Unfairness:Views on Unfair Acts and Practices in Violation of the Federal Trade Commission Act

Industry-Provided Depositions

Unfairness:Views on Unfair Acts and Practices in Violation of the Federal Trade Commission Act

Date: Apr 1980
Length: 253 pages
680061994-680062245
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Type: REPT, REPORT, OTHER; BIBL, BIBLIOGRAPHY; DEPO, DEPOSITION TRIAL TRANSCRIPT; LETT, LETTER; MEMO, MEMO; LEGAL; LIST; CORRESPONDENCE; REPORT
Named Person: Abrams, S.K.; Bain, J.; Barkley; Barrow, J.; Bell, H./American Advertising Federation; Berman, A.L.; Bickel, A.M./Yale Univ; Bork, R./Yale Univ; Boyer, B.B./State Univ, N.Y. Buffalo; Brandeis; Brozen, Y.; Buschmann, K.H.; Butler, O./Procter Gamble; Cardozo, B.; Clark; Clayman, J./Natl Council, O.F. Senior Citizens; Clayton; Copeland; Cropper, W.V.; Curtis, C./Curtis Publications; Danforth, J.C./Comm, O.N. Commerce Science + Transporta; Demsetz, H.; Dennison; Diefenderfer, W.M./Comm, O.N. Commerce Science + Transporta; Disney, W.; Dixon; Elliott, W.T.; Exon, J.J./Comm, O.N. Commerce Science + Transporta; Ford, W.H./Comm, O.N. Commerce Science + Transporta; French, V.O./Natl Retail Merchants Assn; Gesell; Glassman, M.; Goldwater, B./Comm, O.N. Commerce Science + Transporta; Griswold; Hackler, L./American Retail Federation; Hall, E.K./Comm, O.N. Commerce Science + Transporta; Hand, L.; Heflin, H./Comm, O.N. Commerce Science + Transporta; Hinkes, H.R.; Hollings, E.F./Comm, O.N. Commerce Science + Transporta; Holmes; Inouye, D.K./Comm, O.N. Commerce Science + Transporta; Kassebaum, N.L./Comm, O.N. Commerce Science + Transporta; Keller, B.P./Boston Univ; Kenon, H.M.; Kenon, J.; Kepple; Knox, P.M./Sears Roebuck; Kramer, A./Bureau, O.F. Consumer Protection; Kramer, A.; Kurland, P.B.; Lanham; Lea; Leventhal; Lewis, E.F./Zimmer Mcclaskey; Locker, A./Locker Greenberg; Long, R.B./Comm, O.N. Commerce Science + Transporta; Mackinnon; Magnuson; Magnuson, W.G./Comm, O.N. Commerce Science + Transporta; Mathews, L./American Assn, O.F. Advertising Agencies; Mccarthy; Mccumber; Mclaren; Mcmanus, R.P.; Miller, J.A./Univ, C.O.; Morgan, C./Charles Morgan, J.R. + Assoc Chartered; Moss; Motulsky, C.; Mulock, B./Library, O.F. Congress; Nader, R.; Nelson; Newland; Newman; Nixon, T.; Packwood, R./Comm, O.N. Commerce Science + Transporta; Patman; Pepples, Ernest, J.D. (BW General Counsel and Sr. VP); Posner, R./Univ Chicago; Powell; Pressler, L./Comm, O.N. Commerce Science + Transporta; Rehnquist; Reich; Rhynedance, H.D.; Rice, D.A./Boston Univ; Riegle, D.W./Comm, O.N. Commerce Science + Transporta; Robinson; Russell, H.L.; Sarvis, A.L./Comm, O.N. Commerce Science + Transporta; Schmalensee, R.; Schmitt, H.H./Comm, O.N. Commerce Science + Transporta; Schreiber, T./Vita Crunch; Schwartz; Schwartz, T.M./George Washington Univ; Sherman; Snyder, W.S.; Stern, R.H.; Stevenson, A.E./Comm, O.N. Commerce Science + Transporta; Stewart; Swift; Thain, G.J./Univ, W.I. Madison; Thatcher; Thurm, S./Assn Natl Advertisers; Wackman; Ward; Warner, J.W./Comm, O.N. Commerce Science + Transporta; Wartella; Weil, G.H./Weil Guttman; Weiss; Wentzel, A.R.; Weston, F.; Wheeler; White; Whitten, J.; Wilson, R.E./Division, O.F. General Trade Restraints; Wilson, W.; Winters, J.S.; Wisdom; Wright, J.S.; X/American Advertising Federation; X/Us Congress; X/Us, C.T. App; X/Us Supr, C.T.; X/Sperry Hutchinson; X/Us Senate; X/Us Common Commerce Science + Transporta; X/Harvard Law Review; X/Us House; X/Food And Drug Administration; X/Fcc; X/General Mills; X/Pfizer; X/Wa Monthly Magazine; X/Aba; X/Wa Post; X/Spiegel; X/K Mart; X/Kellogg; X/Us Common Interstate Commerce; X/Il Mfg Assn; X/Standard Oil; X/Eastman Kodak; X/Civil Aeronautics Board; X/General Foods; X/Quaker Oats; X/Us Small Business Comm; X/Market Research; X/Vita Crunch; X/Pet; X/Colgate Palmolive; X/Pillsbury; X/Natl Assn Broadcasters; X/Us Council Better Business Bureaus; X/Natl Advertising Division; X/Natl Advertising Review Board; X/Natl Broadcasting; X/Action For Childrens Television; X/Center For Science, I.N. The Public Inte; X/Cook Cty, C.T.; X/Assn Natl Advertisers; X/Toy Mfg, O.F. America; X/Grocery Mfg, O.F. America; X/Assn, O.F. American Law Schools; X/Greater, W.A. Board, O.F. Trade; X/Sentry Insurance; X/Louis Harris + Assoc; X/General Motors; X/J Walter Thompson; X/Young + Rubicam; X/American Civil Liberties Union; X/Chrysler; X/Toyota; X/Nissan; X/Texaco; X/Exxon; X/Nra; X/Va State Board, O.F. Examiners, I.N. Optome; X/Nw Ayer + Son; X/Uneeda; X/Atlantic Monthly; X/Yale Review; X/Advertising Federation, O.F. America; X/Printers Ink; X/Zenith; X/American Bar Assn; X/Itt Continental Baking; X/Sears; X/Warner Lambert; X/American Home Products; X/Firestone; X/Stp; X/Keppel + Brothers; X/Us, C.T. Appeals Sixth Circuit; X/Us Consumer Subcomm; X/Va State Board, O.F. Pharmacy; X/Raladam; X/Office, O.F. Policy Planning + Evaluatio; X/Procter Gamble; X/Boston Univ; X/Us, C.T. App Fifth Circuit; X/Us Commerce Comm; X/Administrative Conference, O.F. The, U.S.; X/Dc, U.S. Ct App; X/Bna; X/Subcomm, O.N. Consumers; X/American Assn, O.F. Advertising Agencies; X/Us, C.T. App Second Circuit; X/Natl Retail Merchants Assn; X/Ftc Watch; X/Natl Council, O.F. Senior Citizens; X/Akron Law Review; X/Council, O.F. Better Business Bureaus; X/Consumer Reports; X/Us, C.T. App Ninth Circuit; X/Tugwell
Named Organization: Barnes,E/Federal Trade Commission; Hanscom,D/Federal Trade Commission; Hobbs,Co/Federal Trade Commission; Kefauver,B/Federal Trade Commission; Mcintyre/Federal Trade Commission; Mueller,Ce/Federal Trade Commission; Pertschuk,M/Federal Trade Commission; Pitofsky,R/Federal Trade Commission; X/Federal Trade Commission; X/American Marketing Association; X/Civil Service Commission; X/Federal Communications Commission; X/Surgeon General S Advisory Committee; X/US Interstate Commerce Commission
Characteristic: ILLE, ILLEGIBLE; MARG, MARGINALIA
Attachment: 630995
Litigation: 10004036
Request: Yes
Author: Cannon, H.W./Comm, O.N. Commerce Science + Transporta
Date Loaded: 07 May 1999

Document Images

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"-='C / • ii(iI (D) (4) (B) (6) (7) 680061S94 NUMBER SERIES: tO, • (8) QC2 BY.~ (9) SECOND/THIRD COPY BY (10) C-STAMPED BY (II) DATE ORIGINALS RETURNED (12) DELETED NOS. (13) ADDED NOS. (14) COI~ENTS , O;Tq?, ,,,<::~! .... , :m13,5].'. t ,

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~! ~'~V... ~_~- ~, ,_ ~ ........ : _ UNFAIRNESS: VIEWS ON UNFAIR ACTS AND PRACTICEs IN VIOLATION OF THE FEDERAL TRADE COMMISSION ACT GG 900S9

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~r I i 96tK Congress t 2d SesBion COMM~TT:~E PR~lCT UNFAIRNESS: VIEWS ON UNFAIR ACTS AND PRACTICES 1N VIOLATION OF THE FEDERAL TRADE COMMISSION ACT ~pA~.D AT TIll] E~D~r OF Ho~. HOWARD W. CA~NohT~ Chairman COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATIO.N- UNITED STATES SENATE APRIL I~0

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C0~III-I.,~B ON C0~I.MERCI~, SCIENCb~, AND TRAN~IJ01~'I~ATION 1tOWARD W CANNON. Nev~l.~ ~st~ WARREN ~ ~AGNUSOI~4, W~shi~g~ RUSSELL B LONG, Lo ul~lRua ~IBNEST F H 0 L LI NI3S. South C~llna IIANIEL K~ 1NI)lJ'gl~ ~awntl ADLAI E. S'£tlVEN S0 N, It]lnol~ WENDELL It. FORD, K~IIt u~y DONALD W, RI E C,I~. J~,, NIchiKR ~ ~'. JA~IES ~0N. N~br~ka ItOW~ILL HEFLI~ ~1 ab~,ma ~B PACKW00D~ 0~egon BARRy (3¢1LI~WA TE R~ Ar~zon~ ~IARIIISON I1 SCHMITT, New M~xlcq~ J0~IN C~ DA NFORTH, MisSouri I~ANCY LAND0!~ K2~SEI~ (;~L K~n~s LARRY pRE~LEIt Boulh ~kot~ J (I~tN ~¢. WARNERI V[r~.lul~

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CONTENTS 2'aL-m 5 American Advertising ~ederati0n, statement ............... Bork, Robert tt, A exander .~,f B eke professor of pub ic law~ Yale Law SchooI, statement .............. 17 Beyl~r, Barry B., associ~lte dc~n~ ~ate University of ~w Yor],~ }etLer nm] skatemen~ ....................... 120 Clayman~ Jacob, president~ ~atlonal Council of Senior Citi- zens~ Inc., letter ...................................... 164 Cropper, ~ altcl \ .~ letter ................ 11'2 Federal Trade (~ommtssten v. Sperry & H~tehi~son Co_~r 231 French, Verr~ek 0., senior vice president. Governmental Af f~im, N~ionai Retail ~fcrchants AEsocia~ien. letter ~ 160 Generat Mills, I~e.. statcmcu~ ........... 22 I{acl~]er, Lo ,d, ~Tesldent Americ~ ]~tai] Fe(l~catlon ]ettew_ 155 14obb~. Casw~]l 0., American Bar hssoeintio~l, a~icle _ 27 Kellogg Company~ statement ............................ 41 K ~fart Corporation, ~tatement ........................ 39 Knox, Philip 5[., Jr., vice presieIent~ (;overnment Affalrs~ ~ears, ]tocl)uck & Co,. ]e~er .... ]35 Le~is, El~cr~ F.~ prL~sident~ Z~mmer ~cCiaskcy Lewis, Loais r~l]~, Ky.~ letter .... 201 I~cker. Aaron, counsel~ Toy .'~Ianu~a~turers of America~ Inc., Ietter ................................................151 ~fal~ws~ Lea, pre~lclent. American A :':':':':':':':':':~t at ~ o u of 2~vertising Agencies. ~11c.~ l~r alld st~,t~ment ............ 149 ~¢i~f~nus, R. P. ~-ice president~ Household Finance. ]~t~er 130 .~i er. Jolm A., D.B.A.~ assoo ate professor of marketing, Un - versify of Colorado. letter ...........................194 .~[?r~an, Charles Jr., ceunsc], Gro~ry ~fanufacturers of Amer- lcuI l~ter ...................... 140 Mulock~ Bruce. Analyst in Cons~n~r Affairs, Ecenomlcs Divl ~ion, Con~re~ional ]~esearoh ~ervice, Library of Congress, statement .............................................. 213 National Association of Broadcasters. statcmcn~ .............. 8'2 ~ional Broadcasting Co., In¢., statement .............. 89 Po~)l~Ies, Ernest, vice ]lre~irlent ~n~ ~c~erat coun~I. ]~rown William~n Tobacc~ Corp.~ r~lllsvill~, Ky.~ letter and st~t~- raent ............................................. 255 Rice, Davicl A., profe~or ~nd associata tie a,~. and Bruce P. Kel- ]~r, ]~lou ~iliversitv Sch[x)l ~f Law, lc~r ~d nrtielc~_~ 96 Sch~rtz~ , Tere ~ a i~[., p r'o~essor of law. "['lie. G~or~e~. ~Vashfi~, g~on L~lVerSlt~¥~ let#or ~nd~ ~_kror/ L0,w R~vi~v ~rtlcle ......... 15~ Th~ilu (~er~]d J.. ~s~ociate l~rofe~r of l~w, TTnir(u'~i~y of Wi~- consin-.~[a(li~ou, letter ............................ 196 'Fhuvm, Samuel, ~enior vice i)resident. Asscci~ion of ~atlona[ ~V~,i]~ (~i]b~,~ H. counseI~ Associ~ten of ~atte~[ A~lvei~isem~ f~c., ]ct~r .......................................... 114 IIHI 0o *.,]

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LETTER OF TRANSMITTAL 4 t j |2 Cox~rr~ on CoMMr~cr~ SGTENCZ~ AND TIL~NSPOI~ATION~ Washington, D.6'., April 1980. I)~R Cou~A~cr : As Chairman of the Senate Committee ~m Com- merce, Science, and Tr~ns~portation, I am pleased to provide you with a Committee prlat entitled "Unfairness: Views ou Unfair Acts and Practices in Violation of the Federal TraA¢ Comsnission Act." These views represent the analysis of numerous parties who are interested m the FTC proceedings involving unfair acts and practices and were pro pared at the rv~luest of the CommitU~e. In light of the current interest ix~volving the ~ arious issues of apply- ing the Federal Trade Commission Act to unfair acts and practiee.~ involving both advertising and other conduct I believe this doca- meaC will prove extremely useful in o~ir review in this area. Vvqfile these views have neither been ~pproved or disapproved by tbe Committee on Comm~re~. Scienc~ and Trauspol f aticnt, it is he}pod that t he?.- will be useful background in forma~iom Dincevely, How~F.~ W. C.~wxo~w, Uhalrman. (1) i

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m ¢,¢ t~

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J I ~j ~ATEMEICT OF T~ ~CAN ~LD~ETISING FEDERATION FrC~ ASSERTED PO~VEI~ TO F~GU~TE OR BAN ADViSInG O~ GROI~i~DS 0~" I ~ U~F~IR~NESSII The American Advertising Fyderation l.~k:lr) is a imrional trade a~ociation which includes within its membership of the varmus eis- raents of the advertising industW. Its principal olfic~ is located at 1295 Cotmecticu~ Avenue~ Northwest, Washing~on~ D.C. 20036. Its me~nber~inp ii~eindes ~'25 companis..~ which produe~ and advertise con- Stl~iler ~rodnct~. advcrtisln., g agencies magazine and. news~paper~ pub- hshers, rudm and te evlsmn broadcasters and radm and tel~ws on net- works outdoc, r advertising organizations and other media. Approxi- mately 94 additional trade aa~ociatinns with memb~rshil?S ~m posed of eompanie~ engaged in various ad~r~ishlg pursuits al~ m~mbers of A kl~'. ~/lm Federation membership also includes 187 local advertising dabs al~d federations located tinvughou~ the United States. 'ghese local "grass r~t~:' organizations have a combined member~tip of approximately 20,000 aaver~is ng p~et t oner~, In addition 97 ~lisgo chapters are members of AAF. While tbe AAF and its merabers am interested generally in the rammer in ~'ldch tbe FTC has applied the concept of "unfairness" to all business p~metices these conunents are primarily directed to the ap~p± llcatinn of the concept to advertising. We unders~aud thag others, including some of our nlembe*~s, wi[l comment o*~ the application oi the doctrine m business practices in general. Thus~ m the interest of t~m~ and to avoid r etm~i~.mn we will conlin~ mlr ~mments to th~ sub- ~t which i8 of coiillnoll concern to all of ollr members. Obvinusly~ an order y and understandab ~ presen~atlon is depen- dent in the first instance~ upon a proper a~d lucid statement of the quest ca to be addressed, :in our vew the quest on now before the Cemmittee~ insofar ~ advertising Is con~rned, ~beuld be phrased in the following terms: 8beuld the FTC be permitted to regulate, by rul~ or ad udication~ commercial spe*~ch which is not misleading or deceptive, on grounds that it is~ in some other manuer~ impair to consumers or competitorsl We haw taken some c~re in phrasing the question for it is our view that1)~roper wording will serve to eliminate~r~ripheral arguments and the pursui~ of ~nprod~ctive non-issue~, example, w~ have used th~ words "not misleading or dt~:epgive' ~.s descriptive of tile type of adv'er~ising which is in peril ~-adier thaI~ ~lm word %ruthful" for it is clear that an ad whis]~ is llte~zd]y %t~e:' nmy nondmle~s be de- ceptive and the Commission's power to intetxlic~ st/oh advertisements sitoald be c~eiuded from th~ diseusMon? Moeeover, C~mg~e~s, in tim same V(heeler-Lea Aeg wh ch added the "unfair ~r deceptive" stand- a~l to se~t on 5 of the F'IC~X. 59 ~tat. 11I a so adde* a new sect on • A~ ~tnted ~ P L~r¢21a, d C0. v. FTC, I86 F2tl ~2 (4t~ ~2[r 1950~ : -,r~ te]] less than ?l,e whole tr,tth in aa advertisement I~ a ~e[l.k~o~n me~od ~f flevei~tloa, anti ~ W~ de~elves ha/ re~orti~g to ~uch methods e~nnot ex~u~e the deceptJoe by ~el$1n~ upon the tru~hf~l,e~ Im~ ~e ~f ±he I~tiai Irish by ~lell the deceptlon has bc~n a¢~omg~l~h00.** (a)

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4 15 52 Stat. 110) which prcJvide.n tha~ an advertisement is "false'~ if although otherwise rule, it "fails to reveal fm~ts materiM in the light of mlch representations" as wer~ made in the advert is~-r~tent. We have used the term "commercial speecgu in our question ~ther than the narrower term "advertisement'~ so as to include all for'ins of communication employed by seners in presenting and promoting {heir goods. The term "advertisement" is not sufficisntly broad to en/~om pass ........ all of the forms of commurricatlon sub ect to the Colnmi~sion's. lurlsdlotmn. For example it might not meind~ business or callntg cards of th~ type involved in the Encycloped~ Bri~annlva case or the a~rmative declarations mandated by the Commission in a number of trade r~gulatinn ~lics including C~o]tog Off Period ~or Door-to-Door Sales (I6 C.F.R. 4~0), Negative Option Pls~s (16 C.F.R. 4~5), and the recently vitiated * Ruls Concerdin Prnprictary, Vocational and Home Study Schools (I6 C.F.R. 438/.~e "unfairness" doctrine cuts a broad swat. idver tislng of the typlcM kind, i.e., that which appears in print media or is broadcast via television or radio, is only part of th~ picture. "Unfairness" has been employed to enjoin or to mandate speech in a wide varieW of settings and the discussion thould recognize Otis facL ORIGIIqS 01• THE I~UI~FA~L~E$~ n~Tr~i~]~ While the exact genesis of thg doctrine is the sub e~t of some dis- agreement i~ is popularly but incorrectly thought that it firs~ re- ceived cour6 sanction in th~ Supreme Courffs 197~ decision in FTU v. ~q/~rrg ~ Hu~v~in~n ~o. (405 U.S. ~33). Tim case did not inw)lve advertising or speech but was concerned with an alleged attempt by tha "Green Stamp" company to suplplress the operations of small corn paines engaged in the business of selling or swapping trading stamps to consumers. Thus the case was initiated, tried and decided by tile Coirm~ission as an antitrust or incipient until rus~ vinladon. Tile Coul% of Appeals reversed, holding that the Commission had failed to dem onstrate a violation of the antitrust la~*'s. 4~4 F.zd 146. lo0~51 {bth Cir. 1970). At th0 Supreme Courg level the FTG shifted gears and argued that the practices were unfair to consumers and that tile Com- mmslon could regu]at~ them without regard to their competitive im- pact. The Court accepted this argument holding : Thus le~sistive and judicial authorities alike convince us that the Federa Tred~ Comm ssion does not arrogate ex- cessive power to itself if in measuring a practice a~ainst the elusive, but Congressiondily mandated standards of fairness. it, Iik~ a court of eqtoty~ considers public ~'atecs be3 end sbn- ply tho~ enshrined in tbe letter or encompassed in the spirit of the antitrust laws. 405 U.S. at 244. White the court aeee lted the Commission's ar~'umen~ it (lid not enders¢ th¢ Commission's order to cease and desist. Rather. #l~e co~rt reversed and remanded because of the difference between the Corn mission's .... ~rgument to the Su~)reln~ Collrt ff~using on consunlor in ]ury~ and its opmmn SllppOFtlng tlle order to cease aml desist ll}/leh was founded upon njury to temper tion The matter Ira.s subsequently settled by a ¢o*~ent order. 1979~

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~00~900~9 Ii

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T 6 Kepple standard, as endorsed by Sperry & Hutchinson has no appli cation to commercial speech. In that area the standard was ~e{ 7ong before Keeple, on Decemher 15, 1701, when the First AJn~ndnmnt became a part of our Constitution. WH~ER-I~A ADM~ffDMXlq'r The le~lative history of the Wheeler-Lea Amendment to Section 5 of the F'£ C& shows clearly that the Amendment was not designed by Congress to ¢hengo in 0ely particular the Conmfission~s sub ect matter jurisdiction. Deceptive advertising remained an "unfair method of competition?~ The only effect of the Amendment was to make it un- t~ce~ary for tam Commision to prove that th~ deceptive 0Avertiser's ¢ompetitom wet6 likely to be inj uteri. However~ then a8 now~ some Con- gressmen were ~noerned ~dth the uncertain scope and meaning of the languag~ they wer~ incorporatlag into section 5. For example, Senator White stated, rather plaintively : I think one mu~t voice his di~pproval of unfair and decep- tive practices and acts precisely as he would voice his dis- a proval of sin, hut I should he v~ry much more e~mfortable i~I knew j uzt wba~ J~,~ks or pr attic, s we are making u,fla wfuL 80 Cong. P~C. 6597 (198fi). The Senator's discomfiture is a bit puzzling since, as stated above nothing in the legdziative history of the Vv heeler-Lea AJnendment discloses any Congressional intent to change the basic standard which the Commission had employed to evaluate ndvcr tisiJ~g and otber corn petitive acts and practices ~inee its formation in 1914. The addition of the prosctfption against "unfair or deceptive acts or pr~tices" to the existing prohibition of "tmfalr methods of competition" was on]y intended to correct the techidcal deficiency d~covered by the Supreme {3ourt which it announced hi FT6' v. /¢a/adam 6'o, 28;~ U.~. 643 (19~1). dn that c~e the court had held~ in effcc~ that no mattel how false or deo~otive at1 .'~vertisemezlt was, the CommLssi~n had no power to enjoin it hi the absence ~f an allegatiort and proof that the advertiser's existing or petent[al compeutors wez~ in ured. Phe deci- sion lefL the Commission ~n a difficult position. While it could with only a mlrdmai effort prove the requisite competitive effect hi the typical advertisii~ case involving a maverick advertiser who crcm- peted with advertisers who truthfully represented thetr compelmg gcmds or services it may have been powerle2~ t~ deal with the situa- tion where the advertised goods were unit ue or where aIl competitors a'erc making similar false claims, e.g., eure~ for male-pattern bald- ness. The purpose of Whee]er-Lea was to correct this deficiency by making it unnecessary to provide eompetiti~'e injNr?. In Scna[or Wheeler~s words : The object of the bill is to obviate the 3eeessity of spending thousands of dollars . . . in running down a case to see whether or not toit*ry [to competition] has been done. 80 Con~. Rec. 6599 (1936). The actu~I effect of the Wheeler Lea Amendment is nicely spelled nut in the Hen se Report on the bill:

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7 This amendment makes the consumer, who ma.y be injured by an unfair trade practice, of equal concern, before the law, with the merchant or manufacturer in uredDyb " the unfair methods of a d shortest competitor. I-I.R. Rep. I%. 1613~ 75th Cong. Roe. 1st Sess. 8 (1937). The ~Vheeler Lea Amendmen~ had no discernible effect upon the Commission's approach to advertising regnflatlon. It continued to peoseout~ tlle same types of ea~s as it had before]~a assage of the Amendment. Of cours% post-J938 adxertislng compmlnts charged that the questioned advertising was "unfair or deceptive" but, inter- estingly, until at least the late 1960~s the advertisbig complaints also contained the old, pro-amendment charge that the ad~,ertisement als~ constituted an "unfair method of eompetitinn/~ Itowever~ the latter charge was largely "boiler plate" and Commission attorneys rarely offend evidence as to competitive inj ut~-. V* heeler Lea did not affect in any particular the standard which the Commission employed to ndge advertising. Congress was appar- t.nOy satistisd wish the standard which the Commission and the courts had developed and left it unchanged. The 75th ( ongLess did not pluck the words "unfair or deoeptbee acts or practices" from thin air bus rather sought to codify the standard which the Commission and the eom~s had developed in prior advertising cases. Thos~ cases had uni- formly held advertising was an "unfair method of competition" not only when it was in fact misleading or deceptive but also when it had the tendency)" or capacity to (leeeive. E.g., FTC v. H~rs Tuzrz~r Glass Co., 81 F. 2d362, 364 (3d Cir. 19~5). Fortunately+ we are not t~tally dependent upon the silence of Con- geess as evidence of its intent to maintain the status qno. As pointed out above, the Wheeler-Lea Act also added four new sections to the Ac~, sectior~s I~, 13, 14 and 15, which make unlawful the dtasemina- tion of any false advertisement of foods, drugs~ devices or cosmetics. Section 15 defines, in cclmpr£hensivo terms~ what Congress meant by the term "false adverLisement." Tim section provides in part : The term *'false advertisement" means an odvertisemen~, other than ]abeling~ which is misleading in a material r~ spect; and irt determining whet]~er any advertisement is misfeading~ there shall be taken into account (among other thJn~s) no~ only representations made or suggested by state- meat, word, dosign, device, scund~ or any combination thereof, but also the extent to ~vhish the advertisement fails to rereal facts material in the light of such ~presentations or material with respect to consequences which may result from the use of tbe commodity to which /he advertisement relates under the conditions pt~seribed in s~akt ad vet%isement: or under such condislons as are customary or usual . . . The discussion of this deliniti~a in the Itouse Report is very in- structive. The Repor~ st ate~ : • . . the essential elements of a false advertisement are tha~ it is misleading and misleading in a material respect. It places on the advertiser the burden of seeing that his ttdvertisement i~ not misleading. /¢

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8 The definition 18 broad ~ugh to cove~ e~e~j form o/ ad~ert~ement deception over which it ~ould be h~ma~dy pre~ti~able to e~erelse gon3ern~nen~al control I~ c~ter~'o ~,,e~e~y ca~e of imposi$ion on a ~rel~a~er for which there could be practivrd ~dy. It reaches every case from that of inadvert- ent or uninformed adveriising to that of the most subtle as well as the most vicious type of advertisement. H.R. Report NO. lfi13~ 75th Cong., August 19. 1937. (Emphasis supplied.) It should also be pointed out that seet{ons 12 13~ 14 and 19 are clearly interrelated with, and dependent upon, the Wheeler-Lea Amendment to section 5. Subsection (b) of section 12 provides : The dis~mlnatlon or the causing to be disseminated of any false advertisement within the provisions of subsection (a) of this section shall be an unfair or deceptive act ar practice in comR~erce within the meaning of section 5. (Emphasis supplied.) The significance of Wheeler-Lea to the discussion of the FTC's "urisdlrtion over advertising is not in the amendment to SecLion 5 ~ut in the sections dealing with tbo false advertising of food, drugs~ devices and cosmetics. The amendment to Secti?a 5 had no effect upon the FTC's subiect matter jurisdiction while ~ectlons 12-19 clearly did. As the legmlative history quoted above unmistakably sbows~ the definition of a "false advertisement" contained in Section 15 was intended to be all inclusive, i.e. "broad enough to cover everv¢ form of advertisement decep 1o~ over wllleb It would be hllman]y pr[tc 1 cable to exercise governmental control?' Tiros, Congress~ statpd intent was to demarcate the outer limits of adver rising regulation. The Com- mission ~ow seeks to expand its urisdlctioa beyond these Congres- sionally defined limits. The task before Congress~today is to re-estab- lish~ by legis]atiom the pre~dously set boundaries of permissibl~ Commi~ion inter fereJ~ce with commercial speech. ~[}~ Vc'ITI~O~ ~IOR Sl[~STAI~T~ATIO~ Ix~ his Harvard Law Review article, Commissioner Pit ofsk)" singles out advertisements "published without reasonable )ri~:r substantia- tion" as one of "three t:y'pes of non dece )tlve advertisements that plausibly might be regarded as ~unfair?" * ]~is characterization of an unsubstantiated advertisemen~ as "non deceptive" is questionable, ~ Congress, the Commission and the courts havo always consistently viewed advertisements which make nnm~bst antialed c]ai~ms as misle~ ing or deceptive, not "non-deeepti*'e." Commissioner Pitofsky refers to a 1963 Commission case. Heinz W. Kirchner ~ which involved the advei tising ~f an inflatable swimming aid, to be worn eaneeltled /inder a bathing suit. Amon other e]aims, the device was advertised as ren- dering ~he user "u nsi~able.** This re )resent ation w,~s clearly contrary to £ac~ and ~ ~e Conurd~ on so ~a~md. T ~e Co~m~Pssion's decision does make a reference to ~tdvel rising s~tbs~antiatlon~ hilt in the context of falsehood, not "unfairness.** It sta~es : • DO [larT. L. it e~7. at 6gl. • i~3 F.T (2. 1282, aflUd 3~7 Iv2d 7~1 (gth ~'[r 1 ~6-I}. 00 fjl ~._----l~

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9 One who affirmatively advertises a product to be sate~ in a context in which the prospective user's health or safety may be ad~erse v affected if the claim is false, implicttly repre- sents that ]{e has a reasonable ang substantial foundatlon in fact for making the rialto, 83 T'.T.C. at 1~95. One of the bills ntrodueed in the early and mid 80's which eventu- a y evo red nto ha Federal Food Drug and Cosmetic Act provided that an advertiseJn~nt shall be deemed false if it i~ "fals~ or mislaad- ng n any par icular" ant! if anv repl-esen~ation tbereln as to the efficacy of a r g or devle~ qs not ~u ~ported by scientific facts or sub- stantial and reliable medical or ~ient tic op nion." (See. 601(a), S.5, introduced I~fav 31,1935, 74th Cong. ~nd Sess.) 2 .4. later version o~ S.5 introduced in the Senat~ on 5a~ua 6, [957~ changed the "substantlation port on of the definition o{ a faTse adver- tisement to provide th~.t u representation "shall ba deemed to b~ false and misleading" if the representation "is not supported by persons w} b - rea~ms of ~c~e~t fi~ truin n ~nd ~x~rienee ur~ qu~hfied ~s , Y g . ,, . experts on the sub eel to whmh suI!h rcprc~ntat]on refittes. 2%. mm i]ar definition was pl~vld~l with respect to "udshrandiog," i.e., fals~ or n sl~ading labeling,s Sig~fifieant]y, in th~ subsequent Senate dm b~te, Senator g~rkle~ ~ske~ th~ b IPs spousor~ Selector Co eland: '~Does ti~ n ean that, even tho~lgh tho branding be true, zt ~mlI be deented unsbrandmg tinless supported by the experts .' ~elmtor Oope- ]a~ld responded : "Oh~ no ; not at all." * Passa of tile "~V]leeer Lea Act on March 2l~ 19~8 caused the ]~ouse~ on Apri~lt, 1938~ to delete all advertising provisions flora the bill, Tha House • so changed the definition of misbr~nding and ado ted the l~mg.age which now Is fotmd m ~ectlon 15 of the FTG2k. ~e su stantiation by experts" languags was deleted because: • There are clear implications in cases arising under the old ~o~d and Drugs .~.et and other laws that Cvng~ess may not, by a simple and unqu~li~ed prohibition agains~ mlsleadm representat on, p~nalizc the making of a r~pres~ntatiqn o~ therapeutic effect regarding the tluth oi wbich exper~ o Inion differs (Seven Ca~es v, U.A~. ~89 U,S. 510 U.S.v. Johnson, ~25 U.8. 488; An~riean School of Magnetic Healing v. Me. A~nulty~ 187 U.$. 94) (Id. at 8~1).~ The ~o s~ Report explains that the del~tio, of the "subetantiation by experts" provision should not be int~rpn~ed as sanctioning unsub- stantiated claims. It said : If only a few experts regard a label statement of curativa value as true but the great body of qualified experts in that p.rticular field regard the statement as untrue, then there may be substantlM grlmnd for concluding that the curativa clamx is udsleadlng unless i~ is g~edi~vd dn m~c£ a ~va?l es ~o show the e~i~te~z~.~ o] co~ic$lny opin~ as to {~ ~r~h.*~ (Emphasis ~upplied.) Dunn C W ; Federal ~oc~ I)e~g an~ Cost~etie Act, $1~, ~1 (1~8), t Id a~ 7I$. ~* I4. at 821. ¢ ¢

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ll sion i~med!al power hilt such orders have not been sustained on an "unfalrnea~ ~ theory but upon proof that the advei~dsemen~ deceptively represented or implied that its claims were based u~)on reliable tests or sclen ific evtdence. See, for example~ F~restc~f~e T~ & R~bber Uo. v. FTff. 481 F.gd ~6 (6th CArz 1973) and Pccter& Distsch~ d~w. v. FTG, -- F.2d -- (Tth Cir. 19~9), 1979-2 Trade Cases ~[ 78,618. Apparently the Commission is not content with these court decisions and by employment of the ~;unfairness doctrine"~ seeks to avoid the necessity of proving that the advertisement d~c~ptively stated or im- plied that it~ claims were based upon reliable evidence. ~hy i~ would wish to ~gulata advertising which no reasonable person would inter- preL as re ~rcsenting. or im~dy ing that tJ~e advertiser h~ rusts or se sinti ~iC Sllh~t~lltt]flt[OIl ~l~r c]alnls m~de t~lert~lrl has never been explained. The bm<len of proof it seeks to avoid is so mirdsc,Hc ~s to make ~he ~voldaace ef~o1% laughable. In fact when aa advertisement makes a specific perfonnance claim such as "stops "25 % quicker "as in Fir~tar~ or "take weight off with the very first box" as in Porter ~ D~tsoh~ the bnrlh n is non existent for the Commission c~n infer that such specific claims imply that the advertiser has substantiation for them. [n short "unfairness" is not a necessary ur~derpinning ill (Ira Commission's )to- ga'am to reqifire advertising stibstsntiation. .~RTISE~E~T~ ~HIGH 2~TEI~IEAD CI~IIA)~4 A~D OTHER VI:)~N~BLE 6~R¢~ L~p8 A~ pag(~ 5 of their letter of November 13~ 1979 to Chairm~n Ford, the FTC Commissioners churge lha~ excision of ~heir alleged authority to regulate speech on grounds of "unfairne~g' would adversely affect their ability to protect children from dangers create~l by advertising. h~ support of this argument they refer to several consent orders ostensibly bas~i npon the "¢mfairness" theory. "these consent orders interdicted advertisements ~hich depicted nmdels carelessly riding bicycles on busy streets ~ depicted a naturalist eating unidentified wild berries or fruits~~ and depicted a child cc~hing rice on a gas strive.~* iVhether these ptwceedln s were based upnn the theory of "un- fairness" is s~mewhat questisna~e for each of the corn plaint s cha,'~d that the adve tffising practice was an unfair method of competition and an unfair of decepb~v¢ ac~ or practice. In ~ur. view the prole" e~ I i erlmning f~r ploeedures, against ~xtverl~sements such as these ~ ~ charge th~ the)- are false or deceptive. Tl]e ~mly reason for roceediliff against Sllch af ~eT. 5eti e s s ~ they may mislead c}/i~ren into performing dangero~s ~ s T c a Vel~isements eau b~ (!t~I1stI'ln!d as I'epresenlln con are o fat5 a~ the depicted practice is safe. fr is incoueeival~e that a~[v coult ~'ould I r Iexel e a (~OJ]l]211~;SiOl~. £ eEIS]C*]] []l~tL Ild~ortlg}ng ildl]c~ ay Caus@ children ro ~,~ g/~e In~afe practices is r, isleadhl~ ~[t must }~.~ re membered that the Commission need no~ piove that any child was ever actually misled or decelved to it~ delr[mellL I t is suffi e'ient to sdmw that t]le ~tdvol ti~elr~ent~ had a tendency or capacity ~o deeei~ t,. Pit,c/To 18 Tailoring Go. v. PT~, 1,53 F.2d 103, I05 (7th Cir.' 1946). The extstenco 1~ A.~[ ]~ Inc. Hie N~ 79-° 3~)2~ 1979 Trade ~]~tlons Repot ~ I 51,~89 .* Und÷ Bess. Inc., 89 ~T.C. 1~1 11977}.

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t~ lit ~ -- i J

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13 ceedings for the simple reason that advertising or commercial spo~eeh were not involved. The cases dealt with unfair methods of competition or unfair acts or praetiaes, not advertislng. T~E ~F~ DOCTRL'~ rN TRADE ~10~A,I'~0~ RULE ~o CFA~TN~ Ia the discussion above we characterize the Commission's argument in support of employing the "unfairness" doctrine in advertising adju- dications as unnecessary and therefore, "puzzling." However, we are notpuzzled by their d'efensa of the doctrine as applicable to trade regu[~ttion ruin pioceedings, for it is clear that the Television Adver- tising to Children pr~'eeding is, in part, based upon the doctrine. In a letter to the Commissioner of Food and Dr~lg~ the Chairman of the Commissiondescribed the "logical process" by which the Comnds~ion was procoedmg as beginning with the concept %hildrea's advertising ia thheroatly unfelt." 1, The Staff Report which support~ the proposed ruin fleshes out the "an fairnegs" theory~ alleging that teiaviaian adver- tising ro children is unlawful because many children aro too young to understand:(1 "whatadvertisingis~" g "thecoaceptofa[compotl- tire] ~r[~rkrt," (3) "that a decision to consume any product may imply a declsmn not to consume some other product," and (4) the seiLi~lg intent"or"sellingpu urpose ' of a commercial. The Staff argues that the obJH ~trustingly helieve~ that the spot television advertisement) merely provid~ advice about ono of the good things ~n life." FTC Scarf Report on Television Adv~rtisdng to Children, pgs. 28-~9. The remodie~ for this alleged unfairness which the Commission is seeking to impvse wouhl: (1) ban all television advertising of all products to wry young children (probably under age 8) and (~) wo~,id ban the advortiaiag of heavily suggrad products to "older clilidl~n': (probably under age 13). It is arguable that the second of thep~ roposad bans is~ ~t least in part~ founded upon a classic deception theory~ i.e., failur~ to disclose a material fact, the health consequ[~llCCs of sngar ingsstioa. But such failure cannot pu~sibly justify a ban pursuant tca dece~ep)tinn theory and thus it and the proposed ban on advertising of all pl~lucts to very young children are clearly dependent upon the viability of th6 "me- fairness" theory. At least two other ongoing trade regullation rule proceedings involve the ~,pplicatloa of ~bo "unfai~zmss" doctrilm to advertising. The limt of th~ proceedings, initintz~:l November 11~ 1975 (4~) Fed. ]{eg. 5~63i) propwes a r~le which would make it unlaw f~l t~ make an advertising claim for any over-the-counter dt~ag which the Comlrdssioaer of Food a~d Drugs ~as determined may not he made in ebo labeling of the drug. The notice of rulemaking a~nonnces that making of such a cis, im constitutes Imth an unfair or decepilve ~u't or )ract/ce and the dis- senilnatian of a false advertisemen~ in violation of See~ian 12 of the FTCA. In this p~ceeding the Commission is "pig~'-hacMng" upon the prior reg~ilat~)ry actiatl of the Food and i)mlg %dministratian. As we have poin~d oat above, the FDA~ >ursuant to '21 U.S.C. § 3~1(n). has authority to declare that a drug is ~misbranded" if its labeling is "misleading'~ either aflllnrmtively or by reason of a fMluco ~to r~vea.l ~'Aa*O~*af¢o~ OI Nationa~ Advertises, et a~ V FT~:. -- F2d -- [~*.C, Cir. 197~). No 79 lilT, DlU~uUn~ sip opt~]~u. ~. --

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14 far~s material in the light of such re, present, faerie" The FDA~ is not authorized and has not sought to ~gu,lat~ labelhig under the "unfair- ness" doeS'inc. The real ...... question m the rtflemakin~ preceding is whether a stat~lIle~Ilt which IS a21sleadln~ i11 ]~b~]m IS ulso mlslegd- Jag when it appears in advertising. The in ectlon o~the "unfaim~s" argument ~erves only to cloud this central issue. [n the somewhat similar ~t ta~:id Advertising trade regulation rule proceeding commenced April 6, 1976 (41 F~d. Reg. 14534) the Cam- adsaion is considering a rule which would mgke it unlawful to fall to disclose in antacid advertising 0my warnings as to ~t~el~e efl'~ts whigh ar~ rauired by the FDIK for labeling. The notice of rulemakiug announce~ that the Conmtission las reason to be eve that the faI ure to disclose this warning information in advertising may violate dec- lion 5 and Sec~inn 12~ Le, that such advertisements are fMse and decep tire. However the notice also separately charges that such advertise- merits are "flu fair" because they violate the "public ladicy" expressed J~t the labeling provi~jans of the Federal Food D~g and CosmeUc Ach Hero again th~ additionM unnecessary "unfairness" charge tends to chscure rather than en ght~n. In our view the separate "nn f airiness" argttrnent s made by the C0m- mission and its stag in the O.T.C. Drugs and Antacid rulemaking pro- ceedjags ~re merely boiler plate. These precedings will be finally resolved by the Conmflssion and th~ courts by empley~nent of the tzlassio "misleading or deceptive" test. It is diflieul~ to believe ttmt the ~lnlrt ni:~,~ior t will suect~ssfully impose upon the statutory scheme a n~w theot:¢ not found in either the Federul Trade Commissic~ Ae,~ or th~ Food Drug and Co~mctic Act. , , AS we see it the ouly pure application of the "unfairness: doctrine lmretoforv announced by the Conmfission is the proposal to ban ad- vertising as contained in the Children's "lelevision Ad~'ertismg pro- posed rule. This i~ the ooly propo~%l ja which th~ mere fa~t of mt- vertising~ d vorced of ~ll o3nside~atlon of advertising content. IS the alleged urdawful practice. If the Commission can do rids, notith~g is sacred and the First .%raendment is a hollow shell. GOI~CLUfl~ON In these comments we have demonstrated that the Commissions jurisdictiou over cowm~erciul speech ~s limited by stath~e and the con- stitut~on to ~peech ~hich is in sovn~ rna~ner m~sleadm~ ~r t~s the tendency or cap~city to mislead. We have shown tlmt the Couunission's ~b ty to deal wlth decepttve a(lvertmm~ cont~n~ ~s not m any e~n- t al way ¢Iependen~ upon the exerc~ of its newly dl~ove~xl unfair ne~ theor:v F na y we believe that these comments clearly demon ~huse of the a, t hority eulrus~ed to it,. ~iV]li]e il otl ~ ', ess serious, circumstanc2~ t/m Congre~ might ~e content to stay irs hand and perlult the ¢Oll z't-~ to e ven%uallv rule UP°n the ComJuls~ion'~ ovt rr,~u~}l. I]m]~ art~ overriding rcm~ons ~o~ uot tak- ing that e0a~ I~x the ftrs~ pl~ae~ t~ is clearly the dut): of Con~es~ to ~e~ the standard~ ~hie e Co i lllSSlOIi Fill/St fo/lOW IU exerc]~lll Its dele~-ated powers. As ~tated hv th~ Supreme Court: "Tbe Federal Tt~le Commission is an admi*{istra~ive bed) e*eat~l by Congress to

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.... ~ ± ~ 71J

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16 FinaJly, it is apparent that simply amending Sevtion 18 and leaving the C~rrmxlssion free to pursue its :~unfairne~~' theory in ad edic~tinns constitutes only a partial restoratmn of advertisers' First Amendment rights. The Commission remairts free, in individual ad udieations, to suppress "cc~cededly truthful hlforttmtinn about entirely lawful avtivity." Virginla Pharmacy supra at 773 . An abridgement of coastieutionzl rights is ,no loss ob~ectloaable simpl3 because it is im- posed upon a single advertiser rather than an entire industry. In ~a~AF's view the eonseiLutionM and other infil'mities of the "un- fairness" doctrine, as applied to adver tisi~lg~ can oaly be remedied by an amendment to S~tlon 5 (a) ef the Federal Trad~ C~mmissinn Act. In our iette¢ of h~ovember 14~ 1979 to ~enator Ford we indie~tad oar ~¢neral approval of the proposed Secsion 5 aanendment contained ~n ~ection 2 of the hi]] !le in~rod.uced on ~overnb~r 8:1979 as prir~ted at page S. 1~485 of the Congres~oaa3 Re~rd of November 9,1979. How ever our letter pointe~t out timer the langamg~ of the proposed amend merit should he slightly modified ~o make it clear thug tlm C~mmi ss ~u retained power to deal with antitrust or uedpient a~ltitrust pL~blen~s in the advertlsln industry. Our basic position r~m~ms unchanged al~d we urge that ~ec*inn 5(a) be amended in the following particulars : Section 5(~)(1) of tile ~ederal Trade Co~msissien Ac$ (15 U.S.C. 45(0.)I1)) is amended by inserting immediately before the period at the end thereof the following : ": provided, however. that riffs paragra h sh~]l not apply to false, misleading or dc- ceptSve c(xrame~i~ advertising': Seetinn 5(a) of such Act is am~nded bJ? rc~leslgrn~ing pam- graph (2) as pat~graph (3)~ ~nd by im~rClng humedialely afar pamg~.ph ( 1 ) the following new para~,~ph : " 2) False, misleading or deceptive commercial advertising in or affecting commerce is hereby dec ared u~awfu. We believe that the foregoing amendment would fully pt~)tect the p~blie from the types ~ edvertxsing excesses which have occurred in the pas~ and which are likely to occur iu the future. The term "~al~, misIeeding or de~ptiv(¢' encompasses every conceivable ~ypo of abuse and is well understood by the Commission and the ~out~.~. The amend ment will not materially change FTC law and practice for it merely clarifies what has always been the int~dmer~t of Congress. By eIin~'- is~tlng any statutory ~)asis for.c?nt}nued l~ursuit of the eph'emer~! will-of-the-wisp "unfair advertmtt~g:' doctrine the amendment will make it again possible f~)r the C~mintlsslon to c~n~ntrate ahd exl~nd its ra~ource~ upon subject matter which is cent~l to ~ts mandate. Tile public interest requires no less. ~Q~'EST TO TE~q~Py AT ~IEARIN{]S A.A.F r ef~nest~ the opportunity to appear and present testimony" in support of tts views ~t ~he he~u'il~ g~ which will [~ bald on this sub oct. Our wlme~c~ wdi be 3D'. IIo~ai'd Bell, President of the A*kF and Pt~fi,ssor Robot± Bork, former Solicitor Ganera~ now teaching ~t Yale Law SehcoI.

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17 ,~TA27]~E:~ T t/~ ]~OBERT H. ]~ORK~ 2~L12XANDER ]~f. BICK~L PROFF~fOR t)l~ Pvl~mO L~w, YaLE LAW SCHOOL ~y name i8 ~obert H. Bork.t I appreciat~ this opporturdty to e~ press my views on the pendJ21g pr~lms~l to amend Sectio~ 5 of t~e Fed~rM Tr~ds Commi~ion Aot. That propo6al would elimir~te tho ~uthority of tile F~deral Trade Comrnl~iem to regulate or prohibit advertising on the ground that suoh advertising i~ "unfair" whil~ at the ~m~ time. continuing the Commi~on's authority to d~l ef- fectively with advertising that is "false" or "deceptive." Whil~ th~ proposal being cor~dered 'by this Oo]m~ttee raises a nu~lber of lXnporto.nt i~ues, ~ will co2tlIIl~nt primarily on ~he lfis~D" of the "u~fo2rnem" d~trme, as it r~lates to ~dwr~islng or commvrclal speech, and th~ cor~tisufional an~ public policy problems pr~ by that doctrine. Seatio~ 5 of ~he Federal Tr~]e Commi.~sio~ ~c~ 15 U.~.C. §45, p~esen~Iy ant, h~rizes the Cornm~ssioi~ to pruhibi~ "unfaSr or deceptive a~ts or practic~ in or Mfe~ing co~mn~rce * * *." Sixin]urly S~tioli 18(a) (1) (B) of the FTC Act, 15 U.S.C. § 57(a) (I) (B), uddsd by the ~fagnuson-~foss Warranty-Federal Trade Commis.~ion Improve- merit _~.ct, 88 St~t. 2193 1975 authorizes the Coi~unis~on to pro- mu]gat~ industry-wide "miles which define with specificity acts or pract rues which are un f~ir or dsceptiw acts or practices in or a~ectirLg common, co * * *." Bofl~ sections apply to adve~¢ising or commotvAal speech. Bez~usa of widespread criticism of the Commissinn's ~xercise of it~ rule m~fing au~ho~gty, the Consumer Subc~nmfittee of tile Cc~mldst¢~ on Commerce, Soience~ axal Transportatic*n cxmduct~d eight days of oversight hearings--a~er which the full Committee reportexl out a bill, S. 1991, that would amend the Commission's rulemaking author- ity. If approve~l, S. 199I would authorize the C~)mnaiss]on to issue rules prohibitm,t "fais~ or deceptive commerciM advertising." "Unfairness" would no ~ongsr serve as a bas~s for ~lemak~ng with ~spec~ to com- mercial adwwtising under S """"~etion 18 of the ]~TC Act. The wisdo~n of this action is suppot~ed by the C~nmdstce's l~spor~ on S. 1991. ~. R~p. No. 96-500, 99th Cong. 1st S~s. 1979 . As ex- plained thera~ the Comnfission has used its rulemaking power to-- initiate ] proceedings in which the ';unfairness" doctrine ~1~ been u.s~d Rs a bl~olttl c 1Rrt~2r ~or restric~il~g conliilei~ a advertising solely because it nl~y have consequences that the Corn mi~ion finds c~bjectlor~b]e~ or is otherwise contrary to th~ Commission's concept of "fairness." Id. at 17. The repor~ also notes that the Commission's atbempts to regulate truth- ful and nonde~ptive commercial speech or~ the round that such speech is nevertheicss "unfair" takes t~e Commi~s~rn "into an area pt~i~ne~tcxt hy F h'st Ameltd/It~Ig, cono~rits." ~bid. The Committee's solugion was to limit the Commission's Section 18 rulemaking power over commercial speech to speech that is "false or • [ am ~re~eat/v the h/0~ando~ M Blckel Profesa0r ~f public ],~W ~t the Yale Law School Ft~m 1~73 to I977. I ~erved as Sollek0e (~eneral of the Unl~ State~ ]~efore ¢omin~ to Yal~ in 1962. I ~ eng~d in the rivage prac±ice of few la ¢2hic~g~ au~ New York. ~rhe ~ubJect~ i~ which I hn~a primarily worked, b~th ~ a profe$~r a~d a~ a practitioner, are ¢onsfitu t lena] lair aad a~lt~t law. $*

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18 deceptive." The Committee explained that this action is inh~nded "to redirect .... the Commission to it~ primal'~" and longstandin~ funetinn of determining whether ad~'ert~s]ng contains representations that are false or hay6 the capacity to deceive or mislead consumers." Id. ~.t 18. The Committee delayed any recommendation, however, as to Sec- tion 5 of the FTC Act--although it noted that the continued presenoe of an *~mlfairness~ provision in Seetinn 5 for commercial speech pre- sents a "potential ambiguity." I believe that the s~me mportant con- siderations that led the Conmlittee to propose elimination of the "un- ~airne.~" standard ~a~m Cormnlssinn rutemaking proceedings also require its elimination from Section 5 ad udleatlons. "d~ae history of the unfa rness doetr ne~ as ~ re ares to commercial advertising, demonstrates that the Commission recently h~s exceeded its legislative mandate. That history also belles tbe a~ertinn that the "unfairness" doctrine is an essential and venerable pal% of the Corn mission's arsenal in regulating advertising. The FTC Act, as originally enacted~ condemned only "unfair meth- ods of competition in commerce." 38 Star. 719. The Supreme Court construed this prohibition narmwly~ see FTU v. Gratz, 253 U.S. 421 (1920) ; FTC v. K~s~Ler~ 2,80 U.S. 19 (1929) ; FTC v. l~:a2ada~t~ Co.. 289 U.S. 648 (1931)~ triggering a 1~actinn by Congress. The Wheeler Lea Amendments of 1938 broadened Section 5 of the FTC Act to en- compass :'unfair or deceptive acts or practices in commerce * * *." The Wheeler-Lea Amendmen¢ was directed specifically at the Su- preme Court's decision in the Rolada~m case, winch had held that the Commission lacked authority to regulate any practice not having a demonstrab]y adverse ~ff~t on one of the rcspondcnt:s existing com- petitore. 'ihe Wl eebe. Le L An e 1di[ ent pe " itted the Ct nmission to deal with coannerclal p{actices injurious to consumers regardlean of the effec~ of ~hase practices on competitors. But Congress manifested no intent that the Commission should use its expanded authority to regulate or prohibit tcuthfuI or nondecepd~,e commercial speech. The Commission itself did n~t construe its mandate to inchn]e the regnlgeinn of truthful and nondeceptive Jvertising until ~1)64. The Commission then simply announced in connection ~ith it~ investiga- tion of cigar~t t~ advert ~sing, t!mt "[n] o enumeracions of examp]es can define the outer limits of the Commission's authmitv to prc~scribc un fair acts or prac¢ices~ but the examples shonid be h~:ld to indicate the breadih an[] flexibility of the (~on~pt of unfair acts ov placties." St.ate ment o~ Basis and Purpose of Ciger~tte Advertising Trade Regulation Rule ~9 Fed. Reg. 839A, 8355 (i964). The Commission's claim to prec- edential support for its view has he~n persuas vely rebutted. 5'ee ~elson, ~The Po]iticization of FTC Rutemaking,'~ 8 Conn. L. Rev. ~1~,~17 18 (1976). Fo some time, } o~ ever, the Conlmission igmored the ~unfaivaess doctrine it had createcl~ concentrating its enforcement effol~s on ad- vertlsing chimed to be false and deceptive. Then, in 1979, ~n a case that did not involve adve~ismg, the Supreme (ou~ stated that the ~'edera] Trade Comm~ssinn does not arrog~ate excessive power to itself if, in men u(irillg a pracLic(~ against the elusive~ but congressinnaliy mandated standard of unfairness, it. like a court of equitv~ considers public values beyond those

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simply enshrined in the letter or encompassed in the spirit of tim antitrust laws• Fg'c v. Sperry d~ ttutehina~ 405 U.~. 233, 244 (1972) ( fcotalote omitted). In a footnote, the Court noted with apparent approval the "criteria" the Commission ]tad described earlier in the cigarette rulemaking in determining whether a commercial practice is "unfair'~ : (1) whether the practice, without necessarily having been pi~vlously considered unlawful, offends pubhc policy as it has been establmhed by statutes, the common law, or other- wi~whether, m other words, it is within at least the pe- numbra of some common law: statutory, or other established cone~pt of unfairness; '2 whether it is immoral unethical oppressive~ or unscrupulous 3) whether it causes snbstan- tta± n ury to r.onsumel~ or cvxnpet tor~ or other business- men)./d, at '244 n. 5. JEvea the very broad notion of unfairness endorsed in Sperry & 14utchinson appears to haw some limite. But if the concept is broad enough to encompass the so-culled chddsen's advertising proceeding it !s dlluoait to ~e that any meaningful limits are left. That proceeding revolves a semes cf po~ntlai restrictions on advertising to ehlldrcn-- including, a ban .°n all advel~izmg to chilthen who are tuo ~'oung in the Commlssxon s wow, to understand fully the sethng purpoae of advertising. _6mother of th~ proposals being considered in that pro- ceeding would restrict th~ advertising of certain foods ¢ontairang sugar be~tuse it is "unfair" to promote these foods without warlfing that sugar may cause tooth decay. The F'IC staff has suggested tkm~ such advertising may be "unfair~' to parents because it may produce untoward ~andiiul conflict--putting "pai~ents to the hard etmlce of allowing their children to [risk tooth dscay or of enduring the strife that can accompany denial of request~ induced by tele~isinn adver- tising." FTC Staff Repot± on Television Advertising to Children 34 097S). This Committee recognized that the "unfairness" dOCtl"ine as for- mulated by the Cvmmia~ion in tha~ proceeding, impermiz~ibly views that doctrine as "a broad charter for restricting commercial advertis- ing solely because it may have consequences tha~ the Commission finds oh'eetionable~ or is otherwise• contrary to the CommiSSiOn's,, concept, of ~fairness.~" S. Rep. No. 96-500: supra~ p. 17. lins Comm~tte~ also s~ted that Congress did not intend in the Wheeler Le~ Amendin~nt to grant the Commizsion such unconfined, and nn rt~vit~w~ble, authority to make public policy. In these remarks I am not addressing the merits of the children's advertising proceeding or any other proceeding. 515, concern is with the scope of the power the Commission asserts and tl~e possibilities for the use of that power in th~ future. In eliminating ':unfairness as a basis for rule m.,khlg llndsr Section 18 of the FTC Act, this Committee anticipated that its action would "greatly diminish ]" the danger "that ~he Commission w~ll in fringe upolt Fils[ Amendment rights or impose its own /oncepts of pubhe policy," S. Rep. N'o. 96 500, supra, p. 18. But that is unlikely to be true so long as "unfairness" remains a component of Section 5. While

