of ostensibly favorable study results and nondisclosure of contrary indications from the
same or a later study, the Commission found that there were “many omissions of material facts in [the] ads that consumers cannot
verify independently.” Petitioners, the Commission observed, “made numerous deceptive representations and were aware that they
were making such representations despite the inconsistency between the results of some of their later studies and the results of
earlier studies to which [they] refer in their ads.”
With regard to heart disease, for instance, petitioners repeatedly touted the results of Dr. Aviram’s limited CIMT study
without noting the contrary findings in Drs. Ornish’s and Davidson’s later and larger studies. For prostate cancer, petitioners
consistently relied on Dr. Pantuck’s study of PSA doubling times but with no indication of the study’s limitations. And in
connection with erectile dysfunction, petitioners promoted the results of Dr. Padma-Nathan’s study based exclusively on [one]
measure, without acknowledging that the study showed no improvement according to the only scientifically validated measure
used to assess the results.
Petitioners challenge the Commission’s factual finding that experts in the relevant fields require RCTs to support claims
about the disease-related benefits of POM’s products. We conclude that the Commission’s finding is supported by substantial
record evidence. That evidence includes written reports and testimony from medical researchers stating that experts in the fields of
cardiology and urology require randomized, double-blinded, placebo-controlled clinical trials to substantiate any claim that a
product treats, prevents, or reduces the risk of disease. The Commission drew on that expert testimony to explain why the attributes
of well-designed RCTs are necessary to substantiate petitioners’ claims.
We acknowledge that RCTs may be costly, although we note that the petitioners nonetheless have been able to sponsor
dozens of studies, including several RCTs. Yet if the cost of an RCT proves prohibitive, petitioners can choose to specify a lower
level of substantiation for their claims. As the Commission observed, “the need for RCTs is driven by the claims [petitioners] have
chosen to make.” An advertiser who makes “express representations about the level of support page 48-13 for a particular claim”
must “possess the level of proof claimed in the ad” and must convey that information to consumers in a non-misleading way.
[Citation omitted.] An advertiser thus still may assert a health-related claim backed by medical evidence falling short of an RCT if
it includes an effective disclaimer disclosing the limitations of the supporting research. Petitioners did not do so.
Having rejected petitioners’ statutory claims, we now turn to their constitutional arguments. Petitioners challenge both the
Commission’s liability determination and its remedy on First Amendment grounds. We reject both challenges except insofar as the
Commission in its remedial order imposed an across-the-board, two-RCT substantiation requirement for any future disease-related
claims by petitioners.
“For commercial speech to come within [the First Amendment], it at least must concern lawful activity and not be
misleading.” Central Hudson Gas & Electric Corp. v. Public Service Commission, 447 U.S. 557, 566 (1980). In imposing liability
against petitioners, the Commission found that POM’s ads are entitled to no First Amendment protection because they are
“deceptive and misleading.” We conclude that the Commission’s findings of deception are supported by substantial evidence in
the record. As a result, the Commission sanctioned petitioners for misleading speech unprotected by the First Amendment.
Finally, we address petitioners’ First Amendment challenge to the Commission’s remedial order. Part III of the order imposes
a baseline requirement applicable to all of petitioners’ ads. It bars representations about a product’s general health benefits “unless
the representation is non-misleading” and backed by “competent and reliable scientific evidence that is sufficient in quality and
quantity” to “substantiate that the representation is true.” For purposes of that baseline requirement, “competent and reliable
evidence” means studies that are “generally accepted in the profession to yield accurate and reliable results.”
Part I of the order, meanwhile, imposes heightened requirements in the specific context of claims about the treatment or
prevention of “any disease” (including, but not limited to, heart disease, prostate cancer, and erectile dysfunction). Such diseaserelated claims, like the broader category of health claims covered by Part III, must be “non-misleading” and supported by
“competent and reliable scientific evidence.” But “competent and reliable scientific evidence” is more narrowly defined for
purposes of Part I to consist of “at least two randomized and controlled human clinical trials (RCTs)” that “yield statistically
significant results” and are “double-blinded” whenever feasible. In short, Part III’s baseline requirement for all health claims does
not require RCT substantiation, whereas the specific requirements in Part I for disease-related claims not only contemplate RCT
substantiation, but call for—as a categorical matter—two RCTs.