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20 ~ectioxx 18 rule-making is industry-wide~ once ~he CommLssion has ~c~sfully ohtathed an "us fairness" cease and desist order under Sec tirol 59 it can apl)13~ that order ~ oilier adverti~rs through the notice provision of tim FFC AcL. 15 U.S.(.. § 45 m) (1) (B). The n~tice pl'~- v s ons of tho Act permi~ file Commi~ion to use Section 5 to enforce its no~ioa of "nnf~irrmss'~ on persons who had no oppo~lnity to participate in a Section 18 rulemaking. ]For the respondent in the original Section 5 ad udicatioa the Corn laission:s de~erminatiott that a particular advertisement is "unfair" is likely to involve ~ substantial element of surpri~ and have a conse- quent ehiiiing effect on all related advertising. Th~ Col~missiou's "unfairness'~ doctrine~ whether pursued via Sec- tion 5 or Section 18~ poses serious problems in three constilutional areas: (1) the First Amendment; (2) the due process right to a "rea- sonable opportunity to know wimt is pi~)hibitE~d * * *" (~myn~d v. 6'ire of R~ck[ord 4~8 U.S. 104 108 197~ and 3 the d~leg~tion of legislative power. Ill V&glnla Sta~e Board of Pharmaw v. Cit~zenz Consumer Coun- cil, 1he.. 495 U.S. 748 (1976), the Supreme (~urt col~cluded uneq~ivo- cally t~at ~omm~rdal ~peech is entitled to First Amendment protoc- lion, even if i~ ~d~s ~o more than pl~opose a cotnlnerCln~l ~ranstic tion~ * * *Y Id. at 76d ; quotin~ from Pittsbu~h P~'es~ Co. v. Hu~z~ Relations Cozm~'~ ~13 I_LS. 8~6, 3~9 (1973). The Virginia statute challenged in that case prohibited licensed pharmacists from advertis ing the price of presclaption drugs. The Co~r~ held that the slatute violated tha First Amc~ndment since i[s effect was to suppress "con cededly truthful information about entirely ]awful sctivffy * * *." 495 IY.S. at 738. Whiie the Court'~ opinion in V~rgi~i~ St~e Bvard of Pha~m~acy expoessly permits the reg~llation of false, deceptive or mis- leading commercial speech, the Court's holding indeed, the entir~ tenDr df the Court'~ opinidn in the case is hmon~i~ten~ with a ban on commercial ~rraS eech that is truthful and ~ondeceptive. During the immediately followfug its ~eeisivn in V&yin~a ~tate Board of Pharmacy, the Supreme Court twice emphasized that truthful and nondeceptive commercial speech may not he suvDressed. Bates v ~ a e Ba~ o# ~rSzog~a, 438 [ S 350 (1977) ; £~mark A~socl- ateg, Inv, v. Wil~i~l~Tbvea, 431 U.S. 85 (1977), ,~,n "us hdvness ' do(.t fine eD~t~lr~lt, g S(I hr~Rgly as to eoufer the 9(n~er to regulate truthful, zmn- deceptive commercial speech i~, of cour~e, a power to reg~gate the con- . . , r~ tent of vlrt~mlly all eommereml speech. G~ven the Supreme Cou t decisions, tha~ asserted power seems certain to face very ~erious con- s~itution~l difficultv. The "un fairne~¢' doctr the also runs contrary to the "bait pri~eip)¢ of due process that an enaeth~en~ is void ~or vague[~ens if il~.gv~hihi- tions are n~)t cieatlv defined." Gray~eg v. C;t~l o4 Rockio,cL sul~*, 408 [7.S. a~ 108. While the doctrine of void-fdr.vagueness is usually applied to criminal statutes, it, is nevertheless true tha~ an unduly" vagxl~ ]aw~ even lit a civil c(3nrc, x~, rtln$ eo/In~er to the ~'alues uIlder lying ~he idea of due ~rocess. This is particularly a problem when the law concerns speech which it may chili. A vague law that implicates First Amendment fillets 'qne~it:thly leads citizez~s to ~sieet" wider of the unlawful zone' * * * than if the

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21 boundaries o£ the fothic[den area werB clearly marked," ld, at 199 (footnot~ omitted). While Section 5 is not a e t'hnlnal statute, the possi- bility of heavy litigation costs, unfavorable publicity, and a broad order hannmg more adver tislng than is involved in the particular 'ca~% all are likely to chill truthful commercial speech. Fmsily, the Commission's expansive, apparently unllm~ted, concept of unfainaess t, esulte in the agency's acquisition of unguided legislative power. A ddeg~ttion of. legislative power of such_ magnitude, raises a very cons derable coast tu onal pro blen. ~ he ~uprem¢ Court m recent yeat~ has given severely limitmg e~nstr~eth)ns ~o broad statutes in order to avoid the constitutional difficulgy wit~l unsti~ctured delega- tions. Natlonal Gable Televlslvn Ass'n ~. U~dted States, 415 U.~. ~36 ( 197~i)~" Oester¢ivh v. <~eleetiw ~et~iee Sy~le~ Local ]:loard No, 11~ u.s. 099s. Oid0 co r e i, ,o decl,i,, unconstitutional because of overly broad delegations. Seheehge~ Peal ~71 6'o7"p. v. Urdted ~tatee, 295 U.S.. 495 . 19~5). The more recent. ca~es lnd~cat~ that delegation doctrine remam~ ahve as con~tlbngmna] law. Beyond that, however, as a nlatter o~ sound public polioy, Congress ought not delegate to agencies un~e~tered po~er t~ ]egis]a~. Where i~ did not orighmlly delegate such power Congrea~ should bt~ alert not to let agencies gradua]l~' usurp such authority. That is particularly important where the agency, liko the Federal Trade Comraisslon, al- ready shares the executive authority to initiate and conduct litigation and th~ judicial authositv to bear and determine cases, albeit with a sight of appeal [o Article 111 courts pre~rved. If the Commission may use the "unfairness" doctrine to legislale t*stvtetions on f olnnlel" cial speech because o£ the Commission's concerns about moth decay or familial conflict there seems no subject the Commission may not'ad- dress. It may lorce advertisers tv promote the Commi~ion's view of any social, economic, or political issue. Indeed, it has already been sugge~tt!d lha~ tbe Commissinn implement "emerging national values" hy using the unfailness" concept to ]egls]ate against, sex role stereo- typing" in television advertising. 5-ore, "Fairness and Unfairness in 'l~elev~sion Product Advertisings" 76 Mich. L. Roy. 498 (1978). Nothing ththe owers d~med by the Oommission suggests it could not do that, ~r dea~w°i~h ~n5 other cause if it chos~. Such an aggeegatio~ of powaw in a gover~maent agency nog directly responsible to voters or to elected officials is altogether outside t~e mainst~am of our eonssit~tional tradition. Th~ Coulnli~k~ion's "anfah'ness" d(xdrlne offends all of the values, j~st dlseussed, for it provides no standard at all. I~ provides ad~'er- risers with no standard against which to measure their Mver~ising; it improperly invoh,es the Commission in basic policy matters, with out even minimal statutory guidance; and its very elusivermss eause~ advertisers to steer ever wider of its ~ncertain boundaries, inhibiting ~}le exercise- of First ~ mendm~nt rights. .ks tile eomnfittee recognized in reporQng oat S. 1991, Oongeess never intended the prohibition against "unfair or deeeptLe acts or practices in commerce" to be applied ~o as to ban or re~mlate~ truthful aml nondecep ~ comma~x'ml speech. In th~ absence of any prmc~p/ed~ limiting, definition of qlnfateness," and ~one seems possible, permit-

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22 ring tha Commission to regulate a~ "unfair" under Section 5 of the FTC/~¢~ truthful als4 nonaee~ptivo commercial speech is in my udg- ment~ unwis~ as a matter of public pohcy and infirm as it matter of ~ons~t~iona[ law. h therefore eildo~e the proposal to eliminate from Seetio~ 5 the authority of tlm Colhmisslon to r~gu]ate or prohiblt ad- ~l~ising ol~ the ~'o~nd that ~ueh ~Vel'tls~g is unfair." STA'rE~a~]NT or G~L 3~AI.LS~ I~c. AD~ISH~G RU~O The following comments of General Mills, Inc. ("GMI") relate to Section 7 of ~. 1991 which will provid~ ~ha~ under Section 18(a) (1) (B) (i} of Tim Federal Trade Couunission ("FTC') Act rules and starnments of polity of the FTC as to commercial advettlsing will be sub ect to a "falsa or deceptive" test and that a standard of "unfair- ne~' sha not app g to such pract ces. Th s amendmen~ w il redirect ¢}~¢ FTC Co its primary responsibility ef determinh~g ~hether adver- tising contains representations that are false or de~ptiw~. Eliminated frout the FTC would be tim highly questionable authority to apply ~morpkous st~durds and exerms~ its biases in a~opting rules on so- culled tm~alr commercial advertising. This amendment is int~ndcd to allow advci~isers (and the adwrtis- ing aiuf media industry) ~l) pl"eSellt plOd/lCtS and ~e/'vi(es for the coit sumer~s selection prow@d that such advertisiug he neitl~er deceptive imr false. It ~s the protection and rlght~ affoI'ded by tim Firs~ Amend meat to mdivlduals which makes this legislation necessary. Regu]a tions which test advertising practices by a standard of "unfairness," a wg'le standard whoss definithm is whatever the subjective ~alue judgment of tha FTC eommissioner~ say it is on an ad hoc ba&s. cons~itut~ g~vernmea~t censorship. If the whims of one agency as to what is or is not %nfair" can be imposed upon the dissemina}ion of truthful informat on o consumers ( vhether ch ]dren, senior citizen:% mlnoritles~ etc.), then individual choices of all citizens are in serious jeopardy. The Supreme Court of tile United Slates in Virfflni~ Nfnf~. Boa*d of Pharmacy v. I'irgi,ff~ f'~tlzsn~ Co~u~*un" Cnwn~il, 425 [LS, 748 (1976) ha~ unequivocally established that commeleial sl~eech en- ~nyu Fi,~ Ar.endmen~ pI:~t ettion. 2qae Coult said, "There is, of course. an alte~aatlve to this highly paterna]istie apploach, That alternative is to a.~ume that this information is not ill itself halmful, that peop]c will perceive tlmir own best interests if only they are well enou.~h in formed. ~.nd that the best means to that end is to open thl, channels ¢)f communication rather than to close them . . . It is precisely this kind Of elloiec, ht!tween the dangers of Sll )pres.sin~ inforlnatiou, ~llld lhe d ng(,rb of its misuse if it is free]y a~ailab]e that the First Amend ][lent lllakpg for as.!! While the I'irtHnia ~oard case is )erhaps the clea]'est expiesslon of rights enjoyed llnl]er commerc a[ sDeeeh~ th z pr nc I} e was a an ox pressed in tile Linmarle ease. IBl 17S. $5 (1fl77), tile ~op,+/,It/u~l ,~err- ;ees ease. 431 [.S 67S ( ]977] and the ]~,ite~ case, 42g I'.~. ~50 (]!1771. Thr' c:pi/don hi the ~ate~ case is directly to the point in that portion of the opinion which reads ".. IC)ommercial speech serles io itt:

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form the public of the availability, nature, and prices ef products antt scrvlceS~ alld thus.gerfol.r~s an lr-disp~ns~.bLe role in the alloca- tion o1: resoul~ £u a. f[.~e ~ntcrprlse sy~m~. '~ll~ m~re Jilt tb&$ a. product Qr ser~.lce may be ~detrmmntal¸~ (unfair!} m ~h~ op~inn of sh~ FTC is 11o~ sulacmnt to overcome she pl~e~Ll~m enjoyed by con $11111~I~ to ret~eiv~ a0.v~rti~in~ mforr~.tlO~l tlll]~s8 sudl ~llv~l'Ll~lllg is ¢isher ~als~ or deceptive, r~h~ ~upreme Court wa~ gle~r o~ this point in th~ Lin~k case whea i~ stated "Al~er Virginia Pharmacy i~ is cl~&r t~ eomln~rcJ~l speec.h cannot be ban~ed because o~ an unsub~ ~taati~ted belief tha~ its ~mpa¢~ is 'de~rimen~aP ". Clear focu~ should be directed to she f~ct ~ha~ !f ~ vagae and ~u~° fined standard o~ fairness is available to the FTC to broadly regulate commercial ad~.e~ismg, it will be ~lsed as a~ ~t~mpt to limit or dis- c~ur~g~ the s0.le~ of pruduct~ alld services L~l~t will 11~ ~vl~ilab]e fo~- purcha~ by all coasumer~. Ther~ is an ab~uda~ce of s~tutes and regul~tmns~ both ~eder~ ~ad ~t~te~ ~ protect con~umers~ ~'he~her children or osh~r ~egmen~ed groups, from products sh~ are h~rmfu] or d~ugerous. Th~ is both ~ proper and commendable function ~f goverrunent. But it is quite ~ d~ffereiLt and unpermissible practice for ~. govt!rnlllellt a~cll(~y t~ mllk~ lip it~ OW[l mind that~ in its o[lm](l12~ certain groups of consumers would be better off if they dicln't ~s~ or ¢onstlnle (t~i~ ~o lllli~h of & particular pr~duc~ ~r sarvi~ ~/id then attempt to accomplish its gc~l by defining the ~sh'ertising of such products a~d services as being "unfair". As stated m the L~nm~'~z case, "(~owrnment may discourage the use of ~be disfavored products by taxing it~ or may e~cn b~n its ~alc altogether, bu~ the ~'irst ~kmend m~nt. disables government from achievillg i~s g,~al by restricting tb~ frea l|ow o~ truthful /nf~r,,m~io~,?' T}d~ ~v~ ~eiterat~d in the V/r- ~n/a c~ in the Court's ~u tt i~g that '~Governn~e~t c~nnot complet ely suppress tbe dissemination of c~ncet(ed]y truthful information about entirely lawful ~ctivities . . ." As GMI stated in its preseutaticn in TRR. No. ~15-6()~ the e~sence o~ the proposals of the Federal Trade Commissicn in sha~ matber iR ~o regula~ the amounts of certain foods ~hat children c~ ~r [be t~rs ~b~ ~r~ pnrch~d for them ~l~l no~ ~b,~ ad~ ertisi~,g of ~uth predate. Th~ iutrasioa ~f Lhe opinions as to wh~t Ivduet should or should not be consumed by child~'e~ or ~h~t toy s~otsh] or should n~ be pur- chased is in a~solute confli¢~ with tbe obligations ~nd freedom of parents as expressed by t he Supreme Coui~ in l~lqne~ v. Ma~s~vhuset~ 3"21 C.S. 15~ (19 #] ). The c~urt there s~id, I~ is c~r~]mal with us shat the custody, care and nut t~u'e of th~ shi]d re~idcs first i~ the p~re~ts~ whose primary ~u~ction a~d freedom include preparation for obliga- tions the state can neitber suppl~ nor hinder." I f advel~i~in can b~ r~- strictcd by tbe FTC under ~ se] f-ded~md ~tand~rd of '~u,~il~ess'~, it l~ probab]~ ~.t parcnt~ ~i}] ~ot h~v~ • freedoni of c}l oie~ to dehermine such ¢~re~ custody and nurture of their thildren; i.e., the ~'ederal Trede Commission ~vi[1 det~rrulne what product~ will be mad~ know~ t~ p~ients and children. This ~loesI~'~ me~l~ sha~ ~ny plodac~ or ~ervice m~y be advertised to c~n~l~mers for childrc,t. The advertising must ~till b~ udged by s~ndards of ~o~ having ch~roents of false or decc~p- tivc tlrllc~i~!~ a11d t]~e p~ducts alld ~ervice~ lul~t b~ ~af~ snd suitable for consumption as regulated by food and prod~c~ s~fety l~w~ ~nd r~gul~ion~

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24 Ia summary the authority of any government agency to restrict throagh broad a~les and regulations the dissemination of truthful commercial speech under a pipet ext of being "unfair" is the equivalent of granting that agency cen~rship powers. Additional views on this sub ert are part of the record "in the matter of Children% Advertls- ng, 43Fed. Reg. t 91 ~ ]~RI~.No.~I~-60 . For tbe above reasons, General Mills, Inc. strongly supports the above discussed prop,osed amendment to the Federal Trade Commis- sion Act, General Mills, Inc. is also strongly supportive of the ether amendments to the Act as centained in 8. last bat has lbnited its com- ments heron to the matter which it deems most crucial t~ the rJgh~ of all eitizeas. tlU_NFAIR~ STANDARD---SECTION 5 (2-) (1) or TI~E FEDERAL TB2.DE ~0~I~IS $I0~" AGT The following statement of General Mills, Inc. ("GMI") addresaes thectuestion of ....whether Cungress thould exclude adjudication of corn-. mereml advertising frOlll tim concept of unfatrrtess now set forLb in Section 5 of the Federal Trade Commission ("FTC") Ac~. Under such ~aw~uLle islation, the tests for commercial ~Ldver~isteg would be declared BA C~KGROU~r D Section 5 of the FTC Act, as drafted in 1914, provided for FTC jurisdietien over "unfair mr, thods of eompetitmn ia commerce"• This was interp~*tcd by the Supreme Court to limit the Conmlisslon's powers over unfairness to lnatters of eOtllpe~iLioll lind IlO{ [I) eonsulner protection. See, e.g., FTC v. Gratz, 253 U,S. 421 (1920). Thi'vugb the 19:38 Wheeler-Lea .Mmendments~ this matter was mdeKned and the FTC's unfairness po~ers were extended to consumer protection. The initial judiciM review of the FTC's unfairness authority came in FT6 ~;. Spe~wy and Hu~eh£~son Uo., 405 U.S. ¢NI3 19721, a case involving S&H s practices restricting the un r* ted use of ts trad ng staraps. The Courtagret~d with the FTC that a general the<~t'y of unfairness, ~par[ from t]mt (if anti eompetili~•elles~ or deceptiolL (,xisIt!d s~ helebv the FTC could mow to )rotect injured consumers: In oft-repeate~l words, th~ Court sad ( Id. at 24~) : Thus ]egiMalive and udicial authorities alike eomtece us • ¢ tha~ he be] lal Tld.d (o lilts Iq l ~no? ~a~A eXC sire power to itself, in mea~uling a practice against the elu- sive b~tt congresslo~l~y mandoAec] sta~lard of Iabmess, it. like a court of equity considers public values beyond simpl , ttltlsl~ enshrined in the letter or encolnpa~d kl the ~pirit ill the antitrn~t laws. (Emphasis added.) See al~o Spe~f/el, hie v. /*'TU, 5K} F~ll ~7 (Tth Circuit 19761: N~zf/o*,l~ P fI'oTr **tit ./~bbe),~ .4*~or4czt}on v, FTC. 4~2 F.~d 67~ ( i),C, Cir. 1973 ), cert. denied. 415 V.S. 95i (1974). THE U~FAII~NES8 8~I2~DAI~D ~S TOO BROAD A DF.LF~;ATION OF I~3WP~R TO ~r ADMININ~ ~ I ]VE ~GI.~f y The standard of un fairness is not only ehlsil (% ~ls the Supreme Court fonnd, it is sbnply far tr~o vagne and amc)rphmts a coneep~ for any agency to administer adequately. This view if found ia commentaries

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25 on the FTC ~¢ well as in the reactions of business people who must live with Section 5. See Schwartz, Re nla~ing 17nfair Practices Under the FTC Act : 'rhe Need For A Lega~ Standard of Vnfainle ,ss; 11 3.kron L. Rex,. 1 19,, ) ; Note. Sectlon 5 df The'Fede1~fl Trade Commission Act--Unfairness w Cons~3mers, 1972 Wise. L. Rev. 1071. (i~fl submits that continued adjudicative determination of what is "unfair': commercild advertising should be wit~ldrawn fT,vln the Cummis~ion. Otherwise, ~he end result is and ~ill be confusion and actimouy~ wlth agency ofllcials confused over the limits of their o~ce and the business communiD often uncertain over what ate lawful business practi~es. In ~he alteI native~ Congress should defhld "ml fair" in terms which clearly ex )ress the boundaries and limits which should llde and ~overn the FTC. This Committee ~ould benefit, at least in t~lis instance, by folloMng the positi{m taken b5 Chief &Jdge J. Skelly Wright of the'District o~ Columbia Circuit. In the 197-0 hook review (Beyoml Discretionary Justice. 81 Yale L.J. 576, 581 (1979)), he m'~&d this (?ongtess to rake a new look at its practice of deleg'atlon. Congress sllonld cent re] d i~!I~t il)n l)y r(!a.~sumile~" its righ~ fu] ro]~ as the arlhiteet, of fundamental allministz0,fiiv~ policy. Its current discontent with the consequences of ex- cessive delegation could be~t he translated into ~ practice of approving only th~se statutes which set standards sufficiently precise to ensure that the relevant agemcy receives clear sig- nals reg/uding the policy it is expected to e~Lrry out. Core gressiona[ in ~iMd, n e~ on ~lleh clarity eonld also give the courts ft wotka[i][~ Man(larL1 tel leriew, all[l~)~ ~l~at in/poltance-- enable congressmen io monitor more effectively the perform- al~ke~ o~ exe~u~iv~ h~eneie$. TI[~ I:~CS I)Ek~INITIO~ OF ~N]V*~I~TnESS IKEQIUII~ AN A~*ID~NrDSIGNT OP Tt:[~ STATU TIB Senator Ford was correct in stating ti~a~ the FTC itself manipl lares tln]l~irncss so that i~ %neans whaL ttl~ ( oil3inisgioll says ib means. ' 9-10 An~itrns~ & Trade Reg. Ilep. (BNA) A ~3 {Xovemher ~g~ 197i)). The FTC's actions to date confirm tbe ~ aiidtiy of the Senator's concern. Followh~g the S&H case, the Commission reviewed its efforts at cleMing with unfairt~ess. In Pfizer, Inc., Trade Reg. Rep. (CCIK) Pat~Rraph ~O056 (197~) ~ it re ~oned : ~klt unfairness analysis will take into account many b~sic economic facts and considerations, and ~ill permit • broad focus ire the examination of m~rkoting practicers. The FTC then wen~ ou to admit that it ~as not ~roing to allow unfair. ness o )e nalel down t~/ an, singe beet Raher unfarness in the ~ency's view. was hft ilncertl/il'l. ~o that those wititin ttle, FTC's j!tli>llietion alight not be able to antki lat( s ;evifh re~uh~tion. By the aceney's owI¢ definition "l-nfairness is potentially a dynami< t~)ol capable of a prllgrt~sive, i!vo~v~n~ appliea~tion ~ltieh et~,n keep pace a~ ith a rapidly ehanffing economy.' In its ]at~t step. the I"T(~ ]las taken the tire polie considerations, ~ cononlic and s,lcia], and ~ ea~ed them into two qut,stion~. A(]~ ertising of Opthalmic Goods ~md Services, 43 Fed. Reg. 23992, 24000 (1978). t0

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r 26 (1) Whether tlm a~s or practices result in substantial harm to consumers. In making this determination both the economic and socla] benefits and losses flowing from the challenged con- duct must be averred and 2 Whether the challenged con- duct offends public pol cy. W~d]le the FTC~s talk of a dynamic policy~ aimed at meeting new cond]tions~ might sound acceptable at/first blush~ the effects of such a poliecy must be addressed. Prof~sor Schwartz clearly states the ap- plicable dilcrama. Sehwartz~ Regulating Unfais Practices Under The FTC Aet~ supra at 26-27. When a standard of unfairness is set forth which varies markedly from prior fol~lulation~ of un~airness~ the Com- mission has made no effort to harmonize the variations. Tims~ it is unclear whether the tetcst standard replaces the older staudard or is simply an additional standard which has been developed to fit the mark~t place practice to he addressed. Such ambi~plity compels Congressional action as the FTC has made it clear that ~t stands by its dynamic standard~ as a policy drafted by tho Congress and needed for the Oomlrgssinn to deal with shiftin~ economic and conm~ercial practices. GMI feels that no business shoulil operate in an enviromn~nt where the rules ar~, at best~ uncertain. L*ntairne~ is without doub~ a vague term that offers its pessessors almost unlimited power. The FTC~ as prosecutor~ judge, and ~ul~', in Section 5 cemmerelal advertising adjudisations~ should not be delegated with a bload]v drawn power o~ this nature. The Commlssi~n must operate unde¥ ¢]0ser and more detailed, legislative., guidance. Chief. ,lud~e Wri~hb was correct when he sa~d (~mght. Beyond Dlscretmnary Justice, supra at 585) : The whole reason we bare broadly based representative a~mb]ies is to require some degree of publis consensus before governmental action occum. To be sure, we pay a price ior awaiting such censellsus. Sornelimes desirable ~ctien is de- layed or becom~ impossiblo alto~ther be~mls~ tim reptu ~tatlv(5 organs o~ government are too fragmented or uncer- tain to ~ormu]ate a coherent policy. But our experience with broad delegations * * * makes clear that there is a price to be paid fvr eongr~sstenal abro~ration as well For the sta~cd reas~)ns, General 3[ills. Inc. supports additional legislation to prevent, commercial adver tisin~ from. beblg declared un law,u1 under Section 5, oua ease-by-c~.~e has~s~ snnply because ~t faded to meet some vague~ amorphoas~ undefined and cbanging concept of u~fairness. The alternative is for Congress to dofine '~uufairness" with specificity. $* 1"¢

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L 27 UNFAIRNESS AT THE FTC-- THE LEGACY OF S~H C^~WELL O, HOB~ M~rabtr of lhq Dutr~t of Coli~nbia B~ ~d Chairman, Subco,amltle¢ an Ca~cr Pme~li~n Fadttal Track Commission Commilu* Strtion ef Antiirazt Laza In 1972, a clever and perceptive article appeared in the Wazd~ington Monthlj Magazine entitled "How Ralph Nader, Trieia Nixon, he ABA, artd Jamie WMtten Helped Turn the FTCCtround."~ The authods therae was the uurlous set of circumstances that had convergedz to set the Federal Trade Commis- sion (FTC) on a new course of enlightened regulation in the consumer inter~l. Since that article was written, them have been at [ea~t three comparable milestones in the YFC's evolution as a consumer protection agzney. The first was the Supreme Court's 1972 decision FTC v. Spry fd t[utddmon Ce.,3 in which the Cour~ reaffirmed the Commi~ion's authority to proceed against o0mmcrcial practices solely on the basis of their "unfairness" t6 cor~umersJ' The SOd/:/ deeisltm launched the FTC on many of the enterpd~ which recently led even the I¢'oshlngton Post to suggest that the agency has become mmething of a "national nanny."~ The second milestone was the passage in 1975 of the Magnu~n-M~ Warramy-Federal Trade Cmnmi~ion xwelllord H.~ Ralph Nadet, Tnoa N~ the ABA, and Ja~ W,~*tun H*~M 7"urn d,e fiT(2 A ,~tai 4 W^~I:~CTO~ MO,*I~L'/ NIA~.Zm~ 5 (Oct. [9?2). ~Perhaps it is symptommic Dr that vetT phcnt*menon thxt the zuthor pf the ar tlcte, Hamsor* W¢l[[o~, ~5 currently highly placed ~ the Cz~er Admlni~trot~oa ~ Ax*ociat- L~[~z~-t or o[ the O~c¢ of [vt;magemcm and ~lget. ~5 U.~ 233 (t 97-~). ~['he Court stated: [L]¢g~s]ative and judicial ~mhorities alike convince ~s that Ihe Fed¢ral Trade Commt~ ~i0n dc¢~ not ~.mogate e~¢¢sslve power to i~lf i[~ in me~urln~ a practice ag,fin~t the e[~,s~,m, but ~n~r~ion~[Jy m~datt~t ~t andirzl of ranges* it, l~:e ** tour, o[ etltllt y, cottzide t, public va]~ h~yo~d 5iro ply tho~- enshrined in the letter or encore pas',ecl in the s~i~a t o[ thtt antlt ru~t I~,~;. /~ at 2~4. ~Wzs]l po*t Mar 1, 1978~ al A ~* col. L

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20 lheor~e~ of Ul~ falrne--J to consumers,l~ tile practltioncr is fac~:d ~r.~th the n~ for almlytlc~l tools to evaluate and provide cour, sel on the approprlate reach. and limit~, of this doctrlne~u~t w~t ~ au "u~ralr" ~mmerci~l pm~e? ~' ,~Usuall~ the ~ rch~ ?n one o££our ume-honored sources for a definition of un~h-ne~. First. ;I will quote from the ~A' d~on. in whl¢~ th~ Su- preme Court ~atcd that the FTC can operate ~lik¢ ~. court of equity" aud co~der '~pub]ir= va]ue~'~ ~o determine ~tanclar~ of fa~rn~~ ~eoond~ the Commi~on will refer to ~ 1964 Cigarette Trade Regul~tlon RuLe,l~ po~- !rig out ~at il wa~ cited ~pprovlngly by ~he Supreme Court i~ ~H.~ Theeig~rettemie'~te~orun~'aime~include: ~ ~ ~r~.~ ~ ~ "1. whether the practice offe~d~ public policy as e~b]i~hed by st~tu~e. :°mmon ]aw, or oihc~vise; ~ !~ .... ~ .~ ~ ~ ~ .~ ~ ~• r~ • • . ~?~• • '~ ~• ~. whe~he~it~immorai.uneth~c~l, oppre~ive o~ru~rupu~ou~;and .~1 ~. whether ~us~ub~m~ a ~ury o con umer~. ~ ~ , ..~ Third, the Commi~on often w~li cile its 1972 PT~'~ ~ decision in which i~ instructed: "An unfalme~s analysis Will take into accounl many b~c ~onomlc ~¢~ and eon~ider~tlon~, and will permit a bro~d fo¢~ in the ~xam]na~ion of marketing practices. Unfa;rne~s is potenfi~Jly ~ dynamic !. analy~;cal tool c~pable of a progro~ive, evolving ~pp]ica~ion which can keep pac~ wi~h ~ r~p~dly chining ~:onomy."~° Fin~lly~ ~he C~mmi~ion~s f~o- quem ellncher is Judge Learned Hand'~ pronouncement thai ~be Comm~* slon'~ '(du~y... i~ to di~over and make expllc~ th~e unexpre~ed st androids of fair d~alln~ which the ~i~nce of the ~mmuni~y may progr~ive]y ~ ¸¸¸i¢ , ; ~ ~ !~ r~?. ~;! k;1 ,: r~ ~ ~rta~ly thee standards o~ un~ime~ o~e~ ~ ~hle~ I~yer~, ~nd their c]ioms, ca~ ~spir~ but uufor~unaiel~ they provide pre£iou~ little analy~i- ~1 cor~ent or practical guidance for e~ther prodi~l~ve or reactive puWo~r~. '~.q~]]~ some sense of cer~int~ as to the p~rame~ers of unf~irn~ m~ally ~' r~ult from the e~e wi~h which ~he~e te:~ ~n ~ summar~.ed or ~0~U~S~al~4~~ ~ ~ ~ ~ • ~ • ~ ~ ~,,~ -~ ]taz~rd~ ~ ~ok~ 29 ~1~ P*~, 8~-~ ( I ~4I,

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31 In the six }~ars following the SC~H decision, there have been a plethora of FTC staff proposal~ based on unfairness theories, but the stalT definitions and analyses of un fairne.'~ have been numerous, inconsislen! with each olher, often Lacking ixx any common analytical thread~ and frequently based on very subjective and eonelusory anab/sls and crherla While two FTC unfa~r- ne~ cases have reached the federal courts ~ino~ S~P2, in neither ease was any analytical content added by the revleedng court. IQ Bentfida~ Corp, /*vI~2~ tlae Third Circuit avoided discussion of the Commission's theory of unfalrn~ (based on contravention of public policy) by upholding the Commlssion's decision on the basis of the Commission's llternative finding tha~ the practice at issue wa~ deceptive. The Seventh Cireuit,.in Spt'eg¢/, /he. ~ FTcy affirmed withoul independent analysis an FTt3 unfairness order based on the FTCI~ conclusion that the pxaeticea offet,,ded public polley and w~re injurious to cortsLtmerl.2B To ffiustrate the lack of focu~ wlft ch currently charaeterlze* the unfaftne~ ctmcept, c~nsider some of the unfairness theories fount[ it, tile FTC's staff report on children's acioerdsEng.29 which serves a~ the underpinning for one o[ the most 5igt~ific~nt of the c~.rrent ra~etxlaking acttviti~ at the I71"(I. The FTC st~ff report demon~trate~ the slatrs propensity to enterlaio wlde- ranging cuncepts o[ what coIL~titute~ "~nfalrne~" uitd~r ~tion 5 of the FTC Act. For example~ the staff state~; "Unfairn~,s • • . arlse~ out of the striking imbalance of suplaisLicallon and povYer between wel~l~nanced adult advcrlisers, on the one hand, arid children on the other man)' of whom are too yc~ung even ~o aplareclale what advertlsing is,"~° T~ ~laff supporls this concept of unfairness by ~tating thal ~fthe ¢la~ical jumtification for a free market, ~nd Fur tile advertising that gt)e~ wi~h it, a~ume* at least a ro/~gh balance of information, sophistication, and power between buyer and seller ,,~L ~f~li~k about that for a minute how d~ you apply a ct}ncept ¢)f a consumer transaction becoming unfair because of "an imbalance of sopfa~- ~tnaly~e~, ihe concept of b~l.lncln~ ~ompe~i~g ~,,nomic irlt~restl h~ net he*-n emph~s[zol r~le. which c~ncern~ the adver~i~in g at ophthalmic goods and ~ervtco ~ an enct~nraging cmphasi~ ~o ecc, n~mi~ ¢o~t~ and b~nefi~s, b~*~ stops shor~ of ~pecifying the interplay bet ~een ,he.e economic consideralionz and ot her criteria or unfairnes~ 43 Fed. Reg. 23,992 (1978) 2~54-~ F2d 611, 61¢~18 Cad Cir. 1976), ~ee¢. de~,ed, 430 U.S. 983 (1977). 2~M0 F2d "287 (Tth Cir i976) : r}~e court cortcluded: ,,A ptacllce is ur~fai* when it offend~ es~abllsh~l ~bl~- policy and ~hen The praC f~r e i~ immoral, unct hlcal, oppressive, iillSer u ~LIIOU~ (tr ~uh~lantlall~. injur~ou~ t~ con~,,rxe,~- /d /.I ~13 (citlz~g FTIL/ v ~per'y & Hutchlnsoa t'o., ~03 US 233, 2~,3 n5 1 72)} "~PTC 5;t all Report on Te]ev~si'~n Adwni~ing to CMIdrmn IFeb 1978) :'/4 at ~8 l~ at 2'~ 00

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32 /,¢

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srZ ~3

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34 such vuInerablthy is certainly an appropriate criteria for triggering FFC evaluation of the need for regulation in an area. the reasoning becomes circular when vulnerability is used as a justification for regulation. The fact that kids are different from adults certainly justifies a close look at children's advertising, hut it tells one nothing about the desirability of regu- lating such adveriislng or the form such regulation might take. Mo~over, aside from children, the singling out of particular groups in our society as vulnerable and needing of ~pecial federal protection is an increasingly lu~pect e×er~ise, In 1972, for example, the FTC sought to protect huuzewivez from advenlslng that allegedly exploited their anxietie~ by sug- gesting that marital problems could be cured by taking a brand name stimulant a few bourn before their husbands arrived home.41 Now the F'/'CI staff apparently is suggesting that homeowners constitute a vulnerable group which needs federal pvatemtla tl from salesmen of home insulatlon.4z Similarly) the F']?C's proI:.osed credit pracdceJ focuses on the poor as an especially vulne~ble gro~ap) and would shift ccrtaln eost~ and burdens from the poor to the rnerchanls with whom they do business,ca While regal determinations based on ~cial~ economlc~ ol other "class" dlsdnctlans are n~l uncommon in the law,4~ to the extent that such decisions are not consistent with economic efficiency considerations it can be argued that they should be left to a legislative body rather than an admlnistmdve agency. Bul the basic point is that the F'TC must carry its analysis far beyond the mere determinalion that a certain group is particularly vulnerable or disadvantaged belore it can conclude that a given commercial practice is, in fact or in law, unf~r. We are left with the criteria of "substantiah injury to consumers" as the only te~t of "unfairnegq') which affords any ohjecdve analysis. And even this tes( requires more refinement and focus than the Comrgisslan has given it in the past. Sn long as the FTC's regulation of commercial conduct was based on ensuring the absence of deception or reqlllbng that material facts be disclosed to c~tlsunlers, i~ legulatory philosophy ~vas on all fuurs with the colacept that the market place thoo[d he governed hy consumers' freedom of choice. ~z&r J B WilliamsCo, 81 F.T.C 238(1972/ (zScr FTC Sl.ff Repu.I on La~¢hng and A do',tcain~ ~] Iqome I.~ulalEon (?9763 ~3Sr* generalg Schwartz, Jupra note 32 (sugg~stlng ~,l par~ c h.~t tl,e p~oFosed Credi~ peac~i~¢~ Rul~, while dealgned t,a ~,ct,~ect ~h¢ pc~,~ ~u~men ,nay in ~act have th~ op~J~i~e ,e.~lt); *~profess,,. Left has don~ a,, adrn~r~bte lob of cat~E,:~g the ~pecial prvteL~ion gi~e*~ Io he~ es, widows, a~d ~ailoes I Lef~ ~npra note 39, at 532-331, ~d the ~l~ed for a clear und¢.~l~ndi~g el ~he ,rnphcat~r~ of the pr c~es~ /d a~ ~S8 /,a

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35 When the FTC beglns to exercise its un[altne~ jurisdiction in situations in which deception is lacking,4~ however, it may begin to remove freedom of choice from the consume~ In t~ther words~ wken the Commi~ion dcter- mines that a marketer shn~ld no~ be permitted to offer ~ particular choi~ to ~hc consumer~ the consumer's commerclai freedom is abridged to that extent.~ IronicaUy, in e~paadhzg it~ unfairr~'~ concept, the Commission may well find it5 earlier do:~pdon ¢a~es being used against it. Con~idcr, for ~ampl¢, the Supreme Court's statement in FTC ~ ,4Igor~ Lt~ ~4~ that. ~'the public is entitled to g~t what it choose~, though the ¢holc¢ may be dictated by caprice or by fashion or perhaps by ignorance "4s Similarly, the FTC~'s Direc~r of Policy Plannirlg, in evaluating the implicatlons of Fir*t Amencl- n~ent protection for commercial speech, states that: '~[iJf one premise uncler- lying th~ fnst amendment in~cr~t in noncommercial speech is that ¢idzcns should be ~le to make their own political choices even if s~eh choices are harmful or unwise, a corollary premi~ i~ that the government shoul~ not make commercial choices for comumer~.''~ For this reign ~ahen the ~onzm~smun regulates solel~t on the b~is of unFairne~, it should r~ogniz¢ the ~undamen~al is~u~ at ~ta~ end should adopt a m~ch more rigorous and dlscnmlnatln~ ,m~iys~$ than has been required unde~ re~ulatlons pursu- ant to the ~Jeeept]on standard. lssue~; relat~n~ to deception ~r~ essetltl~]]y questions of ~ct. ,~,Nd oll~ can be comfortable ~ith Icavlng their re~olu~ion tc~ ~rt admln~stratlve agency presumed to hav~ ~.x~r ~l~e in stach inat t~. Ulrlalrn~ss~ in co~i~a~t ~o decep~ t~o~, {i3voIves ilor~tatlve v~]ue~ ~.nc~ ~ore ~e~eral m~stte~ of" p/ihti~ pc*llcy suc~ as th~ ~slr~c] bal~flo~ of po,ael" b~t.aeell zl~erdl~tts alld Consumef~.~

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~6 As the current CongrtessfonaJ Um~tt VIS-A-VIS the FTC illustrates, the~ is considerable concern with pJaci~g pollcy and ~,atu~ ~udgment~ of this nature in the hand~ of an adminlstraliv¢ agency, and a growing sentiment that certain ~reas of reguJat~on ~nv~e issues of politlca[ judgment best ]eft to el¢~ t ed o *uuuuuuuuuuuuuuuuuu~al~ a~d bodies. [n e~tabllsh~ng and del~neatim~ standards c~f unfairness, ] suggest that the Commi~i~n should l~sist the Eind of analytical shortcuts whlch have bccn sanctloned in regulating ~ti0n, such as "tendency or capacity to deceive," "protection of the wa?f~rlng fo~l," "expertise" and the llke. And, as I no~ed e:ariicr, ~e~ts of unfai~ which rely on "public p~lle.y," "vulnera- bility,~ or ~'oppre~ive" praetit~ are comparable semantic shortcuts which arc equaLly devoid ~f ~ny s[gnlkant analytical content. [ believe that the only" objective and predlctab]¢ ~st of unfairness is consumer injury, and that in applyin~ tills ttst it~ Ct~tmi~i~ n ~hould ~sure that cor~umer injury outweighs any conformer ~ em~me~ial benefits jusd fylng a practice before pre*cr~bin~ i~ ~ u~ fair. T]~ ~ ~ow~vcr, currently ~eems ~o bc v~cillatin~ between a narrowly focused a~ designed only to ~demi~ some di~:rete quaDmn~ of consumer injury as a I~rerequ~s~te to its exercise of ~ts unfairne~ juri~dlct~ola, and a broader v~ tha.t reco~n~ze~ th~ ne~zd to ev~]uat~ on an overall bas~s both consume" ~ury and commercla[ just~flcat~n rI'h~ Cormnlss~ on~s analysis in th~ Sjk¢~/,/~. ~./~T~~ c~ illustrates th~ narrow approach. In 8p/~ge/, a Chlca~ based ma~order cat~log rela~ler folM'.~ ed the practice o~ I~rlzt~n~ sult in (~hJca~o .x~a~m~ ot~t o~st~I~ c~stozners ~hose ~c~ount~ were o~erd~e The FTC pro~u~e~ this ~ractlce ~s ~nfa~r "oecause of Ihe burden it plac~d o~1 o~t of ~tam t:onsurner~ ~0¥ reqt~ir~ t]~em tt~ d~f~lld a l~wsult !~ ~n inconv6n~e~t court. Presumably, ~pi~e$ now simply writes off" ove~duc ~co~llt~, ~s bad de'~im t~ ~iJCUlS ~J~ts~d co~ to c~llect ~h~ro in courts inconvenient to it. In either event, Sp~g~l'~ ¢o~s of do~r~g b~s~e~ ar~ lncr~asL~l~ and thc inclx=~ im~lst be passecl (/ii to some o~- ~1l o~" its c~stomers. No effort w~s made b~" the C~mmls~on to eva$~ate whether t~e benefits produced by its declsitm outweighed these cost~.~2 In aLlevladng lao~t{rne~ to the small ~m~nt 4)[ m~i[.order colx~umers whose ?,ccount~ are overdue, the FTC may have increased prices for all otlaer mail-o~dcr purchasers who p,ay their acco~rt~ on t~nae. In failing to evalu,ate the ~ul[ sl~0 [~r2 ~7 (Tth C~r 1976I t~,~ "[~][ i~ ~Jt,fa[~ r~ s,LbJ~ct a~ ~n,~m ~a~ty ~o teats and imrr~ occasioned by ~ gu~[~ p.~t ~* " ~tater, te~t ol ~si~ ~nd p~,r pn~e Prozux*~l~m o~ 7 ra,~c ~e~l,l~t~on [~ul, and Star ~me~ ~ot h,,10 tr~e ~h~ the ~L(~ i~ de~lln~ t.~.~ ILvah~a hie r~ht ~ wi~ich ~,,r ,,~et y hoid~ ~ear," ~uch ~ the rlgh~ to be sue~ conve~ier~/ (~plegel, I~ f*~ F T C 4.'~, ¢~3 I L97~)1, which, p~t~ma~y mt,s~ he f~tte~e,J at ~ny ~ ~ ~rher ,-on~um~t~ S~. gra~m@ Xy,n~ ~ ~r~d~ Ptaa~ ~/.. ~upm t~otc 43. /,0 ¢0

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37 range of c~onomi¢ effects of their rullr~g, [be FTC znay h~ vc made co,lsurcJers, :35 a who]~ worse o~:~ A co~t-benedl anabjsls of commercla[ practlccs, wlth overall econoralc ~/fi¢izn~cy as the c~ntr~[ touchslone, would place the FTC's unfairness dec trine on the fight track. Such an approach would provide an objective, predictabiz standard that could be undePstood by those to whom it is ap- plied. It ~tlso should help minimize the problems and perce~tlons of ~xce~sive, arbitrary or mlsguld~ r~gulatlon. And it should Dot produce r~sults signifi- cantly al wriance wilh other social and cqultable objectives In adv~)catlng prlmar)' reliance on ecollemic efnciency as Ihe g~ide to unfa~rnes~ st~tndards, 1 do nc~l suggest Iha~ rnathern~tleal prcclslon is po~i- ~')le--the dll~cu[ty in quandficalion of cc~ts and benefits can be stiFula~cd. Nor is there ~ny dispute thai there e×ist important social and ~quitable goa]~ other tha~ economic efficientg. The issue is ~he e×Ient to v.hich the FTC ~hc3u]d ~ tlem[l Io miniver Io such n£)ncco~omiz goa]~ u~dcr II~e ~u brle ~[ u n fairness in ciz~ums~ances ~n which the rcsu[~ would b~ to ~cri~icc over~l[ ~conoml¢ efflc~ency. I Ile~ieve th~ when noncconomlc goals coni~ict with th~ goal ~ff cc~r~omlc efhci~ncy, the FI'C get.rally shoul¢~ wilhh~ld divot ~ctlon ancl exercise h~ stal~lorl power ~o act ~s a leglsl~dve ~dvlsor to Congress, ~e~klng, if approprlatc, e~pllcil congress~o~] autbc)r~ty a~d direc don "to undersz<)rc chls poi~t, consider lh¢ mcl~lgc of social a~Ld ~Liuit.~ble conslder~dom whizh conceivably could bc implicated i~ ~n u~r~stra~nc~ unfalrnes~ anaiys~s. Would a m~trk~ter's vlc~s ~d activities vis-/~-vi~ F~KA, [ore~ payoffs, and I,~b()r un~ont b~c~Ji~ p~rt ~f tt~e z~gul,~l~,y c~lct~/~ls? T~e~c in~ttcr~ ccrta~n]y ~l'e imDorI~l~t I(~ m~l/y cons~lm~Iq~ I~er~[Is ~ven yc]ev.u] ~ to Ih~ir ~t~r~]~ d~ci~l)n~ and iil~y }l~v¢ co~n~ t ~ve llll~211ca lions a~ ~e~l What ~bout advcrtls~ng or marketing ~ppe~ls b~s~d o~ economically irrelevant or irrational factors? ~s il i~nf~[r to zclI an i~ferior p~du~l at ~n inflated price by use of ~ ce[ebrlty t~tlmo~i~l?~ Are standard form ec2~lr~L~ un~,ct~r ~f wr~tlen ~z~ 1~[~~4 Is ]L ut~,~l" io ~vertls~ e~$y cred~I to ~ £'la~ oF c'O n~ U m~rs who ~rc a/r~(]y cxccs~v~]y ~n de/~ i?i~

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38 The~ arc dil~icuR LSsues, and the touchstone of economic cfftcicncy is oel"tai~[y no panacea. B~t if a good eco~omlc ~se ¢z,n~o~ I~e madc out [or r~gula~tlng th~¢ ty~ of commercial practi~, is the FTC the appropci~lc bod)t to pro~hc them a~ unfair in ord~ to achieve ~omc o~hcr soclal objective? In my opinio~ ti*cr¢ is ~ risk that, if thc FTC choos~ to disregard economic cf/~clency in favor of thc ~'pore-ole-wid der-[ady" mod~ of analysis. it may well Create more u n/ai~'n~ [hag. it cures. GO ¢/1

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39 STATIST OF K ~,L~E~ CO~TION K Ma~ Corpor~km s ubmil~ these commants coJlcelming the FTC's alarming ex{lans[orl of i~s statutory ~mwer ~ll regulate "unfair or deeep- tlve acts" mlder § 5 of tim VTC Act~ 15 I_'.S,C. § 15. In the delicate artd im[~rC~nt area of ~dvertising~ K Mart urges Congress to sub $titllt6 an ~Kpr~ ~ildard of tFutl~ for ~k~ Co~lH~Ssio]~k ]i~it~ss discretion in de~rmining aunfaJrness," Th~ concep~ of "un fairne~" has recently been so br o~Jly defined by the (]olnrlli~siol~ ~hat pli~ ate indtlstry zs we][ as the consuming public ilave been greatly disadvantaged. In its overze~Ious efforts to regulate advergising~ ~he ~olnmission and its ~ff kave taken the position that whatever the agency deems to be "unfair" will be the z~levant legal sttmdltrd. This ~ssmnp~iou of ilower is exemplified by the ~ollowing comment made by l~rltlhlce S. ~nydcr, th~ Assistr~nt i)ireetor fo~ th~ Division of Advertising P~ctiees. ou April 10. 1979, [mfore the Adver bmm~ Research Con fer~nce of tlt~ ~ ew York Chapter of the Amerm~n ~arketlng ~sscci~tloll : * * * (T he Commi~io~ is empowered to determine upon view n~ or ~t re~dirlg of Rn ad whether Ol not it is un f~ir or decepti,~e, and i~ ~an ~mffm ~l~i~ detemnlnat~n "u~i~o~ ~'e~/~qg o~ any e~i~ks4~, ev~dez~'~ 8~ck a8 co~umer re.gear~ o~ f]~e m~nlnff o~ ~he ad~. Coincident ally, it should be noted that the ceived be- an ad~ but rather dta~ tlle ad ]l~s a t~ndelmV ~nd c~pacity'to decei~e~ (Emphasis added.) nfke Federal courts have ~one to grea~ lengtl~s to defer t~ the Co~l- i son's interpeet~t on of t ~ "unia z~e~'~ s a~da ~d con ~ ned n ~ 5 Ih~ extreme d~ference afforded the Comlnission is ~ result of the Supreme (~ottr~:s overly broad holding in Federal ~'~e ~om~r~i~g~on v. Ny~rry ~ I[(~tchf~on Uo, 405 ~,S ~:~:~ ( 1!)72h whmh overruled the court of appeals decision Ihal, S&H bud no~ vi~htted either the ]t~ter or spiril of the antitru~ laws ~nd crm]d not be held liable uuder § 5. Th~ Court*s opin oil ~p ~ine t h~t ~ 5 ~ffor ded the Colrml gsion bl'oad dis,'retlon to consider all aspects of'a pa~tlcular pr~ctlce ~nd lhat the Cmnmis~iol~ w~s entitled to ~o beyond ~he antltrus~ laws k~ deter- mining what is an u~Sdr trade pt'acdce. Specifialh, ~he Court stated that d~e FTC could take into consideratioa the following factors: (i) Whetke~ the practice, ~ithout necessarily having been ~l~ vioi~sly eor~sidet~d tmlaw~ul, offe~(/s public policy ~s it has ~e~ e~lisk~d by ~t~mt~. tk~ common l~w. ~ ~ov~e col~lm~n-~alo, statuto~y, or other esta~iM~ed coneep~ of unfairness; (2) whetluer i~ is immvml : u~thisal, oppress~e, OOl~unlers (or compl titors or oiher bklsinesslllt,la ). ( Ell1 ~tX~l~iS added.) Id, at 244-5 n. 5. In ~hnrl, the FT(3 presently ha~ seized power ~o legislate puhlie lnOliditx an([ ro i(~<~llatt~ "O))l~,Ssive" Coltduct; It [(!gisla[ive )ower /,~ t c! ~ ~ op])r('~s %'6 t~ 1~ aft( x~ / ch Ias )eet~ en( olsed in general b3, I he courts b~lr~ llot ~an~t/~n~d by t lie Collgress.