Petitioners challenge the remedial order’s blanket, two-RCT-substantiation requirement under the First Amendment. They
contend, and the Commission accepts, that their challenge should be examined under the general test for commercial speech
restrictions set out in Central Hudson, which first requires that the “asserted governmental interest [be] substantial.” The Supreme
Court has made clear that the governmental “interest in ensuring the accuracy of commercial information in the marketplace is
substantial.” [Citation omitted.] The Commission asserts that its remedial order aims to advance that concededly substantial interest,
satisfying Central Hudson’s first prong.
With regard to the means by which the Commission seeks to further its asserted interest, Central Hudson requires that a
challenged restriction “directly advance[] the governmental interest” and that it “is not more extensive than is necessary to serve
that interest.” Here, insofar as the Commission’s order imposes a general RCT-substantiation requirement for disease claims—i.e.,
without regard to any particular number of RCTs—the order satisfies those tailoring components of Central Hudson review.
In finding petitioners liable for deceptive ads, the Commission determined that petitioners’ efficacy and establishment claims
were misleading because they were unsubstantiated by RCTs. We have upheld that approach in this opinion. Requiring RCT
substantiation as a forward-looking remedy is perfectly commensurate with the Commission’s assessment of liability for
petitioners’ past conduct: if past claims were deceptive in the absence of RCT substantiation, requiring RCTs for future claims is
tightly tethered to the goal of preventing deception. To be sure, the liability determination concerned claims about three specific
diseases whereas the remedial order encompasses claims about any disease. But that broadened scope is justified by petitioners’
demonstrated propensity to make deceptive representations about the health benefits of their products, and also by the expert
testimony supporting the necessity of RCTs to establish causation for disease-related claims generally. For purposes of Central
Hudson scrutiny, then, the injunctive order’s requirement of some RCT substantiation for disease claims directly advances, and is
not more extensive than necessary to serve, the interest in preventing misleading commercial speech.
We reach the opposite conclusion insofar as the remedial order mandates two RCTs as an across-the-board requirement for
any disease claim. Central Hudson “requires something short of a least-restrictive-means standard,” Board of Trustees v. Fox, 492
U.S. 469, 477 (1989), but the Commission still bears the burden to demonstrate a “reasonable fit” between the particular means
chosen and the government interest pursued. Id. at 480. Here, the Commission fails adequately to justify a categorical floor of two
RCTs for any and all disease claims. It of course is true that, all else being equal, two RCTs would provide more reliable scientific
evidence than one RCT, affording added assurance against misleading claims. It is equally true that three RCTs would provide
more certainty than two, and four would yield more certainty page 48-14 still. But the Commission understandably does not claim
a myopic interest in pursuing scientific certitude to the exclusion of all else, regardless of the consequences.
Here, the consequences of mandating more than one RCT bear emphasis. Requiring additional RCTs without adequate
justification exacts considerable costs, and not just in terms of the substantial resources often necessary to design and conduct a
properly randomized and controlled human clinical trial. If there is a categorical bar against claims about the disease-related benefits
of a food product or dietary supplement in the absence of two RCTs, consumers may be denied useful, truthful information about
products with a demonstrated capacity to treat or prevent serious disease. That would subvert rather than promote the objectives of
the commercial speech doctrine.
Consider, for instance, a situation in which the results of a large-scale, perfectly designed and conducted RCT show that a
dietary supplement significantly reduces the risk of a particular disease, with the results demonstrated to a very high degree of
statistical certainty—so much so that experts in the relevant field universally regard the study as conclusively establishing clinical
proof of the supplement’s benefits for disease prevention. Perhaps, moreover, a wealth of medical research and evidence apart from
RCTs—e.g., observational studies—reinforces the results of the blue-ribbon RCT. In that situation, there would be a substantial
interest in assuring that consumers gain awareness of the dietary supplement’s benefits and the supporting medical research.