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4O Even though tile Supreme Court has unequivocally r~led that ad vertMng is entitled to the protection afforded by the First Amend men[, Vb'qi~da N&le Boat4 of Plc~nMng v. Ylryicda Cit&e77s Ccm~Te{l, 425 U.S 71S (1976) • the S&}[ doctrine was sul~e(;nent]y expanded to include ad~el~islng and its extremely sensitive First Amendment eonsuhuatmns. See, e.g. Pfi~ez, [r¢~.~ 81 F,T.C. 23 (1973). The Cmnmi~]on has emuinned to expand its own authority in rcgu- latlng the free flow of commei,cial information. IIlusti'ati~.e of the (ommissim~rs insatiable ap )etlte t~/ overregm]ate a¢h,ertL~hlg is the pro ~osed Children's Advertising Rule ("Kid Vid Rule '), 43 Fed. Eeg, 179(;7, April 27. 1978. The 0ommiss on appears ready to go so far as to "ban all televised advertising for any l~'odu~t which is directed to, or seen by, audiences composed of a significant proportion cd ehil dren" who ill the agency's view are "too yountr . , . to ¢onlpl'eheIld or evaluate the advertisin~z." ld. at 171)69. Fmthet~ the proposed rule would Into televiml advertisements for "sRgal~d food produezs" seen by a "sigi~ifieant propmtion of eider children.' Yd. It is readily ap parent from this proposed Itfle that serious policy ~ uestions ate raised as to how far government (an go to act. as a national arbiter of adver rising at the expense of the free flow of ~peech and btf~wmation. Serf mm questions are raised l>~ Ihis asset tian of agetlev power which go ~I11' ht!~ond the )Ioposed l:/de, '['hi! free flow of )roduct information will b~ slowed to a trickle due to the Federal Trade Commission's un- brl ]e attempts to expand a~athoritv over "fairness' determinations. K Mart urges the Congre~ to apply the brakes to the FTC's exp~.la- sion of power in a reasoned and r~sponsib]e way w~ that all "unfair~ ~dvcrt is~merlt w<m hl he defined as a sl atenleut wbiell is false or 12ntrue. This would stop the FTC from charging a pe 'son with vie ating ~ (; of tbe FTO Act when its advcrQsemenrs and represent,~tions are trm~ or w]leI~e llo actual dee.c ption has ~ce/lrred. When Congt'ess amended Ihe F'FC ~et in 19~6 to plohibit "nafalr or dece Itive" praetil!e~, it ~as intricated in restraining "unfair and deceptive acts and praet ¢es wl cl dece vc and defraud the pnblic generally within& Idle Commission heinz put to the necessity ~f roving that the competition of the offender have suffered mom(hH'v ~amage" S ReD NO 17(;5 74th Con~ 2d ~e~s (]986~ "W" ",sp t- full3, suhmlt that Congress &d not intend for thl! ( Ol[l/lIISslon ~o ~- pand this power beyond eases wheFe eonsnmers are misled, .ks long as the rc.Inesentation ill tile advertiselnents are true, this regulatory power should not he extemled to include highly questionable and va~le faetors such as pub]ie %reality." Section 5(h} of the FTC Act shonld he modified t** make if clear Ihat truthful non <h ecprive achertisin~ is not a~ai]able by the FTC. Thi~ wmlhl he fully consistent ulth the present statu~cny limi~ on the FTC to initiate ~: 5 p~oeeedings c,nh- where they "w~uld he t~ the in terest,~fthepnblied Tl>roean be~odonbt thdt rruthf, lndvertiing /romotes an e~giellt ~l/d c¢]nlpefitive [l/~lrhe[pl[]uI~ be/~lll [~ consIHTI~FS c~m base thai[ dm]e~s ~m widdy disseminated hlfc~lmati~n on produet~ appeal b/~ in that market piney. If. on file other halld, tile P~f;Trl[II]SSiOII ellllfhlLll*~- t() I~q/lilO ;LI]/ cr~i~ ms to t~," to gathei dela]led sulistantiarion dll,~ which the C~mmlt~ : k'Q~,u~l in ~Tbtfi,,~ /~m~ ~ o¢ PNInnb ff ~lwr~ nt 77~ ~h,, Su[m,me Cmlrt mind that h, Ifr ~ ~n~ndm~nt d,*~ n,,r prohPIr [ ** ~tat, ~rnl~l in I!rUl~ ~:~t h~ r~v,ui] , cm~m~r, ~ mrrma cn fl,~,, ,~t, ~ ~w e :r,., T,c,, .,, ~, ¢1 any tea an~ lie ~tcps [o lnst~r e the clel~ n ~u~i free flo~ ,ff hffdrm, tkm

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sion has decided to re( hire irrespective of the truthfulness of the ad- vertisement, the public nterest (wh ch ~5 s meant to protect) wil be irrepat ably injurE~d in at least twf* ways: (1) th~ cast of advertis- illg" will bc im, re~Lsed by m!tdless, o%[!rlt!atbirl~ gOT(!T'rl[ll~llt I~IJ]l£ tion; nnd (2) hea~y regulation in an area m]ch as allveIti~i~ whi/b is protected by the gh~t Amendment is itself an infringement of eon- sfitufiouMly pl~teeted freedoms. The public interest, as well as the efficient winking of the marketplace, requh'es (he unfettered flow of truthfn| and nondeeeptive infarmati(m. As recogadzed by the c~mrts~ "the particular con~/une*'s intelest in the free flow of commercial in- f~rmatioa , . . may be as keen, if not keener by far, than his interest ~n the day's most urgent political dehnta." Vi,g~rdo. St,r~e Boa,d ~] In order to serw better the public and the nlarketpia.e~ in accord: anco with the clear ob retires of § 5 of the FTC filet, * mlfairnc~~ slmald be expressh defined to be synonymous with trnthfulne~. This wouhl enhane~ and eIl(*O[lr~ the dissevtination of ilecurato f~tgttml il/fOt'ltl~ltiol~ 5nd wollld iiS~lS~ ¢OIISIIlU~I'~ L(~ ulal¢t hlfol'nled and ra- dlmal ehoice~ in th/~ inarkel place. ~TAT~3t~T IIF ](~L~OGG CO3[P~NY L [NTROI)yTCTI~)~ On November 21. 1979 the Consumm Subcommittee of the Senate Committel o1~ C~mlneree, Scienc~ and Transportation invited "Laj]l persons interested bl the q,e tion of how nnfairness ~hould he defined a.~ u~!d in the FT( ket. and whether unfairness ho~dd be It iplil!ah]e to i!ounnel eial adver tiMng'~ to submit their vie~ ~ fo t le Suhconnn ttee. In accordance with tim5 notiee~ the Kellogg ( ~m~paIly heleby submits the following enmments. In view of I(el]ogg's in~oB'ement in twe ongoing proceedings be fore tire Federal Trade Commission. the Cere~ds Case (fG~16yy Corn party, et a?,, FTC D~eke~ No 8883} and th~ Chiidren'~ Mlverti~ing Rnlemakb~g Proeeeffin~ (FTC Docket TRI~ 215 60), we bclil!vc that ire can Inoliffi~ tim elmu.ittee with unique irlsiff]l~ ~nto the practb:a] Imp err~elltatlon of lhc llll~Ulll'nP S standard u: ( ilmmLslOl~ )l~/:eed ings and appreciate this epportunitv to [novide colnments..ks a con- seqllenel! of that experienee, we would note that it is particularly impet'tant f~r the' f'omn~ittee in its review of the unfairnes~ standard to collsider cm/eotni[an~lv b,,th [lie t'elrte Iv available to the (~OIlll[li~ Si{)ll IludeF SP('tilI[I ,~ nf/(i t]lo 1)t(Io011111e IIsPd hy tim Corn,mission tn pllfolee Ilia[ atllholi~y, ro do oth(rwi~e w~nlld be to dibrek~tl'd (be ratiomde emldoW, d b3 the Congress in 1914 in grantin~ the CnmmG- sb)~ "nufairne ~" a ut ]lol'ir3 . _~ceordin,~ly. these eomnlent~ will first trace the legislative, and ju dicial hisrcu v cd tlu. eval~ iu~ st tmdal'd ,is x/t.lI as i e/dew new 1 enwdies ~ouIzIlg by tl~e ('(mlndsMol~ which exceed the l~t ranwter~ of No~tion 5 nntholitl. ~ddiriol!nlh, we 1/[11 explore pro,'edurnl pl'oblem~ tlmt the Coul/lany ia Illesel~tl) exll/.]u.einff h/ ~,ae]l of tit/ [noceedings irt /viii( h it i~ curl ruth" hll cl]l'od. Thi will sorxo To demonstrate that the ('onuuis inn i~ in t~turiona]l3 inelliable of affording the kind of dtm

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& 42 process protection ~Leeessary to justify the ¢xtl~eme t~emedies proi~osed by tho Cormnission. Finally~ in an effoIt to place Lhe broad unfairness standard coupled with a reach for llove] remedies in a contemporary and meaningful persueerJve, thes~ conmaents will discuss in detail the most current exanlpl~ of the Colmnission's attemp~ to push beyond the s~atutery limits of se<tion 5 : the Cereals Cane. 1I. TItE XLF~A.NING OF TI=I~ TXR~ ~IjNFAI~,~ A8 IT 1~ U~F~[; l}ff ~LTIO~{ 5 OF T~]~ F~DERAL ~I¢&DB CO2~MISSJTON ACT A. Introduction Iu this seciJon of Kellogg Company's comment~ ~ close scrutiny will ba given to the teIm "unfair" as ic used in Section 5 of ~he FcderM Trade Conmlission Act. The exposkion el tim ineauing of that tram will entail un analysis of the. legislative histories, mMer]%n~, both die enactment of the Fedei'a [raae Comrmssion _~.ct oi 1914 and the Wheeler Lea Amendments of 1938 and udicia] interpretations ~f the term "unfldl,~ cu]n/imt[ing ilt tho L-hired ~tates ~upleme (2ourt s decision in FY6' v. ~',~emT d~ Hutc/vir~en Co. l~5 U.~. 23;; [l!K2). rd. T]~s legi~lati~.e A~te~ u~lde~ tying t~e e~,actment of section 5 o/t/~e Federal Trade ~vm~issic,~ Act The Federal TIade Commission Act~of 1914 was enacted partly in response tn the concerns of busillessrUell~ who believe that the inade- quate lind erratic quality of the judicial enforcement of the Shermlm Act "had created a climate of legal uncert aimy in which effectil e busi aass plam~ing was impo~ib]e....' S~otsment of Basis ~d Purpose of Trade Regulation Ride 408~ Unfair or Deceptive Adveitising and Labeling of Cigarettes in Relation to tbe Healtl~ Hazards of S mokii~g, 29 Fed. Reg. $348 19~r1) [hereinafter cited as Cigarette llule State nlent ]. In ereathlg FTC to t age charge of the enfol( ement of trade reg ulation laws and the pi'ohibit[o~ ot trade practices contrary to good public policy, Congres~ therefore authorized the Commission "to pze- vent persons, p~l,~nersbips, or eorparations . . . from usii~g uufair methods of cmapetgion hi commerce. ~ 15 [ S.C § 45 ( a ) { t; }. Nowhere in the statute was the )}nase "/lllfUir ]netllod of compeli t oft" e~er del]lled. T 1 s elm ~s on wa~ de berate. Crm~ress cons dered but eventua]]y reject~d the pl~posal t]mt a CCmlmOl, blw standard of unfairness consisting of enumer~,ted pwhlb[ted practices shouhl be included in the Federal Trade Commission Act. =ks tbe Seltate Com- mittee nn interstate Conl meree staxed : The Committee gave eall!fu] connbh!ratilm rll the qul,~tion as to whelber it WiKlId attelllpt to define die lilal]3 altd vari able unfair practices which prevail in conuu~ t(e and t,~ for- bid their contintlanee or whether it woulcl~ Ily r} general declav:lti~n eundenmin~ unfair practices, k,alc lr to die Commission to determine what ptacttoes ~ete unfMr. It coil chlth~d Lh,'lL tIl~ IattcL course would be better. [~),' the ] ea~on, as ~tated by one of the iepresentat[/es <d the l]lhl~/is Manu- faeturei'sr \ssociation. tlmt there wets, Ion nlanV .nf~dl Was rices c~; delim,, and altez' wlitinr, twenty of t}l~ nl into law it wo/dd be 19,i[c i)ossib/e to invent others. ~S. l{el), g~o. 597, ~3d Cong., 2d Sets. 13 (1914).) m o~ b~

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4 L 43 The }louse Confmenee Report on the Federal Trade Commission Act was equally explicit on tiffs pc nt It is impossible to frame definitions wlfich endmtee all unfair practices, There is no limit to human inventiveness in this field. E~en if all known unfair ~r actices were specifi, ally defined and prohibited, it WOlfid be at once necessary to be~glin over again. If Congress were to adopt the method of definition, it {~ouid undertake an endless task." (Id.R. Rep. Xo. i14~ 63d Cong., 2d Sess. 19 (1914) .) Needless to say~ the extremely broad langmage utilized in the text of Sectien 5 caused eoncerrt a11lorlglegislat0rs ill [he Congress tha~ enacted that statute. See 51 Cong. Rec. 18114 et seq. J914 . A eom- ]amt ~olced by sol m Congres~lnen ~as tilat a b~lslnessalan would ~e rulable to detetlnllle whether a particular practice ~as made un • ¢ ]a~ ftll until ~he (onllfilS lon~ aln] Col]rls ~ale the reliefs] lan[ru~.~ ge spetlfic substance. ~ee, e.g., 51 Cong.Ree. 13114 (19141 (remarks of Sen. 3IeCunlber) l ~ct. at 13116 (remarks of Sen. ~Ne~land). In ,~rder to allay these fears, the Ctmgress of 191-! Jlaced an important lhldt~ t}on uI~olt t le po~er of the FTC to remecty an unfair trade practice, ~lile {'g2ITHIilSSIOII eotdd issue a cease and desist order which would then he Sill) eet to af~l'rtlallce or levers;t] by a fetlet'a[ ilip ) ellate court• I But even 1~ SHell an affirlnanee were {ol~heolllln~. t 11! oil (!g wi)H d no bind a respondent ,n]ess and tmti] it ~as enforced by a se state court of appeals in an independent pH)eeeding..gee FTO v. R~e~er'ogg Co., 313 V.S. 471h 478 (195~.) ; ~,el/' deme~! Wood Fini,*k{i~y (re, ,~. Jfmwsot~ ,lfhd~9 & ,l[fg. Co.. 3{~ F.~(I '.Hfi. 355 (3d (Jr. 196~) c*ff'd 3gl ]--.S. 311 (1965) l Proper v. doM~ Bene d, Noa~ Din., 2!!5 F. 729, 731 (E.D.N.Y. 10Ca) ; Cigarette Rule Statement. supra. 29 Fed.Reg. at 8348q9. The effect of this proeednral prerequisit~ ~as to ,re~ent the enforcement of any cease and desist order unless the respondent subset ueutlv ~ iolated ~}s trims and a court of appeals determined that suc I g v o at on s IOU d he pellalizec. T 1us, Jlllllil:i{ in the oI gills framework o~ Section 5 of the Federal Trade Commission Ac~ was a lie]anne between a broadly-woe/led proh~httmn against unfair trade practices and a rather restrictive remedial format by whir.*, that proldbition could be en forced. U. SuSsequer~ i~tdieial eo~st~cfio¢~ sad 7~'9&~glgva actions ~,yarglr, o *r,?tfo t~ 5 of the f'+t de rJ Ttwd¢: (' oz~ tm'¢.s;,m . I ~ t In FTU v. Grc~z, 253 ILS. d'21 (19~0), the Vnited States Supreme Court hehl that vhile tl~e exa(t meamng of the phrase "unfair method of competition' may he in dispute, the proscriptions of See tioI1 ~ 5Vel'O '~elearl¥. mappIienitle to practices never heretofore re ~tttded as o ) iosed to good tnolals he(ause (:]lalac:terized by dent!p- tim*. had fitith, fraud el c~ppression, or as a~_'ablst public policy be- eattse of tlmir dangerous tendency llndll/y to hinder eolnpetitJoll or ererdp II1CMhO])O]}. : [d. at 427. (7/(;#-. th~,ll. Inaplaod [111[ I/v[) ('hlSSi~iea 1ictus nf cases where the e(meept of unfairness is crucial: (1) those c,~ses illl'()]vir~g pl'l)dllet cPDh}15 where the unfniz pi'ntlJee is pri- maI'i]) dir,'t'ted against ermsumers~ ~lnd (~) the Inolxe tl ulltionta] anti tl'llst c'as~s where ~ *espondenl el)i~df.~,d to >on~e unfair conlmereia] practice directed against ~ competitor. In neither iitatanee, ll{}~lever.

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46 The first explicit chink in the unanimous approach presented by the decisions in (~ratz and Raladam and those of the lower federal courts api~xed in FT~ v. R. F. Keppel & Bee., l~w., supra, where the Supreme Court stated: The [Federal Trade Commissi(m] Act undoubtedly was • imcd at a~[ the familisr methads of i~w violation which prosecutions under the Sbepman Act bad di~h~ad. See Fed- eral T~de Gommi~sicm v. Raladam, ~up~a~ 283 U.S. 649, 650. Bvl as this Court h~s pointed on~ it ~]so had a broader pur- pose, Fede.t~ Trads Co~r~iselon v. Winsted [Ioslery Co. 258 U.S. 483, 493i Federal Trade Gc'mm~si~n v. Raladam Com~p,any ~uFt u~ 983 U.S, 648 .... As proposed by the Sen- ~te Commlttea on Interstate Commerc~ and as intraduced ia the Senate, the bill widch ultimately became the Federal Trade Conlmission Act declared "unfair competitioa" [~ be tmlawfu]. But it was becaus~ the meanh*g whish the com- mon law had give~ to t]lose words was deemed tee narrow that th¢ broa~ler and more ilexibis phrase "unfair methads of competition" was substituted. Congress~ in defining the powers of the Commission, thus advisedly adopted a phra~e which, as this Court, has said, does not "admit of precise definition,:' but the meaning and applieoLion of which must be arrived ~t by what this com~ elsewhere has c~l]e~t "th~ gradual process of jadici~l inclusion and exclusion." Fed- eral Trade Com~isslon v. Re,adam Cqmpany, supra, 283 U.S. 648 .... The argument that a method used by one competitor is not ~mfair if o~hers may adopt it without a~ ~,striction of competition bet.wean them was rejected hy lhis Corot in Fed- eral T~od~e Ccqn~Lssion v, Win~ted Hosierq Co. supr~ .... There it was specifically held that a trader may not, by ursuing a dishonest practice, force his competitors to ¢hoose ~etween its adoption or the loss of their trade. A method of competition which cas~s upon one's competitors the burden of the loss of business unless they will descend to a practice which they ~r¢ lmder lr powerful rnoi~al ~mlpulsion not to adopt, even though it is not criminaL was thought to involve the klttll of unfairness at which the statute was aimed. (291 U'.S. atSll 18; footnotesomltted.) Accordingly, the Co~r~ hold : We hold that the Commission correctly concluded tbat the practice was an m~fair method of competition within the rgteaning Of the st at ilte, ll is unnecessary co attempt a eolnpre hensive definition ~f tim tmfair methods whg.h ,[~ banned, even if it were passible to do so. We de not hltmmte either tha~ the statute does not aetthorize the prohibition of other and hitherto unknown methods oI conlpetition or. on the other hand. that the Ceinmissi~n mI~y prohibit every unethical cam petitive praeiiee regardless of its [uu'tieohtr (~h el'act e r or con sequences. New ~r different practices must he considered as they arise in the light of the circumstances in which they are employed. (Id. at 314.)

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47 Tile effect o~ Keppel was to undermine sevel~ly the holding of RalaAam that unfairne~ depends upon a showing that the conduct complained of had an adverse effee~ upon competigion. AKain, some courts were slow to pick up this point. See, e.g., All.z* R. IPzistl~y Co. v. FTU, 11:~ F,gd 44~7, 44tM9 (7~h Cir. 19II1) ; l.r~emgttiord Art 6'0. v. FTU, 109 F+gd 393, :~97 (7tll Ci['. 1931 ) FTC v. R¢d Prot~ CarT, 99 h'.gd 617, 619 hid Cir. 1937) ; Butterlck Pub. Co. v. FT£', ~upra, 85 F.dd at 526. Any doubt that Keppvl evlscerated the Courts prier holdings i]~ l?aladam and Grate, however, was completely dispelled by the passage of Ike W]~(~ch, r Le~ A1Tll!lldlllei/~.~ ~1 ~h(! Federal Trade Col[lngssi(lll Aeg in 1999. That ]eglshttion, amlmg other things, !tmcnded S(!etgm 5 ~f the Federal Trade Cemmissinn Act to prohibi~ "unfair cr deceptive acts or practices in Gc*llln/oree'~ as W~]I as Uull~air metheds ef competi- tion in commerce.' Tl~e expressed pllrpose for sue]l a ehang~ was sum- marized in the House Report: [ • ]h~s amel~dhleilt itla]xes the consunler~ wko m~y be in- jured by an unfair trade practice, of eqaal concern, before the la% with the merchant or manufacturer injured by the unfair methods ef a dishonest c~)mpetitor. (It.R. Rep. ~*o. 1613, ~Sth Cong,, 1st Sess, 3 (1937). See also S. Rep. No. 1~05~ 7gth Cong., 9¢1 Sess., 9~ (1936).) Aveord, Handler~ The Cgnt~ol of FaJse Ad..erti~D~9 U~d+~ the Wheeler-Lea A~t, 9 Law d" Co¢~temp. Prob. 91, 96 (1939) ; Cig~rette Rule Statement, ~upra, 29 Fed. Reg. at 8349. After the enactment of the Wheeler-Lea Amendments, the courts uniformly read that legislation and Keppel to overrule Rafg~lam and permi~ tim FTC to pr(~eeed agains£ respondenI~ wh¢)se conllllef Ilas no demonstrable antieompeti~ive effects. See~ e.g, Kohn v. FTC, 299 F. 2d 311~ 319 (6th Cir. 195~1) ; ~lobe Cat'dSoa~t ~'¢oveltgf/o. v. FTC~ 192 17.2d 444, 449 (3d Cir. 1951) ; 6!harles A, B~erd.'~son.~ v, FI'6', 158 F. 9d 74. 77 78 /6lh Cir. 1946) ; Wolf r. F? 6'. 135 ~. 2d 564. 567 (Tth (fir. 19t3) ; Nei~ntifiv Mfg. Co, v. ETC. l~ F. 9d 640, 64~-44 (3d Cir. 1941} i Pep B<qs Man*~g, Moe & Joel' ~. FTC. 129 F. 2d 158, 160-61 (3d Cir. 1911 . See also Alo~ Airlines, l~.e.v. CAR, 598 F. 2d ~50~ i51 (D.C. C r. 1979 ; Evanston Motor Co.~ Inc. v. J[id-~S'outhern i'oyota, 4,~6 F. Supp. 1370,1574 (N.D. Ill. 1977). Indeed, in the second Raleda~ case decided by the Supreme Court--FTC v. RaZada~ Co., a16 U.S. 14~ (1949) it was asserted that Section 5 of the h'~uh ra] Trad~ Commission Aeg authorized the FTC to ~on~bet incipi~mtly (m fair methods o~ eempetitien having no immediate antieompetitlve effects : I~ is not necessary float the evidence show specifi(a[[y thai lo~.~es to any pal~iculnr trader or traders nri~e fr/ml Rala dam's success in eaptt~ving part of the market. One of the objects of tile .le~ creating the Federal 'l'rade Comnl~ssk~n wus to prevent potential injury h~' ~oIIping unfair metlmds iff competition in their im'i )iencv .... And when the Com- mission finds as it dig bere that misleading and deceptive statement~ wet0 nl~le with reference to the qllg(li~y f~f lnet~ ehandlse in a~tit'e competition ~ith other merchandise it is also authorized t~ in fe~" that ~rade will he di~ cried :~mm cem-

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48 pefit(>rs who do not air-age in such ~hmfair meth(~ls." , . . Tho findings of the Commission in this eg~e should have been sustained against the attack made upon them. (ld. at 162.) Subsequently. the Supreme Court has stated specifically that the first Rdadam ¢ase was~ in e~eet, o~rturned b Keppe~ a~td the l~'he~ler- Lea Amendments. See FTG v. Sperry (~ ~tutchi~on Co., supra 405 U.S. at 24:~44. It and other federal courts have also reiterated the p~itlon, actually a corollary of the holding in the second Ra~adam caset that Section 5 of the Federal Trade Commission Act does not re strict the Commission to forbidding only that conduct already prc~ scribed by the Sherman or Clayton Acts. See, e.g., FTC ~,. Motion P~eture ~idn.ert~sln~ ~qe~, Co., 344 US 392~ 395 (195~q); FT(7 v. Gem~m2 [nstitute, 333 U.S~ 663, 708 1948 i Grand U?doT*~ Co. v. FT~r~ 300 F. 2d 92~ 98L99 (2(1 (Jr. i96~o) ; Myti,~gep ~ Caz~elbe~,~/. Inc. v. FT6,361 fi. '2d 534, ~40 (D.C. C r. 1962). ]:n summa~y, then~ by the decade of the 1960~s the narrow construc- tl()n [)f the tel'm "unfair method of competfflon~ given by the f,lllteq States Supreme Court in floe Gvatz case had been completely eradi cared by subsequent judicial decisions and eonffresshmal enactments. The net result of these Inter developments was a very open ended deft nitio~ of unfairness, both in deceptive product elaitr~ eases and in the more traditional antitrust cases deaIt with by the FTC. D. "Un~alm~°~'' ire t]u~ 1960'~ aa~d 1970~s: I'he nlgarrtCe ~de ~atr m~n$ ~ld ~perey & Hu tvh~n~o~* In the mid-1960 s and the early 1910 s, two developments crystalized and defined the evaluLion of the ]aw regarding the definition of un- fairness, as the term is used in Section 5 of Lbo Federal Trade Com- mission Act. The first such development was tbe promnl~ation in 196~ of the FTC~s "Statement of Basis and Purpose of Trade Regu]ation Rule 408, Unfair or Deceptive Advertising and Labeling of Cigarettes ia ReIation to the Health Hazards of Smoking? In that staterc~ent the Commission described the following three factors it cansidet~s in determining whetller ~ practice that is neiiher deceptive nor in ~inla tion of the antitrust laws is nevertheless unfair : N'o enumerathm of examples can define tim outer limits of the Commission's authority to prc, scrlbs unfair acts ar prac- tices, but the examples should help to indicate the breadth a~4 flexib Ety of the concept of unfair acts or practices and to suggest the factors that determine whether a particu]ar act or practices should be ~orhldden on this ground. T]~ese factors are as follows: (1) whether the practice, without necessarily having been previously e¢)nsidevelt ~mlawfuh offen(]~ lnlhllo policy as it has been est nhllshed by statutes, the common ]aw. or otberwlse--whether, in other words, it ]s within at Ieas¢ the penumbra of come common-law, statutory, or other eutab lished cnncept of unfairness; (2l whether it is immoral nn- ethiehl, oppres~h,e, or ~lnscz~lpulous: (3) whether ~t causes suhstantial in]nr~" to consumers (or competitor~ or other bus ines~men). T~ all th~ee fnetm'~ are pre~ent, the challenged conrhllt wiIl surely vio]ate Section 5 even if there is n~ spe- cific precedent fo~: 1)roserihinff it. The wide variety of decl- sinnu interpreting the ehlsive evneept of unfair~es~ at ]east i'¢

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9~0~90059 ] i--

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~o tratively) the additional types of conduct thus falling within tile agency's regulatory ambit by citing the tht~efold criteria set forth 1171. tile C2garet&~. RaZe ~2~ateme~t. In the years, smee Sloe7W. (fi [luteh- sqzao~ was dex:lded~ howe'* el', that case ilas ree~lvPd Iio i Ildn!ud elabora- tion. Courts have occasionally repeated its st~dara for determining unfairness. See e.g., Sglepsl Inv. v. FTC 540 F.2d 287, 292 7th Cir. 1979 ) ; U~ga~ v. Dualdn~ Donuts oJ A#un,~ca [nz., 5gl F.gd lgl 1 1220 (gd Cir.)~ cert. denied, 429 U.S. 928 (1976) : National Petroleur~, Re- l~wr~ As~e. v. FTC, 482 F.gd 67~, 685 (D.C. Cir. 1973), cert. dented, 415 U.S. 991 19f4). Rut these courts lmve cansistent ly failed to chart the boundar es of the Supreme Court's defin tinn of what s encom- passed bj¢ the term "unfair." Thus~ the ramifications of the Court's opinion m Sperry & H~Jtehinaon remain unexplained and iii defined. As a result, the p~esent situal;inn in the area of trade regulation is one which has come full circle: the Feder~d Trade Ccmtmisslon Act Was enaetefi in 191~ to aSdlla~ the uncertainty alnoltg bas1nesdmen ~rising from the erratic enforcement of the antitrust laws; the appli- cation of that Act in 1980, however, is itself an even worae source of uneert ailttv, because busi~essmen have no reliable way of determining beforehan¢l what constitutes an "uufalr method of'eompstithln' or an "tin fair or- decept ire act or praetloe." g. The FTC~s ewpan~fi~n of the Do~rfw of g*da6-~es~ a,~ it applies to co~m+rciel advertls÷ng and a* u~ed in its Rulema]elng Proceed- i~9 on ChfMren's Advertlgng The uncertainty inflicted upon businessmen by imprerise jtldicinl constructions of tile adie(ti~e "unfair" as thaL word is used in Section 5 of the Federal Trade Commission Act wouid be im forthnate enough if it only exposed such businessmen to the threat of a potential adju- dicative action iss*ued by the FTC. However, in the mid-t979's. Co~ gross eat~sed the vague criteria used to defne un fairnes~ nnder Section g to also ap fly to ruienmking Droeeedings initiated by the Commis stun. Under t ~e 5Iagmuson 3Ios~s AeL t m Cumin ss on may no'~ pse- scribe "rnles which define with s ciflrity acts or practices which are unfair and deceptive" (15 U.S.~STa(a){l)(B)).' The FTC has not been hesitant to use its irew rulemaking powers. Perhaps the most c~ntroversial of the uses to which those pvweis have been put is the Commission's attem ~t to regnflate television advertis- ing to children. Children's Advertising ][1 ulema~in~ Pi'oeee~ting. FTC Docket TRR ~15 gg. On April 27, 1978. the FTC published in the Federal Register e formal announcement 43 Fed.Reg. 17967 (April 27, 19781 ) wherein it proposed to determine, inter alia, if it thould : {a) Ban all television advertising for any product which is directed to, or seen by, audiences eomp~)sed ill a si/.mifieant proportion of cldldren who are too young to understand the selling purpose of. or otherwise eomprthend or evaluate, the advertising ; (b Ban televised advertising directed to. or .seen by, nu dences composed of a s gmifieant pelt on of older ¢-h ldr0n • TI/e KOlo~e Com~nr, y I~ aware o~ the Cnmml~t*e'~ ~etl~rt n~ g. ~991 WMeh ~r<,vl(i,,~ f~p eort~ln ~,lt,~t~n rix e eharlee~ ill th~ rllI~t~tR k[tt~ authnrlty ~f th~ ('n m mi~gl~n a~ H re]~ toq let eo/~tmoe~laI ad,~rt[u[ntt Ne,~rrhele~g I{~llogg hell~,,e~ Chttt ][ [g lt~C, qul t~ ¢llgc,t a t~e Ih[]0~n'~ Ad~rtislng tul~mtlkDX~¢ Dro~din~- ~ bm[n~ Ii[ll~(~lllfwo of n:e mlnnor [1~ ~hleh clu~ C¢lm ta~ a,Mcm ha~ ~haen to lm pie r¢~ t~t its ~[ ~,g~ll ~111 ~II3%$ rldemakDig t~tlthn~ 5

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T $I~0~900~9

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5~ which the FTC has so ht to expand in the Children's Ad- vertising pr¢ceeding it ~u~f. To tile extent that the FTC is seeking to apply the concept of un- fairness to commereiM speeeh--~s in the Children's Advertising pro- ceedinLg--it faces severe constitutional obstacles. Indeed: the courts have already reco~dzed the existence of such obstacles in cases in- volving FTC adjudicative proceedings wherein the Commission issued cease and desist orders that impinged unduly upon the right of re- spondents to engage in c~mmerci~l speech. The sum of the matU.r is that in advertising arty preduet ~i~ television to which an audlen(~ which, in the FCC's word% (at cannot "differentiat~ between the program and the o0nmlereial message:" and b cannot "take [an axtver- tisement~s] paid status into consideration in assessing the message,~ an advertiser is engaging in a practice which Con gl'ess, according t~ the FCC, vletormined in Se~tim~ ~17(a) (1) to be "unfair." The FCC's use of the word "unfair" did not occur in the specific context of Section 5 of the FTC Act. But unfair- aess in a practical sense and unfMrness in the Section 5 sense are intiiiuttely relatrd eo~eept~. As the Supreme Court held in Keppel, 291 ~LS. a~ 313~ "the first eritermn of statutory con- struction" to be used in defining the word "unfair" as it ap- pears in Section 5 in "the normal., meanin, g of the word.". (FTC Staff Report On Telev*x~cm Advertising To Children, 222-23 (1978). (Footnote omitted).) Now, according to tile FTC the tripartite test elaborated upon to the Cigarette Rule StageTmmt is no longer necessary to define unfairness; merely televising It (!olllrllel~ial to al] audi~511(¢¢ Lhat includes young children without identifying the pahl status of the messaga so con veyed is suddenly said to be unfair per ~. Needless to say, no objective definition of the word "unfair ' supports tile FTC% conclusion that that word accurately describes the conduct just mentioned V(hat the Commission has instead done is inexcusable: it has defined the concept *~f unfairness to fit the llnderlvin facts inwlved in the Children's Advertisfi~g proceeding. Not on~ly ~ this grossly violative of the most fundamental prineiple~ of due process, but the scope of the Commis sion~s p['oi)l)sed ru]n~ [)r(zerl~s grave First Amendment problems. For example, in Beneficial ~orp. v. FTC, 54"2 F.2d 611 (3d Cir. 19767, cert. denlev~. 430 U.S. 983 (1977), the Commission issued an order prehibiting a finance company, which also engaged in the prep- aration o~ tax returns, from advertising loans to tho~e entitled to in eom~ tax refunds as "Instant Tax ]-[efnnds$~ on the theory that ~ueh advertisements misled].)etentia] berIoweL~ into believing that they did not have to meet the usual ers~llt worclfiness standardg of the finance company. 54'2 ie.~d at 617, Because the order impinged on commercial speecl~ protected bv the First Amemhnent. the, court in- validated it on the theory that it imposed a prior restraint "~ot rea- sonably necessary to accomplish rbo r~-medi *1 ohjeetive of preventing the violation?~ Id, at {~19, In failing to consider the alternative of rewriting {lie respondent~s advertisinff copy. the court also held that the Commission abused its wide remedial discretion : t¢

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5~ The Comnfission, llke any governmental agency, must start from the pr~mise that atxy prior restraint is suspect, and ttlat ~. remedy~ even for deceptive edvertising, can go no further than is necessary for elimination of the deception. The Com- mission's ~l<ler proscribing use of the term instant tax refund or any other word or words of simliar import or meaning~ without consideration of tim context ia which the words ap pear, went further than was permitted for that purpose and was an abuse of the Commissioals remedial discretion. It can not in ~hat form mid without such coas±derattau be alilrmed or en furcai. (Id. at 6g0.) In a mmther of subsequent cas~% the courts h~ve reiterated the First Amemlment ]Jm!tatlon oa th~ FTC's remedial power that was rec- ognized hy the i~hird Circuit in B~l~'i~l. See Ermgvlopvdia Brl- ta~a~ica, l~w. v.~ Tff , 605 F ~d 964~ 979 7th Cir. 1979 ) ; Standard Oll 6o. v. ~T6, 577 F.~l 655~ 662 9th C r. 1978); United ~ta$ea v. Readers Digez~ Assn, l~v. 464 F.Supp. 10~7, 1051 {D.Del. 1978). Of the~e decisions tim most extended discussion of th~ topic appears n t ~e Nli~th Circuit's opinion in ~St~ndard O~l. In thsC case, t m re- spondent aired three t.~levision ~)mmercials promoting a gasoline additive kimwa as F 1~10~ wtlieh was said to reduce ~xltaust emissions from dirty engines and improve ~nileago. 577 F.2d at 655-56. After concluding that these ~presear~tions were false the Comrmssion is- sued an order prolfibiling Standard Oil and its advertasing agency f~om all advertising with rega~[ to any product that creates a mis- leading talprcssion by use of tests or demonstrations or by visual means geaerady. Id. at 660. After reviewing the p~cedent con~rnJng the remedial discretion of the Conmfiss~on (id. at ~61-6~ ), the court struck down the order st~tmg : Moreover. first amendment considerations dictate that the Commission{ extend restraint in formulating remedial orders which may alilOlln~ tl) ~ p~ior restraint on protected corn inertial speech, lle*mfia~al Corp. v. FTU.... The cease and desist ~rders issued by the Commlssion in this ease unques- tionably burden [the ~spondeats'] advertising capacity. 2Athough it is generally accepted that false commercial ad- vertising may be prohibited . . . tbese orders go far beyond eltaii~mthm of the s *ecifie misrepresentations which wer~ made alld also beyond what in fa rnes.~ (~mbl bc d~nted neces- sary to deter future conduct. In tim emerging law of grs~ amendment protection for commercial speech, one of the first principles is that "such speech serves individual and scciet~l interests in assuring informed and reliable deeisiolm~ak ing." . . . At a miniature administratiw~ a~cncies may .or pursue rigorous ertforceluellt to 5he i!xten~ of discouraghlg advertising with no concomitant gain in assuring accuracy and trutbfutaess. ( Id. at 66~).) It is important to note that the cou~ts in ]~et~efiviM and ,~'ted~lar~ 0:1 ~tmmk down Commission ordt~'s p~,ollibiti~g commercial spe~e,h adj ~d.~ed to he deceptive, a concept tlm~ is l-a]at]ve]y ~ell defined. In ths Cbildren's advertising proceeding, ho~vever, there is sn ominous prospec~ tbst the FTC wig impose an outright ban on certain coat- ~0 ~*.---'="=W

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54 mercial speeth solely because it has bexm deterrnimd h~ constitute "unfair" conduct~ as that term has been newly defined especially for the purposes of that praceeding. Given the (?omnfission's int~leiably locce definition of unfairness under Section 5 of the Federal Trade Commission ACt~ the application of that concept to justify a ban on tele~dsed advertising to children results in both a ~dolation of the First ~mendment and the provision of a new hitherto unsaspectexl and wholly uneorLseionable expansion of the prohibitory ambit of Sec- tion 5. llI. LEG&L OBJEGI'[O ~-$ TO TH~ FT(: ~8 EFFO RT8 TO v.JTILIZ E TJIE REMEDIZ8 or DI~'~TI~7[aL &~-D TRAD~ ~*[AR I~ LICI{IzrI~I.N'G L~ C ¢%S E ~ BROU(~HT U ~I)ER S~.C- TION 5 OF TZIZ YEDERAL TRADE C4)~[MI~8[0N AqJT A. In~'oduetlon The Commission h~ proposed divestitme and royalty f,~v~ trade- mark licensing as reliof in a number of eases bl~aght under Section 5 of the Federal Trade (ommission Act. Such remedies go far beyond the cease~ and desist power granted to it by Con~reas. The i~lex,,an(case law denies the Co~mnission divestiture power ~n eases whet~ the di- vestiture order p~ovides for more than the mere relinquithmcnt of the fruits of all illegal ac~luisition. Tra~Iemalk licensing is an even le~ tried method which, if adopted~ would hapos~ substantial per~ul- tlcs on the lieensors and substantial costs upon o~Ytsili]l~rs. B. The Feder~ Trade Commission has no power of d;zesligure uzule~ ~ct~o~,5 An analysls of the Commission's power to order divestiture under Section 5 ,~f the Fed[wal Trade Commission 2~er must Iwgnn with FTC v. ~astz~v~ Koda]~ Uo., 274 U.S. 619 (1927). In Koda&~ th~ Su- rome Com~ deified enforeemen~ of a divestiture vlqer i~sued by the ~ommission against Kodak which required the sale of three [aDora- tories. Kodak had purchased these laboratories as a thtvat v0 its cus- tomers that should they continue to buy foreign film, Kodak would in[egaa~e forward through these three labm~atories, thus competing di~e~ly with its eustoHe~s. The circuit court held that : it was not and is not ~mlawful for Eastman Company to equip itsel~ fro' or to enter upon the business of making pie- thves; but it was unlawfttl for the Commission to order that company to divost itself of the factories or laboratories ~a lawfully ~wquired. (Ea~l~nan Kodq~ Co. v. FTC~ 7 F,2d 991, 996 (2d Cir. 1925) ), The Sup~eme Court agreed, concluding: IT]he C~mmi~lon had uo authority to requiro that the company di~est itself of o~nelMdp of the laboratories, if the owneFshlp or m~do.t~llal]ce of thes~ laboratories has pro- duced any lllllaw~ld status, the lemedy mils[ h(~ adndnistercd by the couv~s in al)propriate proceedings. "274 U.S. at 6~5), No Suprem~ Com~ deeisioa subset uent to h'odc~k has dear dhcctly with the X~TC's aatholity under Section 5 to order divestitn[e, and t(o(kth ha~ uo~ I)eett overruled by the ('om't. It ,a~t be ,:oncluded, therefore, tha~ FTC v. I~'a~tman I(odak Uo, remains the applieabie

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55 rule of law l'egalding the Co~t~nission's divestitur~ power under Sec- tion 5. Gilb~rtv~lle Tin, eking (re. v. UiL~ed States, 371 U.S. 115 (19623 is di~tin~.~list~ble ell ~ number of ~'oands. 'rite action was hi.light under 5(4) of ghe Interstate Commerce Aet~ (49 U.S.C. § 5(4)), ~n act which also pto~ides tha~ the ICC may "tD3:e such action as may be neee,.%%,liy in file oplfdon of the Conllni~lon~ |tl pl~y~.ll~ COllLinu~nee of such ~qolation.'~ t9 U.S.(J. § 5(7). Thus, the ICC was not limited to the use of cea~" and desisg powers. Fur~helmore. Ggbertville in- volved a situ~tlon which tile Court in Kodak explicitly noted was not present: a situation where the acquisition in question was itself un- ]awild. See 371 U.S. at 12~127. ~klso, the Court's discession in GiZ- be~'t~ilie on tile power to di~'e~g is dlcturrt~ in tha~ divestitu~ was never ordered. Similarly PaT~ A~°~iv~ W~t'!d A ir~'ays. Inv. v. g~z~it~d ~S'tate~ 371 U.S. 296 (1963 . involved an unlawful 'olnt ventut~e in witleh dive~gi ture would merely t~esult in the discontinuance of an illegal combina- tion. The Cout'k~s express failure to overrule Koda~g: indicabes tha~ the Court dlstln~llsl~ed Its declsio~r In Pan Ar~,~ea~ on th~s ground. See 371 U.S. ~,t 312, ~t. 17. This (listincti~n w~ts t~itenlted in U~lited Nte~te~ ;'. Phil~delphla Nation, el Ba~c, 37t [T.S. 321 ( 186:1 ) : The question of the FTC ~ ~emedtal powe~ under ~ 11 of the Clayton .X-et is to be distinguished from that of its relne dial powers under § 5 ¢*f the Federal 'tirade Commission _~-et. 15 USC }45(b) in Fedv'a T ade 6'oe~ 'n • Ea~ *~z~ l(oda~ 6~o.~ 2~ U.S. 618, 47 S. Ct. 688, 71 L. Ecl. 1238, the Court, relying on Thateber a~xd Swift, held that the C~tnmis- sion had no ~ower to order di~-esti~m~e in § 5 proceedings. But el. (Jilbe~ ~viU~ 1 ~'~cki~t~l t:'o. v. ~/~ite:d ~3t~ze e~ 371 U.ff. 115 129-131, 83 S. Ct. 217, 225 227, 0 L.~d.2d 177; Pe~ A~ner can ~ or d A ru.,a!~s v. ~ nlted ,~tates, 371 I7.S. ~96, 312, and n. 17, 83 S. Ct. 476, 486, 9 LEd. 3~5 (,374 U.S. at 339, n. 17.) In PTC v. Dea~l Foods Co. 38~ iS.~..~97 6(16 n. 4 19683~ ffust~ee C ark n d etmu noted t ~at [foda3" had been ~repu( atexl." "~Vhen con- sidered in context, however, it is clear that ,lnsti¢~ Clark was n~t ffis- cussing [lie Commission's authority to order di~'estitut~ under Section 5 o~ tl~e FTC Act (as he sl~ould ~ot h~ve, since the issue was not in tl~e case and, th~ls, ]lad not beeit brief and argue(1.~ R~tther, Jt~st.iee Clark simply noted that the Court, in P~r~ Arrlv~'~oull and ~i?bertcille, had held that the ~odaI¢ ease did not preclude agen¢ies~ such as the Civil .keronautics Board and Interstate Commerce Conm~i~ion, whioh iobsess Jel.~asi~e eeonomi(~ r(~gt/]r~tor~, ftUt]lOl~V, ~I~111 order- ing divestiture h~ ci~eulnstances deemed a )p~) ~iat~ p~n~ to e~eh ~;ll~h ag~/lev~s e×tensi~-e re~rkl]atoi'~, autholitv r0s ~'etiI~g • )articular ind~st,ry..kdditional[~', iia a discussion of De~ctr~ ]~'oods by e Supreme (loHtt in ,~(zll~pson ~'.'.~/l~'l'¢~ff, 415 U.S. 61 1971 . it w~ts pointed ol~t that f)eal~ Fooc[~ was simply an effort, consistent with tile cong~s- z ,~s stated by the ~ iDreme Co~lr t. the isau¢ ~n Dean Food~ ,~ s : • Itle Dower ~f the CoUel ~f .~] 0e~ls under the ,~1 ~rlts Act 2~ l~l~ ~ecTion 1651~a~ (1fi5~) ed} ~o telllllorar113 e~lioin the vo~utr~ma~on of a movge¢ that IS tl~(ler ~tts~k bef~,re ttl~ ~ed~al ~rad~ C,~nln~ls~t~n as ~kc,l~ti~e ~f ~ectlon 7 of tile ~:/ay~on AC~ aa araet~detl, 84 Star 1125 1,~ U ~C Section 18 ~1064 e~ll ' g84 U~ atgO9 00

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% ~0~900~9

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57 In short, tradem,~rk protection is % result ila a~,cord with the realities of nmss media sMesmanship ~nd zh~ p~rehasing behavior of con- sumet~." Soa~,e~ by Vera~ the, v. Tod~ Imports, Im.~ ~pva, 544 F .,2A~ at 1173.+ The Federal Trade Colrmksslon has argued in the cereals e&~ that inasmuch as S e/'rion 5 empowers the 0ommisslon to order eom pulsokw p~tent licensing, Unltad 8Sates v. Nat¢o~al Lead Ca.. %2 U.S. 319, 838 (1947 A~ner;can Cyanamid Co,, 63 F.T.C. 1747.189(~91 (1963), rsv'd on other grounds, 368 F.2d 757 (1969), it has authority to order Cradelnark licensing. To ustify iM unprec~lentod legal position the Commission is fore~A to resort to ~, precedent in the ai~a of pa~rds as an attMogT. However, tile analogy should ne~ serve ~ th~ C~m- mission's basis for ~rdering trademark ]icenslng : ~ P$tents and trade- marks are separute and distinct 1 M rights..'*fcCarthv, Cemc,Asery Lieem~ng of a Trademark : Re~ne~y ~r Penaltyf 67 ~reden~rlc Re porter 167, ,223-32 (i977) ~h~reinafLer cited as ~fcCarthy]. P~tents ar~ permitted only becaizs~ they enconraga and tx~w~rd inventions ha~qng be~e,fit t~ tim public, ~ee 4 De~ler~s Walker on Pate~ts ,~t pp. 9-10 (~d Ed. ]9651. They are legMly ~onfel~l ex- clusive rights to m~ks, use, and sell devices llst~d in ~he patent claim, for a fixed period of t~me~ Id.; 1~ U.S.C. Sec. 971(a). Inasmuch as p~tents Vend to affect the av~ilabillty of a specific prodact within the relevant m~rket~ colnpulsot~- p~tent licensing is ~t times neeess0,ry t~ oveve~)m~ the economic i~)wcr or ei~t ry barriers ere~ted by such legu]ly s~nctioned monopolle~. McC~r th3,~ s~pr~, ~t 9'25,36. Com.erselv, trademarks exist only ~o identlf~" and authenticate the roduot of "a partlcul~r pro(Incur. Fotemat ~orp. v. Coehran, 437 ~.Snpp. 1231, 1941 D. Ken. 19~7). Trademarks do no~ affe~v the availability of produets~ ~,nd the only competition exch~ded by them is the "tmfair eompetcition" arising from trademark duplksxtion which f~!nd to eonftls~ {.Dnstllncr~ }*[aC~t~hy, suprlt t[~ '29~. A,3 wnB St~Lk~ in T~.~:]¢ Equlp~*n~ ~qe~. Co. v. Fmhcuf Co~rp. 539 F.2d 1210~ 1215 (Sth Cir. 1979) : The prot~ctiotx 0ecorded by the i~w of traxiemark and un- lair compctit on is gre~tsr t~mn that accorded by the l~w of patents bocause e~ch is dirocted ~t a different purpose. The tsMer protects inventive activity which, ~rif ~w a t*t~ ~f 3(~, is dedicated to ~he public domt~in. The ~(}rml~r p[~¢~ eoln- mcrcial ~c~Lfity whh~h~ in our sc~dety~ is esse~tially private. By o~-eerting an ~nal~gy between compulsory gaten~ [ieen~shtg and trademarks the Federal Trade Commi~ion overlooks the ~par~Ve and vastiv distinct purp~ses served by these two legal rights. "-Yo right accrt~ing from the one is dependent upon or conditioned by any right ¢oneotnitan~ with flxe (~.her. The Iongevi~y of the e~cltm[~d~y of r>ne is m ted by aw wh e the otJier iII~L~ b~ extended in perpetuity2' Applivati~n of .][oge~ Da.id Wi~w, 329 F.9d 9~5. 929 ( C.C.P.A. 1964). ,,,Th~ p~eeetion of trademarks Is *he law*s ~e~.o~nl~ton 0~ th~ psychMogical function ~yrabols If I~ [~ ~t~ tLat ~e liv* by ~m~l~. it ~s m* l*~ true t~,,t ~ p,*echas~ ~oeM b~ them A trade mark ts a mereha~td]s]t~ shortcut ,,hlch Im/ue~s a pxlI'*ha~r ~c~ ~el~e~ what he m~t~ ,, MtaBawo?*e ~2ub~*r • ~oole~ 2dig ¢'o v ~ ~ Krea~e Co, ~16 US 20~,~-05 (1942) IV,EC Ch~rmn~ Pevtso~uk canceled In his concurring opinion ]a the ~eaLemon e~ that th~ patent anaIo~ may not be enltrel~ oO~lt~' to trademarRs. Borden, lnc, CCH Teadn Re~ I~pts 19~79 TraO~tee ]~l~0et, P&ra 21.~90 (i978) leo~e~tr[ng Opt. Of ~er*~chuk)

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58 Therefole, the Connmsslon has no lagal basis f~r elaindng t,bM, bt~ cgus~ it I/my otgler po, t6nt licensing it may also by anrzlogv, order tx~de~r~rk lieensirg. The Feder'al Trade Commxs~aon has also argued ths,g aaqumin it h~s authority to eoml~l tmdeamrk licensing, it may do so on ~ royalty free basis, Clearly, ro3,alkv- f tee licensil~g is a confiscation of ptx~p~r[v of a p,altiw n~ure. Such measures ~re beyond the proper fm~etior~s of the Commissloa's remedial powers. D. Pvoeed~a'a~ diffivu~tle8 involved i~ Fedsml Trade C'or~n'dzslan adjud~a~i~ The withholding of divestitnre power is also appropriate in light of the relaxed prc~edural safeguards which gceompany administra- tive adjudicafion. Indued, the respondents in tbe lfell~ffg tcase recently were dealed a right which unt~ucstbm~blv would have been ~rovhh~d had the ease been before the federal jud]~ary. Kellogg Company is presently asserting its right to hay8 a retrial of a substantial portion of the case. Circumstances during the fall of 1978 led to the early retirement of Administrative Law Judge Harry R. IIinkes. The sub- stitute udge Alvin L. Berm~n, denied Kellogg s and General Mills mot ons for retrla on the bess flint the demeanor of the w tnesses who had testified previously before J~dge Hinkes would not be of material assls~anee in deciding tlm ~. R~galding ~xpert t~imony, wbieh eo~el~ ubeut one half of the testimony Judgn'~ Berman held that the credibility of experts is a function of logical analysis, cre- dentials, data base and other factors readily discernlbIe to one who reads the record. Tbere can be no doubt that had the ease been before federal district court, ~ retrial would h~v¢ bee~ ffranteA, rewardless of what the ud~'e re~diug the renard might feel abeut whether de- mea~lor ev deuce woud make a mater al d ffei~f to ~he 611~1 Lit!t! ~, on. See, e.g, ~n~ted States ~. Ra~Idatz, 592 F. 2d 976, 69,3-84 (,th Cir. * - O • 19,9)i Ln~ted States v. Bergera~ el- F, 2d 891, 898-94 (9th Cw. 197.5) ; Smith v. Denta2 Prods. Co. 166 F. 2d 516 518-16 (7th Cir. 1948) : United States v. N¢~ge~2, iO0 F, 9d 215, 917 (6th (?Jr. ]93~)~ re, yr. denied, 3fl6 U.S. 648 (1939) l fl~z re ~gltbi¢~, & Lip~aa~ 215 F, 669, ~79 71 S.D.N.Y. 1914 . The better t~easoned authority requires the same result in adm nlstrative adjudications. See, e.g, ,% Buehabaum & CO., ~. FTC, 153 F. 2d 85, 87 ([th C~r.) )mr. ~aeated because error waived. 328 U.S. 818 (1946) ; Fetdman v. Board of phczrnvazy. 169 A. 2d i00. 108 (D.C. Mnn. Ct. App.), a~d on this point. 279 F. 9d 8~1 (D,C, Cir.1960). The extent ~)f the LienJal of due process inflicted tlflon Kclhlgg in the Cereals Case can best be undl!rs~ood by a detailed recounting of the Hinkes affair. In an ext~aordinar?~ and unprecedented series of events which begun a~ some undetermined date prior to September of 1978, the Federal Trade Commission proposed, negotiated, and conehlded an unlawful employment contract with Administrative Law Judge Harry R. Hinkes, who had been pre~iLiing in tim FT{, ad udicati~n proceedings [n the Matter of Kcllogy Cornpany. et aL Tliis contract (the "Hinkes Contract") provided ~n e~sence tl{at ALJ Hirlkos would retire as aa aLindn~strative law judge, and wrluld imme , • tr Liiately be rehired b3 the Commission to complete lhe heai~in,_s and to prepa~ tb~ initial decisio~ in the Cereals Caso. The I[inkes Contract was formally entered into on September 7. I978, It contained numcr

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50 {ms provisions which destroyed ALJ Hinkes' judicial independence, cleated eonllicts of interest hvtw~on hi3n and the rospondents~ and otlmrwi~ et'eated both the appearance and the face of impropriety and bias. The entire Hinkes maitre" presents an extnlordinarv situation nil preeedented in tile entire hi~tory of the federal adJni~istrative proc- ess; the ad]uinistrative law judge assigned to preside over alx agency ad udieative proceeding became mmble to eontimm salving and the inability was caused by the unlawful conduct of the agency itself. Although the factual situation is without parallel, its legal con~- qenees are clear. Section 51c} of the APA 5 U.S.C. Section 5,54 d requires timt the agency em lo ee who hears the evidence must make the initial decision, m~less ~e ~ecoiaes "unavailable" to the agency. Tim term "unavafl~ble~" in this context, means uuavailable for reasons beyond the agency's control. Since ALJ/Iinkes' inability to continue serving was not beyond the Commission's control, [t did not make him "unavailable' wkhin the meaning {){ Section 5(e). Consequently it is a eh,ar villlatbm of Section 5(e) for Judge Barman, the substitute l'~ct gnder~ {o [eSUllie tht bearings fiom tim point at which AI,3 Hinkes stopped, and to render an initial decision, without conducting a hearing de no re. ct • . Although the Comm]~slvn has made every effort to piny down and te cover up its role in rendering ALJ Hinkes unable to c~],dnue par- deipating in the Cereals Case~ the evidence establishes titat his in ILbihty to eOlltinue l~,ab a direct and proxiinate result (ff {lie Coln/nis sion's unlawful conduct. The contract between the Federal Trade I]ommissioa ~nd Harry I%. Hinkes was totally hlconsistent with both the spirit ann the letter of the statutes and zegnlatieus designed to assure ll~e independence el pl esidmg o~icers. .4.x"de]e I of the euntract provides that "the cent ractllr sh~]l perfozm all necessalv duties inquired itt nestling c;~er such prueeedhlg and ~hMI }/ate {}m sam~ power as a flearing e×amin~r.'~ But, wlJ]e {lele- Kadng to Judge Hinkes all the dudes and powels of a hearing exanr- blur, tim contract did no~ even i)u* port to make him aa administrative taw judge, and there is no statutory basis on which a contract could make him an administrative law judge. Indeed, the eentract explicidy recognized that ,]uda~e llinkes was a contractor and not an admin~ u~tive law judge. The delegation of power~ [o one not qualiged by htw tu receive them is a clear violatiun of 5 U.S.C. Section 556(b} which provides: The~e ~hall premde at the taking of evidell¢,e-- ~1) the ~geney ; 12 bmm .r mitre memberS of the I~My which e~amprise the agency ; or !3! one or more adminiskr alive law judges alJpoiutcd uutler Seetiotl 810~ of Illi~ title Tim contract does not constitute an appointment tlrlder Section 8105-- a provi~io~ that entai]~ all the safeguards establiJied under the Civil '~el%[CC ('orlllI]i~ion. Likewise. the eolttl'aetuat delegation al~o ~io h~es 5 (' V.I{. Section !):/0.~09(a) which pro~ide~ that: kn a~ency may not detad an employee who is not an ad ministration hLw judge to an adufinistrutive law jndge po Itit~lL

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6O ii a fa lme oi the ~ ederal Iraile Comlmsslon o comply w] h these provmlons deprived Kellogg of lt, s right Lo l~ave e~maence heard m L[lls ~l'OC~ebl/lig bg oil~ ~o lla~ been lli~u/~ct~sd by ills posl~lon ~1~111 tile influence ~f tge ~ederal l'lade Comndssmlu By law, the Civil ~erwcu Commission controls the hiring, tenure aitd compensatiott of administrative law judges. Under the contlaet tim glting~ tenure and comb~lnsatiou of Harry IL attinkes were controlled by the ~'ederal 'l'ra~e Commission WltgOLlt regard to the Civil ~elviee ( ommission, ~lt@ ~ ~C c~l 1o illO ~ as~ all t le 0.u~ e~ a ld ~o~. e s of 8xl ad tl is~ tire law judga by contract than the Departtlmnt of ,Justice can create federal judges by plivata agLeement without benefit o~ Presidential ai)t)omtmen~ or ~enatoriai consent. llirinfA--ttegulations under die .gdminist ra~ive Procedt~res ~&ct and the rule~ of the Yederal q.'~ade f2ormmssion give the Civil Service Commissio~ authority over the hiring o¢ admmistrative law judges. The eontrae~ between the FT(2 and dudg~ ltinkes does not pmpar~ to be made, imder th¢~ altt hority or subjec~ ~o tile pliol approval of the Civil 8er~ic6 ( ommissiom ~e/~t~re.--ihe tenet'6 el adntlrllstratlve law udges IS inextricably rt. ated to the r ndependence, if the 1 ve ihovd el t le adm n strut ve law udge is del)end~n~ on those ~ho have ar~ intcl~est in his decisions t lere ~l[lk ~ l~O aSsUlalle¢~ o~ ~air iiearing~. •lo avoid t ~ ~ ~lnger of eonf[i(:ts of intt~lest~ oontr(l[ over the ~l!nlti'e Of ~idnliu[strati~e i&w judges was reln(ixed frol[t [hi! agencies aml ~ested in the Civil Service Commission. lu disregard for the statut% file regulation and th~ coal eerns which ~ awned them, the eontlact ilro~ Jded tha~ it may be ter- mlnated, in ~ ~ele or ill p&rtI "¢~or the convenience of the (~c*v~ t'Illllent ~ when i¢ is determined nlat sueil action is in the best interest of dm Government." (Section 9 of the cont~Itet.) Thus by the terms of the contract dudge llinkes wouJd preside m,er die hearing hz flhis matter a~ ;'{h£ ¢'or*vonience" of erie of tim parties. ~" I1 I'L]lel'lllo/e~ urlde/- 2gl title I[ of 6}11 IIInt r~}t:t, tbt Comnlission lllay or llla.y l]Ot~ ~'ill its interest' decide to extend ltl~ ('Ollgraet fu r all additional period. Com~,ensatlon.--The compensation of an admirdstrafive ]a~ judge is also m be deterlnined by the Civil Service Commission, not ti~e Fed erai 'trade Commission. Judge IIinkes~ compensation ~a~ plainly de termlned bv contract with the FTC and not the Civil Service Corn mission classifications for administrative law judge , as required k,~ statute The allocation of compensation ta eer~lill ]-~illl~l,s [if tile case. as set forth in Article iI of the contract is ~ithout any pala]lel in th~ classification 3slem used b5 file CNi[ ~etviet ( olnmissi~n for defernlining the salaries o~ administrative law udges. FHi't]terlnore, illll]t'r .krtiele II of the contract t]m ('ommis lot) "it, its best interest may negotiate an ftmetldnleul uith the ¢(llltl I('toI"~ Ilndet w hiell it could hal'~ paid ]aim an nnmunt "not ttl ex~ eed $~'/.400.'" Obviously, Ill/' (?[~il SHI ice ('Olinnission's ~t]at~ (.lnssititat[ons ~a3" nothing ~l]oltt 'din ~lI/IOIll)~ no~ to eXC~i'd ~'2:~.41)[}*'! ]l]llIlk ha~S rloffotit/- lions ill the "best int(,iesC" c~f ~he b'eder*t~ 'l'r t(h, f'onltnission I .dei" the, conlrnet, thl l,"l'(' detm minvd such conipeTisat[on but. by regu] t th)n, die (il il gerl ice ('enroll sion is soh.lv autil<ltizo,I to do s(~ and ~S (,X)resS]V )lohi/lited flOlll t;tkil/~ tim FI(" x le~xs lille t/(,<2¢)11iii. ITinallv, t Ill>peal ( la( I ~(, .'TC~ eontli~l,d to ell.a e an allt/h~e ntent whk!]l. Ihtol~ffh tile simugalleous I(¢eil)t of contlact l)tOrm'nts g g, ,q

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01 and retirement benefits: would have entitled Judge Hinkes to receit~e total yearly compensation of nearly $72~000~ an amount far above the maximum ~or administ,rativ~ law]'udges provided by the Civil ~ervlce Commission. The contract evidealce an intent to circumvent th~ statutory scheme designed t~ avoid th~ receipt of ~ull pay and rethrement bencflt~ at the same time. the bestowal of ~uch a special and substantial benefit upon an administrative law udge is n~ within th~ power of an adnlinist.rative agcncy~ is clearly inconsistent with the statutory system~ anti is incom ~atiblc w~th both th~ appearance and The abjBct failu~ of th~ Commission to proceed L~ eonforJalty with the requirements of th~ AdminisLrative Procedur~ AcL and l~egulat~ons promulgated thereunder ~s sufficient without more to mandat~ a full examination of all the circumstances surrounding tlt~ offer of t]~at contract by the FTC to Judge ltinkes. .:~ ;~ ~J ,~ ~,J~ ~ T]~e net efi'ec~ of th~ nun~e~rotls unlawful features and provisions of tlle llinkcs coutract w~s to create the appearance and the reality of bias and other improprieties; to compel ALJ Hinkes' immecliate disqualification and to preclude him from serving as administrative law ud e in the Cereals Case at any time after Se ~temtmr 7~ 197~ even under a d fferent emp oyment agreement. The llega prov s on~ which created actual and/or ap arent irapro rletles ~ell into two broad categories: first, those whi~ created convicts between the per- som~ financia/ interests of ALP ttinkes and the interests of Ke/foffg and t]m o~her respondents in the ]itigation~ a~d sccond~ those which created the appearance tha~ ALJ/Jinkes h~d sl~ rre~derexl his "~zdicial independence to the Commission and had sub eeted hlmsel~ to the Comrais~ion'~ direction and control. Exempllfymg the de~ects in the first c~tegory was the C~mraission~s failure t~ have th~ Hinkes con- ~ract approve~ by the Civil $el~eice Commission. This defec~ was so paten~ that it compelIed t~ respondents to mow immediate]F ~or ALJ ]~Iinkes~ dlsqua]ification, and thereby to place thernse]ves in t]~e ~osition ~f asking the Commission to take action which contravened LJ Hinkes' financial interests. Amon~ the contractual provisions in the second category were: Ore terrainatiotl provision of paragraph 9~ which providcd that the c~ntract could be "termlna~ed in whole or in pa~ for c~nver~ieI~c~ of th~ Governmcnt~ when i~ is determined \ that suc~a act~oi~ is ~n the best i~teresls o~ ~hc Go~rernment . . .;" and the renewal provision, which provided that the C~mmisslon could renew the contract for a period o~ six months if~ at the end of the original one ~ear term, an initial decision had still not been refidered ~n ~h~ Cerc~ls Ca~ and if ~h~ C¢~nm~ion conHid~red sut'.h renewal in its best interests. Finany~he~partedlscussionsa~dne~otiations between the Commissiom various ind]v~duals and ALJ Hiakes~ which preceded the offerin~ and finalization o~ the IIinI<es contract~ created the appearance tha~ ALJ Hinke~ had misu~c] his pnsi~on il~ the Cereals Case for his own pers~na~ financial advantage. For all o~ the~ reason~ the IAinkes contrac~ not oraly cornpeI[ed ~4~1 Hir~ke~~ immediate dis~ualificatlom b~t prec~lded him from ever a~a~n ~err- ing as administrative law judge in the Cereals Case--even under a nev~ a~d Iawful eml~loymen~ con~ract~ Because ALJ Hinkes' inability to continue serving in the Cereals Ca~ was directl~ caused by the Colnm]~io~, it ~s m~tnifestly u~ju~t

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! 62 a~xd i~equitable' to permit the Conmfission to characterize that m- ab ty as "tmavailability" within the meaning of Seefion 5he), and thereby to deprive Kello~ of its right to an initial decision by an ad- ministr~tlve luw judge who has heard the evidence. ~k ~trther--and fundaraental--reason wbv ALJ IIh]kes sbonld not b~ held to have becon~c "unavailable" here isthat such a holding would permit th~ Commission to take advantage of it~ own wrongdoing, to m ( eLriment of Kellogg. ALJ Ilinkes' inability to a)nfimm s( rving, far from bein "beyond t he Commlsslon's control, ' was, in fif t~ proxl- matelv causc~ by wrongful activities which the C()mmissmr± had a legal "duty to avoid. In this respect, tbc presenb case is one of first zmpre~smn. Thele is no prior ca~c ia which an agency's own i]legai o0nduct iendcred one of its hearing cxalndlerb incapable of coatimdng to preside over an adjudicative prt~eding. Such a case sl~uld be con- *relied by what Benjamin Cardozo described as the ~prlncilAe . . . its roots dew, ply fastened in univel~al sentiments of notice . . . that no man should axdiL from his o~m ine ultv or take advantage of his own wrong." B. Cardozo, T~e Yature o~ t~e Ju<lieal P~'o~'vso, 4i ( 1917 cd.). Thisprinciple applies to governmental agencies as well us in- dividuals. It should preclude the Commission from in~oking the "un- availability" claesa of Section 5 (~) and thereby genyln~ Kellogg its fundamental rJgh~ to an initial decisivn in tim ( ereals Case by in ad ministrafive law udge who has beald all file evidence--when its own wrongful conduct made ALJ Hinkes unable to serve ~m( access tared the appointment of a substitute. "lbe enormity of {be 1_Tummi siorfs offenst~ in ¢(Hltl'aitilig ~ilb ALJ Hh~ke~ is fml~ compo~md~d by its continaed (ffoNs t~) fruslrate l~ellogg's attempts to ~nvestigate the extcn~ of the FTC's wrongdoing. The investigation of the ]Iinkes affair gas had a ]enffthv and tur- bulent history. On September 7, 1978. during the com~e ~f heai'ings in the Cereals L'ase. ALJ Ili~kes annnuncecl his i etimmwnk He explainf,d that "for pel'~on~l reasons" it Was im )erative that he "comntence bis pension at tiffs time" but tbat he would nonefbeless continue to plesidc over furtber proceedings in the matter : In that connection. I ~dll be retMned tben by the agency on a contract basis for the tmrpo~e of erlrcph,t]n~ this I'a~c. corn pletinZ the bearings, reeelvin~ the brie~s of the )at tlos and making a decision, at which time ray cotmectloa w[ti~ the agency and this case will terminate. gild Hinkes retired as an administrative law jull~e ,ffectiv~, September 8. 1978. the day after tlte Hink~ cem~m't uas finalized. ]:Ie eontinned to preside over tile CeI~als ('ase. pulsnlni to the Hinhes contcact, until October ~0. 1978, when the Commission staved further )roeeedings in the case /er, din ~ its dis/osition of ~ertah/di coy( ry and d ~qltMiflca~irm ;llotions uhich Kellog~ ~111¢] lbe I/[ber reslmn<hmt~ ]m(] filed in SeptemheI and Octobe~ of ]97g. The l'eSl/ol] del~ts dernon~t~ ,~h'd in fhelr di~qualificatie, n motions that the illegal Ieatules of the Hinke-~ contract disqualified ALJ lIinkes from p r~,sidlnz ~u'e~ tiu, ('ere,~ls C~ as agndnistrath'e law ~l,d~e at anbthn~ ~/fter '~btember 7. 197~. under the Hinbe~ ~orfl rqc{ or ~l~" olb~F clad z~ll~l. On Der, emb~r ~. ]!)7~ Ihe Cr, rmli~ion i'-"m,,I n, ~rd~,r thr" ~hb'f 1/ur~o~~ of wldch ~ la exrtde :/lut c~bfuso~lte t]/e i~lf,~ l:d~ocl I,v Y¢ello~'s aml the otlwr le~wm~b',ts' diqu:~l[fiearicm m~ilc,n Tn tbi~

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~at ill- ), and aH &d- dd not would ing, to )roxl- had a ltegal lllRlrlg le ,.. • that of {)is i (1977 as i/l- ie llull- egg its an ad- ts own sitated ission's by its ate the ad tur- plained nee his ~reskle on ,Ill- nd the ] ,ffective zed. He IIinkes further ery and nfs ]lad ~strated IHnkes ~, 11ndt.r ,, ¢,hle f i~ed by In this Order the Commission held, hlter alia, tha~ iiLO Hinkes' "reuremen~ OR ~ptembei b~ iOT~ ' mmle hHu %lR~/allab2e~ to t~l-e Colll~SlOIll within the mem~mg of ~ec~mn 5 (c) of th~ Athumi~tratlve Procedure .4.¢9 (the "2xl~_~."1 ; thaL the raotmns tot dl~tualmcatioR and dis- ¢overy wero ~llel'ezor~ moot; that ~ substitute a0Jnil~tl'anve lfeW ~l~dg~ ~homO. b6 a~pomU~d t(} preside oyer the Oe~ealS (.ase; aRd tlx~ tn~ partzes shored brmf, anti the new adalmi~u'auw law judge should deetde the ls~ue el ~hetherr alld to what exten% tile subst±tuu3 ad/nln- istr~tiv0 law j ildg~* would Jiave to ¢onduc~ ~ he ~rlllg de nolo. On December 12~ 1919~ 2klvirt L. Berman ("o!~ttge 11ernmn') w~s appointed as tile subsutute administrauve ]a~ jauge ill the ,Cereals Case. On May 24, 1979, Ire denied the mottonu o[ KellOgg/utd General ~lls for a complete hearir/g de nero, Thereafter on &ugust i~ 1979, Judge Be[ [l]all al tllOlU]ced th~tt begi/llilllg on Oot o~r 2119 ~ t.)1 16 well d t~sume the ad udica¢ive hearmgs m the Cereals Case from the point at which ALJ H nkes stvpped, complete tie hearings, and render ~Ji initial decision--all without r~heartng any of the witnesses who pre- viously ~ppe~red before :kLJ llinkes (and ~he hearmg~ did resume on October 2~ 1979). Oa November 13. 1979, the Comnfission, upon moti~u made by Kellogg tm July 2:¢, 1979 mdeted ~ supplementation of t!te record regarding the Iael~ surrouadi*~g the "letirement and reemployment of former ,iLl Hmkes. In dlat O~deh the Commission directed FTC Chief Judge Daniel ltanseom. FTC Deputy Cl~ief .Judge Ernest Barnes, ~il~ FTC Deputy Executive I)ireet~r Barry Kefauver to flh within 3{) days all{davits "which set forth flleir knowledg~ (ff die ciretlm~tan~cs of Jltdge Hink< g reth'~ ment and lhe ;l~gtltiftlioIiS lead ing to tim execution of the contract with ,ludg¢ liinkes" smong other ddngs, hi additioiL die ( ommission directed the Secietary of the FTO to send ~t letter to Judge Hinkes le~luestlng hdn to file an a/tidal,it Oil the same subject. In its November 13 Order, the Commission phtced the Hinkes matter in the hlmds of Jttdgf Berlnan. dire.cling him Lo c:~nsider, ~/}terl {)led, the four affidavits and take st~ch further action as he (kenmd a )p:o- priate, inc]udhlg seeking sindlar affidavits from olher ~etsons and the exercise o9 compulsory pl~( css. Jndge I~er inaR promptly reeused hiI/2 self from the supplementation of record proceeding. OrL November 91, he for*nail) withdrew, sta~ing that : I was app<dnted as an administrative law ju¢lgt wiItl the Fe lera] I ade Co m 5. Oil on kpr 1 . 1, ~9. At the time T joined the Office cf Administrative Judges, Daniel II. IIan- seOrtl was serldn~_r as (~hief ,lllclf.~. ]£t'liest (1 ]~arlles '~-as erv. ing a~ I~t putv ('hit' f Judge a.d HarI'x R, Hinkes was ~erving flS ~ iltdge. So£ dill~, }laY( t he.~! t hre,, indi~ Mm'd~ been m. col leagues of ]on~ standing, b.t I eonslder each of tll(qll to be iHy friend. • . ill ¢n'der to avcdd file/p~earanee of impropriety T an whlldr m'in~* flonl the tlpldenlentation of /erording proceed inff (li~ coted hy the C,/mmi~siolu .lud~e [~elmanr~ ]~a ill ~ tt • wa placed ~}i~, re:alter before (thief • [ud~e [~:/nsem* . who ~ollld ordinarily appoint a ~ubstitnte AL.T. ,]'llr] ~ f T ttt~l~l'l)rll dee ]JnecI [o lit) so. lid re{llrn od the ~ntire supp]el ~enta- 0 0 ¢n N 0

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64 tion ,ffi record proceeding to the Commis3ion on November 26. explain- ing that .no .a=LJ with th~ h'TfJ could pr~ide over the inquiry whicb file Coumds,~ion had fiirected : Pursuant to $cction 3,42, ~he uMersigned would normally appoint a substitute administrative law]'udge to conduct the supplementation of record proceeding directed ii/ this case by the CommiKsion now that Judge Berman has wkhdi'awn. ]4owever. in this instance tbe factors cited by Judge Berman motivating his withdrawal apply t~ all the rein dninff law judges ill 0tls office .... Thereafter~ on ~-ovember 80, 1979, {he Commisdon deeid~d that it wmffil review the affidavks ~md, "if it is dpemed neeessgrT~ seek ad{li- tional information m~ the ciremnslanees of Judge ttinkes' retirement." Sub~eqtmntly, Chief Judge Ifan~eom, Deputy Chief aud~. Ba~es, and Deputy Executive Director Kefauver filed thole affidaviLs. A review of those affidavits demonstrates that nuinelxmS essential mat- ters renlaill %lnresolved alld questiolls unanswered. To date, ~orlner MM flinkes has not res ,ended to the ( ommission's request for an affidav t. Recent y, the Cmnm ss on d retted its ()ffice of the Oenera Counsd to issue a subpoena commanding former ALJ Hinkes to appear unless he files the affidavit in the near future. This whole series ~f incidents thus graphically demonstrates the lack of adequate trffil t3 p~ procedures to adjudicate th~ im positiort of remedies beyond erase 811(1 desi8 t ovdet~s. The FTC ha~ also begqm to propo~ tlm use cd the~e drastic remedie~ in rulemaklr~ proeeeding, which afford the affected parties even fewer rights, The Commission% ralemakin¢ govm'ning advertising direeted at ehildi'en presents a good example of the inadequate proeedm~e rights being provided hltm, ested par~ies. As Judge 3IaeKinnon~ speaking ft)r tile court in Asaoeiatlon of A'~ztlonetl Advertlsb~y, Ira'. v, FTU, Slip Op. No. 79 1030 (D.C. Cir. 1979) stated : The district eom~, andg~ Gesell presiding, expressed serious reservations about several of the Commission's actions, bug held. that appellants' claims were premature. We can cer- tainly ~ nderstand the district eou't's misgivings for it is difficult to *'~ad the record in this ease without becoming ffis- turhed vt same of the Commission' unlqtl6 stq)s. Indeed mm gets Ihe im in essSon tha¢ the proceeding it=oil 1~ window dress ln~ for the benefit ~f a court ~assing on a final trade r%mla- tion ~ule that was in stock long before its tentative models were displayed in the ehildren:s advertising Notice. (id. at p. 14). The injustie~ of the imposition of scxerc c, fgrmative ~emedies lind prior restraints rail speeldi ~ls i o31ten/pIrtted in the (hi]firen~s advertis- 111g rule HIll ]dll~ p~Ml])mlll fi~ the ]l~er ah~enee o~ reasonable procedures being utilized in pursuing such action. Zw TI:tE OEI~LS CASE l'n April of 1972, the Fedoral Trade Conu dssbm ieeHed a ,'om- plMnt ~ffainat l?e]lo¢~r Compax~>. Oeneted Bfills. Inc. General Foods C~n'poratiorh and the Quaker Oat~ Company~ charging that these four O~

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~5 eompani}'.~ (referred to as the "respondents" in the ease) ha~ gehleve~I anl[ m~mtamed a "highly concentrated, non-eompetitsve 'm~'rket ~ruct,ure in the pIoduction and sale of R'FE trendy-to-eat] cereal." The ~,ssenee of the complaint appears to be that although no one of the companies could be considered as a monopoly, the four firm~, taken together somehow constitute g "shared monopoly." The Com- mission s action was utterly without legal precedent, hi fact the notion of a "shared monopoly ' is unknown in Anleriean legal history. In this section of these comments, detailed consideration will be given to this so-called "shared monopoly" proceeding bevught by the Commission against four of the manufacturers of ready-to-eat cereal. k brief review of the background and nature of the case will be set forth, giving attention to the abject absence of an3" reasonable relation- ship between the allegations in the ¢omtplaiat and the concept of "unfair methods of co petition. ' 'l'here~fter~ what appear to be the more salien~ features of the Commission's theories in the case will be set forth and analyzed. The theories which will be briefly reviewed are "eoneelltratinns~~r "[Irtl~ts~~ ILnd "barriers to entry.~ Fimdly, tile proposed remedy sought by the FTC in this proceeding will he scrutinized beth in terms of its probable drastic effects and wide ran "ngimpEcatlons. ~'~L~ complaint was issued after two years of extenslve investiga- tion into every facet (~f the cereal operations and cerear industry. It was issued on a tlu'ee-¢o-two Commission vote. Commissioner Mclntyra and Commissioner Denntsoa, now no longer with the Com- mission, did not concur in the issuance of the complains. Commis- sioner 5fclntyre objected to issuing the complaint on the ground that he thmlght it was ]igely to produce "much li~ig~tinn and little reform," and that the tlle~zies Ilpon which the coin plaint was based were untried and untested. Commissioner Dennison also dissented~ on the ground that he thought that the com laint and its theories were premature in light of the information avai~abts at the time about so-caltsd concen- trated industries. Events in the ensuing years have proven the fears of those two Commissioners to be eor~eet. The complaint had been preceded by an extensive investigation whith had been formally authorized by the FTC in July of 1970. A proposal for an illvestigation by the Commission of the cereal industr7 came to light in the coarse of ~ome hearings of the House Small Busi- ness Committee which published memoranda issued by a dixdsion of the FTC that was urging an investigation of so-called "highly con- centrated industries." Although that analysts showed that the alieged breakfast cereal industr3 was dwa~ffed in size by some of the other h~dusbi'ies selected for Sc~ltiny, the breakfast cereal tadttstry was nevertheh!ss n~)lldrtated tin th~ FTC's n/Inlbel one target, and a Com- mission resolution ~as sougbe for an investi~atinn of it, The ofl~cla] reasons that have been given for se]e~tlon of the break- fast cereal ind~stry as the fit~t target are unconvincing. An announce- ment filed by the Federal Trade Commission in July 1970 said that th~ investigatina of the breakfast cereal industry was : To determine whether and to what extent the public may be denied the benefits of vigorous competition because of tile struc~nlO of ttle industry the eotlduet of in¢ astry marnlel% or the interplay of the two. ¢ -wml.~ O~ tO

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}i: : 66 A mine likell~, set of ~ easons has been expressed by Char]~ E. Muel- ler~ a terrier FTC staffer who was a murc~ of the theory for tile in- vestigation. Mr. Mneller has been quoted as saying : I didn't pick the auto or peh'oleum industry because they lmve too much political clout. The cereal industlT didn't have the political muscle to m,Jddy the waters .... Because an attack on the *'ead~ hJ ~af cerium industry for purport- edlv being ar behavlng like an oli~opol y wo.ht be without foundation in logic or law, tllere was substmltial shock in the academic and legal community whert it was learned that ~ne of the principal proponents of the precomplMnt investigation. Rufus E. Wilson the Chief o~ the Division of Ger, eral Trade Restraints of tl ~ FTC s Bu,~a of Re- straint of Trade (now the Bureau of (Yompetition }~ viewed the assault being launched as one ~m the stiucture 9f the industry ; \Ve would emphasize again, however, that the central thmxsfl of any proceeding here would he oriented primarily toward tim S~l'tlctll/e/pel'~orlYlall~4! eilara( tetist,i(~s of the industry ]I1 question and that the role of the relevant conduct described • . . is a secm~dary oue .... Should litigation ewntually re- suit, perhaps as lmleh as 90 percent of the-evidence produced by complaint cmmsel would be aimed at developing these non- competitive featules ~f the industry's sir~lettlpe add perfni~- an~e. a father modest ]9 percent or so t*l its conduct or be- havioral features. Wilson. T]~e FTgt's De¢g~egtratlo~ Ca~s A gc~3t tile Breakfast Cereus [nelu~tT~] : A Neon Ba?lguzr~ in A ~tltn~l~t? 4 A*~it*'lt*t L. @ Econ. lfev. 57. 73 74 ( 1971 ) ]Vilson's view of the case was echoed ~lmost immediately wheu com- plaint counsel advised the presiding administrative law judge, shortly after the complaint was filed, of their prop(~sed timetable stating that "[c]omplaint counseI will re(luire ~pproximately severt weeks to pre- s~.nt theG case' "Proposed limetable for Completion of C~mplnint C~otmseFs Pie-TriM I roceedlngs: at x (August 9, 1972). The FTC proposes to remedy the alleged "un fair method of comp*e- tition" in the ready-to eat cereal industry b~ renubing the creation of five new compames : three from the assets o} Kellogg, one from Gen- eral Mills, and one from General Foods~ This fragmentation of inter- imlly generated assets would he ~mdert~ken without mw eampensatiou whatso~!ver to the three companies in question. In addition, the FTC would mandate that each of the three cempanles dedicate, again with o~t eompensatlon~ some of their respective trademarks to the newly- created entities on an exelnsire b~sis. Furthermore Kellogg Company General ~[ills and General Foe ls wm ]d be required lo license all of their c~m, al fllrl/lulas, krtow }~(iw, [)roeessc~ and. trademarks to* ili/yone (except the other [Igl)(llIdl~ll~) Igho XrVfll/l~ ~O [lSe them. a~ain free of ehal~me {except for the cost of qtlalitv eontrvl services). The formulas k~ow ko,:~, pI.ocess(,~ aild trademall,:3 for an~ new ~)l.lJd/ic~J ~ubNe- quently derah~ped I/y I{ello~g (Yoln *an~, (~eheral Mills or Genera] Foods would be similarly liceilsed, without r~yahles to tl~e licensor, in tact t~*~.~t.~e eor~gl~t.~t o,~.,n e~ ~ el,~e Including Dt,rt~al p¢~Daearlon /aatod until I~n 11 19;~ ~mo~t Mx y~.trrs tn,ol~0(I ,~,~t ~KI a~t~lo,se~, re,mit~ll n~ore thal~ 2r)rt trial iIays and ouetl i~i e~l more tllan 2g Or)0 lm~e~ of tran erlpt l'0

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67 begiim[ng five yeals after the conclusion of test marketing. 2d[ re- spondents would be prevented from nmki~g futul~ aequi.qtiolls of read3 to-eat cereal manufacturing firms for ~0 years--apparently lrlvswetive of the size, health, or ecnnomlc significance of ~he menu facturirtg firm in qucstinn~ -trod would also b~ p~vented fronl offering shelf sl)aee dans tn ~gailers, except for their owu pruducls irrespec- tve of /vhether or Dot reta lets want to rei:e ve such suggest ons~ whether or not it is more efllci~nt for respondents to furnish them, and whether or not consumers will be best served by such prohibition. B. T]~e Nature a] the eaze ]'he issue in the Cereals Case with respect to Ke]loogg Company is whether it has been lawfully competing in the marketplace or whether it has engal,~d in unfair methods of competition m' unfair or deee ~- tlv~ acts or prltciiees," hi viol~tioll of Sectinn 5 of the Federal Trade Comminsie, n Act. The unsllpported theories sol fort~ in the complaint are contrary to settled principles and in conflict with the antitrust pol- icy enacted by Congress. These theorles are likewise inconsistent with tim Commission's statntmy mandate--itself theoretieMly circum- scTibed by the standards of "unfnir methods of competition" which does not and shouhl not make conduct unlawful simply ae ~ording Lo tbe novel, personal theories of the Commissioners or their staffs. The FTC's. and complaint counsel's antitrust anal~.sis was turned inside out b~ denigrating normal, non¢oercive competitive practices, second-guessing consumer ch~dee, and testing industry. "conduct" on the ba~s of iInpreeedented, imprecise rnd meanmg/ess standard--all under tbe purported aehqs of "unfair meth~*ds o~ competition." The FTC's eh*Ll'ge~ cont~nlplate rtothing less than a giant step toward ad- lni~istratlve control of industrial organization in tbis country ; those charges have nothhlg to do with any ka~own or reasonable sense of "unfairness." but instead are a blatant eI/ort by the FTC to regl~]ate the Ht~m tut'~ of the ready-t~ eat cereal industry and the type of prod- uet it may manufacture and ~e]l. The co~wlaint contains broad allegations that Kellogg C~mpany and the other respondents "have exercised ~onopoly power in ~he aTE cereal market," To (]li~ peculiar when leveled at four comps ales and lln ni)ported, ehar~e.~ ,caltlP]aint eoul/sel, added, ~'ust prior to tlm commencement Ill the heai-lngs~ a contention of conspiracy to mo- nopolize. Complaint counsel originally disavowed any clahn that re- spondents had combined in aux, sense t}~ at the word is used in the Sher- man Act. Complaint c~ultsel concede as they must that Kellogg Corn- pan) has nevl!r i!xprl,.~l3" t:on~ldrt!d Ill" a~rl't!l!d with imy of the other l'e~poladents to engage ..... in all~- {!on]/]2 on/*on r~e of eontloc~, II~te~d. oom- plalnt eolans~i lnv/~ke an eeonnilllC concept of no legal Slg~ll~cance tacit co]lsph'ac~, Yet, ex-en under lhat nn )recedented criterion, there is a ~so uttdv m~ ~v ~ enee to support the c ~arge of comb nat on. Apparently a~ are flint their (<m~piz acy I~: mom* ~ollzc theory is le gally erzm~emis and faet~mll3 .nsupportahle. complair~t cou~tsel also a~sert that lkel]og~ Company has violated Seetmn ~ of the Federal Trade Comnlisshm .ket under the nc~el theory that parallel non- eol]nsive eonduc.t ~mehow eonstit~t~,s, if it existed (which the record fiat ly demcmst rares ig not the ea~t.I, an "unfair method of el~mpeli~ion.~ Quite spelt from the lack of f:ictual support for this assertion, com- I)]aint ooun~el's ~l/enrios re~t tlpon h'g~fl arglnnen[s which are devoid O~

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6~ of precedential at" logical basle. Indeed, their theories present an ab- rupt and radical departure fr~ml ~ legion of decisions o0nstruing the Federal Trade Commis.n]on Act, and are based on an erroneous inter- pretation of antitru~t policy. Not only do complaint counsel urge as law that which decided1), is ant law. but they would make illegal ust tlmt sort of competitive oeba, ior whicii the antitrust laws have sought to foster. The eonchmlon filet indus{i'ial t~oln!~lltraLiOll per se nt!ither offends the spirit of the antitrast laws nor i.~ ullnf~ir~ within the lnentling of the Federal Trad~ Commission Act is reinforced by an examination of the Act's legislatlve history. This historieM evidence overwhelm- ingly demonstrates that Congress explieitl3( considered granting--hnt ultimately denied--the Commission th~ xerv ~nthorlt- asserted by it in this case. Indeed, five years ago the FT~'s Office JPolicy Plan- ning and EvaIuation repudiated the pi~position that concentration necessarily related to any economic evil, real or imagined, and poinbd OUt one (if the many ill~desi~h]~ rp~qtll~8 of goveHinlental in/erferene8 iu the market place. In its 1976 Budget Overview, the Federal Trade Commission Office of PMiey Planning and Evalnation obeerved that : The decline of smaller firms usnally signals the emergence of socially deslrabIe efficiency in other firms and the existence of c~mpt t.ition among H/era. In such r~ situation tim eolnpeLi- tire viability of sma]ler Ih'ms can only be assured by problems that keep prices above the levels diat would le set by the oper- ation of the market. (]3ureau of National Affairs. Antltr~xet & Trade Reg. Rap. No. 69~ at E 9 (Dec. 10, 197~).) Simply stated, there is Im antitrn~t statute m" policy which makes a flrnfis imtepandent conduct nn]aw~ul heoall~O th@ con¢]ltcL lnay make growth or entry into the industry more diffiodt for actnM and poten tim competitors. And it is impossible to see how the law emdd be other- wise. Fierce competition does make Iife more difficult for others, hut that is the necessary byproduct of the competitive system. The skill. forest ht and industrx of incumbent ~rodueers may discourage new entry~nt can mrd y'be proscribed w thnut d~mage. T~e ass ~ uons ~rgtiNfaetiOn Of eonsqlner desires nlflv ]eal| Olll5iders to ~l~;SlH/]e thR~ entry is not feasible but one cart hardly say that ~neh nttenti~m to eoIlsnlners by exi~iIl$~ hrfIflne~r~ i~ nnhtxvfu/. (~onsuiner satisfaction is 1 primary goal of the eonlpetitlre ~ysteni and is not sub- ject to antitlnst attack merely because it may disrmlra~o~ pNendal competitors front enterlnff an industry. CcmIdaint counsel's argument to the contrary ~ppareutly eonteniplates that tha Commission should be allt]lorized to proserit)~ any I°l~lll 3etitive hehaViOl (hat makes entry by. ~otential corn )et ffoi~ mot ediff~cnb. Such reasoni,g, if c~u'ried tn i(s logwal couCuslon, wmlld ccmvert tile Federal Trade Cclnnusslon Into a Board of Directors for MI American business, with power to stifle teehnologlca] innovathm, eotltl'ol wages add pl'odl/et coasts and review virtnMlv eveIv deei~iol~ of mlmagement. ~ueh a result i~. nf ecmr~e, ah su "d. b s ~o I~ o e ahs rd than. nnd i~ d~,e~ neritahly follows from. the argnnnent advanced hy conlplaint cmlnseL C. The FT("~ :heorqes o/ Ihe ca*e 13eean e of tile novi.It V of their ea~e, the/awxers for the I(Th! aI pear to lave adconsider~lle liffiell yil flndin~awaytoatta<'ktlli~ne/~

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legal demon Lbey have conjured up. They haw sldfted about from onB theov~ to another in an attempt to tlnd the legal position which they think can best be supported. This current theory rmls this way : 1. The r~ady-m eat cereal industry is "concentrated." 2. Tber~ have been "excess profits." 3. The high profits o£ the industry should have attracted entry, but because of the existence of "harriem to entry," none has oc- curred. The alleged barriers arise out of the respondents' strategy of: a. ~'Brand pro]i~eratlon, pvoduet differcntintinn, and trademark plwmotion," b. supported by "intensive adver rising." 12. Col~'eatrat~t~ ~nd profits Industrial concentration ilas been the subiect of consld~ratlon by varinu~ economists and politicians for many years. On several occa- S - • . . dol)s, attempts ]~aye been made m Congress to introduce leglsla~mn whmh would faclhtate the break up of concentrated industmes. Con- gress has never seen fit tz) act upon these measures, however. The attack on concentration and profitability has many of its roota in certain economic studies undertaken over 25) ears ago which pur- ported to show an associatlon between industrial concentration and profitability. It was theorized that industrial concentration facilities c~opcvative behavior by the members of the industry to keep l~rofits at %upra-eompetitive~ levels. Development of the market concentration doctrine toward its pres- ent form is generally attributed t~, the work in the early 1950's of Professor Joe Bain. See Bain. Relation of Profii Ra~e to h~Iu~tW Uoncen~r~.tlan: American Manu]aeturlnff, 1936 19140~ 65 @ J. Eeal~., '293 (1951). In Bain'~ study, industrie~ having concentration levels of 70 I ercet or h gher had~ ]ilk, her average profits than the industries w}th I~vels of less than J0 potent, ltowever, hls study dld not delaon strate thaL higher profit rates wcra to be fotmd only in ]ndustrh s of 70 percent or higher ¢oneentl~ltion : "E~'en in Bain~s data, however, a group ef industries with concentration less than 70 percent could be found that had higher aver~ge profits than the over 70 per~nt concentration group. It was only by grmlping these into the br~ad under-7(~ percent category that their higher profit rates could be sub- merged.'~ (V~reston, [mpHcatlon~ of Reee~l.~ Research. for the Structure Approach to OligopoDJ~ 41 ABA A~21t~z~t ~w Journa~ 623, 627 (1972) [hereinafter cited as Weston].) Studies published after the Bain's appeared to comport with his fimlings ]ndieating a positive but weak relationship between high industry concentration am/ high pro, fit rates. S~ e.g., ~ei~ The Coneentrcttion-Profits Relatlo~shlp end A~tit~zt, in hutu,~lria~ Uon- ~entrotion. I']~e New Leo~miny at 184'233 (Goldschmidt, eta[., eds., 1974). Many ~eent nnalyses~ however have vitiated the reliability of tim earlier coneent~atlon-profit relationship studios, and the val dity of pl~mising I, ny antitrust policy upon studies ~ue]l a~ l~nin ~. One ~ueh I~Celit stndy was mldertaken hy Professor Yale ~rozell, ~ho reex- amined tile original Bain study Blazon. /?aln's Co~wentratlon and

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~O R~e8 of Return Revisited, 14 The Jour~.~ o[L. ~ Econ. 351 (1971). Brozen Iirs~ sougl~t to update the Bain sample for the 1960's. See al problems aros~ however owing to the changing nattlre o~ the indus- tries and tile disappearaalce in tile intervening yeal~ of many cf the firms which ~vere in those industries at tim time of Bain~s study. Brozen~s findings rather than supporting Bain~s thesis revealed an %mderlying dynamism of the U.S. economy" (Weston~ supra, as 6~8). As summarized by one cortmaentator : [Brozen] fonnd th~[ iz~dustrie~ with the gt'eatest profits ~t the tinm of Beings study at some earlier period, expanded at a higher rate in subsequent periods~ and their profh~ trt nded d.owI~w~.rd toward the average of jfllxlfits in all iil£tllufa( ~ur ing industries. Those industries ruth the lower profits in an earlier period expanded a~ a lower rate and their profits trended upward toward the average for all manufacturing mdustries. This is very powerful evidence that competitive processes were m fact operatmg m these industries. Even if ig were argued that high profits arc a~sociah~d with tempo l~.ry nionut~)ly p~)wer this is ( uite different fr~>m tim pal)lie implicatlmm usually stressed. The d 'namic eleme~lts of our economic system provide its own sel~'eorreetive, tIigh profit industries trend down toward the average: low profit indus- tries trend up toward the ~verage. Intervention is not ulred. re~ndeed, when Brozen expanded Bain's original list of 40 industries and included some additional firms from each in dU$tl'yI llO valuation hetween concentration and profits was found .... (Id.) It is important to bear in mind the express assumption entertained by Bain in his work relating to the market ccmcentratton doctrine. I~ain had flatly assumed that a correlation Imtween concentration and high profit rates would resulL from successful collusion. Several factors and considerations, lmwever, lepudiate the reliability of Bain's work in the market concentration doctrine, First, as noted above, subsequent studies such as Brozen's cast doubt directly upon the underlying as sumption. Even ~hose studies where a positive relationship war( found, that relationthip was weak or loose. Moi~eover. Jdain's and later studies, air hough in each instance encompassing multiple industries, have pro ceeded on the facile, but erroneous~ assunlption that a sln~le, static explanation was eol,sistently appropriate for each of the industries: Whfie it may well be that the profit rate~ (~f any gien industry characterized by monoDol3 or effechve cO]hLSiOn would I~e higher than th@ would be in the absence of such conditions in tha~ partiettll~r industry, it does not follow that they would be higher than the profit rates in other indus- t ries~ particularly if the hdter contain competitively superior firms. There is sire gv no necessary logical relationship be twecn collusion and i~hiffh" profit rates wh~,n "high" is de- fined in relation to the profit r~tes of other indusr*ies: high profit ra~es can ex st ollt monopoly or effective collusion and vice versa.

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71 The heart of the Market Concentration Doctrine is Bath's prediction "that there will be larger profit rates wish high seller concentration than with moderate or low seller concen- tration" if effective collnsion is positively related to the de- gree of seller concentration. But this doctrine is based on the supposed relationship be~we~ n collusion and high profit rates which, as we have just seen, is not a valid presupposition. Wfiile there ~n~y be aw,h a ~efaNvn~lHp, i2 mu~ be d~vgn- atrated wtl the ba~i~ of e~r~pf~ieal ev~enee~ t~t~d lluLl~ ~ ~ot been d~l~e." (Liebel~r, ',]ladfcet Power and ComTmtlgiv~ Su pa~o~'ity in Cvn~;erdratecl h~z~lru~e," ~5 U.O,L.A. L. Rev., 1231, I~39 (1978) (emphasis supplied) [hereinafter cited as Liebclcr] ). Inimeslingly~ addi¢iona] work by Profe~cor Bain, subsequent W his 1951 study, points to~ard non co'llusivc exp]anaticms for industrial concentration, His sub~equell~ work~ based upeit an inte~laatlontd sam pie, found that: (l) cot~sidering the saint industries hi the foreign ¢ORlit t'ies as in the United ~tate~. concent, ratinn ratios are generally }dgher in the foreign countries; fi industries in foreign countries ex}dbifing. . .... high concentration are genelxlP,', the. sam~. industrie~ which exh~bl~ lngh e*)ncentrat~on ratios m the Umted ~tates: and (3 con- sidering the same industries in the forei~:,~ countries as in the United States, foreign industries which were not concentrated are generally the sam~ as those which are ~ot concentrated in the United States. See g. Bain, lnter~atlo~2~ D~fferences In lrJu,~t~eJ~ ~'t~ctu~ 1976) ; ~ estoi~, supra, at 624--~5, As Professor P~ eston has observed: ' these t'esults suggest dmt it is not motivatmns that determine whether or hog -n industry is eonccntrat col but rather more fundamental underly- ing teel~nologb a/ and ecoltolilie factors," ~Ves~oll~ siipra, at 625. [n the course of the hearings in the Cereals ()~% compiaint coun- seYs principal ecollomie expert on concentration was asked, on cross- examination, about the finding by the F ]'C's O f/tee of Policy Planning and ][~bvaluation in its 1976 D udt.,*ct Overview th!~t although some early studies seemed to show ~, "positive but loose relationship" between high concentration and high 13refits, recent s~udies have "questioned tim persistence of such a correlation over time or, indeed~ even its exist ence to any si~dfieant degree." The witness, -~Iiehael (}lassman: ~as Idso o,e ef the FTU economists chiefl~ ivsponsib]~ for the (¥reals Cas~ c(m~y]aint. When asked to e~r/iment on the co~telusion ~eached by that, Budget Ovcrvk,w that thtre is "¢li~greerllea/t" on th~ question of ~ltetkel' thi!re is a s]gnifil artt eorrelaiilm beLwet!n tlr/)fits lind conven- tration~ he simply admit~ted tliaL : I would say if anything there has been a movement toward agreement since ttfis was written and that agreement has been that one should no~ expect a very strong re]at onsh p between eoneentt ation and prof/tability. /Tr. 26523). AS a consequence of the deficiencies and unreliability of the early studies on industrial concentrtttion: economists ale increasingly turn- his tr) an alternative expLnation for apparealt high concentration and profits:

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72 * * * iT]he latter relatinnslfip [between concentration and profitj can be explained cn the basis of other factors, such as competitive sllperiority~ unrelated to collusion." (Liehder, supra, at 1240.) $ * * * [l~]ecent evldenc~ runs against the view that con- ce]ltr~tion in tile United States i.~ higher than it need he for eificiency. It suggests that differences in concentration among industries are explainecI by underlying factors, th~ most itn- portan~ of which are underlying economics of scylla in manu factutfing or management." (We~ma: mtpr~L, at 626.) The conclusions that seem to emerge from recent studies are that (t) the cost advalttage of larg~ firms relative to small firms increases as market concentration i[~creases and (2) if thel~ is a tendency for collusion to be more effectire as market concentration increases, it camtot be detailed eith6r in th~ profit rutes of small or middle-~ize firm~ or in the pewiste~ce of any signilicant pesiti~-e relatinnsh ip between industry profit l')tt¢~s and nltlrht, t e~meentratiou. These findings do not augltr well for adoptinn of file market ionlentrati/m doltrine as a guide for reforn~ulath~g aI~titrust law" (H. Demsetz, The Market Concentr~tlon Doct~ne, at 26 (1973).) The altet't~ate~ far ravre plausihIe explanation--that competitive superiority explains any apparent corrdatina between concentration and high profits--has been tke subject of several recent studies. Each of these studies indicates that competitive superinri~y nnlst he con- sidereal as tim viahllt premise. Harold Deln~,tz~ among others, has posited the competitive superiority explanation: Under pi~ssure of competitive rivalry~ and in the apparent absence of effective barriers to entr), it would seem that vhe concenWatlon of an industry's output in a few firms cwdd o~Jy derive ~'c~ their supe~i~rlty ~ pTodueqng ~nd ma~.keti~g p~vduvts o~ 4¢~ t£e aup~riorHy of a s~ogu~e of i~uatry i~ wI~ich there are only ~/e w fl~w~*. In a wmld in ~ hich informa tion and resource nmb~fity can he secltred only at a eost~ an indu.~trv will become more concentrated under competitive conditions ~nly if a differential advantage in expanding out- p~zt developes in some firms. Such expansion will increase the degree of c~ncentraticn at the same ~ime that it increases t~e rate of return tilat these firms earn. The cost advantage thzt g'~vea q'ise to i~¢r~ee~ed c~mzez~tvaHo~ ~lla~ 5z rcl~ct d ill ~c(:le eco~co~,~:r,s o~, in d(~l:~t,ar(~ #hfft8 fn ~)~#~iv~lp ~h~zl)ell rnaT- gf~ co~ c!~ve# or it may 5e ~'e~eot~([ in be~tep pt'o~llze£~ which satisfy cf mond at ~ [o~z:er ooze. (]3emsc~z. Industry Econ. I, 1 {1973) (emphasis suppfied).) Even if one were to assume that the de~ree of concentratlon has ~ometklng ~o do with tile (/imlit y of competition in an industry, it must first be determined what tl~e relevant m~rket is for assessing the degree b~ ¢$

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~2 78 Of concentration. Ready-to-eat cereMs must compete with &ll other foods offered as breakfast alternatives. For years, the growth of the ready to-eat cereal industry o~me largely ~t the expense of hot cereals. In recent years, read-to e~t cel~als have been faced with aggressive competition ~rom other eonvelficnce breakfast foods, ~ueh ~s mstal~t breakfast drinks, toaster pastries, fl'ozen pancakes, era. According to a study coudueted by Market Research Corperat ion o~ Amer [e% ready- to eat cereais account for only 18.7 percent of all mah~ dish items con- stoned at breakfast. Thu% one cannot sin]ply examine th( degree of coneeatratiml in the ready to-eat cereal industry and make ud~ments,~ concerning competition without placing the industr~ in perspective as part of tile entire breakfast food market. Colnpetltion from many other products provides an important influonce upon prices arid mar- keting activities within the industry. A comparison ~f eo~Lc~nt/~tion levels in diffelent industries ~ould also be nPslending. For example, ther~ nlay he over 1,000 fiims which bottle fresh milk iI~ the United States and in statistical studles that industrv's "eoncentiation~ mizht appear to be extreme]¥ low. Yet, within ~atty advert market one 5ottber might have a virtual monopoly: On the other lmnd, in most supermarkets i~ the United States, yon will find sever,~] manuhmturcrs of rmLdy-tn m15 cereal represeuted. IL is di~eult to Jqnd another section of the supermttrket wirh as m~ny Inanufacturem t~presellted. If the number of firms competing is file impoltant thing, there ale more ready-to-eat ceLeal manufacturers competing at the point of actual consumer choice than there are manu- facturers of almost any other food product. In snm~ the FTC's action against the ready-to eat cerea] manufac- turers has proceeded on dxe basis of misguided and dangerous hypoth- eses. The d~ngel is nol merely that human and other valuahle re- sources have been and will be wasted, but that positi~ e, ]auda hie social and economic gains will be destroyed, and that tile FTC will produce, by its owrk ]land. significant in ury to industrv and consumers, Profes- sor Fred ~,~rest oil's summnry of the status of the "structural approach~ is p~rtioular]y insinmtive : All o~ this ~lmws thut tile structural approach to ~lignpoly which eqn~t0s it with shared monopoly is without fmmdaticm in fact or ia the reality e,f mgrket behavior EmplrlcM evi- dence is consistent with the theory of dynamic competition by large firms in content rated market~. Price increases have been sm diet in concentrated industries. It is precisely the factors that explaiu concentration that explain their moderation in prk'e increa es. It is the ~reater capita] intensity, it is the gieater research and development ucti~ities, it is lhc eontin,wd pr~ss,~to~ nf ?ar~ firm ~ivalrv., efforts to a~tr~et cnnsumei spending to their prodncts by pr{ce reductions, that exD]aln why firms in concentrated ia dust ries succeed in offsettin~ the general inflation ro some de- gree. Instead of the c_~encra] myth that some people are seeking to perpetrate that the present inflation is due to oligopoly which is equated to shared ~ mnupoly, Ihe hints arl Ihe ~*ppo site. (~oncenirntion ~(fleefs rLnd creates economic e~cieney, which moderates the irtfiatimx pressures rather than eallshlg them. ('~Vest on, supra, at 684 )

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74 E. Ba~rlvrs to ent~*y 1. "Frofits" az a magnet The FTC co~telnis that. in view of the "above average" pt'otRs in .a the indus ry~ m~w compan es sl ould ha~e entered, but none i a. It is questionable Chat ~ poteI~tial entrant would find pt'ofi~ levels in the ndus rv to be particularly attractive. Even if l~ellogg ( ompany earns "above ~vera~-¢" roflts~ would a otential entrant seriously believe lie will Ir~ake th~ saPm level of probers as a company which ires been in the business for 70 ve~l i's ¢ NOL likely. The potential entrant wouh~ have to look at Lhe industry in terms o~ what he can expect to earn, based on his level of know-how and his investment co~ts. Complaint counsel'-= assertion that "high profits" in the ready to-cat cereal n sttT shou d hare a tracted "new entry" receives utterly no support from the evidence. The ealculatica~s and tabulations ott'~,~d by complaint counsel were suppo.ed to show th~tt profits ~ere "high~ • ~fien compared with a put'potted "benehm ark." The evidence, howe~ er. izidicates that the calculations and tabulatio1~s are unreliable, and es sentiall, amount to little more than guess-work• The ~o-aclled "bench mark t~n:s out to be, upon examination, n¢ benchmark a~ all. ):[oreover, even assuming that complaint counsel's profit and profit ability eMculations are correct, the~ reveal Widely varied and fluctuat- ing profits : a attern not only ineo~akstent with the market eoneentra- tioit (h)ct fine. ~Jut one which points directly at competitive superiority as ~he ay~propriate explanatory device, o The F i'C's thesis ~ests on the premise that lfigh profits hi the ready to-eat ceie~] industry act like a magrnet which WOtlld ~tttm'l new vrttrailt~ ]ltI~ for sortie ftl'til~eial barri~l.. ~]'ow~v~v the recorc] silrt dy contradicts that premise. Con] )laint counsel rodueed oidy two ~it- nesses from companies w t eh eoi~side~d w ~el]:er te pro( tie@ rear y re eat cereal Mr. Owen Butler Vice Chairman of Procter & Gamble, testified that the expeeled profit~ oil al~y (.e~va/ bl[md depend (m its eh~rat~teristics inch]din~ capital requlreatmnts, costs and exI)ens~s, de- mand, etc. Id~ stated that it was necessary to develop a ~roduct before one could esthnate pl,0fi¢abi[ity. He s~ted that a key factor in the decision to enter was the development of a product which constnners ~oll[(l accept. 3{r. Butler" d~d not eortsider the estitnnted )l~alit rate of indostry memb~tz~ a c eterm native factor n ~ ec dng whet ler to produce ~ ~eady to eat cereal since one (0 ld not ]s~ hat lllfOIlll~lti()Ii to predict one's o~n profitat ilit v. Similarly, 3I~ Toby Sch~vibe~ to~n~ erlv of "ella (!roncl~ testified that his compal~v went f(w~ard x~irh the profinction rd a g/~l/ola because it piojeett d that its product ~xould b~ $~e~'essf/ll. Scllreibei ~aid ~ll~t in deeidfilg ~lhl alley Ill b~in~ (ut ~ln RTE cereal : A. Is it tznle tfiat I did not consider it significant. Yes, it is lru(, Ihat I dh] not give significant a[mly is to tb0 ptoilr inargin of tfil RTE cereal industry. Q. ~Vhv is tfiar ! A. I didn't ttfinfi it was pn~ie~la~ly relevant to our anal- ysis of the busine~.~. V;'heie we were .e~ ? ~.xI to he. (Tr. ~5038) Thu~. neither Vita Clunch nor ]~lc~.tc.i & Gamble. WllO i'epro~o~t the ~'TC'~ enthe attenlpt to establish some SOlt of p]lrllotte~] plofit ]n]~-

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75 neL made its decision as b3 whether or noL to m&itll fa£tAll~ a ready-to eat cereal bused on profit levels of existing companies. The failure of c~mplaint cvun~M to call the other entrants and potential entrants sed n the r tr at brief creat~,s the presumption that they also woahl lmv¢ colic i adict~'d complaint counsel. Aside fl'om the question of the attractiveness of industry profit ]~vels, the fa~t is that sikmifieant new entry has bc~n occnzring in the ieadv-to-eat cereal industry. Pri~ ate label competition has grown slg~ niflcantlv ill l~eent veal'~. ~h~l'~ ha~ also recently been a host of new entries of ~o called "natural cereals." These el~trants inehlde com- panies of considerable statm, e. such as Pet Inc., Col ate-Palmolive ompany, and Pillsbury Company. In addition, since t~e early 1960's, the Quaker Oats Cem[mny has ~)een transformed from a ilmr~nal producer of shredded wheat, puffed wheat, and puffed rice hire a major factor in the industry. This was, in e~nce, a signi[ieant folm of new entry. ((If course, Qntlker became such a sn/l!essfnl entrant thug it ildtiaily found a place as a respondent in the Federal Trade Com- mis<ion's ease.) ~. Product Wolifera~ion, p~od~*vt differenl~ctio~g arw~ trade- ~nask pror, otlon The FT( contend~ that the pllnCl )el bairle~ to entry m the ETE Celeal ind/tstry is "produce prollferafioit, product differentiation, and tradenlal k promotion," The first answer to this contention is that enter has not been hurled, as e~idenced by tht substantial entry that ba~ ocl:u rred in the imlustrT, But aside from that~ t~ady-to-ea~ cereals are significantly differen~ from one another, and the number of products on the malke~ is the result of healthy conlpetifioa to bring eonsume~ s the kind and varlet y of products tbey want. Ther~ ure subslatltia[ differences in the bas~c cotnpc)Mlioi~ of cereal products. But, equally important, ther~ at~ substantial differences in such attfibntes as flator texture moufl~ feel, and appearance. AI- tkough the FTC may regard fl~e:-e differences as trivial, consumers do not. People care about the taste, appearance, and eating qualgies of their food. A producer who fails to i~eco~t~nize ~his will be unable to survive in tl~e cereal industry or. for ~haL matt0r, in any s%o~n ant of tbe food industry. Each cereal sold by Kellogg Company has been introduced with a view tow~rrd responding to a perceived consumer demand. The notion that Kellogg Comp~ly would~o to the expen~ of developing and marketing a new product slmpty for the pnrpo.e of excluding ~m petitors, rather than generating sufficient sales to make a profit, is absurd. Kellogg Company has achieved its success in no small measure by its dedication to developing and marketing products that achieve a profitable sale~ level. Fhis can only be done if-the products developed are of a kind and guality that eons~une~s lik~ and will eon~im~e to buy m the long term. It is fundamental tliab differtmt consumers like different things. 3foreover, people do not like to eat the s~me tbing for b~eakfast morning after morning. Cons~mer SUl'~ evs show tha~ people like vari- ety in l~hat they have for hrenkfast. T}lese are the real reasons far the number of cereals available today. The number of cereals is a ~D ",d

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78 healthy o0rnpetltlve response to a consumer demand for a choice at the breakfast table. The FTC~s own economic witnesses have clone much to pull the rug from under their contentions on product prcIiferation~ product dif- ferentiation, and trademark promotion. On the subject of trademarks, an FTO economist attempted to construct a complicated statistical analysis to show that high profits in the indust ~'y were associated with the use of trademarks. On Cl, Oss-examinatJon~ his analysis was shown to be completely faIiacious and the FTC voluntarily ~withdrew hot1: the analysis and the economisg's testimony. As to product differentiation and brand proliferatiom R{chard Schmalensec, the chief architect of the brand proliferation theory, o mnly admittext in iris testim~my tbat whether diffel~nces between products are minor or trlv al is sometk ng best eft to cousumer ~udg-ment." (Tr. ~°~400) Since giving his testimony. Dr. SchmalenseB s written : I~aet, indlvidu~] RTE bra~w:s do d~ffer physimZly in pe~ ceptib?~ ~oaya, a~rul t]~e spect~m of available br~ls seems clearly ~o mffec~ a~em~q~ to apl>ool ~o itvlivk~ual~ w¢~ ~ db~erse to.~te8." Seh,na]~nsee, Ent~'g De~erre~me is t~ I~TF,, Bma~- fagt (?ererd [~dgstl?/, 9 Bel~. J. F.co.n~lnlvs 305, 308 1978 emphasis supplied). Fmally, Dr. Schmalen~ee made the remarkable statement that "I have ne~,er argued that Kellog~ ~r anyone else intro- duced new products with the conscious aim of en ry deter- renceY (Tr. 2262fi) Similarly, Mx. Glassman, another expert witness for complaint coun- sel, indicated that the action of a respondent in btanging out a ~c,w l'Oduc~, ~hen a nmv 's[mce in tts~ lr/llrke~ b~ls }man [mr(,gi~ed ~ ~0,8~ ~e regarded a~ a ~ens'ffile ~u~ine~s co.duet." Tr. ~7068 (emphasis supplied). Nevertheless, it is argued~ the effect of this sensible business coud/Ict iS adyet ~e to new thai'Silt s, g. [~Ye~slv~ ad~,ert~4~lg The FTC argues that the respondente have supported their strategy of proliferation and differentiation' by b:tens:ve' advertising. WId]e it is difiie~dt to isohlte total marketing costs for a wide rnng,~ of industries some e(Hl[ Jarisol]s gtix~ ~vaiblbfi!, Wl~ese c~).l lari~lUlS show that Kellogg Compan,~% total cost of marketing (advertising, promo- tion. selling expense, ~istributien expense, etch.) is not, ahnor~al wheu compared to other consumer-oriented products. Some e~mpanJes em phasize distribnttsn, promotion, nr field selling in their marketin~ mix. Kellogg Compan~'s de(isi,m t~ a(lvevli~( simply reflects th~ choice of what it ha]ieves to he the most efficient nleans of marketing its products. Kellogg Company's advertiMng has proven its worth in m~ny ways : P~,odv~,tfi~ e~7~i~l~. Aside from creating a market for veroa]s (which has remflted in efficient mass produeiion metbods/, media selectian has caused • leveling ef Kellogg Cc~mpanv's seasonal sales pattern. This leveIing ha.~ resulted in more effective ~ear rour:d e~ nip ment utilization.