The two-RCT requirement in the Commission’s order brooks no exception for those circumstances. No matter how robust
the results of a completed RCT, and no matter how compelling a battery of supporting research, the order would always bar any
disease-related claims unless petitioners clear the magic line of two RCTs. The Commission has elsewhere explained to industry
advertisers that, “[i]n most situations, the quality of studies will be more important than quantity.” [Citation omitted.] The blanket,
two-RCT substantiation requirement at issue here is out of step with that understanding. The Commission fails to demonstrate how
such a rigid remedial rule bears the requisite “reasonable fit” with the interest in preventing deceptive speech. Fox, 492 U.S. at 480.
[W]e hold that the Commission’s order is valid to the extent it requires disease claims to be substantiated by at least one
RCT. But it fails Central Hudson scrutiny insofar as it categorically requires two RCTs for all disease-related claims. That is not
at all to say that the Commission would be barred from imposing a two-RCT-substantiation requirement in any circumstances.
Rather, the Commission has failed in this case adequately to justify an across-the-board two-RCT requirement for all disease claims
by petitioners.
Commission’s remedial order modified to require petitioners to possess at least one RCT before making disease claims;
Commission’s decision and order otherwise upheld and petition for review denied.
The Global Business Environment
In most developed nations, the problem of misleading advertising is addressed through self-regulation and through regulatory
schemes established by law. Self-regulation includes voluntary action by companies and resolution of parties’ advertising-related
disputes under industry codes of conduct or other agreed procedures that exist outside the formal legal system.
Since the passage of a 1984 European Union (EU) Directive on Misleading Advertising, EU nations have been obligated to
have domestic laws addressing misleading advertising. The domestic laws of EU nations typically have not contemplated a
significant role for direct government regulation of the sort in which the Federal Trade Commission and other government agencies
engage in the United States. Instead, EU countries depend more on litigation instituted by private parties—competitors and, in
some countries, consumer organizations—as the chief legal means of dealing with misleading advertising. In this sense, the
approach taken by EU nations resembles a different aspect of advertising regulation in the United States: the indirect regulation
that comes with private parties’ false advertising lawsuits under § 43(a) of the Lanham Act. (Section 43(a) and the types of cases
that may be brought under it are discussed in Chapter 8.)
Sweden and the other Scandinavian countries have established, by law, a consumer ombudsman who hears advertising
complaints, resolves them when possible, and resorts to litigation if necessary. The ombudsman also has some power to promulgate
advertising rules that carry legal force. In this sense, the ombudsman’s role resembles that of the FTC in the United States.
Advertising laws contemplate significant regulatory roles for government agencies in New Zealand, Australia, and Japan,
though industry self-regulation remains prominent in at least the latter two of those nations. In Great Britain, the traditional
emphasis on self-regulation through the private Advertising Standards Authority has been supplemented during recent decades by
government regulation through the office of the Director General of Fair Trading.
page 48-15
Unfairness Section 5’s prohibition of unfair acts or practices enables the FTC to attack behavior
that, while not necessarily deceptive, is objectionable for other reasons. As demonstrated by the
case discussed in an Ethics and Compliance in Action box that appears later in the chapter, the
FTC focuses on consumer harm when it attacks unfair acts or practices. To violate § 5, this harm:
1. 1.Must be substantial. Monetary loss and unwarranted health and safety risks usually
constitute substantial harm, but emotional distress and the perceived offensiveness of
certain advertisements generally do not.
2. 2.Must not be outweighed by any offsetting consumer or competitive benefits produced
by the challenged practice. This element requires the commission to balance the harm
caused by the act or practice against its benefits to consumers and to competition
generally. A seller’s failure to give a consumer complex technical data about a product,
for example, may disadvantage the consumer, but it may also reduce the product’s
price. Only when an act or practice is injurious in its net effects can it be unfair under
§ 5.
3. 3.Must be one that consumers could not reasonably have avoided. An injury is
considered reasonably unavoidable when a seller’s actions significantly interfered
with a consumer’s ability to make informed decisions that would have prevented the
injury. For example, a seller may have withheld otherwise unavailable information
about important product features, or used high-pressure sales tactics on vulnerable
consumers.
Remedies
LO48-4
Describe the types of orders that the FTC may issue against a party held, in an adjudicative
proceeding, to have engaged in deceptive or unfair commercial behavior.
Several types of orders may result from a successful FTC adjudicative proceeding attacking
deceptive or unfair behavior. One possibility is an order telling the respondent to cease engaging
in the deceptive or unfair conduct. Another is the affirmative disclosure of information whose
absence made the advertisement deceptive or unfair. Yet another is corrective advertising. This
requires the seller’s future advertisements to correct false impressions created by its past
advertisements. In certain cases, moreover, the FTC may issue an all-products order extending
beyond the product or service whose advertisements violated § 5, and including future
advertisements for other products or services marketed by the seller. The Kraft and POM
Wonderful cases, which appeared earlier, illustrate such an order. Finally, as explained earlier, the
FTC may sometimes go to court to seek injunctive relief, civil penalties, or consumer redress.
Consumer Protection Laws
The term consumer protection includes everything from Chapter 20’s product liability law to
packaging and labeling regulations. Here, we examine federal regulation of telemarketing
practices, product warranties, consumer credit, and product safety.
LO48-5
Identify key features of the Telemarketing and Consumer Fraud and Abuse Prevention Act.
Telemarketing and Consumer Fraud and Abuse Prevention Act In the Telemarketing
and Consumer Fraud and Abuse Prevention Act (Telemarketing Act), Congress required the FTC
to promulgate regulations defining and prohibiting deceptive and abusive telemarketing acts or
practices. The FTC responded to this directive with the Telemarketing Sales Rule (TSR).
For purposes of the TSR, a seller is a party who (or which), in connection with a telemarketing
transaction, offers or arranges to provide customers with goods or services in exchange for
consideration. The TSR defines telemarketer as “any person who, in connection with
telemarketing, initiates or receives telephone calls to or from a customer.” It
defines telemarketing as “a plan, program, or campaign which is conducted to induce the purchase
of goods or services by use of one or more telephones and which involves more than one interstate
telephone call.” Exemptions from the telemarketing definition are provided for sellers that solicit
sales through the mailing of a catalog and then receive customers’ orders by telephone, and for
sellers that make telephone calls of solicitation to a consumer but complete the transaction in a
face-to-face meeting with the consumer.
A major feature of the TSR makes it a deceptive practice for telemarketers and sellers to fail
to disclose certain information to a customer before she pays for the goods or services being
telemarketed. The customer is regarded as having paid for goods or services once she provides
information that may be used for billing purposes. The mandatory disclosures specified in the TSR
include the total cost of the goods or services, any material restrictions or conditions on the
purchase or use of the goods or services, and the terms of any refund or exchange policy mentioned
in the solicitation (or, if the seller has a policy of not allowing refunds or exchanges, a disclosure
of that policy). Various other disclosures are necessary if the telemarketing solicitation pertains to
a prize promotion. The TSR also makes it a deceptive practice for a telemarketer or seller to
misrepresent information required to be disclosed in the mandatory disclosures, or to misrepresent
any other information concerning the performance, nature, or characteristics of the goods or
services being offered for sale.
page 48-16
CYBERLAW IN ACTION
Reacting to frequently voiced concerns of e-mail users that their inboxes were being inundated by unwanted,
sometimes misleading, and often offensive e-mail messages from commercial providers, Congress enacted the
Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003. This statute, usually referred to as
the CAN-SPAM Act, took effect on January 1, 2004.