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Fletadl~ng e~cie~:des. Ready-to-eat cereal products ?rB ~hl (yla advertising) d tee v to the consumer. This one-step selling operatmn mgkes it possible fc;r the retailer to incur less promotion and selling costs of his own. Ready to-eat cereals are thus subject to lower-than- average mark-ups by the retailer, and the consumer benefit~ via lower retail prices. Product qw2l tq Ke egg ( ompany, by its own actions, has been encouraged to maintain high preduc~ (unlit) standards due to the hlfluenee of advei~is ng If the quality of a pn.lueg is unsatisfactory, repeat purdmses will be lew; and if the prrnlm~t hss been extensively advertised, the advertiser will fail to recognize a ~atisfactot)" retmn on his advertising investment. Mm'eover, the bigh degree of brand iden fifieafion created bv advertising will enable tlle consumer readily to a~ociate o~l inferior product with its brand name. Sound economic shall'sis totally refutes this proposition that ad- vertising a d o er cap tel outlays can be somehow viewed as "bar- riers to retrY.~ l~nther, slleh ~x])editures eel~/e and promote a variet,y o¢ factor~ w~lith benefit eOl/N/lnlel~, Tile ~videI1ee a15~0 tIldtea~e~ ~qll~l availability of advertising and capital factors to the fi~ns regardless f s ze Hare d De setz. among many others, lms incisively articulated the anab sis : What does it mean t~ s.qv that adw~i~islng expenditures and capital ¢utla~'s constitute "barriers to entlw ! One meaning is thag firms must make such expenditures if they are to ~t~dace and communicate about the mmmofiigics they hope to selL A secured meamng is ~hat existing firms are more efficient in the employment o~ such inputs than are 6rms not yet in the industrv. If tbls is so, the existing firms deserve applau~e~ not dives~it urn. A third meaning is thac existing firrt~ h~e an undesirable advents e in lhe u~ of these inputs. Since all grills Call bor t'o~ ill i~ie capital nlarketb And e~n llllrchase ad- vertlsing compaigns, it is difiieult to see wherein the unfair ~dvantage lies. If large firms are better risks to ]coders and, therefore, if they can borrow at lower rates {intenlallv and extexa]ally) than can small or new firms, then this element of superiority for the larg~' scale, eider firm is )re ~erlg re~z~g- nized by c,tpdat markets. Similarly, i[ ht~ve~u have more eonfidet~ee in. and are more ]~mwledgeab[e about, well- established products, then this also is a real efficiency not to be denied to firms that have inve..~ed in building substantial reputations. Nor should buyers who do not desire to bear the risk of consumin and the cost ef searthing for i~itllv equally ~oe, d but ~eus ~ell known alternatives be derfie~l tlm advantage of trading with older~ larger fli~ms.'' {Demsotz, Two ,~ystems of [3elie~ About M~opoD/ in /ndu,s~4~l Co~l- ~'emsatlo~- TI~e New llea~vd.sg at 173 (Goldschmid, et el,, eds.. 1974).) F, T:~ ffTC'~ proposed ';remedy" t. -l Sllm~121vj O~ the I)~'vposal Although ~t Ires been apparent from the outset that the FTC, through its complaint ec,unseb ~eeks a radba] restructuring of the ready to-eat eerl!a] infiustrg, their ilrepe~n Is have not been statod with

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78 th~ degree of pt,eeisicn r~quisite to satisfying the miuimum t'eqnire llq~llt80]~ due |)l-oeess. Oil }it le~tsL ttlree ()cc~tsioll~ e~lnp±~.i~l[ eoutlse~ have attempted to ~rtieulate tlmir pla~l ~o~¸ tlm L'edes~g~t ~f th~ in dustry (Complaint at 1:~; Complaint Comlsel~s Trial Blief~ Vol. I~ at 117-186~ 'rr, 22~217-23, 22~67 761. We are confronted, witll t~e sort o~ vague s.nd inex ~liclt suggestioi~s one expects from casual con- versation. One thing, however~ is explicit 1~' dear from complaint coun- sel's pz~posals. The ~remedy~ s~ught is utterly unprecedented. It represent8 an atter~p~ to e~g~ge in ~. form and seop~ ol" il~dust~'i~l re o~gania~tion never before lm/~ert~zkin. It constitutes the e~earest of ilel~art~res from the F'J.'(2~s C~n~re~%ional eharr*~ and would p~rmi~ the Commission to arrogate unto itself a form of omnipotene~ that was ~ewr eo~ttemplt~t ed and which cannot be r~ationalized. ~Vha~ they do seek, in lien of a cease a~d desi~ order (which is au- thorized by Section 5 o{ ~he Federal T~ade Commission Act) is a n~onllnT,¢'ntal re,~t, rlletulill~ of ~h~ ielldv to e~ cereal illdlls~r3- along llr~es which suit theiz¸ fancy as economic= t~e~rists and social engineers. The relief ~hey propo~ is ~f a scope un)aearcl ot in American jurls- prudence ~d without legal or econ~mie s~ppo~t. Its eon.~eqttenees for the ready-to=eat cereal indus~'y and business generally are potentially devast~tiag. (al Fras'~en~a~o~.--C~m ~lalnt counsel propose ~hat tile relie~ order pivav de for the ereat on of five near an( vab e firms. Three firms wo~ld be %pun-o~f' by Kellog~ Corn )any, and one each 'or (~en era Mills and Ceneral Foods. Ea~ ~rm is to l~ave the capacity ~1 ]3rodll~2e ~tp~roxinlatelv ~ix per~ellt (if total ready t[i e~ el!levi] ~al~8. "Via~e~' tradmn~rked 1minds ~ould /~c exclusively assigned t~ each ol the ~e~ firms (Tr. ~2,~67-~76). All of this woll~d be ~ndertaken ~vitht~ut alay e~mp~rtsatltTn wh~ltsoeveI" to t]2c*se ~hree i'espolldellt oo~tl- parties fo~ the confiscation of their respective assets and gcedwill and ~putation. Corn l~ia~t counsel's reLie~ prop~.~al d~es not define the term ~vi~ hie." ItPdoes ~o~ indicate whettJer %i~billty'~ is to be de~ermlned pro- speetivel~s ~ pr~p|leey~r i-e~r~pe~ively--as a fa~. The proposal does n~t include an~ ceil eria f~r as~sing ~vlabillty.i~ Tt~e ma or ~urge}5' i~volvecl i~ complaint counsel ~ prolpoaal i.~ sig- nifleantly diff~rel~t from that entailed by the mere divestiture ~f ono or more eor ~orate aequ ~sitio~s. "Whatever the ~rob[ems erttailed by t/~, divestiture of an acquired ~rmr~nd they can t)e qui~e subs~,~nfi,~l the entity <[i~es~ed h~.~ tx~d a Driov~ independen~ co~or~te existence which may s~ipp~r~ the assumption that i~dependene~ can ~e rees~ab: llsh~d effectively. The ~-15ef proposed here. on tl~e otl~er hand, dce~ no~ entail ~he (]ives~i~lll'e o~ any previous acquisition. Rather, it con t~mpl~lfes ~he creation of new ~rms and of a single ~r~aniz,qtion. Be y~nlt the naked command t]qat the nc~w firms must 1~ ~vinhle~~ there is noth~n~ to support th~ view that they e~m h~ made viable. There is ~o su]~port for (~e ~tion that tl~e proposed di~member- q~lerl~ of lq[e c,£ret Ct~rll i,~ll'¢ eRn, a~ • prrtetlea] inattel', lie inlplelnexated. /itd~eaL ¢,x~tnple8 of th~ Illost probate]0 r~811 ~s ~ ~ ~'tel~edv'~ b~ impoc-ed point to antie~mpetJ~iv~ consellum/ees an~ dero~,ation (~ eonsunl~r w~l ~'tt re. 'I]~e r.~ may ]~ no x~gy to cre~t~ ~our ~v~l~le~ i,e~(~y- Iij.~ll~ i,l~l~] f~rlll~ FIC~IIL Ke]io!~ff (*©t2~ll~triv. ~r ~wll L~ ifll/]l~~ ~11~ frorll G~neral 5~il~s or from (lene~l Foocls. There wil~ l~e d~eaillc~n~ ~rui~- g~

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7~ ~ctlon costs a~s~iated with fl~grnentati0n of the ready-to-eat cereal manufacturers. Pmces to consumers enuld be expected to ri~c. Produe* quality could be expected to decline, Pt~cduction costs could go up. and numerous cost sa~daffs efilelencies couhl be elimmau d or sign fieant y mlpaimd. Moreover, expenditures for researck ~nd development c~mld be di~m~aged, resulting iz~ a decline in iimovatlon, CompI~int compel have laid dow~. as a cenlerstone of their relief proposal, th~ dismelubermen~ of respondents in order to create five new entities. They characterize ~his suggc.~f hm as "divesti~m~" in dm hope that a label will pivvide them with s~2p tort for their unpz~ecdent~ d scheme. What they propose, how~ver~ is no~ the dL e~titure of existing entities as in cases cognizable by Section 7 of th~ Clayton Act They al~ proposing the e~tion of five totally new corporations from the assets now emph~yed by Kellogg CompaItv, GeneraiMills and (~ener~l Foods. Complain~ counsel and ~he FTC ~persist ha this scheme in the face o~ the ,[egl~'sla~ive h~story of ~he Fed( ra] Trnde Commission Xeh tLe absence o~ authority supporting cot )orate dismemberment b ' the FTC in th~ decisional l~w, and the absence of any valid considerk~ton or denmnst ration (ff why they seek t~ exceed their po~:er to i~ue cease and desist orders. 'b T~'ade~nark llcenslng. Cmnplaint ex)uns~d propose that follow ng fmg~nentation of the three industry m~mbers pwvid[ ~]l comers (execpG Lhe other re~pondents) with a~ royalty-free nonexc]usive ]i- cens~ for t.he trademark (including "*trade dress~'. and ~)acka~e~ de~i.~l), ~oI2tlu]oq know how ~lld patell s ll-S~z~:H]~[~d w/ h ~l~ o~ lt~ reHlail]lItg brands. License* for existing brands wo~tid run f~r E0 years from the entry ~f the order. With respect to brands whicl~ have no trademarked name, licensee would be permitted to t~'prescnt that its )roduet is in all respe~cts identical to blmt of the licensor. New produe$~ woldd b~- come subjee~ to m~n(lMory licensing ~or L)0 years ¢(~llllliCUeiY~g live ),ears after comp]etior~ of test marketing¢. The licensees, wouhi o )crate ~lder .~.qll~ll[y eonlro] svs~l~l t~ ]~ lll~lntalllcd lo~, the ]ivell~or. gt tll~ 119£[[~e~ expcll~¢4~. ~lsptltes over Cl/mh~v eontFol de~tSlOlls we/lid b~ resolved IW urbittution. Alt.hou~,h trad~mai.k ~i~hts would ±e~cr~ to the hcem'~r upon c le expil~tiol~ of th~ license, the assc~ia ed know- how~ formulae aad patents wouM gpparenfl~ be um'ccoverab]e. (Tr. 22217-23; Compiain~ CounscPs Trial Brief, ~*-ok II, pp. 128 30.) Complain~ counsel also propose that Kellogg be required to prelude information ~t~u~ Irc~luct impro~enleats to its licensees Tr. ~.21b). It. is not a i )~ll'en~ wllethel P.~e/loffg lllaV yR~he prodiltL ill~ ~rovoments when d](l dtt]3]ie~ttiol~ of such illlploYeltlell[~ WOllld l~(llt I"(3 substantial tutditionM e~pital investment by licensees. Nor is it apparent whett/er licensee rosy alter the licensed produe~ (for better or for worse) and still ~etaia the tlademark. ('(m~plahlt (~mn~el have not stated what ~oll]d he tl~e 31lLhnate en~ natim /taro of this mandacol~" lieensin~ svs%m, Although ]i- ecn~os on alI present products wou d expiie after 20 )ears, it ~s nn~ a ~ m~ent whethc, r KeL]¢:gg ~ouh/T~, ~e~ uired to nmk~ a~nih~hie in tlw year 2100 a product i~ ir, tto(lueed in 2095. If such p~ rpetual licensing i~ untoter~de(h i~ ~ not eviden~ wlwn f(ello~ i~ to be z'eiiea~d of th~ bmdeit of beirt~ ;m uncompensated plll)]i¢ udlity, On [be other lmnd~ there can only I~" three leasons--rtone of them h~itdnatc'--for Jn/pos ing this hnrdensom, ~ml /,onli~x!aturv 5~telll in jlt, lpetuily: (i) fvr some ~l]l~t ltel] reason peculiar to ih~s i}/du trs~ it can rtever h~ left,

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8O to operate under the rules that ~vern all other industries an admis- sion ttmt th~ proposed order will fail to establish competitive eondl tions) l (it) complaint counsel disapprove of Ihe seatutm'y and eom mort inw governing trademarks, paints and trade secrets and ragard this proceeding as a handy opportunity to begin the general ~brogu- tion of that body of law; or (iii complaint counsel seek to tak~ punitive action against respondents going beyond put~ly remediat req uirl~men~% The proposed licensing 1*reedy conflict~ squarely with legis]atinn and common law, and is unsupported b~any rationalpoiicy of com- petition. The L~nham Act (15 U.S.C. Sees. 1051-I127), pro~ddes in Section 1055 that a trademark licensor retains its rights in the trade- mark only where the licensees are %elated companies" which in S~tion 1127 am defined as those which are "contmlled by the regis tntnt . . . in respect to the n~tuee and qualisq of the goods or sere, ices ill cnmmctk)n with which the math is used,1~ See: t~.g.~ Da'W;% DO,lug Co. v. HorFs Food Stares, Inc.. 207 F.2d 358. 366~7 (2d Cir. 1959). The leg'xl protection of trademarks is based ~pon the procompetitive function they serve. Competition requires that consumers have alter- natives to choose among. Those alternatives at~e cmnmoniy and usefully identified by the trademarks of the competing firms. Were competitors to use identical marks, choice by consumers as a practical Inatter. wmdd be impos~sible for want of any means o~ distinguishing • lnong tim altem~atives. By preverviag the identificatim~ of go(Ms to u supylier, trademarks, serve as.an inducement for superior mr formanee which wouh be ihsslpated if ostensibly c~mpetlng firms sold thmr goods under a common mark. The licensing of tredem~rks to competiix~rs, on the other hand. un- dermh, s this pre~:ompeLilbe pllrposiL Trltdelnarks i!on~er no iriol~op oly; unlike patents, tmdemarks do not )reelude competitors ~rom todu plicatinthat of lt~ea~/dtnulemarkSelling holder.under their own nmrks a product iden lea Complaint eounsePs proposal for the ready-to eat cereal industry is unsnpl~artable. The entthe rationale behind such ]itensing m~der t he Lanham Aeg turns on the assumption that effective quality control could b~ maintained and assured by the licensor. "I'ha~ m%umptloa i~noces the reality of the production of ready to eat cereals and high- lights th~ purely theoretical nature of the wopo~h The record is virtually nneontead]etrd that manufacturing of reud-to-e~,t cereals is (Iependent at, evetw stage on the nd~qnenh experience and skill of em p ovees w th respect to tile rolativelv subtle and complex chnrs/.tems ties~ of taste and palatability. We are not hm~e concortled with a mechanical product, ll'flste, T~P xt In't! .nd ~ppoarance donlinate the evah nation of the quality of the finished product. An essential clement of the trademark llcensinlz scheme is the main- tenalxc~ In'.. Kellogg o'~ a quality centrol pr¢~lzram with te peel tu the prednctlon of all licensees. Obvteusl v. to permit licensees to sell prod- ucts 1]ncler Kclloglz's tl~allemarhs without takin~ the steps necessary to ensure that the products are suhstantinnv identical to those pro dnced hv I~eJlogg, would rO~lllt in deftmudinl~ the eon~uirler and, te- deed, inthe b~ af the tredemark under the Lanh~m Act, 15 U,,q.C, .qeolions ~055, 10('~!, 1127: Franeh¢~d A'tore< [no. v. ~Vtnfer. ~94 F.2d 66~. 668 69 (2d Cir. 1968) ;'Daw~ Do~t g'o. v. Hart's Food g'l¢~re% g g

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Inc., ~ul~ra, 2t;7 F.2d al~ 366-67 ; Robi,~*vn 6~o. v. Pla*tic* Re*eare$ and Dec~elopment C~.~ 264 F.Sl~pp. ~5~, S6~ (W.D.Ark. 1967). AI~ ~ffectlv~ qnallty control program~ however, is necessarily com- pl~x~ p~r ~asiv¢ and intrusiw, covering every aspect of thl~ pro[hl~tion process from r~w materials acqulsitlon to packaging o~ the finished product. If it is not to involw enolmous wasce~ quallty control requires that ~wif~ action 5~ taken in ~sponse to ~udgment s made at every s~ep of th~ lin~. Those udgments, relating to ~uch ~ub~l~ and sub ectlw c~h~l.ttl!Let']~t]/!~ I~s L~s[l!~ ~xt11i.(, l~nd Qi)[o~ ~i~ h~rd to stI~icu[9*te ~*I/d virtually impossibl~ to wrify in an objcctiv~ fashion. It is simply not credibl~ that K~llo~g can exel~is~ ~h~ neee~s~l.y control over th~ production activities o~ m~lep~nd~n~ comp~tltors. Either in~cpcnde~ce will b~ lost or control will not b~ ~tt ained. Th~ snggest~on th~ cllsput~s over qualit control c~rx be resolved by arbitratlo~ fai]~ to come t~ grips with ~e character of th~ prob- Iem. Quality control ~ntails decisions and ~d~ustments to the produc- tion pr(icc2s on ~ daily and e~'~n hourly basis. Cor~e~tiv~ action must he ~al~e*~ immcdiar~lv or vast ql~lm~itics of un~c~'I~t~bl~ produc~ can b~ turned out a~ grea~ co~t ~n raw m~teria]s, plant ~imc ~nd ]~b~r. Even in th~ best of circumstanc~s~ i~ is som~ime~ necessary to discard s~*b s~antia[ quantities of output at I{el]ogg. But the time that disputes ~ve~ subtle hut nonetheless critica[~ual~ty jud~nents are submitted to arhitrat ion, th~ output that is ~he s~bject of d*spute would 5e dispersed beyond re~aIl to retailers ~r~ss th6 country. By th~ time arbitration is cone]/ided, tho~ g o~(L~ ~vill be g~'owing too stal~ fc c dist ribut ion. Given t~m in~v[t~L~]~ iLn(1 n~ur~ tension between Kl~llogg and i~s ]icc.see- comp~tltor s~ t]a~ opportunities for |egltlmat ~ controversy are |imitle~ ~Ixd ~he ta~k of reso]ving such controveI~ies ~lnmanageab]e. It nms~. ~lso b~ ~ec~g'Mzed that 1{ellogg's• produ¢~ fo~mnlac ~nd production processes have ~volved owr ~lme and may reasonably bB ~xpected ~o do so in. th~ f uttlre. Sllch ¢h~.nges will however, give r~e to v~ry serio~ls difficulties under the proposed trademark lieensin~ scheme. If/(ellogg develop~ an impravement in ~h~ formulation of a liccnsed product~ is it rer~uired ~ mak~ th~ for.~ul~ immcdi~tcly ~v~i]al)l~ to i~s ]iccnse~ or may [~ retain t]~c ~evclopm~nt to ifse]~ ~or five y~ars ~s it ~oll]~] with ~ ~r ~rol]llc~ ! ][~ i~ e~n i~ta~n the /]e- velopmen~ for itself, then th~ product that Kellogg and its licensees will b~ marketin~ under on~ trademark willmislea~gcoi~sumers~o Ion er be ~ cIent ~cal and ~}~e trademar~ w~l~ to that ex~e~t, sel'~e to by sug- gesting that th~ product~ arc identical. IL howe~er, I(~llogg makes ~lm ne~ fornlul~ ilil~iJe41at ely ~w~i]al)l~ to i{s ]icell~ces, are th~/icense~ s ~&liged ~o ad~p~ it on pa~n of I~sing their licenses if they fail to? Forfeiting the royalty-free lle~nses may well entail serlous loss to a |icense~ who has invested heavily in the prod~lctlon and promotion o~ pr~duc~ under th~ llcens~. (~n the other and, ~d~pting th~ new f~rmula mi~h~ 1)Iove unacceptably costly ~ the Jic~nsee or~ ind~ed~ th~ l]l!el~ee nlay no£ re~ar/[ tim new fOLIILulu a~ Ull ililpto~elilelLt. The s.%me set of problems wo~lld ~rlse wi~h respect to ~very c]~ang~ in the ]production pro~esses that has all impact on L/ny quality cl~arac~er- is~ic of th~ produ~. ~or are the problems i~volvc~ cosine(1 t~ clean ~2es tha~ l~l~ogg seeks to implement. If a Hcense~ develops L~n improve- ment i~t th~ ~ormula or production processe~ for a licensed prod~ic~ is h~ reqlli~cl to make it a~7~i|able to Iqe]]~)gg ~nd ~ th~ other licc~sees "5 00

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82 of thut product ? If some or all of them do ~ot wish to ~d~pt the de volopment, is th~ license~ pr~inde from implementing it unle~ he surrenders his right to use the trmlem}Lrk ? Ar~ nPprodt~et in, prove- me~ats with respect to licensed tl*ademarks ptexdmte~|exee )t. upon [he un~Itimotts vote of Kellogg and all ins lieense*,s? Lt dmrt who is in %ontrol" witlfin the meaning of ~h~ Lenham Act ! 0omp]alnt eounsd's proposal provldes no answers to tJtese ques tlons. ~ore im ortant, them are no satisfactory o~nswers to them. Tho licensing sle~em8 Would lock Kellogg and its eompetlt or-lieenseos into a ~undamenta]ly irration~h eeonomlcal]y inappropriate, an¢l ultimatdy ~mworkabl~ relationship. V. COk~GLUSIOI~ To surmm~rlze this Committee and Congress are faced with making a serious choice. On th~ one hand, ~he FTC has been gk'en by tim courts broad r~medial powers to eorh ~buses ia ~he area of trade regu]atinn. On the other hand, it is enforcing a prohibition against %m fair" ¢om- m~relal practices that slmp[y has no readily aster tainable meaning. In light o~ these facts, the serious ehoice that Congress needs to make is obvious. There can be no doubt that i ounter-measlues must he etx~eted to prevent the adverse economic eff~ects caused by the Commlssinn's ill-eoncelve4 etfort8 to reorganize American ingustry. Tlm~ eounter- ille&e, tlr~ e~ll h~k~ Oll~ O~ (~VO h~io~ forIiis. CoI~rl's.9 can (o~lfll'u/th~ intended remedial i~ower~ of the FT~. so that the Commission is pro- hibited ~rom imposing any more than simple negative relief by ineans of a cea~ and desist order. Or Congress can redefine ~lnfalrne~s. as that term is used in Section 5 of the Federal Trade Commis~inn Act, irt ~ way that reinst~,tes tho purpose for theft section envlsioned by the Congre~ of 19!A that passed the .Yet. %'* hieh(wer em~rse of aethm C~mgre~n elects to fa~ke, it must he em h ~L~ized that ~uch a choice must be made now )~fot~ compe~itlon in ~nerican industry is irrevocably seer riced on the altar of ~he FTC s regu a~ory overzea ousness. t~TA~NT 0~" Wll~ ~Aq*I~NAL A~SOf~IATIGN OF BROAI ~2ASI"~RS Writiug in 1969. Professor Richard posner of the University of Chicago Law School, said of the Federal Trade Commission (FTC) : The lack of meaningful standards to eircumseiibe ol~ ciul discretion seems ld~h ahsolute ]mr% al~d the opportum- ties for abuse eorresponding]y great.~ Because the Natlonal Assocla~ion of Broad(asters believes that Pro- lessor Posner's observation~ lice even more appropriate today than the~, were a decade ago, we welcome the Consume1 ~llhr*olt]mlf(ee~ rev~ew~ndcondemnatinn ~f ~heFTC'suseof the ~fai" ess sta~l- ard in ~ecent rainmaking proceedings. The Commission has unabash- edly abused its statutory authority by the expansive applicativn of th[~ elusive concept Tl~is attempted'approgriati,m of new and ex- e~ive powees was made ims~,ible by the seem~n._~lv boundless ehar~oe to reffu~ate the ~:unfair." A~d hecause it is an inherent]y unworkable 1Po*~ler, The ]Ted~ral "rwade f'ommis~lon ~7 U~'hl h'dev ,~7 ~1 19691

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88 standard, tbo NAB urges the Members of this Committee to restrain further Commission action not only under the aegis of its rulcmak- ing, authority .... but with regar o sdjudicatorv p.rveeed ngs. as we . Congressional action which ~tops abort of eurtazhng rehanee upon a theory of "unfairness" in regalatlng noudeceptive and tru hful commercial speech may eontlnu¢ to signal Commission excesses. At the least, moreover, it would leave open the door for errant usa ,e of th~ unfairnes~ standard by way of section 5 m whereby illdiv~ual ease rulings lna~ enjoy industry-wide a llcaZlon. More {mportantlv, howe~-er, retentiou of a section 5 pro~i~itlcn against ~'unfait°' a(l- vert~smg would [~i'csent the FTC with a conflicting message as to the real intent of Con ess. It was only a ~w~ years ago that Congress passed the Ma~nuson- Moss ~Varrantv-Federal Trade Commission Improvement *(of em- :oweriag the Cotmnlssion to issue trade regulation rules. ][hat legis lation was necessary, in part because the existing law was to(, lm~rky on the print of wh&bor the agency possessed substantlw rule-making autho,ity.~ Today the Committee" on Commerce, Science and Trans- portation has reco ized the need to again revisit the question of the proper arablt of ~mmisslon regulatory activities. But this tir~m a very different kind of Congressional response is l~tluircd. As noted in the Committee ,Report on S. 1991 "oversight bearings demon- strafed that in manx instances the F~EC had taken actions beyond t e t t of C g~ess."• ...... ~ There is some necessity therefore~ for e]ar1~fy'mg the FTCs rois and bringing ,is actB-]tzes back rote the • bounds prescribed by Congress. Yet S. 18~1. as it now ~cads, would only partially serve that need for clarifieatlon In fact, by amend n only section ~18 and thus leaving section 5 intact~ the Congless wil~ foster greater c,onfusion b) (reslting an an~mtdv in the standards for regulating advertising. Section 18 was fashioned to eliminate a cumbersome piecemeal approach to industry-wide re~u]ation. In response to instances of FTC's abuse of its ru~emaking powers, section 18 is now to be circumscribed to eliminate the possible im position of. a vague, standard an s ~eech. Yet that same too. vague standard is to remain when regagatmg on a ease by ease basis under the auspices of section 5. AJtd~ as noh~d above, the Cammissi~n will be at a loss as to how it is to make use of its section 5(m) authority where two different standards prevail. This dichotomy must be re- solved if the Committee expects to avoid the constitutional issues that have arisen in recent advertising rulemaking proposals. Thus, S. 1991 needs to be amended to stale explicitly that the FTC ]~cks the authority even under section 5 to regullate as "unfaar" eommer- elai speech which is truthful and nondeeeptlve. Al0ernat]vely, if the Congress is to be assured that the irregularities which have abounde~ in recent rulemaking iliopusals ale not to be repeated, tbo ( omInis~hnt should be instructed flaat it is to rell~is from enforce- ment activities under seztion 5(m) of the FTC Act which w~u]d cir- eumven~ the restrietisns of ira ruismakiag authority imposed by S. 1991. Hit. R~ Nd ~--1107, 93d C,mgre~s 2d ~en~ton reprD~ted 2a [197~] U ~ Code Cong & Ad New~ 77~ 7T15 S Report ~, 9 ~hf)0, 9~th C0agresL 1st se~alo~ ~ (I~701

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T$0~90059 o

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85 Based on its "unfalrne~" jurlsdlcticn, the FTC propels to re- strict or, at worst, ban the tele¢-ised advertising of sugaredproducts that is directed to or seen by child ten. The advertising attacked iu that proceeding is neither .....false nor deceptive. Nevertheless, the_ FTC. seems. intent upon deeming g "unfair~ and. therefore, illegal because it fails to disclose the potential health effects of eating sugared products and because it may cattsa some frletbm within the family2 The pmeeeding i~ founded, moreover~ upon nove[ and unt~sted s~wlal aml I~havloral theories and does not benefit from any empirical dabs. Nor is there any basis for eoueluding~ that the drastic solutions nmnely bans on adver- tising, would remedy the purportedly troublesome nature of the com- plained of advertising. Thus~ based on it~ intuitions about the likely effects of advertising on the dental health of children and the serenlty of the family unit, tile P~TC proposes to adopt rules of far reaehin lg effect whicb w(mld rcstricL tim truthful, non,~eel, ptive ~ulvcrtislng of lawful products. To aecomp]isb t}ds noble task the FTC has al~ful]v manipulated the broad language of Sperry ~" IluteMn~qn and the inherent vagueness in the unfairness theory to cast itself in the role of a super legislatul~e, or "national nanny." more concerned with issues of social en~ineertng than with the lawfulness of cammercial advertising practices,* its proper stato~llry mandai~. Its assumption of ~bis n~w role is n(l~ only iaa~ppt~priate ~s a matter of sound administrative law ~md policy; it is also contrary to the intent of Congress and fraught with coastitu- tlonal implications, There is simply no indication in the le islative history of the Wheeler-Lea Amend~nent moreover, that the ~ommis- sion was meant to enjoy tbe freedom to proscribe truthfnI and non ~[eeeptive advertising under the guise of unfairness. Bu~. even assum- ing, arguendo, tha~ Congress had contemplat~d ]fis expansive and vir- ttnt]ly unf( t fered ap pill!atom of thl! unfairness stander(l, its I]~ by the FTC would still face insurmo~mtable constitutional harriers. ELI)II~a.TI*~G TIIE T]g]{.~I ~I~]qFArR!~ ,*~-OULD ~OT ]!3[fl*SC~:~To.~'I'E ~ ~o~- The Commissioners have decried tbe demise of the FTC an/] par tlcularly of its continued ability to protect the pnblic fl~m imfair advertising shout4 S.1991 he enacted. Termination of the presumed mandate to regulate "unfair" yet truthful and n~mdeeeptive commer- cial speeeb will not spell the undoing of consumer protection. As indi- cated above, it is at Ix, st debatable that the C~mmission was ever imbued with the authority to apply a theory of u~fairness to adver- tising. 3fore importantly, however, the imposition of such an elusive legal standard upon protected speech is constitutionally suspect. • The ~onlml~M~n~r'~ letter of NOV 13. 197~ addressed ~ C~la[rman Fortl effete the existence 0f a fe~ Cnu~snt O~der~ e~nc~rning aapeet of ehadren'~ aawrtL~t~¢ a~ further e~¢i~aoe ~f ~he ~lroprl~ty ¢~f its efforta t~ r~gulare ,,unfair- nd~er~ki~g -Concept, to Cbe ~q.C~ order I~ m~ch ease~ cannot De eo~strned a~ mllKmrt for th~ legal theories advanced thcr~-im ~I0re ~m~orr~at~y. moreover in e~ch of ~n~lse ea~es the challenge of "tmf01tness' concerned dangerous behavior tleD~eted in th~ cut, inertial and ~ot the ~,ature or content of the adwrti~rfl me~sa~x~ or ~f thn produ(t b~ln~ adv~rtl ed Nlmilar ls~ue~ of p~yMrM s~,fely are ~ot invol~ed !~ tlw ~ll~r~'s ad~ertlstae pr~ ~ ~ n he no tlfialfl~ ~*r m~ag~rabla hoers OBysleal ~e Otherwise. atl¢ih ~ b o he atlw ng cha enge~ a the pe~ead ~g O~ /'0 1'0

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86 The unfairne.~s standard fails to comport with the basic constitu tional lVXlUirement of fair noticeJ It does not, for example, convey a reltsonahly definite warning as to what condue~ is proscribed and what is not. Thus, all advertiser is at a loss to deternfine whether its advertise- ment comports with or violates the statute. "Unfairness" furnishes the FTC with an m~bounded and entirely fluid standard that it can manipulate to achieve objectives which were never even contemplated by Congress and are wholly unrelated so the purposes of the Federal Trade Co*rmfission Act, In essence, "unfair" advertising can be any thing the FTC deteimine3 i~ to be, Unlike the concepts of "false" and "deceptive," "unfairness" carries with it no popu]ar referent by which affected parties may judge their conduct. NAB believes that basic concepts of duo process cannot be foreefl ro }ield to (~anllnission whbn. Under the un~ailne~*s umhrella: moreover~ the FTC could effectively intrude into virtualy every consumer purchasing decision to insure that col~sumers are making the "right'~ decisions for the "right" rea- scns.S The "unfairneas" standard necessarily forces the FTC to make subjective, Orwellian jtldgments about what is "f.,ood" and "b~d" for e~nsumers. Such udgnmnts were not intel*ded to be within its iut'is d et on ; are e early outs de of its area of expertise ; and ar~ a direct affront to the First Amendment rights of the advertiser. Througlmut the course of the ckildren's advertising inqttir~, the ]rl'C has evinced a blatant indifference to First Amendment coasid- eraLions. Its reliance upon Sllem'y de ltutchlr~son, a case which did not involve speech, hz regulating vlii]dr~n'~ Irk Idsion advertisenlents on]¢ demonstrates its insensitivity to these concerns, That ease did not con- sider the question of the FTC~s authority to regulate un:fair advertis- ing. It did not even involve advertising~ If the issue ~f the C.mmis ~io]l 8 ~t RtkoI'i~'q to regll]at e advertising were to come before tile Coul% NA13 snbmits," the Couurlissiou's atlthority to wield the "~nfairness" rubric would necessarily he circulnsetihed. TZ;rgi*~ica Stets l?oard of P/la~'nTazT v. Virginia Ct'gizen8 <Yavncil, Inv., ~25 U.S. 7tb (1976), and its progeny, demonstrate without doubt that commercial s )eeeh enjoys First Amendment protection. It is tlue that these ea~s exempt ft~lse trod mis]eadin~ speech from, eonstitutionnI n'oteetilm. However, t, hey do not, and *NTAB SUblHl S~ eOtlld /lot, eoYLs 1 I1 Rl[llllly pl.~)~ei.lbe "unfair" speech, The use of the "unfairness" standard to regulate )l-otected s )eeeh is sub set to vagueness am overbreadth c m en£~s. Rues wh eb wm~ d reguhtle protected speeek in those few in tances whets tiler ape to be toler.'~ted at a]l mus~ be fashioned ~ith precision and 'claritya ~=aR~le~ anlorplloRs st anda t'ds of regulation, such as '~on fah'm,ss.'~ chill protected speech and, therefore~ constitute unconstitutional prior restraints. Thes~ eonstifiuLional objections become all the more compelling in light ,~f tbe fact that, hi spii~ of its asse[.tbm~ 1o Ih¢, eolllrary, tbo Comnfission doe~ not tPdly nee the unbounded discretiort agotxled ~e~ Ro~h V U~ited ~.te~, ~a4 U S 47~ 491 reheartn~ denied, R55 U S g52 {195T~ tlt has been ~u~geated Ior example that the FT~" o~t~hr to r~ r~7~te "mnod' or ']rml~' ROver tIMn~ becau e ~f the 13,~t enti/I for ~uvh ~aetor~ to Infl u v me p,~rc ht~e d e tsl,~l, t Ke~hlan v. Baar~ ol Regen~ o] [ nit trait ~ oy ~ta *¢ oy ~.T., ~g3 U~ 589 (190~) t¢

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!!! 8ff by tft~ "unfadmress" standard in c*rder to csrvy out, its statutory man- date. .... The stmldal~ds (~f f~lsity ~tml deeei*tion pro>vide the. Commit'ion. . with ample flexlbdlty to r~ch advertising wbmh re,sends o" re,s- informs c~nsmners. At the same tim~, tllt.~o standards fut~tish clear guides to the Commission as to its prop*~r r~le in the rc ,.l~t~rV sc[mme ordained by Congre.ss. Thea~ more definite, stand~C~ ~ds~'pl~vide usable refe~nt~ against which ~lvei~issrs am able to rne~sta~ thr@ advertising practices. Tim deletmn of the "unfairnesS" standard would not t)revemt the FTC from l~ching objectionable commercial advertising practices, But, it woMd mea~l that the Commission would be r es~t~ined frc*m ex- tending its ~uthoritV beyond commercial practices ~o isaues of ~gu- l~t~ng dictaEw habits, p~rs~mM de~tM hvgien% int.t~fatrdly tra~quillt y and the like.~° AmL as a mugger of poll@, govevomental inm~sio~ rote ~hes~ ~ei~l que,~tioll$ is unw~rr~llt~h T}I~ Comlni~ion musL l)~ re- directed to its proper course. ~XZ~IIN(t SID~F-IIE(~UI~'FO]Iy AppA]RXT~ CO~I'LE~T GO~'EI~N~E~'T REO I~L~kI'[(}NS I~'U]fI'HEIt II~U}tH:IN[~ THE NEED roll F~I~(~A~]ING, |N I{],:(I~LMIX}IIY O~RBRE.~DTI~ Clearly, it is no~ NAB's position that the Commission Alonld re- frain f~om regulating de~pdve spe~ceh. But given the appat~mt pre- dissposiLion towards ex )anding it~ attthority the Congre~.~ ne~<ls to pull n the ~e gns tightl~ lest ~he Co~mnisston stray too far afield. S. 1991, even if amended to similatly elmlgl~t~ the un f aha~e.~s stand ard in secth>n 5 would not open ti~ floodgates to ad~el~is]ng whici~ disservcs the public interest. Esp~ially in the area of children's tele vision ad reprising whlcl~ h~s so pte occupied the Commission in recent months there exists an ~bundan~e of ~lf-regulat~ry endeavors evi deneil~ an ongoing and cent inuir~ commitment t~* be pat ticularlv n spon sire to tl~c uec~is o9 children. At, l~age 18 ,d tbe Commit le~ Repo~ on S. ~991 ~.ohmtary action on the part of brot~dctkzte~ advertisers • nd other interested parties to gttcnd to child~x.n~s needs is specifically encouraged as a substitute for governmelxt im,olvemen~. Vobtntarw self- regulation has been, and will continue to b% a sigmlicant fa~t~r ir~ regulati~tg advertising ; and tha~ is a~ it should be. The N~tional Association of l%ronde~stcrs ,rnd the ~df r%~,hlmy arm of the broadcasting industry, the N~B Code .ku thtn'i~y, tong ago established a host, ~*f adw r¢ising standards ~nd guidelln~- including miraF which take into account the special needs and ch~i'mte~dstic~ o~ children. The standards set in the NAB 1Radio and Te]evislon Cc~les have been carefully desigued, for example, to guard sgains~ the [~s slble exploitation"of children through advertisglg, Although stth se~'iption to the NXB Code is volnnt$~v well over 85% of loda3's television ~ iewmg takes place on Code subscribing st~tions. The NAB Code Autilotitv doe~ not limit itself to i~uing ~dver- tiring guidelines. It has in~t~tutionMized all eln,l)~rlt[a framework f~t. • *~th~g ~tgtiomn and adveltiser~ ]n ilnplementilxg Code gtdde]hles. mTh~ h~tont ~f at ?east some member, o$ tile Commt~s~ua to hape soc~a volie~ I~ av- ~h~ren~ ftr examl~le in Uhalrman ee~t~ehu~ eltr] pr div~i)ns ¢oneernlo~ the 0hild~t advertising Ucoc~e018~ 'Our undertaking ~i]l have a Irofo/tI~d imDae[ on g mojo~ ~c~ me~ of lndll~tr~ ~nd th~ n/otH~ and upo~l ~he v!l~tr0nment 0£ th~ t~l~0 md th0 family, ,Xat]~u~t & ]:r~de Y~ l~ep~ at A 1~ ~M~r 2,19781 00

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~0~90089

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89 CONCL~'SION Especially in an area fraught with First Ammldment concelns, the FTC must play a muted lx31e. The deletion of the unfairness standard from sections 5 and 18 of the FTC Act would ensure that the Com- nfission wonM play such a role in the future by substituting the rule of h~w for the rule nf unbnunded discretion--and only thl~ former comports with e(mcepts of j ustice and the prhmiples of oar democratic process. ~TATEME1WI O~ THE I~A'fIONAL BROADCAS"fI~G (~ObIPANy~ ~NO, The National Broadcasting Company, Inc. ~'NBC" submits these colll]llent~ ill tonnectieJn with the Consmner ~uhconm]ittee~s re.view of the concept of "unf¢~irnes~" as used by the Federal Trade Con> mission ("FTC"). At the outset, we should make clear that NBC does not oppose efforts b~" the F'PC, and others, designed to prevent the disselainatioa cf false, misleading or deceptive advertising. As a major broadcast- ing organization wilose l~venues come primaiily frvm advertismg~ we believe, both as a matter of prmci ~le and sound business policy, that it is essential that public confidence in adveLtising be maintained and not impai~ ed by ha adulent techniques or claims. We do object~ ho~evcr, to the lecent effo*ts of the FTC which, in our udgment go beyond the Coixgiessional mandate given that agency and which ha~e been applied to restraill truthful advertising for lawfully-seld pioducts. In particular, NBC is concerned that the FTC may be setting for itself the objective of social engineering thro,[~h the use in iulemaking ~f broadly delilled concepts of "uuf Lir ness. <lVe (lo no~ beli(~e that the ]:'ICes efforts to ban ct" severeiy r6- strict ad~ evtising (hit is ru)~ fals(, misleading or deceptive is lpln~ pthdo air lmr on policy or legal grourtds. NBC believes that the FTC's Children's Advertising Rulemaking is a particularly etzregious example of the ngsuse of "unfairness." I hat proceeding involves the mc~t disturbing ~ropo~al to (lute; its roots are based on [I[lfOll]/(h!d socilll and behallOl'al themies and its solu tion~ SIilaeg {If on~ailallted golviltl/~ert%al paternalism. In that pro- ( coding, the FTC sta/t has e~en one so fn" as to suggest to the Corn mission that it does not need to ~[¢l that "hI~rm" to cffitdre~ has aetu ally oecutred, but instead, mav make ': mliey deh rlldHlitiollg~ fallout such factual questions. Armthe~" distnthing aspect of this rubonaking proposal is its discrm,inat(.g thrust, since ¢nl~ one fctm of adver- tighig tth!visi¢ln is ~illg]ed out for bans and severe restrictions.~ NBC therefore supports an amendment to the Federal T~ade Com m issiol~ ,i~,t /~ hieh II otl~d r~ctify tile FTC's eurren~ overexLen-~ioi~ of ~ bile t~,e ~ h~h]r~ n kdv( r t~ in~ RulemltMng r ~ts ~s thu mo~t t~o.bth~ ~ial l~a~i¢ ~ and

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90 its power and make it clear to the Commission that it lac~s authority to adopt industry-wlde rules to restrict, as "nnfalr$ commercial odver tisin, g which is truthful and nondcceptive.. . Such an .amendment would ehmmats the danger of unconstltutlonal and uncles,ruble over l~2gu] a- tion, yet would have no odver~e effect whatsoever on the FTC's abil- try to fulfill its basic ~tatutsry mand~ts. 1, CON'0RF~q~ fill) l~[f/l~ ]N'I~W~ TO GI%~ TTIE ~ A]TTHORTI~I" TO R]P~TRICT X~W'f ]I F~ CA'I~-,OB I~2~ OF TRITTBVFIIb~ 2fOIVDE~/~q'IV~ ADV~RTISIN0 OF LEOAL I'RODUC* I'8 lqothing in the leegl"slative history of th~ Federal Trad~ Commission Act suggests that Congress ever believed that it was giving the FTC the authority which it presently asserts to regolate entire categories of truthful, nondeeeptixe odver}ising for legal products. In claiming such authority, the FTC has chosen to overlook the objectives which Congress sew itself achieving. The decision to ban or restrict entire categories of trllth~d nendeeeptive advertisements f~r le~l prod- ~zct~--even i~ it were constitu~ionaL which i~ is not is ama or policy decision which Congress alone can make. TMs Committee [ins appropriateIy recogolzed that the Commission has gone astray in usin~r it~ Section J8 ru]emaking powers in defi~ing the statutor~ concept of "unfairness?' We commend the Committee for ~ecogolz~n~ that ~ Congoesshmal reslmnsa to this overext ensinn of agency power is n coded. We iu other support the Colmmt t*e's d eelsmn not to impair the FTC*s ahilitv to deter wrongdoers and provide guid÷ anee through t~-by case enforcement under S~tion 5. The ease by- ease prceess is distin~dshable from rulemaking since it fceuses ~n a specific advcrClsement. . or prnctiee in the context of an ad]'odieatorv. . hearing w*th all o~ the )roeedm'al sllfe~llards that are reqmred, m- cludin~ #adieial ~eview. We do. however, have reservnti~ns that some members of the FTC might try to do indirectly what the Committee's bill wouhl prohibit them from doin~ directly. In particular, we are ecneernet/ that the ~ommission migh~ attempt to use Sec. 5 m , in place of Sec. 1~, of the FTC ACt to achieve tsdustwwide adherence to ~t~ orders by rtotifv- lug industry members that th~v cmdd be sued for clviI penalties 'i{ they enff~ge in conduct which 1he C~mmi~.~i~n has held "unfair" in issuing an order against someene else. The FTC couh] ft*r example. detsrm, he. that a pt~ct cu ar category. , or type, of odver =ing .~ % nfa r'i n a Sectmn 5 case brought agomst o~e advertl~r, send collies of its enmplaint and order to other advertisers_ who were not parties in the ori~rln aI CaS~. and thell sue sttell "non-respondent" adverti~rs for ehdI penalties ~mder Section 5im)(1) of the FTC Act if their future advertising falls within the ~ro~crll~d conduct. The end result wouhl he similar to . Trnde Re,darien ]~u]e adopted under Section l~-- entire categories or types of tr thf ~ondeeept ve ,dvertlsing wmfld hn restrained. W~ ar~ a]~o c/mcerned that the Commission minht attomot to adorer industry wide r~l e.~ ¢hrm~h a theotw of imoli~d rulem akln~. Thi~ w~ done by the FTC prior 6o the ~ama~e of the MH~Im~on-Mo~s War rantvFTC Improvement Act when it adoptecl a rule requh'in~ the posting" of octane I~tin~3 Any attempt, to cth'umvent See. 18(a) (~) Nntfonal pet~0teum* ~e~e~* AaaCe~I~, v FTC. 45~ ln 20 ~72 ¢D ~7 C]~ 19T31, cr~¢ a'enled, 41.5 U.S. 0~1 ¢19~4) /¢

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v,, H, ~3 4. *IUNFAII1NESB~I I~ RESl~ZL~2 TO ~ERCI2J~ 2~DVERTI~I~O .. Commercial odvcrtisi/~g has ch~ged aign ificanily over the past dee /tde. This was acknowledged in a speech Ly FTC Commi~simler Rob- ert Pito~sky before the National Couvention of the American Adver- t!sing Federation in Jun~ 1979 " at ~hieh time he stated: ~ i "First, the sharp deelin0 in [FTC] ease-by-case enforcement to some extent has ~urred because tim ~free-fire zone~ advertising ~ae- tices of 10 and 15 years ago have vistuall~ dtsappeared as a resu t of %-oluntary restraint by advertisers and their agencies perhaps induced jn pare by the ~cti~dst stance of the FTC. ~ , ...... :~ • ) . Most people I speak to who are knowledgeable ~bout odvertmmg and the regulation of advertichlg seem to agree th aL there is more com- plete substantiation and more careful qlmlilinathin of ad claims than in oarlier years. Eqaally iraaportant, this sell restraint by advertisers seems to have been managedwithout converting al! or most advertis- in~tomeani1~glesspuffery." " i ' .:, , : 1'o the extent that the h'TC's efforts have Contributed to thcs6 f~vor- able changes, it was because it ch a]lengod advertising ~-~ deceptive un- der Seetinn 5 and through the use o{ its odvertlslng subetantlat on pol- icy, which this Committee has preserved in S. 1991, :~;~ , v, Part of the advances in commercial advertising as Commissioner. Pit o fslry also noted, can also be attributed to industry's voluntary ef- forts. Voluntary self-regulation can and has worked well ih this area. As stated by tile ]0"ederal Communications Commission F.CC : "The Commission commends the industry for showing a willingness to regulats itself. . Broodeastln g which serves the public interest results. . from achons such as these winch reflect ares nslve and responsible attitude on the part of broadcasters toward ~t~eir public service obll- gallons." 1974 Children's Television Report 50 FCC 2d at 19. Although the system has not always been perfect~ its overal resu ts have been commendable. ~rhere concern 'has bee~ e~xpreseed, the broad- casting industry has attempted to respond through broadcaster review of ~dvertisements ~nd chrou h changes in the Code of the National Associmtinn of Broadeastem ~NAB),to which ~BC and other brc~d- eastersvoluntafilysubserib~ , ,:~:~ !, ,,~; ~: :,_ ii~ a~Ng~Broadea~t~qtandardsDepar~ment ~ ," ~,,,? . NBC, as well as other broadcastsrs~ has taken numerous steps i~ past years, to eliminate advertising which could be mlsle~din, g or deceptive. NBC has a Broadcast Standards d~partmenL winch reviews a total of approxin~tely. 48,00~ co~mnereials. ~zh. year. Broadcast. Standards as part of ~hls p r ocean, rovleWS subetantmtlon for advertis- ing claims and consults the NBC Manu~l, the National Associ~tlon of Broadcasters' NAB) Code andguidelinea as well as applieable legal regulations. At the FTC's r~lest, copie~ of s~tovyboards of ~mtwork t~le~nslolt and r tu:llo ~omlnerelals which h~.v~ b~en br oadc~i~ are p~rl. odicaHy s~nt to the Federal Trade Commission. NBC~s owned stations &lso have personnel ~,pplying bmadcmst standards in their review of localadverdsing. , ~ •. , ~ ..... • Remark~ nf Robert plt~f~ky. "Advertising: ~£he~ and N~W2' h~f~re ~h~ ~t~o~al C0~ vent Ion ~f the &meflca~ Ad~er~lMtlg IOe(leratloa [Washington, D,C. Sune ]2, 1979), $~-95~ 0 - B0 - 7 g g ® !i

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(viii) Disclosure ef relevant information on product chamc- teri~ic~ and functions is encouraged a~d information should be presented in a straight-forward raatmer which will not ¢xag- gorate or distort the characteristics of functions of the product. ix) Commercials for breakfast type products are to include reference to the re e of tile product w t l n the framework of a balanced diet. (x) lrtdlscrimlntae or immoderate use of snacks or candies is not to be suggested. (For instonce~ children may not be shown with the large sizes of a product or more than one candy bar). e. The Nati~ud Advevtlsg~ Review Board ("NARB') Tbe Council of Better Business Bm'eaus, Inc. ("CBBB') has also issued advertising guidelines and es~abllshed a ~ational Advertising Division "KAJY: and the Natonal Advertising Review Boar([ N_~B ). RAJ) based on the voluntary ~ubinission of advertisement its ow~t monitoring, or compinints, revmws advertising after it h~s b~en first publisbed or becadeast. In appropriate sltuatlons~ NAD may seek substantiatinn of advertising elaim~ If an advertiser disagrees with the findngs of N.4A): an appeal may be taken to a five member NAI~B panel, composed of three advertising representatives, one agency ~ep- r~sent~tive and one pub]is member. If the panel upholds N~D and th~ advertiser still refuses to change the advertising, the matter nmy be referred to a government agency with public disclosure. The self-lvgulatory wc~mplisltments of tim N.kRB w~re cited by Commissioner Pi~ofsky as one of the z~asons die need for case-by case enforcement by the F'FC hms declined sine5 1971. %~. ~econd m~jor re~ol~ why cas~-bg-case enforcement, is le~ esaen- ¢ial today has to do with the ~mark~bis success of tile National &d- ~'ertising Review Board. I was present at the ¢rea~iol~ of that organi- z~taon ~hat is, I sat in on the ea rli~st meetings between its ori~dn~tors and FTC enfolcer~and while ~e all ~'ished tile project well, I think we Oil the gov0rnlnellE side snspec~ed that this effort ~ self r egular.ion like so man others~ wonld bare u very difficult time. Afl~r ais)ut seven or eight years of vigorous operation, I think we have enough evidence to c~nelude that the NABB is as successful an effete; at self- regulataon as any we have witnessed in tiffs couJ~tt~'. M,uay of the eases that migh~ otherwise vex federal cnfot'eers are nipped dlrough the self l'eg,nllation pit~ess~ and poiiei~g now o(cul~ inside advcrt~sing's house and tbei~efore wkhout the inevitable friction of goverlmx~n~ regulation of private ac~lvitiss." 5. G fg~ (~LU~ ~t~ N ~e do not beI~eve ~hat i~ is desirable for a Government agency to ht~ve the ~ltthori~y to ban or severely restl'leL truthful advertising of la~ fnlIs-~ld pl*~dml.~ simply be~[us~ a ~rLaj~ril)" of it~ C~)inntis- sioners, at a given time bare persol/al ob eetiolls to [leh ftd~eI~iShlg ill. tl~* l}rralue~ ~e l~g advel~ set. ~[ol~oveI, ~xe do not be ieve tha~ Congre~ ever intended, or that the (onsbitutten [lermi~s, tile FTC be exerclsc such an IlllfeL[cI'od aulbority. ~Such intrusive over-t~guJ~- tinn is as offensive to Ole fund~rnelltOd values al/d the eor~2]on ~se

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f 9~ u n wldeh our democratic ~ystem w~ built as i~ is violatiw of tke ~Poonlst ution which embodies thenL When ~ Government agency loses sight of the original Conffeessional intent in its int~rpretatlon of a statute~ it ~s up to either th~ courts or Congre~ to set fire agency on its proper course. In this iust~nee, we believe that strong Congressional action is n~es~ry to limit the FTC to its proper Congressional mandate. BOSTON UNrvr~S~TV, ScliooL oF I~w, OFq~ICE OF TII~ ASSOCIArrE DF~ ~ Boston, M~.~ December 10~ 197.9. Senator ~rE~-DEI~ H. FoP~ D2~ SE~ATO~ F0m): I am writing because o~ ~he.signifiennee o~ th~ present controversy o~r the FTCA See~an 5 lan~qmge prohibit- ing "u~t~ir . . . ~ets or practices." The statutory pt'ovislon was the focs of concern 'n ~ ch'ldrens telev'sion adwrti~ing cotangent which I ~repa~d with Bruce P. Keller last ~alL Mr. Keller and I ah~re the concerto ~ ~e ~tatutory standard has ~o~ been eohe~tly defined and eons~tently followe4, However, em~s cu]~tion ~f the FTCA by striking tim ~Jfl~ir . . . act~ or practices" • d udlcatory or rulemaki~g jurisdictioa of the Commissi,)n in order to cheek peree red ncons stency or excesses strikes at the publ c rather than the Commission. The soun~ ~ternative ~or both Congress and the con~s is t~ insist that the FTC articulate and consistently apl~]y o~ the record thee eri~ri~ which ~vill guide the Commi~sidn i~ its el~fOl c~m~ii~ Of ~]1~ s~tute. The failure to do ~ (hriIlg ~]le l.ec~h~ [)ast~ during which active eaforcement of tile prohibition has m~rkedly ~cl~sed, has not yet been before the courts, We be]ieve, quite strongly, that this is the achilles heel of current FTC practice and (h~ the courts, as we]l as C~ngres~, will find unacceptable the variable definition of ~he statutory st a~d~rd. The ul~im~e question is~ of course, whethex or not i~ is possible to articulate • wor]~ab]e defln~tlon of ~un~alr" ~t ac~o~nmodates b~th ~he concern ~or channeling the Commission's exercise of jurisdiction and t~e oi i~nal intent c)f (,ongress tha~ the FTC should not be undu[~ coustrained in dealing with ever chan~in~ marke~ practices and con ditlo~s. The wisdom and foresight of C~ngress with respect to the latter is beyond dispute; the market practice~ arid e(~ldliioJ~ o~ the hl~e l!)~lls ~tIld ~he po~l World War Tf e~usum~r good~ an(] services oriente~ economies are 4i~inc~ly different as a result of the proc~s of chan~e f~reseen by Congress in 193~. The dramatic difference is uowh~r~ m~re ~vide?~t t]l~n it i~ in adve~i~in~ an ar~ in which vast reso~l~es and gre~t talent ~r~ ~Iives~ed in t}l~ ~evelopment o~ adver- tisin~ can~palgns. Limitnriou of FTC a ilver~i~in~ jurisdiction to "false ~nd deceptive" r~lthl,r llmn ~/[nfair iir deceptile~ adve~iseme~ts woul~ unduly em~ has~ze li(el~l contel~t a~ a time whea studies indicate that t]~re is ~t]e I~ter~l content in contemperary national a/lv~rti~in~ a~d that the effectiveness of such adver ti~i~ff i~ a ~roduct ~ the use of ~ophis~i-

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97 cared, subtle techniques of pemuasion and attitude change. Tlmt would be extre~nely unfortunate. The distinctly better approach is t~rtns of both consumer and competitive market concerns is tn b~t tar define the criteria by which it wl]l be determined whether or not particular ads or advertising practices are unfair because of their effect on consumer deeision~mking. Enclosed is an extract from an early draft of an article on "tmfair- nc~s." The al~icle derives from our work on the comment filed with the Pre.~iding Officer in the Children's Television Advel~ising pro- ceeding, but its focus will be the "urffair . . . acts or practices" stand- ard in a broader context. ] hope that it will be of interest and that we can be active participants in aI1 effort directed toward guiding the development of the law in tMs important area. Very truly yours, P~e#8or alzd Am~te 7)e~ Enclosure, .'~fAF~KL'T PI~OE U.',-F:dRNI]8$: ff-N OBJEoTrv~ BASIS FOR I~TRIffrlNO COMMERCTAL SPEECH TO CHIX~)k~N ~IT]=II~ T]=LE ]~OUND~* OF TIIE FIllS'P A ~fENDXENT ]By David A. Rice, profes."-a}r and Associate Dean, Bostnlt Unlversfty School of Law, trod Bruce I". KelIer, 1970, Boston (lrd~ersity School of Law L INTROD UGTIO N The proposed Federal Trade Commission (FTC) rule restricting children's television advertising ~ raises important and difficult statu- tory and constitutional issues that have ma~or implications for both present and future efforts to regulate commercial advertising. These issues, wifieh are overshadowed by the popular press and media cover age of the emotion-ckarffed debate concerning the significant and dial cul~ scxial and economic policy questions posed b v the Commission's initiative require eritiezd ~flection on the meamng of ~]m FederM TradcCammi*~ionA(t FTCA ~rohibitlonoftheuseof'hmfair... acts or practices ~ ~nd the ~npor* for FTC regu a~ on of the recent extension o* constitutional protection to corc~mercial speech2 The Children's Television Advertisi~xg rulemaking was initiated upon the pet l~ions of Action for Children's Television (At)T) and the Center for Science in the Public Interest (CSPI)? The Commission's decision to nlqde~}l~ tt ltilPm&thiIl~ )roce~diu~ euhtlinated yct~ru of grcmnd ~vork 1Md by op]ponenCs of child or Jent e(]. eOlrmmrc]a] m] e vislon edvertising.~ The evidence eo~,tairled Ina substantial all(] rapidly • i,,.l~ Nc)tie~ of l*e0Oo~ed ~z2]e~flRl~g oa Chil(iteft's AdverttsJ~g, 43 2:'~. Reg. 17~67 Apr. 27 1~78). • FeflerM Trade ~ommls~loll AcL Ch 311 § 5, 3g 8trtt (191#*) Icozl~rcent ver lv~. at I5 U S f'. $ 4.*(a~(l, (~97~} See g~x~ratlv, V~,gi,**~ Z#ctte ~oard ol Pbarm~¢rJ v ~ir~$ula ('~t$ze~ (o~#~tmer Oo~n vii, l~,v , 4~5 U ~ 748 (197~t : Bate~ v ~¢~v Hdr O] Arizona, 43:] • S 3~0 (1~7) A tMrd pedtl~m raising mat~v <If th~ sam~ Iss~les that ,to ~ d I~ fhe ~CT and ~'PflI l~etnions was tiled j~intly ~lth tho C~mmt~sion by C~laat~mev ~ itl~m ~I A~tvriv~ Inc and ILe Committe~ on Chtldren s Tclevisiott, IRe. J.-~C Notice of l,ro])O~ed Rulem~klng. n0t~ I supra at 17968 s S~ g~ eral]y, Thnin 'NOn Law public Iltterest .~dwe~c : .~d~'ertlslng o~ ChEdZ.en s T I l o ix Wv bod ed. The S,)c a azlfl Ec0nont c ~equences o l~ab c r~¢erest Ia~ Acttvity 1~78).