In the CAN-SPAM Act, Congress outlawed various commercial e-mail practices, including the use of a false or
misleading statement on the “from” line of a commercial message and the use of false or misleading subject headings
in a commercial message. The CAN-SPAM Act also required that a sender of commercial e-mail use a functioning
reply address or “opt-out” mechanism by which consumers could elect not to receive more messages from that sender,
and that the sender send no further messages to a consumer more than 10 days after the consumer has opted out. In
addition, the CAN-SPAM Act required that commercial e-mail messages contain three components: clear identification
that the message is an advertisement or solicitation, conspicuous notice that the recipient may decline to receive further
messages from the sender, and a listing of the sender’s postal address. A further CAN-SPAM Act provision required
warning labels on commercial e-mail messages that feature sexually oriented material. Enforcement authority for
violations of the CAN-SPAM Act was given to the FTC (which can launch adjudicative proceedings or initiate litigation
in court), to state attorneys general (who can sue in federal court concerning certain violations), and to providers of
Internet access services (which can sue in federal court concerning certain other violations).
The CAN-SPAM Act also required the FTC to promulgate regulations to implement the statute and further its
purposes. The regulations promulgated by the FTC took effect in 2008. The CAN-SPAM Act and the related regulations
have made progress toward the goals they were meant to achieve, though critics have lamented that the inbox-clutter
problem remains only partially resolved. They have pointed to a continued proliferation of unwanted commercial e-mail
as an indication that purveyors of such material have either ignored the legal requirements or found it relatively easy to
modify their e-mail techniques enough to comply with the law while still maintaining an ability to flood inboxes with
unsolicited messages.
According to the TSR, a telemarketer or seller engages in an abusive practice if he directs
threats, intimidation, or profane or obscene language toward a customer; causes the telephone to
ring, or engages a person in a telephone conversation, repeatedly and with the intent to harass,
abuse, or annoy a person at the called number; or initiates a call to a person who has previously
stated that she does not wish to receive a call made by or on behalf of the seller whose goods or
services are being offered.
The TSR also makes it an abusive practice for a telemarketer to call a person’s residence at
any time other than between 8:00 A.m. and 9:00 p.m. at the called person’s location. In addition, the
telemarketer engages in an abusive practice if, in a telephone call he initiated, he does not promptly
and clearly disclose the identity of the seller, the sales purpose of the call, the nature of the goods
or services, and the fact that no purchase or payment is necessary in order to win a prize or
participate in a prize promotion (if a prize or prize promotion is being offered). Still other abusive
practices are enumerated in the TSR.
The FTC and state attorneys general may bring enforcement proceedings against violators of
the Telemarketing Act and the TSR. Monetary civil penalties of the sort described earlier in this
chapter are among the available remedies in proceedings initiated by the government. Under some
circumstances, private citizens may sue violators for damages and injunctive relief.
Do-Not-Call Registry
LO48-6
Identify key features and effects of the Do-Not-Call Registry established by federal agency
regulations.
Regulations promulgated in 2003 by the FTC and the Federal Communications Commission
created a legal mechanism by which consumers who preferred not to receive telemarketing calls
of a commercial nature could have their home telephone numbers listed on a national “do-not-call”
registry. Commercial telemarketers became legally obligated not to place calls to the numbers
listed. The do-not-call registry became popular among consumers, with many millions taking
action to have their numbers placed on the list within the first several months of its existence.
The page 48-17 do-not-call registry’s restrictions apply only to telemarketing calls made by or on
behalf of sellers of goods and services. The restrictions do not apply to calls made for the purpose
of charitable or political fundraising. Exceptions to the general do-not-call rule permit a seller of
goods or services to call consumers who have signed up for the registry if the seller and the
consumer have an established business relationship or if the consumer has provided written
permission to be called.
After the registry was established, affected commercial telemarketers initiated litigation
questioning the legal validity of the registry. In Mainstream Marketing Services, Inc. v. Federal
Trade Commission,5 the U.S. Court of Appeals for the Tenth Circuit upheld the registry as a valid
exercise of statutory authority granted by Congress and rejected the telemarketers’ argument that
the registry violated their First Amendment rights.
Do Not Track In recent years, the FTC has devoted attention to a perceived need to protect
consumers’ privacy regarding their Internet use. Rather than promulgating regulations that deal
with such matters, the FTC has encouraged companies that provide Internet browsers to offer a
“Do Not Track” system under which consumers can choose not to have their Internet use tracked
by third parties. The FTC has also sought to educate consumers about such issues.
Although some companies began a few years ago to take steps to permit consumers to opt out
of targeted advertisements, the FTC has favored a more sweeping approach under which browser
providers would take further steps to allow consumers to restrict availability of their browsing
history and advertising networks and websites would limit their targeted-advertising-related
tracking of usage. In recent years, more companies have voluntarily moved in that direction. There
also have been signs of movement toward industry adoption of a Do Not Track agreement of the
sort the FTC favored. Future development will reveal whether such an agreement materializes and
seems to do the job adequately, or whether the FTC will eventually seek to promulgate regulations
mandating that Do Not Track systems be developed and implemented.
Magnuson—Moss Warranty Act
LO48-7
Explain the basic provisions of the Magnuson—Moss Warranty Act and related regulations.
The Magnuson—Moss Warranty Act of 1975 mainly applies to written warranties for consumer
products. Nothing in the act requires sellers to give a written warranty. Sellers who decline to
provide such a warranty generally escape coverage. A consumer product is personal property that
is ordinarily used for personal, family, or household purposes. In addition, many Magnuson—
Moss provisions apply only when a written warranty is given in connection with the sale of a
consumer product to a consumer. A consumer is a page 48-18 buyer or transferee who does not use
the product for resale or in his own business.
CYBERLAW IN ACTION
Concern about uses and misuses of personal information obtained from children through their use of the Internet
caused Congress to enact a 1998 statute, the Children’s Online Privacy Protection Act (COPPA), and to direct the FTC
to adopt related regulations. Since then, the FTC has promulgated two sets of COPPA regulations. The statute and the
regulations require that if a website or online service is directed toward children under the age of 13 or the operator of
the site or service knows that personal information is being collected from children under 13, the operator of the site or
service must provide notice to parents and obtain their consent before collecting, using, or disclosing children’s personal
information. In addition, the operator must maintain security over any such information collected from children. Personal
information, for purposes of the statute and the regulations, includes such information as names, phone numbers, home
addresses, and e-mail addresses, as well as photos or other video or audio that could be used to identify, locate, or
contact a child.
Demonstrating that the COPPA regulations have some teeth, the FTC took action in recent years against the
operators of fan websites for various stars, including Justin Bieber. The operators of certain sites of that nature agreed
to pay a $1 million civil penalty in 2012 in order to resolve the FTC’s allegations that they had collected personal
information from children in violation of COPPA and the regulations.
In an effort to make certain that the regulations kept pace with technological innovations and other developments,
the FTC promulgated a further set of COPPA regulations in 2012. Those rules updated the earlier ones so that they
would apply to sites and services accessed through a mobile phone or a tablet and so that they would take account of
such developments as voice recognition technology and the use of online advertisements tailored to a particular user.
In addition, the 2012 regulations appeared to broaden the range of companies subject to COPPA, by including
advertising networks and social networks among those that must comply with the parental notice and consent
requirements if those networks operate on sites regularly frequented by children.
Chapter 20 discusses Magnuson—Moss’s provisions giving consumers minimum warranty
protection. Here, we examine its rules requiring that consumer warranties contain certain
information and that this information be made available to buyers before the sale. Any failure to
comply with these rules violates § 5 of the FTC Act and may trigger commission action. In
addition, either the FTC or the attorney general may sue to obtain injunctive relief against such
violations.