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~8 growing body of research studies on the effects of such advertising ~ aLnd a voluminous FTC Staff Report r prepared after the ~lln, . . , . g ofthe.. ACT and CPSI :etl~tons proved sufiiment to convmce tile Commission that t shou d ab*tm orJ exclusive reliance on a case-by-case approach in the regulation of child tea's tM~vislon ~lvertising ~ ~d to consider the adoption of a fat' reaching trade regulntfion rule. ~ In essence, the recent research demonstrates that marketers have invested substantial effort mad money in orienting and pmm~tthg products t~ children who by their nature lack the cognitive eapacily tz* distingtfish hetweeu eDm- merclal and program content, understsml the persuasive pro'pose of advertising and interpose attitudinal and cognitive defenses to mediate their strong disposition to trust and like all commercials and want all advertisedse~o2rodustsJ" The pe~ling rulemaking provides a rich context to criticaPy ~x amine the ftmdamentdi questiolts conee~'ning ~he sul~tantive nature and scope of FTC authority to r%mlat~ e~mmercia] eondue~ as mn un fair pr~x%ice and the lhnits imp~] on such reguhttion by the ~mt ~mendlnent. ~V]file the issues transoml 0m proce~dii~g, the ~atter ~liumim~tes the former, The proceeding provides a unique setting for examthatlon of the underlying legal issues because it ~nvdves a prc~ posM to strictly regulate speech which is sthenvise non~/cceptive anti unobjectionable on the ground that children are inherently incapahtc~ of mMersi~tMing it,s character and 'pnrpos~ btlt, arc, inI~n'linat~dy ill- fluenced by it. The context, therefore necessitates thorough ¢ons'ider- a~ion and ear*fal articulation of the unfair~es~ standard embodied in Se~rion 5 and largely uncharted exploration of the c~mtou~ of the protected e~mmercial speech terrgin. The initit~l effost of the author~ in this article i~ l~) a,rt, ietflat, e a justiciable %nSalr . . . practices" standat~t utmn whisk futm~ as well as the present ruleulahing hfitlarive can be supported. Once the al- ternavivo to various curr~nt formulations of the standard is outlined and explained in reruns of Zegisimtive hisiory and existing case law, tbo authors demonstrate the superiorSty of the new formulation over pDtWioIIs exprt~s*~k)ns of an olmrl~tionaI ~tal~da~d. "I~/e r~f~I~ll/llS,~£,d • A~ a t~u~t of ~es, t~ held by th~ I~C ]u ~':l examir.~l~g tile effects of m~,dern ad- v~rtiMng pm~tlt~, the ~'~tl~ua] ~[e~ve /~otlt~dntlon cor0ml~M~n~d ~u~tller re'~rch stl~d~es in all ~22Or~ IO ~nd~sivei~" deternll~ ~h~ ~.a]ldl~y of thc~e arguments elaim]~ng ~h~lt commercials 41r~,l~d to eM]dr~n ~¢~ b~lr~0fLnl to tlte~r eo~l~llive a~td physical d**v~l. r~l~memt '~h~ ~e~.~l~ ~re ~o~t~lt~ed ~o Adler. ~ a] Research cm the ~/f~l~ of ~el~v~sion Adv~$tl~lr~ 0~ Children: s. l~evlew el tile LU~r~rr~ and Reeomm~ndatIon~ for Fu~12re P*~e~rch 11977} I~r~naft~v vl~efl a~ AS]erl As Ihe I~t~r mrtlon of the title nd ~he • s~It wH ~ p~r~nI~slVe vatltl~ ~e a eed eoaelu~l~-~. See ~e~eral]y. dl~ells~lo~ ae c~ml~nnylng ~oie~ 121~5 ~n?rn ~45 Fa Reg 17~'~7. ]r~fl9 (A r 27 19"~ See ~ o F'rC $ aft 1~ ~rc on ~e vi ~0 STilt- ~Ff2 il~ d~-ttlt In nlnm*.~nlm Un~t~e~ with *p~q~e childrens' t~le~l¢*ll ~d~e~ll e ~nent~ elairn~g ~hs~ D rt cn p acc v ~ ed S~. ~tl 5 o FTCA. 'Th~e ~d dia tl~e atil r tl]all u]emakl/~ ni a ve~ n e r~ at]on of ~-)flld oriented ~dv~tl~l~ng i~ ~d~ ~mol~g oll,er~ the fM~0v.~l~ en2e~ : I~eal q'ny ~'~ 4 b~C 2~ t ~4 ~ T er Oor~ tlal, rul~ blrtdLr*~ ~n th ud wh ch ~v r~ dl~ d ~ d c ~]h • ,b tl N ,~a p t." ~ ~ R ,~ ~- ~n FT¢~ C~n~res~ suil~equenr]y reaf~tnwd this ¢1~10~ ~nd ~stabll~tl~nl ~h~ prot~dl~rM s~n~ n~e~a~v t~ pee~mu/e~?~ ~ r~n~tlort r~le, Chlldtell Learn To I~el~ 23-24, ~ 18 (1978) 0~

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standard is then applied: dI~wing upon puhfished reseamh findings [m the effects of children's t~levision a~lverbishlg for the factual con- text~ to the proposals p~:sently before the Commission. Finally, tile authors ad&~ss the constitutional c~ncerns raised by FTC regulation of commercial speech~ and particularly efiildren~s television advertis- ing, as a~ ~nfulr t'ather thau a deceptlve practice. II, TIIWA]t/] AN A]~'I'I CI] I ~ATI( ~N Ol~ A JI~STIClA III~ lJ N FA]~IS~t S'TA N IIA~ID A. Backgve'~nd In 1914~ Congress passed the Federal Trade Commission Act under wtdeh it created ~n administrative agency designed to enforce the act's general prohibition of "nnfuir :nethods of competition." ~ Twtmlg-f~mr years later, the Wheeler-Lea Amendment~ to the FTCA further Dros~ribed- all "... unfair . . . acts or ur-aettces in com- merce." L~ The meaning o~ the term ':unfair" was i:ttentionally left & & mlpartieularized by statute in the original act so that the Commission might be flexible enough to deal with anticompetil:ive practices in their incipient srage~ before they ]~came full-fledged violations of the Sheman Act.~s The 1938 Amendments als0 avoided a definition of unfair p~ctlees. Due to toi~ial Commission ~.luetanea to employ "tro- D fair as a basis fur l'egulatoL~' authority other th~n in instances clearly within the ¢onmmn law concept of unfair competition, litt]e concern was generated over tfie precise content of the teem. 12ecently, however, increased reliance by tfie FTC on t~fuirness as an independent basis for both its adjudicative ~nd rulemaking activities has drawn renewed attention to the word's unresoPred scope. The major criticism of tim FTCA unfMrne~s prolllbitic~n is t~vo- fold : (1) its ~morpboug clmpaeter provides minimal gnidmme go per- sonswboares~bjsettoFTCjurisdiettonand (L) ithasbeenvarious]y defined bv the Comm ss on to suplmrt amu titude of rules gad erders reecldng ~ar beyond w!lat many )i~viouslv belie~ed to be the boundar- ies of legitimate FTC regulat'ory action," The first o~ these concerns is explicitly recognized in FTC v. Sperry and Hutehinse'a Co.,~" al- though tim ~tti)l~irle Cour~ decision ill ttmt case is most frequently circa for it.s confirmation that the Commi~ior,, pul~nmg, to tfio Wheeler-Lea Ae~, may indeed reg~tete %nfair . . . practices~ as condue~ distinct in Mnd from "unfair mefl~ods of competition" and deceptive practices.~ The second cow,tern is mo~t commonly expressed in the writlng~ ~f eommentators2s The need for the Commission ~o adapC and to henceforth consist- early apply, a fleer d~etrlnal f~amework for analyzing unfair irac- tiaes is reflected in the afurementic~ed e~tlcism of the p~vious un- 1~ ~ N i~ ~ I~ [~ l1 ) ~ [,~]~]~e fopD~ ~l t~]~ C~mmDsion ther~fe*re wsi~ ~ eolvl*~t m~neD~n~tie ~lld Dr ~4at~r~" pr aptle~ I~ f~m I~e rlt(~r S I~WheelerI,ea ACt, eh 49, ~18, 5~ S~ut 111 (1988) /cll~rent ver~len ~t 15 U.NC. 11~ ~ 8]I~DII~ AnUtrust At*i oh. #~ 26 St~t 20q (I~NI (current ~,er~lo~l at 15 UNC. II 1-7~ }l~e ~1 ~ ~xt aceorr pau Ing n~te 27 ~afra ~" Properly re~d in thl~ mnnner the ca~e represents ]~tt]e more than ,~ ~lm ~ d • i~. nr,n cf the DIIvDe, e b~,h~l~ d the 1 ~:~I~ Amendments ~, S~e ~,cner~Ib fJ~itwl/rr~ ~e~ullltll~ Unfair Pravtlces Under t~. rqc Act: 2"he NeOd fl)~ a "uegsl St~l~ldard of l'n~alrncss II ~rem L Rev I 11977) ; Nelson, "ph~ politlpl~. IIoll ol ~'TC Rulemaktn~ g (r,n~ L Roy ~13 4~t~5 ~197~) ; ,~ustern, What l~ onnf~lr Advor tl~lng"! 2~ F'ood Dr~g (',)Sill I~ J 68D (1~711

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100 falrneas test,~ Indeed, the Supreme Court's de~Jslnn t~ remand t.he £pe~y & llutehlnson ease was b~ext upon the Commi~inn's fMlure to elearl - articulate the tmfair aspects of the aeks or practices which had res~ted in the entry of a cease and desist order against ~perry d~ Hutehi+~son.~ Much has beeu made o~ wfiat seems, at first blush, t~ b~ an approving Supreme Court footnote l~fer~nce to and quotation of~ the indicia of unfairness set forth in the F~I C's Cigarette Ad~.er- rising Rule Statement of Basis2~ I~owever~ close examination of botll the context in whlcl~ it is cited, and a i'ev~ew of tim aughoritie~ relied upon hy tim Commission in originally devel~plng tbose crlh~ri~, e~sts strong doubt upon the validity of the Cigarette Advertising Rule formulation?9 In light of the stakes at issue in the present preeeeding and the inevitable dose ~udicial scrutiny of any r~le that is adopted, as well as the ever present process interests in all problems of this sort, it seems tinle for the Commiss~ion to el~rly esmblisll a defensible and geimrally applh~able unfairne~ standard. As st~ted by fine o3mmell tater, the failure t~ do so will invite %.. udieial revemals of it~ re - lations and legislative limitations on its a~thorityY.~" The follow~g analysis is therefore offered to avoid such censequences. B. The ovon~nlv mtlcmale v, nderl!ting the FTCA Tim Federal Trade Commission Aeg and the Clayton Act ~ were both enacted in 1914 to assure mole effective enforeemen~ of the anti- trust policy er£c~died in the Sherman Act?~ Each was a response to the "rule of reason" articulated by the Supreme Court in Standard Oil v. ~d~ed ~S'tale~, a decision which interpreted the Shet~nan Act prohibition of all agn'~enlellt s in restraiut of trade to m'tu ally pr~seribe only those restraints whieh could be labeled unreasonable. In other respects, lmwever, tl~e companion acts were quite different. The Clayton ,~.st limited the int~rprstative role of the c~urts by specifically prohibiting such practices as price di~-rimination,~* tying contracts and other axctesive agreements,~ and stock acquisitions by one ~ot~oration which would tend to lessen competition or e~ate ~! monopoly.~ These proMhitions were m~uie enferelble in the faderal distdet courts by both tl~e goven~ment, andprlvate parties who had been in ured by specific violations. The FTCA, on the other hand. proscribed as ~unfair Inethods of ~mpet t cu" tho~e ant com[)l,~ tve pra~,tice~s whteh~ altlmugh falling sbc~rt of tradigi~nally actionable t,405 U.S. at 24~i ~, n. 5 ~Q t~xt ~eeompal~lng oo~a 10~ 114 Jiit~a The Indicia of imfa]rt/ess artlelt]a~ed by the F~I2 i~ Ira Trade Reg~llatlv~ ~ulo on (.Igarett*. A:t~rlislug a~: Ill whoth~ ~h~ ~*raetie~ wRhout ~eees~rlly ha.~lng been )revlou~lj- e,,n~idered unlawful offends public ~Hel-. 12} ~ether ~t I~ ImmorM unethteal oppr~sixe o~ un~erul~UlOUs ; I'l) ~,h~tl~r ~ Sehw~tz~ note 1~ supra, at 3 ~Cl~on Act~ ell. 323, ~ 1 et ~e~ 38 Ntat. 7~0 11911) ~eureent versVm at l~ C;S.C =~ llUblee '*Th~ Or[glna] Plan and l~ariy History of tile Federal 'lPrade eomm~to~," tI Ae~/d ~r~] S~l Proe 60~1 (nl26) ~221 l: g 1 ~19~11 q~on~ fmlr h~,lr~ ~ffter ~o Sur~reme [2ol]rr ]Imlled t~e Nh~rman eommt~alan ~et pI~0Se~ his concept of an admilll~tr~t~xe t~rte eomml~ien. 47 front ~.1~ lJ S (2 14 (19~11). ~ 15 Vg~ t 1~ (197~

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SC0~900~9 :i

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10~ phasis w~ placed on the control of unfair cor~petitlw pr~t~ces or market behavior as a means for preve~tir~ monopolization or the m~int~nano~ of a monopoly. In a[~preci~ion of the inventiveness in- spired I~v e~n~ie ~l~-int~r~ C~ngre~ I~ft t.h~ ~rtic~t~r competi tire met lc~]~ pro~c~rib~d by Secti~n 5 to d~fin~tion tJv ~he Cemm~i~)n. It is c]~r however [hat [h~ in~end~| f~ ~f th~ ~FC w~ to he on t]xc~e busine~ pract c~s that ~ul~verLe~ the opera~ on of ~ 1~ free tuar~ ke~. ~'r0m its inception the Ccmmi~slon t~ok a br~ad vlew of the types of business pr~c ices Tt wa~ au h~rlze(] o re~uIa ~ a~d he interests to be protected through regulation. The former is evidenced by the f~c~ thst th~ first three cor~plain~s i~sue~ by the ]FTC concerned f~]~e ad- ver~i~ing~ a practice beyond th~ re~]~torv scope of the Sher~rmn ~nd Clayton Act~ us well ~ ch~ common ]~w of unfair ¢oml~e~ition.~ The Ce~liu~ioll's initially [~r~a~] p~r~e ~ti~n ~f it~ ur~t~tiou w~L~ ~lot r~a~lil~ ~ccepted by the co~r~s~~ bu~ any doubt ~bout the FTC~ jlJris ~ictlon o~er f~]se adver~i~in~ a~ an unfair rn~tho<l of competition was resoh,e~ in fawr o~ the Cor~unlssion in F~F~ ~'. W~d I/o~ Co~n- Th~ FTC's view of ~he in~ere~ts t~t it ~v~ emI~o~ere~ ~ l~rOtec~ w~ls~ however, le.~s ~avor~bly ~al~ ~i~]~ by ~h~ Silt~r~nle Court. The r~co~niz~d ~uri~dic~o~ of th~ Commission over f~l~ ~l~Iv~rti~in~ ~ ~u[~llen~ly limited in FTC v. R~ ~ tc~ ~ase~ in which th~r~ h~d b~eu i~jul~ t~ a co~npetil~r. TI~ Cour~ wen~ fl~h~r ~n FTC ~. K/~ ~cused too narr~w]~ ~n illjul~y ~ ~ ~in~]~ com~itor T'a~]~r r]laT/t}~ ef~c~ o~ the fals~ ~ver~i~in~ on the competitive m~rk~t. Th~ too t~ ~ut hori~ of ~he Commission L'e~u~e the pr~eedin~ ~vas pri~rilv cou~erned ~ith The ¢ompe~itor's private interest r~h~ ~h~n the ~pu~- 1~ in~e~" d~c~ated by ~he FTCA,~ Ewn FTC v. IT. F. l~pp~ ~t~ ~.,/~.,~ the ~ase frequently cited for the ~u~r~m~ Co/~rt'~ di~cu~ ~i~n o~ ~he un~irnes~ o~ exI/l~tin~ children in th~ nl~rke~p]~e, uJ~i m~ely re~d on a ~t~rmm~ton th~ ~h~ pr~c~ic~ ~t ~sll~ ~v~s ~nti con~petitiv~ ~n terms of i~ e~ct on m~rk~t compe~itlo~.~ Thu~, de s Ire ~ub~eqtte~t conJ~T.r~&~ioll o~ ~h~ ~Ollllrli~olt~s b~'~(~ di~c~ti~ t~ ts vew that such de ermii~atious ~ver~ intern e~ b~¸ Con~'~ss to be m~d~ ~vi~hin th~ ~onf~n~ of ~ ~rket focus.~°

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~iI,~ 103 U. The ~ffect of tke 1938 WI~eler-Lea Amevg]~cmnts Tl~e SupreTne Court docisions limiting ~he m'~)pe of the Commission's au~lcJrity to cases invo] ring i~jury to competition lecL to Congre~ional • (]O[l~iOD Of th~ Wheeler Le~ ~mendments in 1938.~1 The addition of the p]~se %nfa~r or deceptive act~ or practices in coInmerce'~ in~ creased tl~e ~ope ~f Section 5 in ~he fullowin~ ~nana~. First~ it eliJ~÷ illat cd th~ need for the Comlnission to prove that the challenged prac- tice affected con~petition directly. It therefore strearalL~ed the ~tig~ tio~l process ~ removing ~ requil~nent wl~ch had. prove~ to be an lml)ediment to effective enforcement. Second~ it signified an equal concern in the law for ~e effects o~ anfA-c~mpe~itiv~ practices on th~ consuming public ffeneraily, as well as the consequent mjur~" to com~ petitom.~ The ameadme~s further stipulate4 that the Commission, ratl~er than the Food and Dr~g Adnlini~tration~ had jurisdiction over it~ h~lse ad~e~isiag of food~ dru~s, d~v~ccs and com~ic~.4~ I~l c~ses invi)lving sll(~h Ilrlll|uct% fl~e V~]]L!clcr-L¢~ ~.l:~ ~u~'~h~r l~ut]ltlr[zcd the FTC to seek taalporary injunctiv~ relief pl~hibiti~g th~ co~tinue4 dissemination of cha]lealged adveltisemcnts t)endi~lg ~ o~tc~me o~ Commission proceedings i~itlated pursuant to Section 5.~ The 1938 amendment~ provide the legal b~sis for the FTC's pro- pc6ed Children's Te~evlsion Advertising Rule~~ It is therefore, neces- sary to carefully exaI~i~e ~he amendme~ts a~4 leg~ative b.istory f~r any indicJiti~u of tbe ~ub~t~l~ti~'e meaning of tl~e t~rm ~unfair . . . practices" or ft~e l~le~ii~g of %nfair" as u~d in bD~h th~ 19l~ an~t 1938 statutes. Upo~l cIose exami~ra~ion it become~ clear tha~ tl~e legisla~ ~i~'e history, p~ovides no direct insight as to the iatended ~eaniag of ~he term ~unfair.~ ~elther. h~weverI does it ~urther ¢on~s¢ ~h~ situa- tio~ with any sugge~ti~ tt~at the ~ernl was intended to have different scope of meaning ~nder the 1914 anci 1938 acts. Thus, it can and should b~ assumed that Congrcss in~cnded %nfair" ~o haw th~ ~lml~ meanin~ in 4t!finiI/~ ~ methor{s elf (!¢Jrll~)l!~i~[{JTl~ an(~ [~t'ac~i(!ea ill c~llllnLerc~~ ov(~r which thl~ C~lnmi~io~l has jurisdiction u~lder Section 5.~ TLe conseq~el~ce of tl~e pl~esulnab]y consistent us~ of tt~ t~rm ~n fair~ in the 1914 FTCA and the 1938 ~Vi~eeler Lea Amendments is that those practices ~vhic~l cause art~¢ia] m~salloca~ons of consu/ners~ economic rcsources~ thereby creating a inarkct di~functicn, arc u~fair g~ b~ g_~"--"L~

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.%. 106 effect has been taken i11to account2~ Thus, even while enhancir~g those FTC enforc~m~n~ mechanisms which enable it to more effectively prevent fraud and unfairness Congress hm~ not indicated in the new eg s at on that the Comm ssion is to switch from a market-oriented toward a consumer protection per se approach. Similarly, the Com- ~nission itself continues to reiterate that market regulation remains its primary task2~ The fate of certain provisions in subsequently proposed amendments to thB Federal Trade Commission Act further underscores that, at least in the eyes of Congress, the Commission's focus has yet to be shifted, by eicher legislation or udieial interpretation to consumer protection as an end m itself. A bill proposed last year would have expllczty created a private right of action for consumers under Sec- tion in tllC~ instances when an unfair or deceptive trade practice had been ouLlawed by virtue of cittmr a trade regulation rule or a cease and desis~ order.~ Another pro~isbm would have made certain FTCA violation~ actionable and created a slmam]iimd class action process for Section 5 offenses by relaxing strict notice requirements2~ Both provisions were controversial alld neither gamlered suificient sup- port to ensure passage/'8 The death of the proposed FTCA amendments does not, of course, mean that consumer protection is not an important Commission con- cern it has been so since the originahlgld Act. Thepreceding discus- sio~ simply reemphasizes that }he unfairness stanaard is best ana- lyzed and de~led in terms of the concepts underlyhl~ the 1914 Act, rather than in terms .... of either commpetitor or consumer protection per se. Such a market-oriented standard is certam]~ a more candy ratmaal- ized and consistent approach than the tripartl:e Cigarette Advertising Rule criteria which makes the determination of whether conduct is unfair dependen~ ninon shifting no,tens of public p~dicy and moral- ity. * Moreover it d~es trot appear to limit ilt arty way the Commis- sion~s present or proposed substantive trade regulation rules. Tbe following review of a representative ~leetion of FTC rules ilh~strates how well this approach serves as a basis and pl~vldes a coherent frame- work for recent Commission activity. HL ~AII~[~T I[~NrAI~SS AI~]~LIED: A (~ON~YST~NT RATIONAI~E ~(~]{ ~OTH RULEMAKINO AND AI].~L~M~bATIO~r A. Trade Regu~at~en R~z~es To date: the Federal Trade Commission has proposed or promul- gated a vartely of [fade re~latlon r~lles which can be cIassified into two bro~d categories. First, there are those relies which l~eq~dre either additlona] or mort! effective dlformai~on di.~l!]~sure. Among the~, arl~ theOctaneNumhersRule. ~heOareLabellngRnle. theF~dAdver ~ ~ U.S.C. 56fa) fd)ll~ ¢ I~7 f;L mSeetei uce0m~a~ynzn0~o~ 2 e ~t~rn ~06 Antitru~t ~nd Trade Reg Re~ (BN.~ A ~ A ? (~f~r 22 19~?). ~35 Antitru~t and Tvafle ]~e~ I~p IIINAI A 2 COnt. 2O. 19771 '~Th~ major faults Jaher ent Jn relyl~ upon the Cl~r elte Rule ¢~lter~a are discussed l~ th~ text aceom~anyt ~ ~0~ 98 110 in fra. I6 C.I~R ] 422 (1978] g

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IO7 g~ing Rule ~* aud tim proposed Prescription Drug '~ and Ophthalmic Goods ~ adver~isill~ ~ll]es. Th~ sccorld category is much smaller and soveral of th~ rules therein a]so co~ltain an ~lem~nt of in formasi~n dis- closure. It dil]'el~ from the first ca{~gory~ however, in that these rull~s alsoI~rohibit particular types of busiaess i~raetiees which are imper- mis~iblB reg~rdle~ of the disclosures tlmt may accompany th~ trans- action. 'rh~ l)rOl)osed C~l~dit ]?racsices Rtfl~s~~ for examp|e~ requires creditors to abandon the use of cognovit confession of udgm~at and eross-collater~| clauses.~ The Funeral Industry P~actites Rule ~ also prohibits certain "exploitatiw practices'7 including unauthorized em- b[dlnln~s and re~usa]s to re~ease eorloses to ~am/ly members3~ Putting to o~e si~ S~ction 5's deception Standard as a ba~is ~or promulgating ~tegorv one rules it is clear th~ they ~re also well ustified unde~ the u~[~airn~ss analysis offered above. I)isclos~re re- quirements, ~sid~ from th~ ro|e they serve ~ eliramating deceptive practices, help restore the competitive marke~ model to its proper ~ork~ng or~ie~r. Among otL~e~ ~,~sumptio~s, the mal'ke~ n~odel presup- poses t~hat consum~ wiIl haw sufficient information wifl~ which to m~I~e r~tio~aI purchase decisions.~ To ~he extent tha~ th~ mark~ provides disincentives for s~Uers to supply t]~at information ~0 they will r~fu~ to do so. The two methods of rectlfyi~g that situati~t ar~ to (1) remove ti~e market disincentive~1 or (~) impose a greater,

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~ ~i,~ ,,,,,, ~05~900~9 r .... .H

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W 169 both unfair and deceptive. The substantive analyse~ aecompan)'ing $hos~ order% how~ver~ in fact Iocu~ only on the deceptive nature of the practice. Even when tb~ C~mmisslon succeeded~ as a matter of seman- tics~ m uncouphng unfairness from d~c~ptmn~ the unfairness with which the Commission was concerned was n() morn than a failure to disc ose~ traditionally dealt with under the deceptlcn approach2° The tlrst FTC decision to empiny unfairness witbout deception, as a separate basis for prohdimng a business practice was Pfiz~r~ . Coming on the heels of the Supreme Court% decision m Spw',,J & Hutchlz~o~g it is an obvious attempt to articulate the standard tlm Court was for looking f¢~r.~ Pfizer had marketed iss Un-Burn sunburn ointment by making glowing claims about its pain reliewng proper ti~s. The compininL charged~ inter aha that It was an unfair i~ra~tlc~ to mak~ uueh claims even if true without first properly conducUng ~.e ri/i- able scientific tests. In its frst clear artlcula~ion of the unfan'ne~ standard in an ad udicat~ry proceeding, the Conoxdssion made a dis- tinctlwiy market-oriented analysis. Noting that in many instances ~ither the low price or extreme complexity of a product inake the cast of produc~ infcrmatinn seaz~hes exc~<~d their benefits the opinion ¢o11- eluded that the econonsical]v rational answer wo~dd be ,to impose a ~I~market tess requh'enlent ninon lnanu faeturers. "G h'en the imbalance of knowledg~ and resources between a business enterprise and its customers . . . t]he consumer is entitled as a matter of mathetplac~ fairnese~ to rely upon the manufacturer r~ have a ~easonable basis' for making per fo~mmnce elaiins." ~ The importance of the manner in which the Commission character- ized the .... m~ f airncss at issue should not be owr]c,~kedi Although noting the C~arette Rule er~tema and their subsequent o~tatmn in ~perry & ~[utchlnson the FTC d~d not employ them as the basis for the deter- nsinatlon. Indeed. the Pfizer opm on represents the most accurate reference to ~'pe~j & Hutchinson yet recorded. Instead of creating the misieadthg hnpre~ton that the c~se endorses a parthm]ar uufair- ne~s a~)proach, it refers to it ou]~ as ~... a succinct coni~r~rlatton of the Conmdssion's jurisdiction over unfair practices...." ~" Subsequent citations have not been so accurate. It has already been noted that the Commission, especially ih its rulemaklng activities, has emplo ed both Sperry & Hutvhi~o~ and the (igaretto Rule as the basis ~r unfairness formulations2~ ~lhe indications are that appellate coul~s, reviewing challenges l(i FTC ~eas(~ im,t desist orders, will follow the Co~mni~ion's lead and affirm on a .inlilar analysis. In the abstract, the ~q~adual evolution of an unfairness standard in this manner is hardly objectionable. The present situation, however~ poses a two-part problem. First. the traditional judicial deference to admin- istrative agency determinations prevents a crkieal examination of the ~AIlZ¢aI~ fn(~u~r~ea a] Nort~ f aroli~a, lne, 72 ~TC 1020 (1967). af~'d. 423 F.21~ ~23 (~th Clr 1970) eert denied ~)0 TIS 82~ [1~701 ~Fnilu~e to disel0se [hat in~tr~- me~l±~ of li,~lebietllte~ received ui~der n hume In*provemen~ contract were regularly plainly ~neompass~ Ihl~ sorl ~I de0epdon; l~ 1~ a ¢[ea~ category one ~R~ati~n $~81 FTC 2~ (19T2) • ~ See tex~ aceom ~an)inz note lY suprm 81 F~O ~t 6[ Ieterea~in~ly. the Commls ~0n aide ~l(ed AI~ ~¢at¢ l~u~lr~e$ ~ ~r~- ~lo~ re~gnltl*~n lhat a ullfformatior,~l imbalance h~tw~n ~a~t[~ ]~ th~ mark~tpla~ Is i~dieatb ~ u£ u,llaloue,m ~* 81 FTC at 60. ~ee ~e~erally ~p~e~, la~ ~. FT~, 5~0 ~ 24 ~ST fTth Clr 19~1. bJ

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1~10 validity of the Cigarette Rule criteria2~ Second, the Commission itself hinders dewlol0ment of a consistent standard through its varyin~ ~ormul~tions of the standard in recent rl~lemakin~ activity28 Splegeg~ Ine.~~° is a prime example of one half of theJ?roulem jll~ alluded to. Reviewing a Commission order prohibiting ~lie~e~ a n~ tional mai~ order retailer, from suing its eust om~,rs except in The eoun try in which th~ e~ns~mer either resided or signed Lh~ c~ntract th~ court appl ed the Cigal~tte Rule test. ~foreo~er~ it claimed tirol the Suprem~ Court had actually approved that staadard in Spe~n~ & ]tu~¢h~nson.~ Tllls is si~nply not true. Whatever the merits of that particular formulation m~y be~ one ~holdd not count Supreme Court endorsement among them.~ Yet it is reasonabte to assume that fut~ appellate cour~ dec~sin~s will blith~l~ c~te the Cigarette Rule ~ril~g~, SIm~y ~ H~hi~o~ and Sple~e~ w~thout independcnl]y ~ uesti~}rdl~g the standard~s validity. Th~s is extr~r~ely unfortunate bec~u~ewn more di~conccl~ing than the Commission's co~tim~a~ claims of a Su rem~ Court sanctinn~d for- raul~.tion~ whic}t played no small part in t~e ~p~?e~ cou~s appr~acl~ is that the original formulation of that standard d oe, s not have the basis h~ law which the FqgC asserts it does. At best, the ~public policy- morality i~jury'~ trilogw h,~s b~t the me~t tenuvus relationship wi~l~ the ease they rely ~pon for prec~den~ial authority. ~foreover the llrs~ two criteria are extremely susceptible to contrasting deflni~ions~ de- pending upon one's po]kics and values.~ A reexamination of the Trade Regul~tinn Rule ~a Cigarette Ad- vertising re~'eals the m~jor wcal~ness of the tripartite test: it is little more than whole cloth woven from thirt air. In the Fe(]era] I{e~istcr no~ice w]~ich accompanied nnn~nlc~mellt olE the rule~ the C~mJldssio~ initially established its basis on deception rounds.~ It 1hen sought ~o elaborate upon i~st~nces ~ unfalrne~ ~termi~ti~n~ raad~ inde- pendently of dece five or anticompetitirc practices.~ ]However~ only on~ of the muir Jtll~c~ of cases cited by the Colm~ission as suppoI~in~ a~ Rn~airlless a ~oro~/!h i~; ~ctu~]~y ireliica~ec) /i im sor~l~lldn~" ~ther ~hlln specific finding of deceptiom~ l ~ndau~trd, t~ Cemmi~ioi~ b~ul~ upol~ those ~uthorities by explaining that a|tho/lgh "... rn o enumeratin~ of examples can define the outer limits . . ." of unfalrne~ th~ c~ses alluded do~ in fact, suggest the public p~licv morali~v-iaj ur~r criteria.~ Unfortuu~tely~ an objective rel~ding ~f throe cases no mo~e suggests ~Aa note~ ~rller there Is s~rtous ~uestl~u a~ to the vull~lty of th~se criteria See dls~ ~slv~ ~ec~mpa~ying u~ 1~ 115 ~n~m Se~ ~xt aceomp~ayl~ ~tes 14 1~ su ~a. ~ Id, ~t 2f*~ n. 8, ~In addlUon to these i~h~r~ ~kn~*s~, th~ third criteria, I~ ~lr , ~ al,~ m~t alw~y~ a~e~ ~e Consder or exar~pe,~hec~u etn~'~msr~rc ngtheposs ,ed~r. ~ramere~als are harm ful ~n several w~y~ the ~ta Is by n~ m~ml~ ¢~nchl~w ~ee ~en~rally, ~ln o~e of t~e ease~. ,l~cna~e~ Tra,~ Pres~, I~V~ I~ FTC 5~ ~9~DI t~ere w~ no ~onn L R~ 413,4~ lg ~t97~ 0~

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Although one can argue that the market oriented approach to a Sple- g~l sltuat~on arguably justifies the result reached in tiler case, such a conclusion requires what the authors believe to be an overly expansive reading of the marke~ based formulatiou. Even accepting tbat among category two unfair practices are those which become unfair solely because of their inapplleability to consumer traBgaetio~s, one m~st define "inapplicable'as almost synonomous with "inconvedient" to determ4ne that the use of long arm statutes is an unfair practice. Using long arm jurisdiction to sue defaultiog raM1 srdev eonsmne~s thrvugl> out the country iu Cook Co/mty Cr*ults simply doea uo~ represent the type of market disfnnetion epitomized by those situations in whlcb a seller can insulate himself from a duty to perform as is the case with many credit practices. This is not to defend SpiegePs business meth- ods; rather the authors contend that there are other legal de,ices available to frustrate 8piegel's ailns2~ However, unless one is willing to equate the emergence of nation wide marl order sales by credit as a disfun orion of tbe marketplace, snob cases are simply beyond tbe serqJe of FTC jurisdiction under Section 5 unfairness. There muet be some economic disorder befoIe the Commission should be able to prc~eedi The SpCeget case~ therefore, is best viewed as an exception to the gen- eral rule. The majorit5 of cases and trade regulation rules employing ~he Cigarette Ruin test ntis a]so supported under a market focused un- fairues~ anlllysis2~ Indeed, tilt! mnrket apprlllmb provides a solid foundation for what is perhaps the Conmfission~s most ambitious undertaking to date: a trade regulation rule prop¢~sing a total prohibi- tion of children's television adveldislng. PIIII,ADELpIIIA, PA.~ J'1~u~27/6. igs9. tieD.. WENDELL ]I. FORD. Dirk~enSenateO ceBui?*ld~G Washi~qtem~ D.~ D~AR S~NA'roR For~o: This letter is respnnsive to the request mnde by Senator Cannon, in connectim, with tbe FTC Improvement Act of 1979~ for comments by the public on "unfahmes~', As a starting polnL I would suggest : An unfalr act is one whereby the actor achieves a g~dn that is less than the sum of the losses that the ae~: imposes upon all others who are affeetedi E~onomist9 Would terul this a %~egetive stlnl g~lne~. Aq an exanlpl~ of an Imfalr (but lawful) act, I aul al)[mndin~ a i!npy ill clipldng from a news~paper a few months ago~ this example is net within th~ pur- view of the Federal Trade Commission, however. If the loss ]s great or the number of persons affected is large, the act might be considered not mereIy unfage but unlawful, [l~ my view, the ComldiSsi~n~s attention is appropIiately ~o(!tts~ed {In lhB b{)rder]im! between unfair and unlawful acts and u'acticos, and theh intention ~,ou d be to narrow the Urffa r range b~," neorpor at ng the most eLn eg- iausly unfair ones imo the Unlawfu] zone Zero-sum ames (activgies/, in which the gains m~d~ by some actors always eqna~the osses sultet;e¢ by all otlmrs, generally are regarded l~,rllc do~trine of forum n(m rcm,e~l~en~ is o~le e~f~l~ple; a ~estricttve aDp]te0A[or~ o~ the -miiltmum cool,eta' test wvuld be another 1~ S~,~ t~ ae~mpv nyDlg n~t es 71D9~ ~uprtl, tv

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as "fair". Positive-sum games, particularly those where all actors g~n in varying amounts but none lose, deserve being regarded as laudable. v , 1 ..... Bemdes the e~onomlst~ vuew there is also the long tradition m l~w that links fairness to justice and the protections of persons and prop- elty rights. There is, accordingly, an enormous volume of legal htera- ture on the doctrine of (un) fairnes~ Be~)'ond that, there are complex moral and ethical teachings about fair dealing among per~ns and insfitution~. The Golden Rule is fore- mast among these, but is obviously too high a standard to adop~ even by tile Federal Trade Commission. In view of all of the foregoing 1 would urge ynur favorubis consld eratisn of designating an acadcmic gronp to study and hold a p~b]]c s~rninar on ~un~airlles.s" and to pl~nt recotnmend~tlOllS to the Sen- ate Committee on Commerce, Selene% and Transpm~ation via the Con- sumer Subcomraitte~ in, say, 198~. The academic gsoul~ preferably should be broad, embr acin t he disciplines of law, economlcs, political science, and ~hilosophv. ~ey should be eaeouragsd to augment tileir number w th persons "outside aeadem ~ and n both the pub e and private sectors. "The Public Interest" was explored in something of the same man- ner in 1959, with excellent results, which are indicnted in the second attachment hereto, i~owevcr, the very considerable amount of re- search ~ncl itmowt~ive tlmugh~ that went into that study had little public impact, largely for the leason that it was not focussed on a clearly stated need. This particular shortcoming wwld be remedied in this cane, if ray suggestion wer~ t~ be accepted. An alternative rlmt you mig~ht wish to consider is to charge the Administrative Conference of the United States with conducting such a study and ~resenting legislative recommendatiens to the Consumer ~ubcolnna ttee all{ Ble ~/dl Colnrrlerl~ C~Innl ~ee. .I very. much a~ptpreeiate ~hls opportunity to express- my. thoughts on this sub] ect. If lean be of further beip in this matter, please ieel free to call o~ m(~. Very sincerely yours, W~ V. C~o~x~. T~ ~%l~r T~X WORLD IS Bu~T In Florld~ there's a law that lets ~ individual buy another person's property frOiil the eotlllt , ~x eo]leetor f e taxes on the property are not paid within ~wo ~ e a rs ~)f when they were due. Taking advanta ~e of that law, Callahan ]ela. re~l estate broker John Barrow. paid ~.05 in[~xes]astdlllyandbeeantetheowne,of ef'a e o s t Hat e M'ae I(em)n a.~| her hushLmd--who can neitheI ~ead nor wr~te built with earnlngs fl'om their veers of work in tobacco fields. Her zon. Jesse I(enon said that Barrow offered o eke~1~ ~.950 for the property ~md then ea~ue clox~n to $10,(}0o. He said he tohl Barrow ~ha~ ~10,0(/0 was too much for his~ parents to pay and that Barrow threatened to have the ]':enons evicted, "The ]nw ~[I] lell ~,ou tha~ i~*aorance i~ no excuse2~ Barrow told a reporter, "E~ervbodv in ~his ~orld. if flm¥ profit any, profit to 5he disadvantage of ether'folks and thaCs the w~y the world is bui]tY t¢

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114 New York, N.Y., Jan~ry 1~, 1980. To: Th~ honorable member~ of tile Co~umer Subcommittee of the Sc~t~ CommitteA) on Commm'e~, Se,lene(h and Transportnt]on. Dirksou Senate Office Bulhling, Wlmhington, D.C On behalf of our client, the Asococietio~ of Natloaal Advertisers, Inc. ("ANA"),I a~ well as ourselves (we are active practitioners in Federal Trade Commission matters , we strongly appreciate the op- i~rttmity you have so thoughtfully provided to comment up~m the uestioa of sc-ealled "mlfair . . . acts or practices" under section 5 of ~o Federal Trade Commission Act ("FTCA" . It turns oat to be a most timely my tation, for no onger ago than the twenty-seventh of last month the Uulted Sta~es Court of Appeals for the District of Columbia, in Asaoci~tiern of Natlarctl Ad~¢rti~ers, low. etal. v. Federcd Trade Gom~sszwn, et at. (No. 79-1117) opined that tho commlssioners, ix their role as ru]ernakers, enjoy, by virtue of congre~sisn,~] iteIega~ion~ the sh'~tlls and powe~ of members of Ill( Congress itself; to slll:h ~ll extent that they can e~lgage in pronlulga~ ing legally binding rules despite prejud~nen~ mid bin~ unless it can be clearly gnd e~nvincingl . )roven that their minds are "una'lterablv l~ad Oongress amended section 5 of the F'rC Act to declare ~:tain type~ of children% advertising unfair or deceptive, we woul~ b~rely pause t~ eonbider ~, du~ process challenge. No court to our k~mwledge has hnpce, ed proeedaral require merits eport a legislature before ig may act. Indeed, any sug- g~ior~ that congressmen may not pt,ejt)dge f0~tual and polisy l~sues is fanciful. * * * Congress cl~ose, however, to delegate its power to proscribe ~nfair or deceptive acts or practices to the Con~alssion because "there were too many unfair prae rices for ~t to define.' S. Rep. No. 597, 6;lrd ('~ng. ~d Sass, lg 1914. M~.Op. Slipp.g7.) Accordin ly, a Coin.]i~ioner sho.ld tm disqualified only when there~ms b~en ~ clear and convincing showing that the agency member has an unalter0.bly dosed mind on matters critical to the disposition ef the proceeding. (Maj. Op, Slip p. ~8 ; also pp. 1-~.) Eve~ before being thus portra?,ed as h~ving the power and im infinities of • legislature, the Commission had been reiteratively eatdtalising upon a phrase in the Supreme Court's opinion in IeTC v. Sperry e~ ltu~eldn~on, Co., ~1)5 U,S. z;~-3 (f,h2) (inaplms~lely, as e slmll discuss below) to assume all tim )o~ers ef a court of equity in COI]~trll ng and enfr~re ng t le unfa r * * * acts or plac~ ces pro~ visions of ~I'CA section 53 ~ ANA s~ t~t.f~lr pr~ ,:c~rD,~rntie~n !,~lt]ld~ti ]It IH0 I~ a t~de as~¢,ctat~on (wn~,~ed of loernlltlo~l ~b0Rl N/el~ ~¢~o~1 aml orvl~e~ to t~+ nt~cn~mn ol the imbt[e ~N.~ aCN,oly Illg functlolI. AC¢Or~IHI~I~, ANA ~rld i members little a profo.iid ~nl~resl ]11 ~lle ,virhln matter ml~slnn 4e~ ao~ arr~ta ex(e ~i,e l,o,~r 1~ i~ell ff ~u m~.am/rln~ a im ¢tt~e a~a~n~t the eon~ldo~ pmMC value~ tejoad slmp, i~ ~h~se e,l~]trh~l ]11 lhe letter ~¢ ell~ollllJ~ ~e~ Ill the S~tl'lt Of th~ anl~tru~t la,~s (4O5 U g at 244 FC~tuot e m~lt ked )

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115 17nless Congress is content tn ]ecve FTC fr~3, as tt claimant to ~II the 3prerogative~ of ~ national legislature but w~th no ne~d for presldentlal appooval), and to those of the equity judiciary, to impose its socio-commercla/-ecorLomlc ideologies upon our country's indus- tries a~d consumers, we respectfully suggest that congressional action is needed to pull in the reins. As w~ shall now show~ it does not appear th~ C~ngreas ever dht metal to invest the FTO with such vast pow~s, if even it could h~vt done so eo~titutinna]ly~-eSl~cially whm~ commercial speech {advertising) is concerned. However, the two court statements r~ferred to s5~ve~ and thB Commi~inn~s past and anticipated further expan- sion of them as a license for virtually untrammeled regu]~,tloa of what- ever in ts-ad~ and comm¢rc~ i~ decides to cull "unfair", oblige Con- gr e.ss to [edefin~ clearly the proper perimeters of its mtthorily. The Commissinn% congressional delegated jurisdiction over "un- fzer . . . acts or practices" never was intended to encompass po~rers of conunand or int~ediction based merely upon judgments of public blesSLrl~ or ~ln~ as ~*eil thrc3ugh Lh ~oiniil/~lOllS e~es. Eveil ~part from lil~t uml ndlnunl e~nsid~ratians, (~ongT~!~S dbl not hl~vp, il~ rniad bY make it the Na~ina's judge or leg[shtuze in those reapect s or to that e~'tenL Ym]precise though "m~fair" may be~ it is not wi~hou~ de]imi~ ing boundarie~ it encompasses only such acts or pt'~etices ~s violate sora¢ hldependent l~w (whether legislative or judicial) or a coln- monly acceptd and recognized moral or ethical standard, and c~us~ injury to cem )eedors or consumers. The Supreme Cour~ perce ved and confirmed that in A.E.A. Se~echte~, Poultry 6'o~'poeation v. U~dZed cqta~es, ~95 U.S. 495 (1935). There, the National Industrial l~ec~very Act (15 U.S,C. 703) ("NIRA") had authorized commi~inns composed ~f industry m~m tmrs to ~t~lpos¢~ for presidentinl adoption "Cc.tes of Fair Competition" to govern their industt es. Such eodes~ f and aa pramnlgated by the President~ weuld h~ve hexl the force of law. The act was attacked on the ground that indfiniteness of the term "~alr competition" left to dele.ga~led ~ulhority too vague and uncon- fined. Goven]ment ~ttorneys, defending NIRA~ argued that "unfair competition:' in PICA had been held sufficiently definite to be con- sti~ntionally peeper, that NIRA's "fair uo~npeti/ion" was no more than ~h~ converse ~,f FTCA's "unfair competition', heine was equally law- ful. The Supreme Court disagreed: in the following language~ (all emphasis is ours) : Unfairness in competition has been predicated on acts which lie outside the ordinary course of business ~d are tainted b~ f r~d. ~r coercion, o~ e~'t ol~ e~ci~e proMb~ed b~ ~aw * * * , But it is evident that in its wides~ range "un fair competition', as it has l~en understood in the ]~w does not reach the objeetive.~ of the ce~Ies wMch are authorized by the 1Va ~ional Industrial Recovery Act. The codes may~ indeed, cover conduct w]fich existing law condt nms, ])lit they are not limited to condoner of fhrtr sort. {~!15 U.S. nt 5z~. ) ¥¢~ cannel re~ard the "fair competi;inn" nf tile codes as anti/bedca] to the "unfair methods of ,:onl[~eedion" of the ¢D ¢n 1'0 q._",-,,It... gdab,~~

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116 Federal Trade Conmlission Act. The "fair t~mpetidon" of tho codes has a much broader range mid a new significance. (Idem at 534.) We think tho conc]uslort is inescaa~abIe that tile authority sought to be conferred by } 3 ENIR~] was not merely to de~] with "unfair competitivevractices' whlch offend against existbzg law, and could be the subject of udlcial condemna- tion without further ]eglslation * ~ *. Rather, the purpose is clearly disclosed to authorize new and controlling prohibitions through codes of law which would embrace what the formulators would propose, and what the President wonld approve, or prescribe, as w~se and benefi- ee¢l~ measures for the government of tmdes and indus t~4cs * * *. (Idem at 535.) Thus~ i~ is elear~ we submit, that FTC's power to interdict "un fair * * * acts or prattlces" does net betoken autlmrity to conanand "fair" acts or practices: or to enjoin acts or practices which, while not "unfair" as defined by ~S'cheeh~er are at the Same time not affiffnativelj "fair" as the commission wouhi perceive that term. Mr. gnstice C ardozo, in a concurring Seheehter o[Sinion, orchestrated ztiH further the (aucial di~kin¢iion behv~en acts which "ale tainled by fraud or cool.ion, or cunduct ol}lell~isl~ mfidbited by aaw' (i.e., "unfair" acts or practices under FTC.I alld commercial behavior that would be merely not "wise and beneflcient" which FTC is now grasping to regulate). He stated : If cc~les of fair competition are codes eliminating "unfair" methods of compet ]tkm ttb~crhtlned upon irtrlui[~" to )r/valI ill one industry or anf~tller there is no unlawful dalogation of leglslatlve functions when the President is directed to in uire into such practices and denoullce them whell discovered. ~or rtlanv ~/ears a like power has been c~nnni~£d to tile Fed- oral Trade Commission with tile ap iroval of rids CUul.t in a long smieg ~f decigicms * * * Rttt there is auothel con ceptlon of codes of fair cmnpetition their significance and function. ~hieh leads to ~ery different e~n~equences, though it is one that is st i uggling now for t'eco~mition and accept once. By this other eonoeption a code is not to be restricted to tile elimination of business practices that wouM be clmraclerized by g~n~ral meepMtme a~ o[)pra~i v~ oi unfair, fr ]g {o includ~ whatever ordinances ma3 he desirable ol hv[pfu[ fol the weld be{eft m" prosper/tF of the industry affected, in that view, the function of its flde3pt, ioli is not merely ne~fltire, but positive: tim pZamd~lq of impro~emv~d~ as well as tile extirlmtion of abug¢~, lVhat is fah, ag thu~ conceive,I, i~ not omething t~ be eontraste(I with w}lat is unfair o1" fraudulent or tricky * * * The e~de doe~ nt~t confine itself to the ~u) pressiun of Inet lods of eompetilion that ~ ouh /e C agsif ed eepted no~vna of eghi~ ([dem at 55~. 553.) Federal Tlade Commh~io~ v. gl, ppeL ~fll I-.S. 391 (19~3) t~kt,s nothing away from ,sJe/wehtet'. It in~ohcd b~ducisg children to pa~

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~i~i[~t~ ill ~0.Tilb~ing~ ~i~ ~t lottery" ~i~vJ~ r~l~dnIv~ ~ht~t,, ~ransgressed ~uch, l~thel" thar~ ~o~ii~ll~h~l ln~t'ality~ '~as ~h~ b~sls for f~ndi~g the pr~etie~ "ul~[~ii¸~ 11T1(1~¸ I~'TCA ~eet,ion 5.~ ~eithel" ~lid the ~perr~J ~ //u~ch~r~o~ e~urt~ deslplt~ ~t.s gener~l~.~:y o~ l~rtgal~ge (st~i~r~ lpage ~) held that unfrJrn~s ~nd~r ~ goes be~o~d the peri~e~e~'s d~si~n~ted fo~" ~ i~ ~e~ceh~e~ ~nd /g~/~l. ~1~ ~lc~ referencg to ~pllbJl¢ v~]lles'~ i~ 11o l/lore ~hlln ~ reprisc~ Of ~ ~/~t~"~. . "accepted .... bu~i~es~ st ~nd~rd~ or ~t~ee ~t~l norin~ ~ ethics~' rnissioil~ o,~.rt ~e~t'~I)~i~n of %h~ ~t~'~ i~ ~onsillers ii~ rleterrt~ini~g ~:}~h~r ~ practice ~h~t i~ n~it h~r in ~'iol~tion of ~h~ ~nti~r~s~ l~ws nor deeep~h'~ is r~onethele~ unfair ~/1) w~le~her the pr~¢t~e~ * * * i~ -,~it.l~iJl at least the per~umbr~ o:~ ~ome common 1~,~ s~t~ory~ or other est~bli~ed concept ~f ~nf~irnesa~ (~) "~hether it i~ i~nmor~l~ unethi ~I~r~r~ ~P~'~d & ~/~te~,~o~ did J~ot in,zolw si~e~eb, ~ disti~e- ~[Olt of ~t'ul~i~/ illl~gnitulJe UrII[L~T' th~ ~r~f lllrl~Tlclm~nL fr~r i~ I~lU~ 1)~ ~loub~ed tlla~ ~o~n~te~/ s ~eeeh carl ~ ~briclged exc~p~ th~ wl~iela is deeet~tive o~¸ ~rdsleatli~g. (~e~zsor~/aip o~ ~dvertlsing that is truthful and~ nol~-mi~le~din~ lne~e15" because o~ some di~ret.lor~.~l v~lu~ j~xdg~ me~l~ by gove~i~me~t that it is ~un~ir'~, has received, r~o ~res~nt or i)r~clietix.e blessing by the ~uI~reme Co~l~. (Note ~'t~r~ D~ ~nd The l~tx~ ~le~J~i~n ~f th~ ~u~Jreme C(~IJ~ ~lealing with commercial ~l~endr~l~n~ ~h~llenge ~ r~xas statute I~rohlb~lil~ optom~trl~t~ from using a trad~ nam~ ii~ e~nrtee~ion ~vlth their pr~tice, The ~sor~ for the de~Jsiott wa~ that th~ pro~.~ision ~, ~. re~oi~ble rne~s~r6 to Dt'~- ~cl~ dee~p~io~ an~I ~li~le~dit~rn~ss ~'~lo~ beiug s ~eel~la~iv~ ~r hy potheticr~], b~t ~ * * based o~l ~×p~rienee in Texas" ~s ~ua]]y ~o~nd~ 1)y ~ 'r ~as c~urt, I dem ~t 1:~ 1~, F~ed~e~ did no mor~ th~h f~lf~ll tl~e prof~hecy ~t fe, otr~ote ~ i~t Co~,-~ bu~ ~ L ~ ~28 fd0 TT:~ (19%) herea~r D ~?~' ~ P/~?- under th~ l~rst~ a~e~dn/ent,'s wi~g. F~/ed~ ~ffe~s no pl~n~e of s~rail~r re~ection for trath:~l ~d.verti~ing. To tJa~ eo~tr~ry~ il~ review of th~ preeede~ re~f~rm~ the irnmtualty from ~tlch ~bri~gement~ ~n~t ~how~ ~h~ ~ppI~eability ot: the :~ree ~pe~ch guaranty to ad.ve-~i~i~ t~ is not trot r~t~t[, ~ft~1" establishing theft th~ ecN~omi~ n~ure r~ th~ ph~r- raacJsts~ interest iJl ~he ~f~eee/~ did n~ pree]~icl~ t~ ~l~s~ Ara~n~l athOIl~t O ~be ~eturll ~ reee ~.e r~ra 11~ ~xpel,d t~r~ ~, i~o~¸ ~ ~&~ ~c, de~entl ~i~ ~ ~,~e~, /,a~ ~o~ ~e~ ~r~ ~ ~o #o~,~.J¸ I/ff~, ~1 lJ ~ ~ Jl~. /'~ ~ ll~l~

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ment protection for their advertisements the [Vi~inga Pharmacy] Court discussed the other interests in the adver- tisements that warranted First ~raendment prot~ctlon. To individual consumers, infolmation about prices for ~rescrip- tion drugs at competing pharmacies "codid mean thI allevia- tion ofphysical pain or the enjoyment of basic nec~siti~¢." ld. at t64. See ety also bas a strong interest in the free flow of ColDmel~ta] Informatiom both because the efficient allc~a- tlolx of resem'ees depends upon informed consumer choices and because "even nil individual advertisement, though en- tlrely ~¢onmlercial', may be of genel~l public diterest." Ibld. The Court aclmowied&~:d the impm'tant intel~st of the State in maintainln high standards aznong pharmacists, but con- cluded that t~l~ interest could ~wt justify the ban ~ t~thfid price advertising when weighed against the First Aindld- ment interests ill the information conveyed. (440 U.S. a¢ 8-9. Emphasis added. Equa y perm ss ble are restrictions on frd~e, decep~ive~ and mlsleadln~ commel~ial speech. [Quoting from Virgi~da Pharmacy[ "U~zw¢hful speech, commercial or oflmrwise, lms never been protected for its own sake, (Citations.) Ob- viously,, hmuch' commercial sp~ch is .net provabl, y false,, or• c~en w olly false, but only deceptive or *~isadzng. ~e fores~ no obstacle to a State's dealing effectively with this px~blem. (Id~m a~ !t 10. Emphasis added.) ~]1 ~I2]YI Texas has dOllt5 Ylo ]ilO~ than r~!quir~ that /om- mere al nformatioa about optometriea] servic~ "appear in such a form * * * as [is] necessary to prevent its being deceptive". [Citing Virginia Pharmacy. (Idem at I6. Em- phasis added.[ Becans~ these ill d6gned mcsoeiations of trade names witl~ price and quality information can be manipulated by the users of trade names, there is ~ sigo~[fieant possibility that trade names wi]I be usod t~ mislead the public. The possibili- ties for deception are auinerous * * * The concerns of the Texas Legislature about the deceptive a~l misleadin¢ v~e~ o.f optomet~cal trade ~tatt~'s ~ere ~9~ spe~idc~ive or ~ypo- thet@al, but ~ere based on experience in Texas with which the legislature was familiar * * * [Idem at 1~-13. Emphasis addad.) The F~isdim~¢~ court fm'ther emphasized its concern lest truthful content of commercial speech not be abridged,* Lir~m~'k .4ssoeiates, Ir~c. ~. lV;fllngbo~o. 431 [ S. $5 1 I!)77). with its "mere solicitation of pationage", simply "For Sale', drives home L]IO] e.~so ~1 Ihat, ex ca stub ban ellcme~ truth fn] peec']l eaenloI be abridged • ,,it is dear that the grates interest in ~c~t~tin~ the public from lkc deceptive and ralsleadtag ~o of optome~ri,.at trifle m/m,s i sub~t~ultb~] :u:d ~11 d~mons~r~r¢d ~e are convinced that 51:Ud~ I~ ~ ¢on~rl(tllh,mtlt~ parn~i ~iMe ~te r~g~li~n0n in f~rther~)lce of ~hia inter~t We ~mph~lz~ in ~o hol~ing* ttta~ t~e rc~r~cti,~ on t~te u~e o~ tfad~ T~X~S optomatrist ~ • iidem at 15-16 1o¢~ n¢~t e omit t~d emphasis raided ] ,,~lmHarl~ ]~ l~ievt%m [eita?ion] ?he C~,urt 1:3t~,l xpHeltt~ rhar th, *~m~i~ll~tom~lly pr6~e¢~d advettis~me~/t *did m~)re ~lmn nim[~/y propose a ~mmecc/al trr~nsacti~a ~l~cl~ ~i~eech 13 c~teg0th Mly different £r~nl the mere so[~cltatloll of pa ~r~uage ]m~l tit In a trade name I~dem at 11 n l(~ ) o0 t~

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110 b~causc of state value l~dgment that it is not good for the public to i~oco re.~ Jbnd~ most pertinently, the Supreme Cour~ reiterated in Bates ~-. State Ba~' of Ai'izo~, 43g U.S. 350 at 37t-75 (1977) : * * ~ tilt ~eems peculiar to deny tii~ consumer~ on the ground that th~ infor, nation is incomplete, at least som~ of tb~ relevant information ncedcvl to re~ch an informed de- cision. Tb~ alterimtiv~O~ ~ohibitiolt of advcrtishlg serves e)nly to restrict the information that flows b3 con- stoners [ f,minole omitted]. Moreover, the argument assumes that tbe public is not sophisticated enou h to realize the linfitatlons of advertising, l/lid iha~ the public is better kep~ in igno~altce tltgit tousled with cori~eb but incomplete infor- ]ntJ tion. We suspee~ tile ILr~rtUlleIlt rests on an und~l'e~tilllation of the public. In any event, ~e vie~ as duhious any justifica- tion tb~t is based on the benefits of publio ignorance [citation omitted]. Indeed, some courts so held in FTC adjudications even prior to V~;vgi~ia Pha~:~y, if the advertisement is not false, defendants have ~ con- stitutional righ~ to utilize it even though its con~ent and blatancy may allrloy both ~lm Commission mid tim g~ner~l publis. FT6~ v. Sterlln9 Dr~x~, lne.~ 215 F. Supp. 327, g32 (S.D.N.Y. 1993), ~,ff'd, 317 F.2d 669 (~nd Cir. 1963). Petitioners also attack that part of the order which pro hlbits them from t~presenting ~hat ~any competitor has m~nufaature~h [list~db~te(l or ~obl an~ or all types of fr~- terlfity products withou~ permission or authorization of an)" fmternlty or fraternities." Petitioners argyle that taxis pro- hibits them from telling the truth and is gherefor~ a violation of their First An~endment rights. W~ agree with this con t~ntion * * * [T]he Commission m,~y not prohibit the ~ell- ing of a tmle s~atcmcnt cvert if th~L rep~a~t a~ion perpetuates the dominance of a monopolist. L. G. Bel, foer Co. v. I~'T~ 4d.S F'.~d 1, ~3--24 (7th Cir. 197i). ~mong the more obvious, and effeetive options a vail able to Congress~ as well as those already formulated in S. 1991, the simplest and most t~ntamperable would ~ to repeal the trade regulation rulemaking provisions t)f the Maguuson--~l~s Ac~ and declare that tb~ Com- missions shall have no substantive rnismaking power. Or, at l~ust~ thnt it shall have no such authority insofar as "unf~ir * * * acts or prac- tices are concerned: nnd tha~ cc~mmi, sio~aers participating in what aver r~lu~mhing might, ba allowed must be free of actual bias or ~,-After I irg,tli,~ I*harma~y It I~ e]ea~ that con,mortal ~eh c~l~10t he banned i,ee~u~e of ~lii ~tl~llt~tl~lllal[ I)~,liel that its iml,at~ is ctetrlm~nld[ * • * %gj]llil¢l~,ro lla~ ~ro srrll~] partie/ll~,r k~nd~ of M~ns ha~e~l ,,l! thoir ¢l~n[er~t ~ecoAl~e It fear8 ~heil, p~lmary el~oct--th~t lhey ~,iil caue ~houe ~ ~.~?]~tl~ Ihe [llft,~n/a~ion 1o act [/p~ il ~ I I T~ this o~lilla/,e~ ~,a elli~¢ted gl~ ~c111~ all lnlDertao~ ~vernmelttl~] ,~,,ieuti~e, hu~,~,r d~e~ II1~, Ol tvl~ltlf,t} i~,formatiolt k'or t}~o sl~n* r~lsot~ I~e ,onll~de tha~ t}/~ Wll/ln¢~bero or. ,.* * * ihe i,rdinall~ illicit revl~ heee ,,high P~l,i/Jr~ "t[/ff ~Ow ol truthflll II:ld ]egfU m~te c~r~met cial ill!0r mattull is ~ ~ ~l](/l~[nnal/y ln,lr m, (~tl~ r~t 98 I IV

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120 prejudgment, or any appearance thereof (to overrule th~ deplorable holding in National Ad~,ertlsem (s~pra. p,~ges l 2) and its destrue- tivt~ .... intpa~£ upon puh e confidence 11~ the fairness and oh'eetivitv2 ~ of admtnlstratl~t~ a&rcncy action . Or, !f i'Lder!laking power for "unfairness" is to 1>3 conceded to the Commmslon, 1~ shodid not be pelnnitted for adver£ising, because of first amend]±mn~ eonshteratioDsl lind %h~ eon~tramtiort of it irL 6'eheeh- ter could produeLi~-ely ~ legislatlvely confirmed. So f~r as we can tell, tbe Commission never did answer tile qaestion put to it on remand by the ~pe~'ry & Hu~chi*~on emtrt, (405 U.S. at 249-~5C/, arid footnote 5 at2d4 as to whether the elenmn g o f itlLrtll to competitors or ¢onsumel-s lS eon'unctlv~ with or dis unetivo re,ira the o~her elements o~ unfair- laess ( .eq vie at on of some ilidepe,dent law, or ~nmsgressinn of a ~eunerally accepted ethic or moz ality). Rathei'~ by its rulemMdng con- et, it ~ppears to have adopted th~ dis unetivo concept thus leaving itself free to ordain tha~ anything it doesn't like to see happen to eonsumer~ (in. to ~om ii!ti~oL'~ "inj/~l-OS~1 t~m; h~nce is ~Ltll~airr*i hence is illegal. A legislat m~ indeed ] W0 shall, of eom~e, be pleased t[i ~nswer to th8 best of our ability ~liy quesfloiL$ yott roigb.~ hart! for us, and to provide wtl~c,ver other assistance may be appropriate in your dealing wi~h this importan~ subjeeL Respec~fully yours, Gitzm~T ]I. W~,. ~T&~ UNIVI~SI'I~ 0~ NEv¢ YORK AT ]~ETTALO~ Buffe2o, N.T, J~z~ua*T 15,1980. I{on. W~WLL II. FO~V, 6'~dirman~ 6'~r.~ume~' Subeomcni~#ee, ,~er~te (Jomrnittee v t~ Oozmneree~ 8cienee, and Transportation, Dirksen ,Senate Office Building, Wa~Mng~en~ D.C. DXAll CLiAIR~IA~r ~0RD: The attached memorandum is being sub mltt~d i~l respollse to ~lle ~ilbet~lllnaitteels req/:est for comments olt the definition of ¢~unfalr]lt~s" under S~etion 5 of ~Jl~ Fed~rni Trade Commlssi~n Act. As the cover ~hee~ to fire memorandum ilalic~d~s, i~ eontahls only my personal views; llOne of the[)ositinns oaken in the memoraadum has been considered or endorsed bd the Administrative Co~tference of the rJnited States, for whom I ]~ave been engaged ~s a consultant studying the FTC's trade regulation rulemaking pro- cedu res for the pas% scxe~I years. In addition to ~h(~ vit~ws expressed in the memorandum, I wodid ]ik~ to take this oppol'tlldity ~ct prcslnb tw[i additio~al suggesdilns for th~ Subcommittee's considel~inm The first concerns tke statu- tory standard a )pl~cal)le to the Federal Trade Comnds~inn:s deceptive practices ruIemaking. I would urg~ the ~tbcommlttee ~nd the Con- gress not to adopt the provision coI~talned in at Ieast one of the i~eent bills to amend th~ FT(3 Act ~lllic]l wouhl i'esLric5 tim (3~rnlalSsiolt's deceptire practices jurisdiction to false and deceptive practices, As others ha~'e pointed out. ?his would prewnt th~ FT(3 from redres~in~ sales abtt~e~ which iI/vo]it! i~hliltts thctt aft not "false" in tim literal sense of the word, bu~ which nol~ethe]ess ha.v~ the capacity or tendency

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121 t~ deeeiw eo.sumen~. At minimmn, this change in the governing standa~ wyuld create considerable nncert0.inty regardhlg the scope of the FTC s power to. combat dece )6ve praetlces.. , ~nd this uncertaintyT would probably i~eqmre years of expensive ht~gatmn to resolve. ~ery few~ if any, of the valld ~omp]~ints about the FTCs recent actions h~ve invol'ved the traditional theories of deception. Thus there seems [o De no demonstrated need to resuict the Coinlnission~s traditiona power to prevent false or deceptbe pi,~ctices. By contrast, there al~ some serious questions regarding tim Commi~sio*fs use of unfai~e~ theories, and as my memorandum indicates, Congressional clarifica- tion of the FTC's mandar~ in this latter area seems very desirable. The second suggestion I wouhl like t~ m~ke is a technical point eon- cernhlg the provision in section 9 of S. 1991 which wou,td impose ~reason to believe~ stondald oll the (l()illllli~%ioll~s decision to issue nobic~ of propo~d mdemahbtg. The Commlt~ee's repot¢ S. ~ep. No. 9(%500 ~t, p. ~0) indiea~s that the dra~smen intended to pr~:htde judid~l re,Sew of this initial Conmission determimmon. However, it may be necessary to incorporate an explicit pi~,hihition of review in the statute ita]f in ot~Ier re a.~s~n'e this t~sult. In Jeloel.Comyanies v. P'[(', 43i F.td 1155 ( 7t h (Jr. 1970 ) • tile court concluded that the FTC's [hcisim* to issue u Section 5 eomplsint~ under a vi~Eually identical ;reasoll to believe" standard was subject w lil!~ited judicial review. Given the strong 13re,unapt on n f~O,o[" of ud Ol~ review refl~2t~ In Jewel and other modern* ea~% anv intent to proeiude udicial review should be stated i o ear mad unambiguous terms, and the rdevant ]auguage shoah] b~ included in the text of the staU*ie, itself. I should add that I feel it is sound practice to preclu de j udici~l t~view of ~ncy decisions to issue notices of pi'op~ed i'ulemakh~g. I hope that ~mse eommen~.~ will ~ of use to the Su,beommittee. Thank you for your ~u)tmidePatiolL Sincerely 5oum, A~sodate Dean. Enclosure. e}ztuxaxo UNF,xnlx~:SS UNDER SECTI0:¢ 5 oF T~[E ~]:[)]{l~[, TI~-I~E (Statement of Barry B. Boyer. Ass~iate Deem SUNY Buffalo Law • School) J[~ ~ROD L'CTLO~v This me morandnm does imt uttemp~ to provide a thorough review of a][ lmssibk or sl~ggested delbdtions of "unfair a(ts ov practices~ tlnd(r Section 5 ~f tile Federal Trade ( ommission ,'vet. ['ltere tu'~ several compavbel~si~e studies a~,ailahle ia the lih,'atare which adequately perfoiTil tllftt function~ ua~d those eolnlnen~ator*~s ~rll agr~d Oll Oll~ Th ,ew ex,r~sedtnthtsmem" duma ~ ~ ,#1 ronalo~h,i~,,, of O,eaulhor y ~ 'g ng o a , aetie*s I rider the, FTC :eL; ~lhe ~;eed fo ~. regal ~tandard ,.~ [,mth.m,~ ]1 .~kron L l~ev 9 T, : t o sk~. o 5a . n m l.,,t~cci.n .nd th~ R~gu~atton o~ .kd~errisi~lg, 10 ]Iar~ L leer ~6L 6S¢~R7 11~77) ; David A Rke ~nd t~ruce B Keller, ~ommeat I~ Chl~dea s Adv.~ru~in~ Pr#ceedlng ~,0v 17, i,,a

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12"2 essential point : the vallens definitions used or proposed lay the Federal Trade Colmnission lack c~herence and conceptual preclsion. Therefore, this memorandum will ~ttempt m suggesL som~ genera] methods or approaches which might be used to provide mm,e deilnite content ~r the statutory standard of unfuii~ess. Sine~ th~ Conmtistion has developed multiple thoaries of unfair- ncss under the .~.et~ i~ is neeess~a'y t*) consider the various strands of unfairness dcctrine separately, llt each of tile following sections, ~n effort has been made to iden'tlfy acts or practices which uax~ ap[ma~ pria~ t~a'gets for FTC action, bu~ which could not be re,heal through a deceptive ,racfices theory, in other words the underlying assump- tiort s that the pl'e~ent on of (e~eptive practices is the core of the Commission's consumer protection udssion, and that acts or practices which tend to mMead consumers ought to ht~ atta~ked ,ruder a fraud or deception rationale rather than under a broad uaf~irness Lheory. However, !t should b~ empha{ized tl~at there are slgTdfican~ c~nstmlcr • bu~s winch aide diglcult or lmposslb]e to remedy under traditional definitions of deceptive acts or practices. For this reMdual, category, o[ ~buses,j an effort, has, been made .t°,.suggest w~ys, of de~nlng "un fz~i r- heSS that wdl permit tile Con~mssmn to provide the needed consumer protection while providing meaningful cheeks on its discretion te tan com,rnorcial pratt, tees as "ira fair." Foltewing the discussion o£ the in di~iduM unfa[m~ess theories, some sugge~tions for possible st~tutory language to define unfairness are offered. CIg~TTE RIUI~ The recent expansion of the coacept of unfairneas began with the FTC~s 1964 Statement of Basis and Purpose in the Cigarette Rule, 29 F.R. 8~24~ 8665 (July "2, 1964). There, the Commission first articu l~Led its often quo~ed three-[Ja~'~ tes~ for determining unfairness wRl~ ou~ indicating which of the three facroi% or ivha~ combh~taim~ of them was necess~, or m]fficient to ~11 ~[~t a findinct or unfairhess a ry pp ~ . E~.ch of he three tests men¢loned there posed some theore real or practical problem~ Offends Public Potleq.--The first test was ;whether the pr,'tctiee, without necessarily having been pre~-iously eon. ider~d unlawful, of fends public po]i~v as it has heen estahlisbed by statntes, the enmm0n lawr or otlmm~ds~wimther . . . it is ~ithht at least ~he penumbra el some common-Iaw, statutory, or other e~tablished concept of unfair ness." Some of the obviou~ questions arising from this formulation are whae the "other" ( presumah] y non ]e~] ) ~011 re~!s of url f~tirness con oe )is migh~ be. and h,)w broadly the Commission might interposer tile ,penumbras, of relevant legal d0etrlne~ to be, ]}eeau~ of these pete=- trolly lar~ co, cape hatches, the "public policy'~ staadurd provides onty minimal check on agency discretion. Beyond this, there is a ~tle~t iol] ,q~ tO what kinds of situations ~ radd arise which were (1) a vmlation of some legal amndaI'd not admin ~e Clgarett~ Ru~e s~tem~t merely ~n[d : ,If all [hre~ faet~rs l,re pres,nt the tqud ]eng~d conduct ~iH ~arel> vio]at~ ~eethm 5 ~ve,, t[ there 1~ n~* s~t:[fic pr~cede,,t flit ~rvam*~ihlllg it The ~.M~ varl~?~ of d~(]skms Int~rvr~iing the eh~ske ,onvep± (,f nnfalrne~ at l~tst makes clear thfit a meshnd o se n~ • o at~u g#e( ou 5 t u exp o ~ ~e or in ~un~b/e ~nd If I~ addition [~ b~lug morall) ohjectl)~aM~, it la ~erimm[y de~rimvn,M re consumers or other beyond ~his it l~ dif~cu[t t~ g~noraH~e, 2~l P R 83~5 (~uly ~ 1964} (a0

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istered bv Lhe FTC; (~) not ~l deceptive practice under the Federal Trade Coalmlssioil Act: yet 3 ap~ropr~ntc f~r F]~C l~medlaI ac- tiom Judging from the FTC~s l~cen~ activities, the practices in ques- tion seem ~o fail wi~]l]n t~'o general categories. The/]rst is the result of the division of jurisdiction batweea the FTC and the Food ~nd Dr~t~ -~dminis~rat ion. Since the FDA's authority generally is l~mited to r~pres~nt~tions m~dc i~ [~roducL labeling and does no~ extentl to claims ma~l~ in o~h~r advertising media, ~l~e F]'(~ h~s occa~io~ally sought to/:onform adve~isin~ standard~ for fo~c] and drug products to the l~beling standards set by FDA. ~aong recent rulcs~ ~he OTC Dru~s and O]'(Y Antacids TRR's exeml)iify this a ~l~rOach. In thls ~itua~ion, t]~e onfair~css doctrine ~pl)a~ntly adds ~itt]e substantive rcaell ~ th~ dcccpti~c pvacticc~ standard in Scction 5: if tile infor nlati~n requil~d by FDA f~r product labels is material t~ the pur- chase decision (as'i~ probably would be in most instances , then ~e o~nissi~a or distortion of ~his info~'mation in advertisements is llkel3 to be decei)~ive. App~ic~iton of the ~nfairness d~trine ~n this con- text may be • I/~tliod of simplying the [t'oo f reql/irement~ that ~'ould be al~p~i~:ab]e under a d~cei~i~n ~hcorv~ bl~ this is not nlt~ge~her clear because the CoJnmission }~a~ ~raditio~lally had cg~e~ latitu/le to make findinffs of c~ecepti~eness oll th~ basis of its exl~crtis~ wit]~out t akirtg ~v~dence o1~ actllal cO, lieu/liter unde rst~,l~din ~. Tllc second category of public policy unfairness c~se~ conc¢rns al~ivi~les w}L]l!h wrllullt~ fl~r l]Jl! mlJsl [~lti-~, ]~c ~rrllui/¢ts f/it civil iJr criminal liability under federal or state law. The Cigarette Rate statemen~ ~f basi~ andpurpos~ lls~s sor~e of these practices w}/i~h were i~rohibited in FTC adjudications: failure to deliver ordered meI~ha~di.~e, or unreasonable ¢~el~ss in shi lping it ; refusal ~o return i~em~ left f~r repair; ~vron~ful rcf/~sals t~ return dc ~osits s}~ippin~ col~cealin~ ~h~ seller's idenli~y iu order t~ obtam repe~t purchase ord~: : and thrcatc~ing s~it whe~ rm mo~e , is actual Iv due. Some ~f these abuses could be ~'emedie~lndcr a ¢~ecpt~w practices t~eorv. For ex~mp]e~ ¢olxcea~mcnt of the seller's identity or rai_~ statement cf the buyer's le~al liabilifv ~h~uld be a~tmn~lh~e~mi~re ~rc- ~lltatilllas uild~r t}~ ~'~ abl]~,~wlI ilefini 1o1~ i)][ ~el:ell ire ~lvac ices. ~h~ m~ fi~ ~erv easily ]~to the ~]cce ~ive ]~r~ctic~s formula, altho~]~ ~hev shar~ u ~common feature in t~e frustration of ]~gitim~te con- s~liiler ex]~ec~tttlon~ 0~botlt ~eller [lerflll,IllaIlCe 111 colls]derirt~ ~h(,~, [,'/~er ~:.'pe~ of al~u~l!~, it rally !it! ii~fu] tll ~l]~Ling[li~h ~1~o po]ar ~] e fir ~. ~1 ch is exemplified b~' the seller's ~ai]ure to dc]iver otdeie~:[ l~elc/l~i/di~, inroh-es a lll'aC~ice tlL~ i~ ~)ll~Jl ~]~,~rlv action I~/[ I)~¸ all ~:o/inteIvni]iD~£ t,cOlt~/nli~: ~1, /ornmel.C]~] i/~essi~y. ]~1~ ~his i~]i/,~'~ for tl/~ Fet[eittl ri'l~lde (~ot~llr~]~s[~/n II/ blillg it~ ~tlen~Lti~ill~ i1/~ c~)l/slt~l~ ~n th~,ir ()~'~ r~ S~]~ ~,;hIl~v(~i¸ r~cIr~b is Et~tti]~lb]t~ ¢]IT Ol1'_~i/ ~/ll' ~1 a//~ C~/ll l~". (~i~ t,n tlle high ~!~)~t s of/iti~ation~ the reluct~ ~l!t~,~ o]' nl,,~tx~,¸ i.~/rlSlllllpl'~ t~ r~olt to th~ ]l!~:a] s~.s~elll. ~illt tile dil~i- i~/~1~3 ill II~ll5 jllli~l~ic~i~)l~ of ~g~i~.g:~tirl~ indi~i/~ual coi~tmaer

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vs- 124 e]~irtls ~llro gh tke e Rs~ ae on mee}lR;llsm there seerng to be a good ease for ez~foreeu, ent b,' some agency, e e FTC. Ide~ y," =~tate a~encles nllght be eonsl~ ered t le most appropr ate hodies to take on this enforeeme~L~ role, but experiei, ee suggests that the il~di~ddual states will not have a,hw t~te tools and resources to monnt g signifi can enfot,~emcnt effort, p~rtieularlv when the seller is a nom'esident or multistate cl~terprise. Thus, tlld Federal Trade (3ommi~sion can meet a significant consumer protection I~eed by usillg its rl~]emaking and e~forcement powers ill tl~e S¢~ llreas, Thra second situation ~iesents a /In)re debatable r.:ettsion for the ap- piiealion of the F'I'C s )o~vers. Tlds would in~-olv~ a pr~ctiee whiclt is illegal um er t~ a~s of some but not all of the states, and wkieh has some eeo on e or e~ mereial justification An ex~Lm)le ml,dle be lie USe O~ the ilolder In [hl(!-(Olli'S0 doctrine to Gut off i le con- sumer's legal claims and defellces ac~l]iIiHt t]lo h~lder of eonlmet'eia[ paper (although it should be noted tlntt tbe Corctnlissiol~s ,TRR~s t011 bllyers~ elaitllS artd creditors remedies were riot ha~ed soh!lv oil a public policy-unfai,~qess tge~*rv). The >roblem in tlds area is~where tO draw t ll~ 12tl~ : ~lb %% IIIE p(~ nt floes ~he ¥~lrianc~3 ¢q~lllO~lg 2~elevant state lairs sug~g, c8~ that thett~ re~tllv is no public policy co~sens~s on this issue, and that therefore the: CmnlniSsion sboul~ premise any action on ~ full oonsidelatiotl of [lie eeonomie aml ~t~bll hlt¢Ies~ that are at stake ! Tn l)raetice~ the Coilli[liK~i{)n ~eenls to h.'t~'e rtso]~'ed all doubts in ~.'~or o{ ~ull c¢lllsid¢'ration Ill the /:/)sts ~lt]d bl!neftts of I~ commercial practice and h~ts lint ~inlI)]y l,3oketI to see ~hetl~er the *~cfivicv is proh b ted under state law. >rbe ~lail Order ~[erebandise. Doo/:-to Door Sales, and Credit Practices TRR's are exaluldes of this ap- proaell~ ~llld ~}l~- will be se ~a~atetv considel~d below ill the st ctilm dealing wit}t the llullfairltess cost [~e~elit~' thetorv, leer present pllr. lmses, howe, vet, tl~e si~llifie~tllI poiitt i8 lhat there ~Pl>far to he ftw, if any, situations whell the col*trary-to-pllb]ic polity /Inf~litllo~s theorv~ standiag alone, is esser~tial to reach :ra;tices which ~re :~)- prop~iate sub eets of PTC action. Eve~ xvhet~ the practice is clearly unlawful under a fedet'a] statute or the laws of the great majority o~ the slates, it seems desirable for the FTC to undemtiee a detailed ex- ploratinn of the eennomie efit,~ts ~l" tlt~, l>rae~ices tlrtll the iusllfk'~t tions ~Or Coi~tlnission Jlltelveiltion. Thetefoie. ¢!lirllittatic~n of tile public-polie~, branch of t}~e /mt drness dc~-tiine would ~ollline a~ene~, dlseret 1on wit he/it preventdl~ tlte l'f(' ~ro[i i remed~ ina ~lh / 15,es that :11~ iml)orr ant targets for fedetal ( oll~Ulllel pl/a elrtion r( ~tlhtt ion, 1~717¢1~?.(~ o~l. [Tli.~(=t*llpitlr;ll.~ Tke 8eel/nd branf:~t of {]1{! Cigarette l/ule tes~ asks x~heliier tllu~ eolimlticbil l~aeti ~ it* iptlstilm is ~¢h~l moral, unethical, i>pl)~es, i/e.~ <lr uns~ r/lIItl] Ins '~ .N'l!it lie } the ('i~al'~tte statement nor the ~u[isequel~t ~[e~elopment of the lmfgLltnens eLoc~tril/¢1 ~ives any' real content to these terms they seem to ~lnlollnt to 11othhl~ li]ore their It ~ox~thlsicm t]lltt the Comrni sio~/ dislik~,~ the pt.~leIit/,s ill qllesti~n. %~ present there itj)l>ellis to hi! /ll't)at/I ~t~reement on tile l>~Opositio~l tfia~ th~ I:'~de~at Tirttle ( ,~mmi~sio~ sho,dd I101 be dele- ,~,ated firoad discretion t(~ detei.igldle xlbipb ¢)lltlnetcial l>ractiees :lr~ iiltl~loI'~l or unetbienl. This t.omponent ~f the llntt/irue.<s doetril~e ¢:otdd safely be serapimd. i'0

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125 One caveat should however, be noted. In some of the more recent TRR~s, the "oppressiveness" ]anguatagqe from this test seems to have been interpreted to mean that thc~ relier has some significant market power which he is using un ustitiably to harm the consumer. Tlds is really part of a distinguishable tbe6ry~ the "unfairness cost benefit" ~p, proaroaeh~ which as previously noted is discussed se~parately below, i . Injury to Consumers or Competitars.--The thlrdcomponent of the Cigarette Rule test is whether the practice in question "causes sub- stantinl injury to consumers (oi: competitors or other businessraen)2 At one level~ it is difficult to quarrel with this proposition: plainly the FTC ought not to be usintgr its resources to prohibitpractices which are essentially harmless. There are difficult questions, however~ in d~fming and measurin~g harm and in determining how much is sufficient to warrant remedial action. In some of its recent trade regu- lation rules, the Commls~ion has beegun to address these issues under the theory that is described in the following sectmn as the !~un fairness cost-benefit" approach . .. ^ . ....... ,In the Imtml Not'me fm th~ Ct~edit Practices rulemaking, the Coin- inlssinn asserted that it has the power to prohibit a trade practice as unfair when 'one party to a transaction en oys substantial advantages with respect to those with whom he deals" and "that party uses an overabundance of market power in an inequitable manner." More sge- cifieallty the use of summary creditors~ remedies could be prohibited if the ,~ .,~om~ ss on found " : : : iI;~ ~J (1) The creditor imposes upon consumers contracts of ed- ~e heslon i.e.,thecreditcustomercannotbarguinoverthepar- :~ ]~ ~ ticular contrac~ provisions) Wl~ch contain provisions dis- : !T advantageous to c~nsumers or the creditor fails to include in (;i tlm contracts of adhesion provisions beneficial to consumers, ~i • ,, ~ all to she consumer~gdetriment; and ~,! ~r~." ~ ~*i~ i' (2) This detriment to consumers is n~t ofgset by a reason- .') • ablemeasureofvainereceivedinreturn. .: ,~: : ¢,'; (40 F.R. 16348~i9 (April 11, 1975).) Apart from the partlc~dar acts andpractises addre.nsed by the Credit Practi(~s rule there are s~veraI notablepoints in this formulation of the theory. "~ ~ , The first is the vagueness of the trigger condition that th~ seller have "substantial advantages" orpossess an "overabundanc~ of mar- ket power" in compuristm to the buyer--which in this case seems to be equated with use of a cvntract of adhesion. In the FTG's interpre- tation, a "contract of adhesion" seems to include every agreement in which.one of. the ar ties.presents a proposed contract on a take-it-or- leave it basis, andPthel~ is no opportunity for the oilier parLy to bar- gain over the terms of the ageeement,--a description which fits the vast majority of retail sales in this country. It may well be true that credi- tom stand in a diffel~nt position with r e~spect to their customers thnn the providers of, say, geoceri~ or rental cars or ready-to wear cloth- ing, but it seems clear tha~ all of these businesses use ~contracts of adhesion" in the sense that she transaetinns are standardized and the tO / %

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126 salesperson has no authority to enrage in bargaining with the eort- ~umer regarding the terms o{ the sate. Nor m the nse of ~Imd~rd-~rm contracts or n~r~-l)s, rg~ine/l transactions llecess~ri]¥ any ir~d~l,ni'}on that the industry {n ~ uestlon is ul~comp~tlt~ve: the three ~ines of b~si- hess eked above~ for ~xample. seem to be highly eorapetitive indust rie~ in mG~ m~tl'opolitan areas. Thus. Either the language ~r0rn the Credi~ Practices notice quoted above re{Is to reveal die true basis for distin- g'ai~hing the c~edit tran~s.etion from other co~l~llmer puI'clla~es, or the "market pewer" eompo~en~ of tile unfairness eost-henefit theory The second set of quE~ions eoneern~ the nature of the ce~t berteg~ al~lys~s that i~ to t~k~ place onc~ the trigger condition of sufficient rnR~k~t ]loxver is ~,x~li~g~([. Ill ~eo~lolniC l~n]s~ the ~llaIyf, is inRy hD~vE both an eflleienev dime~sgm (does tlte practice tend to reduce the tot~I consumer we/fa~e that would be realized with~u~ the practice !) and a distriburional aspect (would a ban on the plaetiee benefit some suh- IOUpS. Of COns/ mel~ w i e pens I]ziIlg o lots ~• }. The "e, rrl~v ~•SO b~ Hn ii~/~ O1" ]ollg* ellil eCOllOilllc etr~c s. For eX~llllp]~ ft chSilg~ 111 l~E pre~ailillg Ir~lctice~ nlav ill,h.e s(~rn~ s~.l]ers o11~ of ]~l[silless ~lld I~td to anticompetltive behavior or the use of otl~er unfair er deceptive praetices. Fbially, ~ome of ~h~ e~nsllm~r costs ~nd benefits may not even }~E economic {ll, nl~asllrab]l!~ ~/~ in []]e Situation w~le[I a pflrticu]aP sal~s or deb~ eolleetioJ~ pr~c~ic~ inflict~ emotional distl,~ss on the EOIISU~IIeI~ These problematic aspects of the cost-beuefit analysis raise t]ll'ee iI~terrelated questions concernin~ legal co~ltrols on FTC discretion in this area. The existing st~tule does not address thes6 p~int~, and at present neither the FTO i~se~f nor the courts have d<~ne much to fill the gap. 1. Which effects shouhl be couslder~l in th~ anMysis? The range of p~ible co~s ~nd be~tefit~ that can be hypothesized when tee FTC proposes to. b~tr~ or moclify a signittesmt commerciaI practic~ is ~a~llal~: large~ and it is not ete.~r u he, her it is necessary or appropriate for the Comrili~;sion Ill e~llsi~lcr ~IU ptl~cndal effects. F~r extunple, ~oulll the Commission prope~]~¸ iguorE di~tribultolml ~'gect~ i~ ~1~'~ ~ere plausible claim t[mt the p~posed rule w~uld benefit literate, upper- cla~s conmlmers a~ ~l~e expen~ of the le~; articulate ~r affluent pur- ehasers of th~ ~roduct i Or, conversely, could the Commls~ion justify issuance of a ru[~ ou ~I~E ~round that it w~uId redistribute income from rich to poor! Should a claim that the rub will drive qmall businesses ollt of the market and lead to dominance lly more efg(!ieltt large corporations b~ regarded ~s a cost. a bene~, or an i~ relevancy I ~2. What weight~ s]louhl be gi~ en to the relevant factors ! Sheu]cl a ~hoI't-tt~rm ~ain 14ol¸ eonsumpts ]n e~tlci~cv ])or~f]t:, I]¢2 ~-e~}l~l lnot~ or [e~s hellvily them JI hln~ t~lltL risk that ~eHer~ ~1]I] en~age in anti~ conlpe~itive el¸ d~cel/ti~ ~ I le}l~ till¸. i f both effects seem ~o/m of tong}l]y ot/ml magnRude ! How ~hou[d a ~Mn ill elllril~ncy bc~ wei~hled a~a msJ ,q ne~ltthe di~tcibt~liona] cffe~'t !~/~sumlnK t}lL~t iLe~d/e tii~t ri/~utlona] effects can I~e ~h, fin~d) ? Shelled th~ wcighls be Mtcr~d i~ the! p~aetice ,leterndned, lullt theh" lehld~c ~uiIlermbilitil!s asse~s~dt i am

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3. Once factorddentificatior~ and weighting issues are reso]ver, how are. lira r~lcvnnt fac£ar~ ~l be measured and proved! Is it pel~nissible for the ~e~lnmission merely to inake ils ~lll!Ht glu!s~~ lit ~ll rely im iIs expertise rattier thang~elier~ting einpirical data! If not~ what kind of empirical data must be gathered ? These are extrelrLely diiti~u ] L questions to answer eyen i1% the context of a particuIar rule like the Credit Practices TRR. and they may well be impossible to resolve satisfuct~rilv at the level of gener~ statutory standards. One possible approach is to put greater emphasis on the trigger conffition of market failure. That is~ if ~he FTC had to show a substantial ~nd well-defhaed market failure as a pl~mise for its regu- latory activity, t]len the open ended nature of the cost-benefit analysis w~uld be les~ troublesome. F~r example, the concept of ~'adhesion" seems applicable oltly i~ subsL~ntially MI of the sellers in the ~l~v~lit m~rket provide ~sentially the! same tei.nis Inl ~n lmpor~ti~ ~onlponellt of a certain kind of tran~action~ and they refuse to bargah~ with con- sumers. 3lore gener~/ly~ if tl~ere is a failul~ or absence of ~ompetlt~ve conditions in the relevant market that prevents consumers from en- gaging in meaningful comparison slmpping or fr~n~ making rational purchase decisions, tlien remedial action may be necessary. Once this thr~slmhl ~ondifion has hecu sl~own to e~ist, the Commlssi~n neces- sarily inust ~xereise disetetiiin in the iliflh!/llt t~lsk ill ~ryin~- [o ~ssess the c~ts and benefits of the praetic~ in question, and of different re- medial alternatives. A regulatory ~nalvsis requirement should help to systematize the assessment of r'emEdial costs and beneilts~ to the ex- tent tha~ this is ~ea~ihlc. Sections (e), (d)) and (e) of the pmpesed statutm\v ]anguag~ of- fered at the condusiml of this memorandum attempt to codify thes~ principles. Section (c) deals with coercive or high-pressure sales tac- tics which have the effect of undermining consumers~ freedom of choice and thereby make it impossible for a competitive marke[ £~ functitm properly. An example wouhl be the need to plovide a of wiling- off pel]od ~m" door-t~-dooI sales h~¢ans~ consumers often find it diffi- cult or im~:~ossible to retreat from a high-pressure sales pitch once the salesman has gained entrance into their home. ~ection (d) concerns the situation described ahm'e in which a dishonest seller simply "tskes the tunney and I'Llns~ that ]s~ enters into a consumer contract and then fails ~r refn~es to perform his part r~f th~ bargein. Th~ language suggested attempts to limit FTC discretion by requiring the Com- mission to make a show[n~ that the n~mnpe~ f~rmance ]s a v~olation of law in a substantial majom[y of states where ~lie practices in q~estion hare been used, Section Ic is a more general /rovision desif_q~ed tr~ reach other s tnations n w]~ ch there has l~n a market failur~ which warrants FTC action to safeguard consumer choice. In contrast to the verw broad theories nsed by the FTC in proceedinge llke Credit Pl'actlc"os, thls pr~visinn ~eks to con fina ~encv diseretioa in severM ways. The Cc*m mission is requi~-d to ideniifv ihe specific nutrket failure and to llnd that ]t has resulted [n widespread ]aek of competition wlth respect te a mat¢,ria] olemenl elf a ~onmlmer transaction. ~lhis would make it ~mposiib]e for the agency to issue a trade regulation ruIc ~n the basis of a cursory "eontraet-of-adhes on" ann ys s ke that used n th~

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Credit practices Initial Notice. Moreover~ tho C~ommission's eos~- bonefit analysis ~f the n~ed to provide e. rummy for the identified market f~ilum is made an explicit element of the th~rv of liability. This would have the effect of earv out m* exception to Ihe ~,~llerul principle that regu atoo" analy~esr~ould not be sub ect to udiciul review for adeeu~;y or sufficiency. More searching]u'udici~l review shouht coml~i tile Co nmission to produce a more e~xefully structured ~nd m~r~ thoroughly ~uppo~ted aaulysis Qf the need for remedial ac tlon in this residual category of case~ A thlr~ strand of unfairness doctrinB seeks to remove re>~r~ints on truthful advertislng, ially ric~ advertising, The Ophthahulc Goods and prescr pt iones~gs T RPI~'S as well as some of the cease-and- desisL causes brought agninst profemionM assoeiatiors, exemphfy this approach Sine~ the S preme Com~ has detcrmineM that even the ad- vert sin of profess OhM goods and services is protected against un- reasonable restraints under the First Amendment, it seems fair to conehule that the F'FC is doing little more than the Constitution it~el f re~,6res in thls ~rea. There are some si~afifieant ~,dvantttges in having an agency like the Y'rc charged with the responsibility for ramovlng restraints on truth- fuI advertising. A regulatory ap~proach avoids what could he a sift- nifieant amount of constitutional litigation, and ~rmits th.e FTC to deal with priva~ restraints on th~ rigbts of ~ellers to, od~ertise. l~ulemak~ng ~/so provides a more appropriate s~l of pr~eedu~ than cour~ litigation for explorln the purpose and effec£ of the nnmerm~s pe~.~ihl, restraints on ~rnth~ul advertising. Thus, it seems desirabIe to codify and make explicit the FTC'~ authority to defin~ as unfair acts or practlees any restrainls on truthful advertising. Section (a) of the proposed statutory ]anguaga set forth below is designed to accomplish tlxa+~ objective. glT~pp, J~SSION OlP N~(~*~y /N]e0R3~ATIO~ Another branch o f contemam orary un fairnG~s d~ct rifle seeks to remedy market falinres which result in tim supprea~inn or omissio~x ef in formation essential to a rational purchase declsion or to proper use o~ the prodn~ in question. This theory has the potential to con- tribute to the effieien~ hmctioning of a chmpetitive marketplace, if it can ba properly channeled. One difl]eulty may arise if the theory expands to encompa~ not only information that is n(~eessary or essen tial to reasoned eunsumer dec~sinr~, but also information that wo~fld be merely belpfu] or ll~eful. Especially in the ca.~e of complex con- sumer products like a stereo system or an automobile, the range of information which may be useful to at lea~ som~ aor~stlln~t~ some of the tim~ is vast, and the FTC ~ discretion would be corre.~pond~n~zly hroad if the unf aivness ti/eOl~, t~)u] d ha ex.andgd to include all useful diseic~sures. Similarly, the dOCtrine can impose ~ substantial burden on sellers ( and therefore deriv, lively on consumers ) if it is interpreted to i~ch~d¢ ~% er~Iv inf0~a%i0~ ~hieh is eolIeGted vv, xltin~lv 3~ th~ normal eau~e of ~hs]~es~ or is reasonably available to the seller, but

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also data that must be generated at considerable effort and ex:pelense solely for th~ pttrpo~ of providing in~oramtinn to cx~ns~mers, There may be a few situations in which it would he ap~p~ropriate to require sellers to undertake some reasonable testing in order to support e~n- tim disclosures but at minimma the Commission should be required to meet a hgmr burden of nvestgaton and ustficaton n thc~e instances. In short, the basic concept of this kind of unfairness theory seems sound and useful and it should be possible to draft statutory l~nguags wh ch will reasc~n ably conhn~ the Commi~ion s discretion in this arch. Seetinn (a) of the droll statut~ s~t forth at the condusiou of this memo1 m]dtml incorporates. . the two p rincipal . limiting . conditions sug- gested above. That is, the m~ormatmn m questmn must be essential to a rational purchase decision, and it must be either available to th~ seller in the normal course of business, or obtainable at a rea~on- able co~ in cumparis~m to the benefits that consumers can realize from disclosure. In contemporary FTC practice, ~'ad substagslatlcn'--tha require- ment that the seller have docum~mtcd s. ppor~ffor his claim~ and repi~- sentations before.maklng them in ed ~ crtising, seems to be regarded both as a subetantlva theory of un f alnless~ and as a remedy for un~atr or deeepti~,e practices. Substantiation can also be viewed as an in- vesti~.mhve or case selection tool since the absence of adequate sub stant~ation may he an indication that the represe~xtatin~ in uestin~ is ~alse or" deceptive. For ~re~ent purposcs co]~slderation is~imited to situations n Wh ch lack o5 substant~atinn serves as the substantive basis for a finding o~ unfairness. The nc~d for the unfairness-substantiation theory seems difficult to assess, at Ieast tin the ba~is o~ the published literature and the rule- making proceedings that have heen conducted under the Magnusqa- Mcas Act. However, the fact that none of the TRR provisions that hava given t~se to the recent ~ontroversies was based ul~(on an unfair- ne~q-s~tbetlmtiation theory is soma evidenca that this ~uraneh of file unfairness dcvtrine is not a major cause for concern. Titus, t~n the basis of the record to date it seems pruden~ to ,follow the course rec- ommended ~n the Colmnitt*~c Report on S. 1991 and inco crate int~ tha statute a provision explinltlv preserving this theory..~'~etion l f) of the proposed statut0ry tenguags ~et ~orth in the follow ng port on of th~s memorandum is similar in subetanc~ to e comparab e prey - sion in the Committee's Report, Fc*r put )v:~cs of this section, unfair acts * r p~ ct¢es sha inc ude-- (a) unreasonable re~ "a nt.n on the truthfu advert ~in~ of products (*r services ; a d dec pt~u,, [lie Comtldtt~,e ~,e[Iev¢~ lhat th~ advertising ~ulstant]atio~ ~rr~ gram h*~s be~ an Iml~rtaat e~me~,~ in the Commission's ~$~rt to pollen ~he m~¢~tVlaee au~ p~ot0et cou~ume¢~ T},~ ¢~>mmi[tee f,,rcher b~]~ex¢m ~l~at the fa[]ur~ re p,~sses~ ~u~. stan~a~b*~ ~0r an ad~r~[In~ claim ~b,~(ad ke ,l~,~ed a a ~eeep$ive practice a,~d th* yropo d language on ~u~a latla~ a [arcaded to ]eaw ao 4oub~ on this ~01a~,. L....m.L_

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130 b) failure by a seller to disclose, through advertising, labeling, or otherwlse~ nformat on wh ch (1) is essential to a rational purchase decision, or to proper use of the prc~uct or service, and (2) either i~ available to the seller in the normal course of business, or can be obtaiued by the producer or seller at a reasonable cest in comparison to the expected t~!ne~ls Io i)ureh~l~ers from disclosure (c) marhe~ failure resL~lt~i~g in widespread lack of competition with respect to a product~ servi~e~ COl]tract telT/b or or.her m~.tz.ria] elemt.llt of a consumer transact~on~ if the projected benefits to consumers from remedying such market failure exceed the projected costs to sellers: (d) f~ilure or refusal to perform on a consumer contract, when such failur~ ~r refusal is a violation of the civil or criminal law of a substantial majorlty of the st~te~ where such acts or prae~i~es have been shown to take place ; (e) acts or practices whlch have the capacity or tendency to coerec consumer choices or otherwise prevent consumers ~rom m~king reasoned decision~ regarding the purchase cf p~ducts or service~; (f) u~e of representations for wbich the seller p~sessed iimdeqm~te substantiation factual support a~ the time the representation wa~ made. H~us EllO~J~ FINANCEI Prospect Heights. I~[.. Jan~g 18~ 1980. CONS~I[ER S~CO~£MI~i~r~E OF ~E SE'~'A'r~ CO~IL~II~r'I~E ON (~O)[~ERCE~ SClE~'CE A.N"D T:~A~,'Sl~RTATIO~ Divksen ,~e~te O~ee BuildZ~ng, 1Vesd~ngtvn, D.E. Sl~s : This resp¢)nds f~ y~)ur rcfiuesi for comment elmcern]nff defini tion of the woful "unfair" as it is used in the Federal T~dc Commis sion Act. From its inception, this Act has condemned "unfair" aeti~fity. YeL it has included no guidapce ~or determlninz what activity should be so characterized. Black, Webster, and Funk ~ Wa~nal[$ define "un- fair~ in terms of dishonesty and ~raud. Presumably, these concepts were in Conzress~ mind. For its phrt. the FTC has described factors it considers relevant to the definition. They include : (1) YVhether the prnctiee, wfihout necessnri]y having been previously considered unlawful, offends public policy as it has been established by statutes, the common law or otherwise-- (2i W]~ether it is immcral, unethical, oppressive, or un- serH1)ii[olls ~ (3) Witether it causes substantial injury to consumers (or et)m pet }tnrs or olh~r bl]~ine~men ).~ Apparently these factors are to be considered can~unetively--al- though this is no~ entirely clear. Sttt~ement of Basl~ & Purpose of ~rade Reb,~latlon Rifle 4~ 29 I~*.d Reg ~55

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The Sup|'etne Court specifically refused to label any practice "un- fair"; bu~, instead, reserved to the ~udlcia~ system only the power to afllrm or vacate an FT(3 ud~ment to tlmt effect} Clearly. all of this history has produced flexibility and has created a law that is adaptable to e~n~ing condltions. In some re~pects, this iB deslrable : but it is not without its rice. And that price can be meas ured, tca large extent, in terms of ~e inefficiency of uncertainty, im p~irment of creativity ~nd undemocratic restraint of personal freedom. Perb~p~ that priee was worthwhi~ in an era when FT(J's "o~ter limits of authority" were not daily probed and penalties for violation were not overwhelming. But that er~ is bygone and the price has be- corrle exhot'bitP.n~, TiIrle h~,s COllie for Con~res~ to pres~lqbe • more precise de'hi,ion of this term "unfair." In a democratic soclety~ the la~fl~[ness of activity~ is typically de- terra,ned by consensus of its elected representatives or decision b3 its udicial system. Because the terms "unlawful" and 'hmfair" are prac- tical equivalents act i-dry within the ~ope of ~un fair" should logicMly be determined in a similar way. This argt~es ~hat "unfair" pr~ctlces slmub{ be strictly limited to thoRe activities, ineluding e~mmerci~l adve}tlsing, that haw been condemned by th~ eonstitutlon~l, statlitory or common ]~w of the req- uisite majority of the constituency. Such limltation would help insure the concept of "unfairness!' is eonsi~ent wi~h the prevailing mores of our national e~mmunity. .'t~oreowr, c~nduct thus proscribed sho~lld not, by itself, he con- sidered a~ "unfair." It should only be so characterized {f it also canses substantial injury to busines~ per~oi~s and lho~ dealing with them, snch a~ eo~umer~. This limitation is l~q~fired by the FTC Aet',z pur- pose--reL~ulation of trade practices. Alth~lgh sub~anti~I business or consumer injury must be a neces- sary ingredient, it ~hould never, itself, be sulfieien~ to constitute an act ~s "lmfnir.'~ In ury e~ and does regmlarly occur absent any ac- tivity which could be fairly termed improper. Consequendy. 11~ of thi~ criterion alone would produce ~ result contrary to human f2 Xp~i'ie tl etL It is gratifying lha( your Sul~c.mmith.~ is a(htres~h~g t]fi~ timely • nd Vl al prvblem and 3[ appreciate the oppor uni y yo~ h~ afforded for Co~]mellt, Wry truly y~urs, R. P. McM~x~s. LOCIKER ~ ~REE2qBF~RG~ .¥ele York.N.Y,. Ja~,u,wT/1,< 1,980. (~ON~qI~[LR ~Ir!I3(:OT*I~51IITEIh OF TIIE ~EN VI'I5 C{)M?,iITTEg ON {~OM~,tFRCI~! SC'IE'qCE, AMD T~A~,'~qpC~RTATIO~-, Di,k~.~n ,%~ate O~ee Bui~dln~, lVttm~inaton~ D.C, (~NTLES[ZN: ~'e represent Toy ~flrltl~lCttlrers Of ~,mei~c.a, Inc. ("T3[zk"). r* non l~It'~>fi~ trade 0,sscci~Ltion who~ membership n~':olmts for ~p[>roxilna~ely 90 percent of the t~y industry's 3.5 billion cto]lars in anmml ~al~, ~ ohlllle at the wholesale level = J~T0 v .~p cr ~ & Mu~chlnapn Ce (19~21, toll U g 23~ ~, t¢ 1'¢ ~-"="='m~

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132 TMA hLs taken pare in the FTC's current p~eedln~s regarding proposed t~dc regular,ions for children's azlvertising, 'I~IA and its members are gt~.at 1 v. eonec. 1 ed over the F T(-9's a emt;t t I promulgate. sweeping regulatmns which e~uld ban all chlldi.~n's aAverfisin~ as being "unfair", under Section 5 o~ the FTC Act. Because of this, TMA has followed with great im~T,ast the biI1 recently pas~d by the Sen ~to Comralt t~.e on ComlneTv~, Seiellee and Tt~rlsI)oi'tatioa which de~ls in i~rt with ad~-er tislng rulemakin~ (S• 1991 ). TMA would like to take Lhls opportunlty to comment regarding how "unfMrrmss" slmnld be d~fined under the FTC Act. Section 5 o:[ the Federal Trml~ Commission Ae~ ("FTCA') pro vides in part: UnfMr methods of competition in eoxmneree, ~nd unfair or deceptive ~.et8 or pr~tices in commerce, are declared lm- l~,wfuk Seetmn 5(a)6 of the Act empowers the ~TC to identify aud pt~3 h h sue pract ees, Section 18 ~) (1) tB) empowers t,h~ ~ommi~sJon ~o promulgute rules which specify acts or ln~udie~ which are ~mflfir or deceptive. Traditionally, the FTC has d re~tex i s re~ ~ o~T effor s n two unpin directions: p~x~hihiting the practices which interfere with ¢om- petitiom ~nd preventing tile use af deceptive p~*aetices. In the p~.~ decade, however, th~ Commissio~ has turned its attention to busines~ activities which ~re neither anti-eompetittoe nor dceeptixe as th~s*~ terms have been traditiolmliy used• Even more r[wently, the F'IC has ~gulate4 practices which involve neither unfair commercial m~ctlces nor false or deceptive advertising. Through Section 5 lroeeedln~s, the FTC has banned advertising that, w ~ e ~ot decept re, w~s t ioug ~t to 1~ "nnfMr" by Lhe Conlmis~sion. In its children s advertisin~ pro ceedin~s the Cc~]mfission is considering the use of its ht'(nM Section I8 a (i)(B) milernakln~ power against "mlfah-", althot~gh m*t de- ceptive, children's advertising. . , During this growth in tho use of the unfalr~ terminology of the ~'TCA, the courts have shown little interest in curbing the broaxl dis- cretionary powers of the FTC, In FTC v. Sperry ~ Huleh2n.wn ~ o. (405 U.S. ~88 [197£]) the Snpreme Court gave the Commi~si~n the n pt~argl~l ly unlimited power Lo, "llhe t~ eout~ of expflty, consider lmbli( values l~yond simply those enshrined in the ]eth.r or en,'ompa~ed in the spirit o~ the antitrust laws" in deeldin~ wha,t unfair practices were (40517.S. at 244). In addition tc this generaI statement, the Court lent its approval to the factors the Cammis.sion weiffhed in cletermiMnff whether a Oract~ce. neither violati ve of the antit mist laws nor deeept ice, is nonethele.~ "unfair~' (405 US. at n. 5). These frlztor~ were: (1) wlmthe~ the i~ractice, without nex'e~rilv havtog IsN,n considered unlawfuh offends public policy as it hmn been es- lllJ)]i~ht~d bv s~flt[ll~£, ~he (,41171111oll law iit olh~t%vic,e * ,~ ~¢ ~ll other words, it is within at least the penumbra of some com- mon law, statutory or other c~)ncept of unfMm~ess: (~) whether itin immoral, unethicah oppressive or un ~cru])ld(als ; (3) whether it eanses subatantla! inputS- to eonsnmei's /or competitors or other btlsinessment. 0~ C2-,,,m,~A

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188 Although it was the intention of the Court and the FTC in pro mui~asin~ these rules that they each be considered in w~i~hing the ~;unfairaless" of a practice, the Commission's staff noted in its initial repol~ to the FTC on children's advertising, that it is not nece,,~ary for an act to ha offensiv~ to each of the factors to b¢ unfair (Speery & Hutehi~son, supra n.5). The staff co atiauad : Indeed, ther~ have been irLztane~s * * * where the Corn mission has found a practice to be, unfair without spcsificaily measut/ng it ngalm~t ~ny o~ the ~hrse rmrc~s. (Intlx)duot.ion and Reconunendagiolm and Summary ; The Promnlgmtioa of a Trade Rule Regulating Television Advertising, at 31~2). Thns, these specific requirements of determlnln~ unfairness have been d ued and sometimes discarded through the FTC~s actiom~. In addil ion to their inability or nnwil lingness to curb the vagueness o~ the FTC Ac/~ the court~ ha~e been unwilling t~> limit the Conmsis sion's discretion under consbitutionaI d~g:~rirts. Comme~tatom have noted tkat doctrines such as the "deisgwsion of legisiatiw powers" m~d "du~ process-void for vagneness" have been generally mlSm eessful in siml]enginff FTC actions (see "Unfairness to Consumers," 4 Wisconsin I~xw Review ! 071, 108~1088 ; "Recent Positions of the Federal Trade Commission." 5 LoyoI~ Unive*~ky Law ddnnml 537 559,-558). This unwillingness on the part of the Courts to limit or pr~scribe the power of the Commission to regulate adversising which is feels is "unfais~' should not detour C on ~'es.s from noting. "Unfairness" is an extremely vacua criterion for determining tb~ practices which the FTC has the authority to prohibit. Unlike decep- tion a finding of unfabness goes beyon~ questions of fact and in- volves norma~h-e values. A determinasion that particular practices are unfair to consumers nece~asily involv~u matters of general public policy. Wl/en the "unfairness" criterion is usd in the area of ad- verdsing~ the Commission is allowed to make ublis policy decisions over what commercial speech can contain an~ to whom "it ma~," be hro~deash These "publiz policy" decisions will of necessitv~ im;olve d~isiens o~tside the CommisSion's area of expertise. (In" the ehil dren's advertising pr(~x,~xling, dm Commission will weigh the F,~y eholo~dcal ability of children to undemt~md advertising). This u~ by the FTC of t.be power to declare, without ebb'c,lye guid- ance, eertaln advevtisln~ to be un{air threatens to impair Fir~t Amend- ment rights. In Virff{nia State Board 2t pl~rmaey v. Citizens ~'a~l- sume~ tTou~wil, I~,e. (4fi5 U.S. 748 [19~6] ), the Supreme C<mrt hstd that tt St~te shrtute timt p rohibih~d eertnin advertising by pharmacists violated tlm Fil~t AIl]enl]ulellt. sinex~ lts effect ws.s Io sllppve~.9 lgeoll cedadL" ttn~thful information ,~b~ut entirely ]awful ac~iviey ~ * *" (Id. at , ~3i. As the ~npreme Court reco~mmed, whde the reeulat~on of tale or deceptive e~mmercia] speech is permissahle under the First Amenilment~ r~gu]ari~n tha,t impcdp~ the frcv fl{)w of tmlthfu] ~nd non-deceptlve speech is not. The Connnission's recent, children's ad- vertising proceeding threatens this fundamental prlneip]e. }~v as- sumir/~ tile a.lhorliv l(i decide that pnrfisular c(}mml!reist spe~e}~ (al- though tmtthful ~lncl non-dec~t>tive) is sonmi/ow "unfsir" and should bo banned on this basis, the Commission ha~ intruded into an area

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1~4 pro t2cfl~.," by the First Amendment. (See attachod "O, ~on As to the VM1dity of a Proposed Federal Trade Commissto~ Ban on Chil dren~s Television Advertising" Pl~ifiip B. Kur]and. for a~. in-depth dk~usslon of t m F t~t Amendraeat a~ applied to the regulation of children's advertising}. In addliioD~ wi~e i~ that power to declare advertising "un fair" is used in the context of a Sectton 5 proceedtog~ it violates due recess re- qulrements of fair notice as to wha~ acts arc proscribed by ~alw. When the power to declare certain non-deceptive advertisinL~ "unfair" is used under the rulemaking powers of th~ Magrmson/Odom Act, it allows the Commission to estahllsh wide ranging iLorms f(~r society beyond its expeertis¢. Congrea~ should delineate what are "unfair" acts or practices. Be- cause the F*IC is an independent commission, pr tocip~l responsibillty for its over~ight and control lies with Congress. The courtshave ~ften noted Congress' failure to h~rther define "unfair" in approving broad discretion for the Commission (FTC v. Sperry & Hu~eMnscq~ Co, supra). In light of this, TMA recommends that Congress act to end the Commission~, . authority .t° prohibit, "unfair" advertisto, g practices. ~[MA.t'~cogntzes our. somet~ s need .....to have the Corniness]on. .reguIate '~unfalr~. ,c°mmercial l)ractlces. Stlcb ~¢t~vlt ins do ltot. infringe upon constltntmna] ly. . ,pr°tected. speech. They also usuall, y Involve.. areas.of the Commlssmn s expertme. TMA also reeogmzes the legltunate m terests of the FTC m regulating false or deceptive advertisements as the term "false" or "deceptive" is traditlonally defined, floweret, the Commission cannot be allowed to regulate advertising which is in its opinion,, "unfair.",,, _!kdditionally. the. Commission's. power to declare] acts uufa~ slmuldbedehneatedb~ legislatlvefa, ctorstobeweghed in a finding of un fairness. Congress could carry oat these recommendations through the fol- lowing action : 1. Thepassage of Senate Bill S. 1991 which, in part~ withdraws from the Commissions authority the power to promulgate rules gov- emling eomme~:ial a(lvcr rising that is not "false or dcceptiveJ~ ~. Th~ p~,~age of ]~is]ation withdrawing the Commission's power to declare any advertising which is not "false or deceptive" unfair through FTC Act. Section 5 proceedings. 3. If the Congress does not act to prohibit Section 5 and 18(a) (1) b proceedings against "unfair" commercial advertising practices, legislation should be cnaeled wh ct~ would curb ~he discrc/inn of {tie C~mmiss(nn in eases t~f alle~,d "nnlair" advertisements ])v rcquirlng tha~ in any Section 5 or 18 a 1) b proceeding that the'FTC make the following stme]fie findings about any, act ~r practice before such ae or practice is declared o he ~ unfair" adver ]smg un( er be FTC Act : (a) that the act or practice [without necessarily being unlawful) offends public policy as it has been established by statutes t)r tim (ore mor~law; (b) that the act or practice is immoral, unethical, oppressive or Ilnscrupido~s ~ and in) that tbe act or practice suhstantiMly injures cons,reefs, coal pot]tots or other businessmen.