Required Warranty Information The Magnuson—Moss Act and its regulations require the
simple, clear, and conspicuous presentation of certain information in written warranties to
consumers for consumer products costing more than $15. That information includes (1) the persons
protected by the warranty when coverage is limited to the original purchaser or is otherwise
limited; (2) the products, parts, characteristics, components, or properties covered by the warranty;
(3) what the warrantor will do in case of a product defect or other failure to conform to the
warranty; (4) the time the warranty begins (if different from the purchase date) and its duration;
and (5) the procedure the consumer should follow to obtain the performance of warranty
obligations. The act also requires that a warrantor disclose (1) any limitations on the duration of
implied warranties and (2) any attempt to limit consequential damages or other consumer
remedies.
Presale Availability of Warranty Information The regulations accompanying Magnuson—Moss
also contain detailed rules requiring that warranty terms be made available to a buyer before the
sale. These rules generally govern sales to consumers of consumer products costing more than
$15. They set out certain duties that must be met by sellers (usually retailers) and warrantors
(usually manufacturers) of such products. For example:
1. 1.Sellers must make the text of the warranty available for the prospective buyer’s
review before the sale, either by displaying the warranty in close proximity to the
product or by furnishing the warranty upon request after posting signs informing
buyers of its availability.
2. 2.Catalog or mail-order sellers must clearly and conspicuously disclose in their
catalog or solicitation either the full text of the warranty or the address from which a
free copy can be obtained.
3. 3.Warrantors must give sellers the warranty materials necessary for them to comply
with the duties stated above.
Truth in Lending Act
When Congress passed the Truth in Lending Act (TILA) in 1968, its main aims were to increase
consumer knowledge and understanding of credit terms by compelling their disclosure, and to help
consumers shop for credit by commanding uniform disclosures. Now, however, the TILA protects
consumers in other ways as well. For example, in 2018 the TILA was amended by the Economic
Growth Act, discussed later in this chapter, to allow a consumer to request a financial institution
to remove a default on a private student loan under certain circumstances.
Coverage Effective January 1, 2020, the TILA will apply to creditors who extend consumer credit
to a debtor in an amount not exceeding $58,300. A creditor is a party who regularly extends
consumer credit. Examples include banks, credit card issuers, and savings and loan associations.
Extending credit need not be a creditor’s primary business. For instance, auto dealers and retail
stores are creditors if they regularly extend credit. To qualify as a creditor, the party in question
must also either impose a finance charge or by agreement require payment in more than four
installments. Consumer credit is credit enabling the purchase of goods, services, or real estate used
primarily for personal, family, or household purposes—not business or agricultural purposes. The
TILA debtor must be a natural person; the act does not protect business organizations.
Disclosure Provisions The TILA’s detailed disclosure provisions break down into three
categories.
1. 1.Open-end credit. The TILA defines an open-end credit plan as one that contemplates
repeated transactions and involves a finance charge that may be computed on the
unpaid balance. Examples include credit card plans and revolving charge accounts
offered by retail stores. Open-end credit plans require two forms of disclosure: (a)
an initial statement made before the first transaction under the plan and (b) a series
of periodic statements (usually, one for each billing cycle).
Among the disclosures required in the initial statement are (a) when a finance charge
is imposed and how it is determined, (b) the amount of any additional charges and the
method for computing them, (c) the fact that the creditor has taken or will acquire a
security interest in the debtor’s property, and (d) the debtor’s billing rights.
Periodic page 48-19 statements require an even lengthier set of disclosures. Much of the
information contained in a monthly credit card statement, for example, is compelled
by the TILA.
2. 2.Closed-end credit. The TILA requires a different set of disclosures for other credit
plans, which generally involve closed-end credit. Closed-end credit such as a car loan
or a consumer loan from a finance company is extended for a specific time period; the
total amount financed, number of payments, and due dates are all agreed on at the time
of the transaction. Examples of the disclosures necessary before the completion of a
closed-end credit transaction include (a) the total finance charge; (b) the annual
percentage rate (APR); (c) the amount financed; (d) the total number of payments,
their due dates, and the amount of each payment; (e) the total dollar value of all
payments; (f) any late charges imposed for past-due payments; and (g) any security
interest taken by the creditor and the property that the security interest covers.
3. 3.Credit card applications and solicitations. The TILA imposes disclosure
requirements on credit card applications and solicitations. These elaborate
requirements differ depending on whether the application or solicitation is made by
direct mail, telephone, or other means such as catalogs and magazines. To take just
one example, direct mail applications and solicitations must include information about
matters such as the APR, annual fees, the grace period for paying without incurring a
finance charge, and the method for computing the balance on which the finance charge
is based.
Other TILA Provisions The TILA has provisions dealing with consumer credit advertising. For
example, the act prevents a creditor from “baiting” customers by advertising loan or down payment
amounts that it does not usually make available. To help consumers put advertised terms in
perspective, if ads for open-end consumer credit plans state any of the plan’s specific terms, they
must state various other terms as well. For instance, an advertisement using such terms as “$100
down payment,” “3 percent interest,” or “$99 per month” must also state other relevant terms such
as the APR.
The TILA also regulates open-end consumer credit plans involving an extension of credit
secured by a consumer’s principal dwelling—for example, the popular home equity loans. The act
controls advertisements for such plans, requiring certain information such as the APR if the ad
states any specific terms and forbidding misleading terms such as “free money.” It also imposes
elaborate disclosure requirements on applications for such plans. These include matters such as
interest rates, fees, repayment options, minimum payments, and repayment periods. The act also
controls the terms of such a plan and the actions a creditor may take under it. For example, (1) if
the plan involves a variable interest rate, the “index rate” to which changes in the APR are pegged
must be based on some publicly available rate and must not be under the creditor’s control, and
(2) a creditor cannot unilaterally terminate the plan and require immediate repayment of the
outstanding balance unless a consumer has made material misrepresentations, has failed to repay
the balance, or has adversely affected the creditor’s security.
Finally, the TILA includes rules concerning credit cards. The most important such rule limits
a card-holder’s liability for unauthorized use of the card to a maximum of $50.
Enforcement Various federal agencies enforce the TILA. Those who willfully and knowingly
violate the act may face criminal prosecution. Civil actions by private parties, including class
actions, are also possible.
Fair Credit Reporting Act
LO48-9
Describe the purpose and major provisions of the Fair Credit Reporting Act.
The reports credit bureaus provide may significantly affect one’s ability to obtain credit, insurance,
employment, and many of life’s other goods. Often, affected individuals are unaware of the
influence that credit reports had on such decisions. The Fair Credit Reporting Act (FCRA) was
enacted in 1970 to give people protection against abuses in the process of disseminating
information about their creditworthiness. In 2018 the FCRA was amended by the Economic
Growth Act, discussed later in this chapter, to include protections for student borrowers.
Duties of Consumer Reporting Agencies The FCRA imposes certain duties on consumer
reporting agencies—agencies that regularly compile credit-related information on
individuals for the purpose of furnishing consumer credit reports to users. A consumer
reporting agency must adopt reasonable procedures to:
1. 1.Ensure that users employ the information only for the following purposes:
consumer credit sales, employment evaluations, the underwriting of
insurance, the granting of a government license or other benefit, or any other
business transaction where the user has a legitimate business need for the
information.
2. 2.Avoid including in a report obsolete information predating the report by
more than a stated period. This period usually is 7 years; for a prior
bankruptcy, it is 10 years. This duty does not apply to credit reports used page
48-20 in connection with certain life insurance policies, large credit
transactions, and applications for employment.
3. 3.Ensure maximum possible accuracy regarding the personal information in
credit reports. However, the act does little to limit the types of data included
in credit reports. In fact, all kinds of information about a person’s character,
reputation, personal traits, and mode of living seemingly are permitted.
However, medical information cannot be included without consent from the
relevant consumer.
Duties of Users The FCRA also imposes disclosure duties on users of credit reports—
mainly credit sellers, lenders, employers, and insurers. One of these duties applies to
user…