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Such Iegisiation would revive th~ three faeto~ of m~fairnezs first issued by the FTC in the Cigaret~ Rule and approved by tim Su reme Court i~ FTC v. Sperry & ~tutchi~on Co.~ (supra). Tl~is wouI~ curb the Commission's current unbridled discretion while allowing it to deal with truly unfair commercial practices. Very truly yours, A~ON Imc~Fa~. Sr.~RS I~azBtrc~ & CO.~ I~ ash ngl~n, D.O.~ January 20:1980. Hun. WE-~DE:[~ H. FORD1 U.S. Sea,ate, 1VgM~,tcm, ;9.0. DrAR $~'a'roR FO~D: This is in response to the Senate Commerce CommltteCs public invitation for cQmments from "all persons inter- t~t~d in the question of how m/~airuess should he defined as used in the FTC t.ct, and whether unfair~ess should be applicable to tom mereial advartlsiug." The Consumer Subcommittee should be commended for its "ma~or review ~f the concept of ~unfairness~ ~ used by the Federal Trade Commission to prevent qm fair or deceptive acts or practlces~." As the invitation fro" e~)mmetlt notes, the recently completed FTC oversight hearin~ have provided ample ustlfication and support for this eonimitlee ~ction, Our comnien~s are intended to aid the cotamit- tee~s deliberations in this area and to ei~courage public hearings and eventual ]egis]ativn on this subject. I~TROD~Yc'rYo~ Complaints ahout the Federal Trade Commission's activities have been legion. Many of these criticisms of C~mmJssion ad udicatory and rulemaklng sctivRies result principally from agency action based upon commercial conduct which, in the sub ectil:e opinion of FTC staff members, is deemed to be "unfair." In addition, ~uch criticism has become, over the past several years, iustifiabty more prounounced as the Commission has sought ~o ex~end the reach of the unfairness doctrine to extra~ agant limits. The Congress has responded to this increasing eritidsm of the FTC with a number of proposals to restrict the Commisslon~s nut]rarity and provlde much needed guidance in the conduct of its affairs. IfowL ever, these proposed solutivns would iarge impact on the Commls~ion~s rulemaking authority to the exclusion of its ad udicator5 functions. A legislative veto m' the restriction or elimin~tlon of FTC urisdieti~n over eel'ta n ndustr~es used t~ltFs, [~sllran~ fun[~ra • 15t~. m~y pr2- t FT(, at use If t[ e parti ipants iI thos~ ind sttles, but dces nott - ins to protect from glllli]~r ~htle~ bllSi/lesses not eo~'ered by exemp- tim,s. Thus~ the present congressional bills eontain provisions which wouhI e senti~dlv trel,C more Ihe syrnploms of t|m "FT~ disease" rather than t he disease itself, i.e. the enabling legislation. Tfie difficulty with the FTC's current enforcement of Section 5 is direcNv caused by the general and vag~w wording of thug statute, the i t rpr ta~i~ s of wlid the (stun L-sign 1 as: either overtly or sub- g

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~i~ ~,!~ ...... TI ~ -71

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~900~9 f

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K h S~2900~9

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I I 139 by substituting its subjective udgment as to undesirable activities for siatutorv pro]~ibitinns, and to proceed sgalnsl such undesirable ac- ti~dtlss whether or not such activities are likely to cause injury, even when such activities are covered by a specific federal statute which the Commission would rather not use. Thus the Commission has, in fact, becc~ne ~ super le~islgrure, able to enact ad hoe ex po~t facto ]aw~ w,hlsh haw~ never b~eo nonsldcrrd by Con~°l~°-s. Aside from the obvi- ous constitutiolml dilEeulties with this proc~s~ /his type of enforce- ment by the Commissi~l utterly pre~ludf~s a redeemable compliance program ~by a l~ponsibls business entity. The bills currently before Congress, although they would redue~ the lmwer of the Commission in some areas~ do not adequately address this problem. To the extent that such bills carve out certain industries from jurisdiction of the Commission, they do not prohibit the Com- mission from proceeding in its usual fashion against other industries. The Ford bill, S, 1991, would exempt commercial advertising from regtdation on the basis of an unfairness standard under Section 5 and would subsgi~ut~ a special '~false or deceptive" standard. This wo~ld not affect the Commissinn~s enforcement of its view of what is *'un falr~' ]n areas other than commercial advertising nor. imteed, its inve~tlga- tion and prosecution of individual aetinus against eoimnercla] adver- tisers. The heart of the prohhm is. and remains, the va~e wording of Section 5 of the Federal Trade Commission Act. It is for this reason that it is appropriate to amend Section 5 of the FTC Act to limit the ability of the Commission to create offenses mit of (a) activ~ties which the Commission simply does not like, (b) artivliies which do no[ cause or ale not likely to cause signifieagr in- jmT~ or (c) aetlvifie~ which Congae~s has deiiberntely considered and determined not to be the subject of federal regu]atlon. The ~ollowing amendment is proposed : Arzendnmnt : Amend Section 5 (a) of the Federal Trade Commission Act reread: 5(a) Unfair methods of competition in or affecting commerce and false or deceptive actg or practices in or affecting commerce are de- clared unl0-w fi!~-: false ar ~!~eptive acts or practices shall be proven by substantial evidence of actual or probahle econondc 111 "u i~~ to ~onl )etl- tots or to eitber direct or indirect c~ls~omers of the pa~'ty engaging in sueb me,beds, acts. or practices. Unfair methods of competition shall be proven by submittinff evidence of actual or probable economicinjury to competition. 3fethods, acts. or practices probibded, re~ndated or permittrd by any trade re~lation or antitrust statute are t~ot pro- hibited by this Sectien unless such statute or re~ulatinn specifically makes a violation of th~l~ stn~ut~ or regulation a violation of the FTC Act. Tile firs~ sent~rlee of th~ amencImelit is ite~i~e/~ to prevent the Federal Trade Commission from inltlstln~ proceedin~os, and finding violations of Section ~ of the FTC Act, without proving thai a trade practice or method is "false or deeel~tive" and ha~ caused, or ~s likely tc* ~at/se~ eco/lOl[li(, injnlT to cotnpetitor~ or consumers. g~

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140 For example, in a deceptive advertising ease, the Commission would be required, to }?rove that consumers a~mally, rely or ar~ likely to rely on the misleading ad and have or w iI spend money to purehaee the product advertised when they otherwise would not. This required new element of proof would apply to rnlemaking as well as to ea~ brought u g~amst individual companies, since males issued under Section 18 of the l* rc Act are to define with specificity unfair or deceptive ~ets or practices within the meaning of Section 5(a)? Furthernlore~ .lthnugh the amendment does not specify that substan- tial or significant injury must be proved to find a vio]~tinn the Com- mission wouId be prohibited from acting where no or only a de mln- ~nu:s iniury could be proved, since such action would be contrary to th~ public interest. M~ntgomery Wa~xl ~ Co. v. FTC Z79 F.2d 666 (1967). In art unfair eompetltlon case the Commission would be required to prove not only unfair anticompetltlve activities, but that such activities had an adverse effPet on competition or are likely to have such an effect. The last sentence of the amendment would have the effect of prevent- ing the Conmdssi~n from using Section 5 irt a nlanaer contrary to the expressed will of Congress in its enactment of rc~alatorv legislation. Under the amemhnent~ the Commission wouht be proilihited from ~r(~seeuting, as violations of Section 5~ acLivities which urn clear'iv perm ¢ted by other ~rade regu at on ]aws~ and would be requ red to us~ such specific tra4e regulation laws to prosecute aetiklties which fail within the prohlbltions of those laws~ and to refrain from prosecuting parties exempted from such laws. Sears appreciates this opportunity to respond to your in~'~ta~on to comment on the issue of "unfairness" as defined in Section 5 of the FTC Act. Respectfully submitted, pri~ M. Kr~ox~ Jr.~ TTiee P~'eeldent~ 5~ove~nm~n~al Affair's, C~aAI~L~S ,~,~0RO,~.N~ Jr. AND ~0CXA'r ~S, CHAm'V2~ WaM~ngtoT;~ D.C., January ~1,1980, tton. W~D~LL IrI. Fo~n, ~ha~quan. Subeomr~ittev on Con~tz~s o~ t~e ~ommi~tee on Com. +r~r~e~ Sclerwe~ a~d T~a~l~o~tati~ U.S. Se~te~ W~hingto¢~, D.C. D~a~ S~aTO~ Fimu: We represent the Grocery 3Iamlfactucers of America (GMA). GSIA is a trade association of ~he nation's leading manufacturers of products ~old ~kl~llgl/ ~rocery store=% A~ stleh~ it~ members are among the nati~)n rs leading advertisers in all media. Section 7 of S. 1991, the Federal Trade Commission Ac~ e)~ I979, would preserve the authority of the Federal Try, de Comrnissien ( FTC ) to make rules prohibiting false or deceptive commercial ad ~Katharl~ G4bO~ l~¢~ao~ (I~.) V PTC, Sllp Op. ~ro. 11~ et e~,q, 2d (~ir, (Dec. 1~,

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14Y vertising~'~ hut would elhrdn0Ae from that authority the power to regu]ato truthfuI, nondeceptive pure speech advertising by terming it "unfair." S. 199t would thereby bring the VfC's ruts-making power nd c the I~ederal 1'rude Comm'ss on ket. 15 U.S.C. 4146, 47-58 [hereinafter cited as t}le FTC Aet]~ ever advertising into con fot~nlsy with dadsiems of th~ Supl~ma Court that extend first amendment pro_ tection to tl~thful, nondeceptive cemnmreinl sV~ech. GMX supports tiffs legislatinn. It also urge~ t]mt ~he Congl~ess com- plete the job at hand, by clearly elimiaatirLg any FI'C authority to regulate "unfair" advertising through ceas~ and desist aetinns. Prior to 1976, there was "no * * * restraint on government as re- spects purely commercial advertising." Valentine v. Oh~este~zen, 316 LT.S. 52 54 (1942). Thus~ neither pr¢-1976 FTC nor ~ederal court interpretat one of the term "unfairness" included first amendment considerations. In 1976 the Supreme Court held that purely commer- cial speech is protected by the first amendment unless it is false mis- lsadi~g, deeeptlve, or proposes an illegal transaction~ VirgiMa Brute Board o[ pharmacy v. Virginia Git~zens Oa',~umer O~m-//, Inc., 4.99 U.S. 748,771-72 (1979). • dt is precisely this kind of choice, between the dangers of suI~pre~dl~g infarmation and the da~gers of it~ misuse if it it is freely available that the First Amendment makes for ~IS * $*" In concluding that commercial speech, like other varieties, is protected, we of course do not hold that it ca~ never be regulated in any way. Some forms of commercial speech re~a.lation are surely permissible. * * * • Untruthful spoeeh, commercial or other~vise, has never beenLt) mtected for its own aake. * * * • * * [I~ may also he] approprlate to require that a com- mercial message appear m such form, or include such additlonal information, warnings, and clisetaimers, as are necessary to prevent its being deeeptlve. Id at 770 771, 771 n.fi4 citations omitted) emphasis added . The Court's extension of first amendment protect o~ to commerca adver- tising repulses a corresponding change in government regulation. The FTCAct s statutory prohibition of "~lse" or "deceptive" advertising is not inconsistent with Virginia Pharraa~y; its proscription of "un- fair" advertising directly conflicts with that decision. Minimal firsg amendment protection reqaises that thespeaker be provided advance notice of any speech-related offense.~ The standard of "unfairness" is no standard at all and consequently, provides no notice. It does, however, provide absolute protcctinn for arhltrary administrative aetio/~, girl,s advertisers no fats warning as to its prohibitions, ~md is vague and sub oct to whimsica]Iv elusive later- prorations. Because it provides no standards to limit lrT(J disct~e/ion or prevent arbitrary and dlscrindnatm'y enfor~'enlent~ it is uncomsti- tu~itumllv vague and unconstitutionafiv irthibits protected speech. 8~ ~ ~, No~e, -The V ~i~'o ~ V~g~ene~ o¢~rl~ e la t~e S~pteme Cou~t," 109 U. Pa I~ ae~* t57 (1960L ~0

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142, S. 1991's elimination of rule making power based upon 'hm fairness" cures a part of the problem, inadvertently, it amplifies another. One purpose of r~ie-making is to provide equal treatment for everyone in aa industry by setting uniform standards for all. lIowever, retention of the "means-anything means-everything" word "unfair" for ad- udacat v~ purposes will allow administrators to single out individual advertisers for arbitrary, selective prosecution. The inherent ambiguity of the word "unfair" in section 5 of the FTC ,kct, 15 U.S.C. 45~ was an original and intentional feature of the Act. ~See S: l~ept. No. o9~, 63d Colzg., 2d.~e~s. 13 (1914) (declining to define or hmlt the term "unfair competition'), IIowcver, t~he FTC~s use of the concept of "unfairness" as an independent basis for finding violatioaa of the 3-at is a recent developed.eat.~ l, Vha~ has been called the FTC's ~unfairness mandate," Nelson, s~D~a, at 413 is traceable to a )re Virginia Pha~acy decision whlcfi ir~volves acts ratlmr than pure speech advertising. In FTC v. Sp~ ,*ry & [1 tehln~on 60. i0a lJ.~. 2fi3 1972 the (our~ upheld the FTC contention that the agone:y possessed the indepeadent authority to "define and proscribe~ un~alr competitive practices a~parr from those practices which violated the antitrust laws. Id. at "239. The court fur- thor field that the agency had the aatborit~ "to pl~scribe practices as unfair or deceptive iu (heir effect u )on eoI~umers regat~lless of their IlatllF¢ or q~la ty as eolnpet tve pi'aelices or the rcf[eet oll cozn petition." Id. Standards for the unfairness mandate were to prove elusive3 Al- though the FTC~s unfairness mandate was arguably deri~'ed from lhe ~Waeeler-Lea Act's addition of "unfair or deceptive acts or pracriees,~' Act of ~far. 91, 1938 oh. 49, 5fi Star. lll (1938)~ te the coverage of see lion 5 of the FTC Act, the FTC did oct invoke its 'qmfnirness" au thority during the 30 yeats which followed its grant. Thus, even in regard to "acts or practicc~" unrelated to advertising, no substantive standards had existed for the exercise of the unfairness mandate. ~'~e Nelson, supra, at 417-21. No doubt because n~ first ~mendnlen~ protection for conunercial speech was believed to exist at the time [~ ~ye~y & Hutchi~zo~. the CouFt offered no ~uidanee save for iTS im plicit endorsemen~ of an "unfairness" formulation the FTC bad pro- a~e* Nel~¢)ll, ,,The Folf~idzaiton ~f I~T~ R/llem~klng" 8 COlOn • I/ev 4~;~ fl~ I1~7~) h liar I a~ Nelson As the C,]lml~e~(.e ~cmmlittee has pointed ~ ff l~( r~g,~ln. I~oII of ad~ert[~em~uls has tra,]tt one] 2- b~en concerned exv u~ ,v,~ 3 ~v h tie con re of 18 ii4 11~6) &~ ad*ectiseu~eu~ u~t~ .u~t~,,if it was deceptive m]sl~din~ (~r false ~ To, Mart~ Cctrler Jaatn~ CO ~2 US 4~ 48 (19~5~ : .v~fio~el ~e$ ~erric~ h~ ~ FlU, "~29 F2d :~flS, ~7 ~Tth Clr 19¢~41 : lVa,,~ L~b~e~tr~r~e~ Inc .z ~TC ~7¢J F 2d ~52 954 ",d (~lr . err deified 364 t: S S27 1191~f)~ t"~o ~es~ Ta~lorfny Co ~ FT(' 15:~ l" 2,1 102 ~04 Ot~ ~thev g¢ound~ ~27 [ ~q ~0~ 1194(I} : Pe,~o¢~ / FTC 150 b'2d 757 "~SS t~(I C~r 191~ v Hflv~ Tier,c, (~ ,,~ fo ~r 2G2 2~3 ~2~ ~ 25 : ~ kTC V A (~ome ~m~er ("o. 29I I: ~ ~7 T~ ~ ~1~41 ,mis~pc~ett~att~n r,l character of vrod~lct hell ~l~n~r* : FTC v I~ i,~ted ~o~i¢~ Ce, 25S V S 4~2 49~ t1922~ ~r~t~brandtr.-~ of 0reduCe un¢a?v~ C~n~rnln~, th~ Fq C ~ m~fhort~y tn e~,~ ~/ate "~/uf~,i- ~de ,,-.~Ice 0It Justice ~ hire In ~an l,~e 41eta tt~ S0(vv~ & Ett,~ehtn.ort ~,r~te t[a the FTC ~a to qn~ra~c uI~,r ~n '0~/t~tv~ bl,t e~/~re~ toa~lh mnmln~ea ,~enda a ~f folrn~ ' a~,l Chnt ~tke a ,r,urt ,,; ~¢~o?n(*~ ~.li~[~d~ The ('trur~ fcmml 1,~i*/a[l~e col]flrraatlnn of ~hl~ m~ndate In tll~ Whaler Le~. ACe [d I'd 5d

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I= 143 mulgated in 1964.* Even a present member of the Commission has written that "[~]he Supreme Court's bl~ad giant of authority to lhe FTC to develop new rides in the eonsumer pmteetiau field is t,no vague to provide any meaningful enforcement ~idelines'~. PitofskF~ Be- yond Nader : Consumer P~otection a~l the Regulation of Advertising, 99 Har~. L. llev, 661,681 (1977) [hereinaftei cited as Pitofsky]. ~n- otlmr commentator has noted that "neither the statute tmr its legisla- tive history defixms ;unfair or deceptive,~ and Congress has not clari- fied this extraorditmrily broad legislative mandate or furnished eri- h~rla by which to gpprai~e the success of the Commission's activities in this area. Nor have the courts stepped into the b~aeh." Neich~ Co~umer Pro~ectlon and Che Firs~ Amendn~en~ : A Dile~ama ~on the FTC?, gl Minn. L. Roy. 705, 705 (i977 [hereinafter cited as Rekh . Despite its pen Virginia Pfia~wm~T vintage, and despite the fact that it did not involve adverlish~g at alI, Spe)w ~ HuteM~on has been marshalled by the FTC and its supporter s as Ih(! Supreme Ca rPs endorsement, of "un falrne~" challenges ta eoastltutio~lall3', protected commercial speech. Nee. e,].. Plto fskv. supra, at 680. Addltmnally. an FTC adnfinistrative law pldpe (AT2T} Las Sugg'~sted that th~ exeep- f • , • tions to the firs amendments pro ee ion of eommereml speech are not limited to f~lse or deceptive ~tatements but include "unfair trade prac- tices" as well. Fo,"d Motvr Co., No. 9001 (F.T C. July 26 I978} ? This view, }my;ever, fias m~t been end[~rsed h3," nny federal court. g , Not 1~ 1 e ~ 111 bJ~sis f(Ir SIIch an en(lot~emt!ilt. T~rgiTl~g Phal~rm~' held that aI~ advertiser whose intex~st in advertising is purolv eco- nomic is protected by the ti~r amendment. 425 U.S. at 761-6~.. The CaUl't found t, hat advertisin,~ eouhl ~erve the ~¢,al of %nlighten[irtg~ public deeisionmnkin~ in a demoer~oy?' and th~t "It Jhe free llow of ef~rumere~al informatiolt * * * is iltl]ispensibJe h/ ~,he l~t'olx!r allo- ration of leSOUl~'es irt a flee enterpli~e system * * * artd indispen sible to the formation of intelligent opinions as to Imw that system aught tr) be red,dated or altet'~d" Id. at 7652 Till' (!{)l]I'~ follnd "rid ol)7,tag](Jl to ~orernn/ent~ ~dealin~ effectively with V~fie] p~eblem" ol "decepli~e ~ misleading" ~ul~'~ ~ising. Td. at I TI~ Court observed that : 'Tile Commission ha~ described the factors it ¢onsider~ In determining wh~ther a ptac. tic~ that Is no[thor Ill ,q~]~lloll 6f ~he ant!trual law~ ilor ~ec~,ptive 1~ noneth~]e~s u~d~[~ : '~11) ~h~thov the p~actlee ,~qt[lOllt ~re~s~r]]y ]~l~g ~ pvevl,~s]F considered unlawful offends ptlhHe ~ol~e~ as it has been ~tabllshed b3 s~atq~es, tho e~l~l]llc~]t ]~, ,~r other~d~o ,~hother Iii other ~ord~ I~ t~ wlthln at Ion t ±he [,em~mhra of some eom monlll~ ~t:,t~ltory, or other o~t~lMl~h~d ton(el)~ ,II unfatrne~ ; ('-~1 ~ether It I~ lnln]~lral, ~lnet~liea/ (~l]pro~sp;~ ~r ul]~crUpnln ~: CI, wh~t'ne~ ~t Cnu~e~ ~u~t~llS~l Injury r~ con um~r~ ~or ,~m )etnor~ a~ o~her b/ ~in~,sme~ Statement of Basis and Furpo~e uf Trade ]le~h/t~on Ill]0 4(~ • R alr~o¢ Decepnve .~.d~'e~tlslrle and L~h~Hng of Cigarettes In iI~la ticm to he IIe~lth ~[~lzard~ ~ gmoki~Is ~,,j b,ed I/og 82,~5 ilr)~4) m, la¢lon hz~ bo~n ,nnden~r~] b, nne e~reult ¢o/,rt ~ee ~¢eqe~, I,,e • FT¢, 54O ~'~[1 Tt7 ~}q fTt!l i:ir l!l~ ii i .~ ]JY~/(rlle i~ ill~fttlr whe~l It ~ffends ~stabHshed p~]le Don~y ~[/d ,~hell th, ~, ,itl¢, t~ Immora] u~lothlea], oppressive, ,n~(rupu]ous, o¢ substantially lIIpurl ol t~ olt~ n/p~ I rf0r,taote~rnltt0d,. ,q'he ,]~dfiOnHe 6f th~ ILJ'~ ~l~e Df ~lnf~lr~ ' n~ ~n imlepead~nr In~t for fir~fl[tl~ ,[0[aIi~n~ r ~c~n ~,e ~h~ FI~ ~Ct I~ unter~M~ h~(~ltl~e the ad~erti~ement~ ~]l~l I~t~ ,I tn Ot~ ca~e ~ere in fact fo//n~ ~o be ml~l~dlll~* nnd ',~o~tl~-e due to the eor~r~an~ s ~:¢ I g ~50 (1977) : L~a,na, k ~oc~ate~, [n~ v "lolen~h~ ~[ ~ill]~qboro, 4~t US ~

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i44 771.~ But, it hdd that the flcst amendment pr oteet.s advm~ising which : L is tt~thftth 2. proposes no illegal transaction ; 3. is not deceptive: ~nd 4. is not misleading. Id, at 771, 7722 The first amendment, said the Court, protects even advertising which is "tasteless." "excessive," "fun]important," '~[un]interesting," "which does ;no more than p~pose a ~nlmet~ial tr~IlS~ctioll~~ * * * [and] is * * * removed from any 'exposition of ideas,' * * * and fi~om "~truth, science, morality, aad arts in generah''" Id. at 762, 765 ( citaLiens omitted ).~ ~dL du~Pee Stewart, concurri~tg~ put it this way : The Fil'st Amendment protects the advel'ciseinerlt because of the Lin~ol'lil~.tJol/ ~f potential int~l~st and V~hl(O~ COll- veyed, B~yelo~+. v. l'~rg~nla. 4~1 U.S. 809 [1975 * * *, rather than bed, arise o1[ an~ direci /~olltrihtttioll to the interchange o~ ideas. * * * [F actual claims * * * lna?' I~ tested empirL tally and coneeted to reflect the truth wkhout in any m~m- net eopardlzing the f,~e dissemination of thought. Indeed, the elimination of /alae and deceptive clahns serves to n~: mote tile oil• facet of coinmeI~ a pr ee and pi~odnet adver- tising tll[tt wRPrflllt~ h'il~t :'%lrlendnlent pi~tecthlll it&; eoi~- tributlon ~o llil! flow ¢1~ nea:ur;tte and relishle information relevant ~o public and private deeisionrnaking. Id. at 780-81 (emphasis added). Thus, bod~ adxe**tise~s and the FTC can test empirically the con- rent o¢ advertising for fidsitv deception misleadingme~s or the prop- position of an illegal transaction. They each can determine what is pl~l~b~L They ~ath e~n avoid ilnpalrlnel~ of the cons~itutiomdl protected free flosx of tluthful and leg,dtimat,~ eotrtntertda] in[oJma- ~ionJn ,-i,w~ attrlbates- o¢ commercial ~peevh dlfferelltiat** it from Oth • form : 1 ,,o1~ e rh, tty" ¢ enmntenqal ~eeeh "may h~ mur~ ,~a sJ]F ~ ~r[fiable' than new~ reporting or p~,lit t er~l e~mm~.tyl, trod t2~ "~.rd~l~es~" ~mmerOa ~peeeh maa* I~e ~u,,re tlur~b]e than uther s~eeeh beeau it I th " m n~n ', ~ p otlt~, Tht~e attrJbu ~ 'ma) * * * mnk~ [ a~ll~ror~Hate t,~ re~lllJr~ 1~1~ gt eamm~rel~] ¢.~sa~e appear in such ~ ft,em o• Inched• s~ch addnt~,llat inf0rm~¢lor,. ,aatllln~a. anfl d]selmmers, a* ar~ neet,~ar~ ~n I~re~nt Its being dee~t~ ~ " Vir~n~ ph a,-ta a of*. ~25 at ~71 n 24 ,s~ ~'r~e~maa v R0=e•s 44O US. ~ ~mro, where ¢he Court uph~ld a rexa~ ~tatllt~ "requlr ~n~ that eomme~emt I,ff0rmntJon abo ~p ome a e 'appe n form • *. as [l~l uecessary to pr~en~ k~ beUIg deceptive ' Id zt 16, q~lot~ng ~•¢/~*t~a p~r~ae 425 U~ a~ 771n 2~ Ad~ ~rt~ln~ ho,~ex,*r tu~t~/~,~ ~ttd exee~h e It som~tiraes i~f,% s~m is ~o~ thp]~ ~ di~ ~t m~atlon of ~n fo~ma ~,,~ ~s to ~/]1o I~ pr,,d ueinz and Se]lln~ wh~ prod et for ~i/a nsoe Cmlrt ~u~e~ted -he, ]m~ bet~,oen pub]h:12, hltert~tln~' o , mr~ar an mm • tn~ and the o pp,~lt e kJr~d could ~r b** ,]~:l ~ 11 " Id ~/it ,, t he choice bet~n ~ a~n~e s o , r,~ •ng o~ and h dart~ ~ ~rnm it~ er,*~ flc~ , • ~ ~r,,e~l~- (he choice 'tha 1~ A ndm n n • ', Bate~ v ~tat~ a~r, 4~a d ~ ~t ~a~. t~ ro~n pereeJ,-el ~ whke flight' fram g on . w~ mp m t,,* o~ th~ N~] of tile t~>lxn~hl. ~ Int~r~t Ill r~ldntlna the ,,antent ~f ~/~ e¢,mmanlc~ti¢,n Integr~tl0,, ~.~ elea•h x,0hl ~uppr~sln~ trllthf~l] commt,reial ~r,~eh was ~ot "ne~dea to ~ure that Wl]llngb0ro r~maln~ an ~nlegr~red ¢0ramurdt y Id. at 95 #. ~2"----m~a

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| I 145 For "unfairness," no einpiri~l test exists. Nor can it. "[rnfalrnesgs is an irretrievably vague concept. It inhibits the free flow of trutbfld, legitimate eommet,~ial information protected by tile timt alnendment, is void for va~lene~, and sbould be legislatively eliminated. "It is a basic principle of due process that in enactment is void for vagueness if its prohibitions ate not clearly defined." Gray~wd v. 61ty of Rockford, 408U.S. 104,198 1972 ). "[.\] statute which either forbds or rek]u res the do ng of an act a terms so vague that men of common intelligence must nec~sarily gue2.s at its meaning and differ as to itu application violates tile first essential 0£ due process of law." Con~afly v. Beneral Con~tmtctlon (70. g69 U.S. 385, 391 (1996). Thus, statutes vinl~le due process and ~re void for vagueness where the~ do nat provide ~air wamfing2~ or if they do not rovifie explicit stanfiards t~J limit execrative dist, i~tlon and p±eveng az~itrary and discriminatory enflbl.eeulent.~2 In numerous settings, some of wMeh involve everriding questions of natinn~l interest, the courts have ~truek fiow~ vague limitations upon free ex tension2~ Now, since Virginia Phar~uley the vague con- eepg of "nn~alr" advertising "abut[s] up(m sensitive areas of basic First h.mendmenl Freedoms." Ba~gstt v. Bull~lt, 377 U.S. 3gO, 37~ (1964), In so doing, it "ogerate~'t~ inhibit the exercise of [those] freedoms," Cramp v. Board of Publ~" b~tmetlon, 398 U.S, ~78, 987 (1961). "Uncertain meanings inevitM~lv lead citizens to '"steer far wider of the unlawful zone': * * * than if the boundaries of the for- bidden areas were clearly marked.'" Gra~4~ed v. (7~'ty of Neek~ord~ 498 U.N. al~ 109, quoting Baggett v. B~tl?.itt. 377 IT.S. at 37'2, quoti~u] £~gelzer v. Randall. '257"U.S.'518 5'26 i1958}. "Free speech may not be so mh~b~ted, Baa ett v. Bulhtt '27~ [ .S. at 37~. Therefore " t ~e~ general test of vagueness appiies witl~ particular force in review of laws dealing w tit sgeeel~. 'iS] I rietcr standards per- missfifie statutory vngn~ness may be applied ta a ~tatute having a po- tentially inhibitln effect on speech: a man may the less be required to act £t hi~ peril ~ere. because the free dissemination of ideas may be the loser,'" IIy.nes v. Mayor and O~u,uql o¢ Oraddl, 425 U.S. at 9~0, n ~e¢ p~a¢~r~st ou v ~'~ty ol Jack~anv~te, 405 U S 15~ 1~2 (1972} ; (?~am ~, v BOard ~] • ~u?~He /natruetlo*t ~ U t~ 27~ : 287 ( ]9Rll ~ *tlted 8tate~ V //arr~gs 347 17 S 612 1~17 17~54) : Jt)rda,t ~, De fteor~7~ ;~1 U , 22:~ ~30-2~12 (19511 : /,annette V ~Vcw d rnev 30¢$ If~ 4~1, 453 t1939) ; ConnaHy v t~en~ral ~onntruct~, CO, ~69 U~. af 891 (392~) V~ted ~tate~ r L (YO~e~ Grocery Ca * 255 U ~ ~1 89 (1921 i ; /nCer~al~na~ //arvester ~o v. tfe~lt~e~y. ~4 F $ 21g, ~23 224 (19~4) 1~£¢~e pa#a~rOtou v O~t~¢ a~r daek*o~v~¢te, 4(t5 rrS ~t ]f12: ('aatet ~ 0~nc~natG 40~ U~ ~1. 614. Itfi~ : Oreoary v c~t~a~0~, 394 U S ~11 126 t1~69~ ~Blavk, 3 con eurrlng) Interstate ffhe,Ht ~.e v Oa~tan, ~f~0 US 676, 694 85 (196g): As~toa v K~,~tuek~ ~R4 IIR 1~5. 20O ¢l~G~l~: G aetna ~ p~o,~lastta ~82 U~ ~19~ fl~O$~ ~h~tfIeaworth V BitternS*bum. ~82 n~ ~7 ~9] (1~ ~ : /(~,z y ~e~v Y~r~ 240 l' g 2~(] (]951$ ; ,gala v ?~ew york* ;1~4 I S .~5~ 559 60 ~1948/ : T~0ra~i~t v. A?ahama, 310 U~ 88 g7 ¢4~ (19401 ; /~eradou v LO4v,3~, ~l r_S ?~42 2~1 ~4 (1927) ,,A vague l~w lm. pe~ml~MM~ ¢l~q~$a?o$ h~sle policy maltor~ to .r,lleem~n jm3ge~ and J~lrl~ fay rl*~hlrlOn on nu a0 hoe and ~ll])j~Hvt~ ~g[~ w[~l t~ nt¢~ndant dan~-~r~ of arMtrary ~nd dlscriml nstory a~pl~ca MoU - tlta ¢~e~ v (ht~ ¢1 ~oeklor#. 40~ g~ at ]0S oq I,~e¢ ca. P~to~ v La Proa¢ 4~'~ F~m,U 7 ~ 7~2 ~D N a~75~ I-n~tlo~a~ see~lrl~" uue~tlt~t[onaay v~nel ~ ?l~-erta~t ~. Jo~n~ ¢'omm~ttee. 27~ Pgu~ ~05. 217 ~n ~MD T~IIII 1~) It~soI~ltlon o~ ~nne~ GenorM A~art,blv t, luw *lza¢~ "~uhvevgl~" aettvl tt~ of ~[~1] rights c~rg~tnIzatlon v,~b~ for ~ueu~ nrrl ov~tbreatl~h} ef Hsl~t~d ~tnle~ v 1~ acute w~era t~l~ ~ovg~n~nr attempts ~ act unae~ s~, ramie a ¢~neet~t a~ the powe~ ~o ~r,~teet 'dt~roestl~ ~oeuritv.'-~: I~i. at ~20 r'qn~tvnt va~,le~e~ ~f ?h~ dome~lle ~e abrogate the flm~tngn~l law ~m~odtod ~n th~ First Amen~rnent-~: ~rat~eN~ v /¢~a- #~eer. 6~ F2d 1192 12~ ~Dt" C1¢ t~)~'~ f-inher~ut ~uo~es~ ~lf th~ t~rrn ,natlt*nal ~urlrv' hamtwrs ~arefnl ~na)r~l~'~ ~ 2,~t~on v ~l~te~¢~? 5~ F2~ 5~4 ~5~ ~4 ,DC ~lr 1973~ ,~¢t. i~tr,lo¢l. 42~ ~$ 94~ (197~11 ~"affertlng foreign relations' 1~ .,no le~s vague ' than "n~t~oaal ~ecarlt~' ) t¢ t¢

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i~ :~ 14~ .~.ustern, What Is ~Unfaer Ad~tlslng'2, '26 Food Drug Cosmetic Law Journal 65% 665 (1971) ca Mr. JLastice Hohues~ who was concerned about the free dissemina- tion of inforraatloa in the marketplac~ 2~ as well as political st~eeeh in the marketplace of ideas wrote that there was no eonstltutmnal protection for a man "falsely shouting fire in a theatre," ~ ~is test was truth or falsity~ not unfairness. For these reasons, GM,¢. supports both enactment of Section 7 of S. 1991 and Congressional elimination of '%uffalrness" as a basis for FTC adjudicative proceedings that relate to adver tishlg. Sincerely~ CtL~ml2~ Moaoa~e, Jr.~ 6'awn~el, Grooery Manufavturere of Amerlea~ lVe~a Y~rk~ N.Y. JanuaTy g$~ lgSO, Oha~rman, Oorau~er 8~bconvmittee of the Senate Committee on Core- meres, 5'c/ence, and Transpertation~ Dirksen Senate O]fice Build- $ng, Washlng~a~, D.G. DEAR SE~rAV0R FOR~ : I am plea~d to transmit to you with this letter five copies of our formel eonlments on t}le use of ~*llnfalrrl~s~ hv *b]l¢~ Federal Trade Commiselou as a basis for re!gu~latory action. We a~pre- elate the brief extension you were able to afford us in submitting these ¢oliiM~llt s. As you may know the American Association of Advertising &germ- ties is the nationa .ssvc at on of the advert s ng agency bus heSS. Our membership, includes ~90 ad~ertising.ga ,vneies. from acr 0~ the United States, wMch together handle atplpmx~mately three-fourths of all na- tional advertising placed by advertising agencie~ as well as a sub- st antial amoun~ of loom retail advertising. I~d lik~ to share with you my own personal concern about how th~ Commlssion~s view of its authority affet~ts our ba~siness. It seems clear in recent yearn that the Commission has p shed the term unfairness to its outer limits. TIev have used it to move Sron the traditional Commission role of policeman to the role of societal engineer..&dvertislng is by definltioa advocacy communication. I~ is meant to he a sales message and therefvre to present a product or serv- ice in its be~t ]igh£ and in a pleasing environment, and to stress its ad- vantages-truthfully, of course. As s ~eh t has ser 'ed our economy and the public, welL'It s a part of the inar ke£ ng process and as such ]s a sales tool ~This I~ no~ '~nhou~ its fictional pa~]l~[. ~ee L Oarr~]] *'A]le$'~ Adv~tt~e~ iU WO~+ ~le~ll~lfl, a~d Tl~rr, ugh The bO~kt n$~ Gia~' 19~] IA[~iit rub. Ca. *4 19t~5) : "W[len I ~se ~, ~;Jrd , ~llllla~ty Dlimpty 8aid, In thriver a ~¢~¢Ul ~o~1¢, ,it mean~ ~llst what I ChOOSe it to m~an--o*,nhe¢ m~e oor I¢~s." .,Th~ questio~l is,, ~aicl Alice, 'whether ~,uu ,can make W~Ed~ mean s~ ma~y diE. ferent tllin~s ,* "The qllestion Is ,, ~ald llumpty Dl~r~i~r~- ,,wh h o b ma ~-~ ha ,~* al ,, A]Ic~ ,~as too milch l~uz~led to say an) t~ing * * • I m~s~ add that ~h~ decree ° * * see~s to me surprising in a country nf fr~t* s~eeeh ~hat affects to r~gard ed~r~tlol~ ~nd ][now/~d~¢ as ~1o~[¢~11~][*,, 4twe~ea~ ~.~lumn *~ Lut~ g~ o~

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160 We am disturbed by the impression that. the FTC staff is moving toward a philosrlphy that snmelmw advocacy in itself, especially when done effectively, is "unfair." They seem to vmw advertising in its ideal form as an impersonal third-party message w~th all nf the (!isclosures they feel are relevant for the consumer to come to the "rigbt ' decision. This is not what advertising is, nor what is should be. ~Ve believe this view does not represent .... or serve the public. We. are greatly con- cerned that the Commission is attempting to find In a basically unde- finable term like "unfairness" the charter to manr at will and'experl- merit with these kinds of philosophies• We can live with such terms as "deceptive" or "misleading.'~ These are measurable, deiln~ble t~rras. We and the FTC can quantify the degree to which consumers have been "deceived" or "misled" through research. But "unfairne~" is a sub eetive, unmeasurable matter sub ect to wide variations of indivldual jud.gIment. So in the interest of protecting t]~e consumer let's retain ~ mislead ing" or "deceptive" as a measure of good or bad ad~ ertising. But leFs t aka away "unfairness" for the reasons stated. Tlmnk'you for the opportunity to express our thoughts on thi~ im- port ant subject. Shl~,rely, LEN M.~TH Ews~ PT~sZdent. Enclc~surB. ~TA'I~:~ f ENT OF THE 2~f EILT G4 ~ ~ S SOCI AT[O ~," The American Association of Advertising Agencles, Inc. ("AA AA') is the national a.~ociat[on of the advertising agency business. Its members are professionals in the art of commmunicating with the public at large. They design advertising campaigns and create, execute and place advertisements o,~ behalf of clients who for the most part are businesses ~ngaged in selling goods and services to the public• In particular, man~ AAAX members prepare television advertisi~lg for the ma or marketers of the children'splroducts ~nder scrutiny in the Federal Trade Commiss on s current ch dren s adver~ s ng i'u emak ing. All A.kAA membcr~ are aware that restr]¢ £ion~ on tht~ use of par tienlar media~ either m~ a total or partial hall or ai~ i!oildltions to tl ~age, will inevitMfly impair ~heir ability to communicate information of interest t~* significant audiences. Therefote~ the AAAA is pleased to h~ve th~ opportunity to explain s~me of the serious problems which have resulted from the Federal Trade Commission's recent attempts to base severe l~gn]atory restrictions of commercial advertising on an elastic interpretation of the "unfairness" concept contained in [he Federal Trade Commission Act, 15 U.S.C. 41 eg se7. Until the mid- 1970's, the Federal Trade Commi~ion m~ve~l avain~t commercial advel'[ising rac~iees only when they were false ¢~1" decep t ve ~o consumers~ theL'/~ov treating th~ terra "~lnfldr" a ahselttia]ly s~nonylnous wl h deex!ptl~e a~ a s a~u Oly a/IthOllZ~ ion of ie~%lia O~

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151 tion.x However, since paesage in 1975 of the Magnuso~-.~Ioss War- r~nty/Federal Trade Commission Improvement Act, Pub. L. No. 93- 637, 88 Star. 2193 (1975), which authorized new industry wide rule- making by the Com~ai~sion, attempts have been made t~) in~atlm an independent life into the ~tatutolT phrase "unfair * * * acts or prae- tices~" 15 [.-.S.C. 45, 57a. Some comments of the Supreme Court in F2"U v. ~pe~ & Hutctd~c~ 6'o., 405 U.S. 233 (197~), have been asserted to have established Commission authority to prohibit as "un fair" eommereiM practices that are neither deccpgiw Itllr antieom- etitlve~~ and bhe Commission's current Chainnan Michael Pertsehuk, ~es act ve y sought to mplement an ambitious and eontrover~sial regu- lat~W program under the statutory standard of "unfairne~?~ As a consequence o~ these recent developments, the Federal Trade Commis- sion has emb~trked on such a far-reachin regulatory pregram with such grave risks of ~verregalation that t~e Wazhi~gten Post has de- ~ribed the Commission a.~ our "natmnal nanny." 4 The concept of "unfairness" embodied in the F:~C Act has never had a ~l~rply-defined or wlde] "-accepted meanin . In 191~ Senators who supervised enactment of tl~e proposal for a ~edcral Trade Corn mission were unable to offer a )recise definition of what constitutes an "unfai~~'~ lneth~t of compesitlon.~ One study of the phrase "unfair methods of corn eti~ion" repared shortly ~fter passage of the ~kct~ :[ound ao many ~vergent ~efinitions that the phrm~e was rovealed as virtually meanlngless.~ The C~mmis~ion's t~ccnr a(divities undertakert pum~ant to its Mageuson-Moss rulemaking authority give Om im- pressinn that the Cemmissidn thinks "um~airness" me~m.~ whatever it wants it to mean. The recent Commission ilsitiative that best i]]ust l~tes the uu bonnd~d sco of the t~wm "unf~h" [s the current childt~n's advertising rale- ma~g proceeding. The Staff Report which recommended prohibi- tion of televised advertising to young children" offerecl three "justi- geatinns" for condemning such advertising as "unfair," and the" usti- fleations" demonstrate the virtually unlimited reach of the Commis- • For e~m~le IIiItlI the 1970~ the lawfulne~ el a~vertl~l~l~ w~ v~n~lsten~l,, evlilml~ed BI term~ ol 'deception.' See, eg Word L~rulor~, ~te ~ FT~, 27~ ~2d 9~ I~d CIr }, g7th Cl¢ 1~411) 7 Jaoob gte~¢~ Ca v ¥~'C. 150 F a ~51. 7~5 (3d C r 1944 re,,erred, 3 ~" I~'S 60~ (1916). • Ill t~e S~'erry d //UtCh~n~n deelston wMch dhl n(,t [llv~l~e eora~erel~ll a~ver~I~ln~ pl~rtlee~. ~he Court ~tnted that th~ F~C can o~er~te 'qlke ~ eol~t ~f eqtdty' to o~n~d~P I iil~l~o ~ a]tl~' hi 4~t~rminin~ ~talldards of f~lrne~ 4O5 U N at 2~t Ionlortun~tel5 the Courto~or.~d ttegu~tl~e~rnwheh pu evall~ hl~ ~lm~ ~o~ ~ ~]] ~ ,irher. ~liid hO~ Jt ~hould be done Q N otlll~ f rr~r~ ~he 12nmmJs im~ ~ 19~4 12i~ar*.tt ~ Traae Ro~l]atn~l prn~rleo~ tU5 Ug ~t 244 n 5 ~ The mo~t wirlel,- k~owu of the C~mmt~sl~ns' r~eeat tlatlat~ve~ hnve be¢,l ltg h~Ider I~1 ~ 4:1~1 ;I r197~1 and lt~ elll/(/ren'~ adr~r~lslll¢ ~r,~ee~dl~, CMIdrea~ Advertisin~, 43 i Wa~lllng~oll pest, 5far. 1, II~TS. at A22 : ~ee also, Wall Slreet JoUr~lal, June 19 197~ ,it l~ ~ S~e ~ g th~ rem~rks of Senators l'ranel~ ~,~wl~nl~ ~n~ Albert Ir'~mm~n~ ~y 8 S~r,~ ~,~d Conzre~s 2d ~o~.~0r~ Con~res ~o~nl R~n~ LI nine 21 I~ll i~ 111011 June 26 1~ flgltJ ~ ~IO~la~lll~ l'nfair M~thOd~ of Comperlt[ ,n ~ 23 Yit]o L J ~1~ (1915). • 1¢I"C S~al~. Re,loft ~n relevl~[ult .~dwrtisillg to Chlklr~l iFebrOary 1978] ('FTC Staff Near t").

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3¸ sion's ¢urren~ application of the "unfairness" concept. The fir~ "justifie~tinn" for regulation was asserted to ~mse fr~ul "the striking imh~lane~ of ~phistie~tlo~ ~dpower between well-financed adult ~ver~rs~ on the one hancl~ and children on th~ ot~her ~ many of whom ar~ too young to even appreciate what advertising isY FTC ~t~l~ tle- p~ at 28. But this rationale clearly proves too much: any ma or ad- vertiser presumably possesses more "~phi~ieatio~ and tower" akput its product than does the oFdmary consumer. Yet~ that ~l~herent un- balane~ ~ys little if ~ythmg ~bo/It the consllm~r S de~ls~on .to pur- eh~ th~ ~rod~¢~. Ineant~tlon of an ~hmh~lance of sophl~l~tlon and power" wlthou~ mot% demon~rat~ ~othlng but • que~[onable intui- tive udgment~ The staff 0.]so suggests that "unfairness~ can be shown by me~n~ of "the purely mampuiative--as opposed to informative--n~ture cf the advertising." Id. at 176. However~ no support is offered for tho st~.ff~s emotive chaplet erlz~tion~ and much ]~lillg suggests that such advertising is no mor~ "nlanipl~lative"~ thau any other type of eom- mLmication, hldeed~ reliable evidence exists that young children ea~ pere~ptual]y discriminate between programs and commercials and discern the purposes of advertisements. See, e.g., ~Vard, Wackman snd Wartella~ H~w Children Learn "1o Buy 54 (1977); ~V~rd ~nd Waekman, Effee~ o~ Tele~ise~ Adverti~i~ff o~ C~n~um~ ~oc~[iza- t/~n ¢5 (1073) W~Td Effects of Televi*io~ Advertising art Chffd~*~, andAdalesee~ts Regor~cfMarketingSeienceInstitute) 1¢ (1971). The staff's final illustration of "unfairness~ purportedly warrant- ing severe restrictions on televised advertising to children is "the un fa~rr~ess of putting parents to a ehoioe * * * between, purchasing redacts advertised to chddren on television and enduring the e~n- ~iet that goes with a rvhlsal tn buy the products. * * *" FTC S~aff Report at 20~. To base a finding of "unfairness" on this rational% ~arenlal s I vson of c dren o¢¢ rrngdalvinregardtoanin- nit~ variety o~ external events and inl~uences,~must be depicted as somo type o~ uausual and severe "conflict Y ld. However, it is settled jurisprudence that "the custody, care artd nurture of the child reszde first in theparents" whose, primalry functions iael. ide I r ,parat on of the child for the ohll~atlons o~ adu t rood. Prance ~. M~savh~zae t*, 321 1~.S. 155, 156 1944). ,gee also, pierae v. S~cgety of Siate~,a, 265 U*S. 510, 534~]5 (1925) ; Meye~ v. Nebraska, .060 U.S. 390, 400~)2 1923). Indeed. the presiding Officer in the chil dren~s advertisinff rule- making, after a rev ew of the evidenoe relating to the staff's alltg~- liens of canfliets, reported that "tilt has no~ been established that tele v sion adve~isin- aimed a eh dren causes sianifiean~ ~s~eholo-"iea] lrarm attrlhutahle o parent-child coati e. * * P es ] ~ Officer s Order No. 75. TRI( No. 0[5 60, at ~0 (July 30.1979). The childron'~ advertising ru]emakinir is bu~ one Commission a*,tiv- itv vet it amply demonstrates the maior problera of the Comlni~sion~s eur~nt ~ unfa mess ~ doetrln ~, espeeiullv ~ apvlied to commercial ad- vertising practices: it is virtually unlimited. It is hounded only by the whims of those who happen to be a~polnted Commis~ioner~ as to what practices should be condemned. Recent aethms by the pert. sehllk C~nlmission I~lake it elellr that it in~ernrets its "nnfairness~ authtrity as a letter of marque to roam at will and pro~cribe what ever it wic~he~

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15~ (3(]NSEQU~CES OF TIll5 CO~[ISSI0~q~S ~OTIONS OF "UNFAIP,~E~S~ WB3E~ APPLIFJ) TO CO~ME!~CIAL AD~ERTI~INO Overregulation is the most immediate result of the Commission's reliance on vague notions of "unfairness" to justify regulatory activi- ties. In the ab~nce of effective statutory constraiuts~ the Comr~ission~s eagerness to impos~ in~ will upan commercial activities can haw severe consequences without adequate evaluation of the alleged unlawful conduct and the proposed remedy. In this regard, it is significant that the Commissinn's authority is not confined to affecting named parties only after a full adversary adjudication of the propriety of their gartieu]ar conduct. Rather, the Commission is authorized to promulgate rules which can have the effect of outlawing conduct in entire industries after ru]emakJng hear- ings which do not even provide the procedural safeguards which would routinely be accorded in a judicial proceeding. 15 U.S.C. 57; see Agso- c~a~on o] Na~iona~ Ad:eertiaers, lnc. v. FTC., slip op. N~. 79 1117 ( D.C. Cir. Dee. 27,1970 ) Assoeigtlono~Na~io¢~alAdvertisersv. FTG, slip op., No, 79-1030 (D.C. Cir. Oct. 2, 1970). For example, the Com- mission has furthered the children's advertising proceeding pursuant to special procedural rule which have been described by the federal Court of Appeals as suggesting "that[the (Jommission] long ago set- tied on what it had in mgat and chliberately fashioned its special rules to achieve that l~snlt with the fewest possible outside intrusions from precisely the pastles Congress intended to have participate in a proceeding of this kind." Assoclat;an of Natio~ Ad,~,ertiaers, Inv. v. FTC, supra, No, 79-1000, at 14. However the Court did not intervene to halt the procoeding because oh eetinns to the special procedures ecmnot properly he heard until after the conelnsion of ~he ralemakiog. As another example Chair- man Pertsehnk will be allowed to participate in the children's adver- tising rulemaking despite the fact that his public e~nlments concerning the rulemaking demonst rate an insurmountab]e bias in favor of restrio- tion of such advertising. Assoclatfon of National Adverthcers, bw. v. FT6~, eu No, 79-11172 Apparently, a Commissioner may par- ticipate ~uch ~. rulemakiog unless it is shown by "clear and con- .zincing" evidence that he has an "unalterably closed mind" regarding facts to be determined, altbougb a biased decisionmakcr would never he eqle~ted in ~ judicial in oeeeding.~ Furthermo~, there is no reason to assume that the current rulemak- ing activities of the Commiadon are the most extreme inan]festations of th~ ~unfairness" concept. With increasingly pervasive federal and state statutes, and the unbridled imagination of appointed Commis- sioners, a "publio policy" elm be found t~ ~suppnrt" virtually any regulatory proposition ,~s erted under the unfairness' ruhrb gff the • ~tl~e MaeKtnl~on dl~enti[~ in ,l~a~a~on oy ~atianal Advert~l~ra, /rig, ~tD~, 0]l~r~e~i that Chairman Perischuk "over a ~u~stanl~lt] perid)~I of ±ime * * * ha~ mad~ Ilum~ou~ app~aea~ae~a ~ a vlgo~ou~ public advocate '¢¢~ramltted to eliding tile .eviia, ilufl "moral myoi~la, i~vllt~nt in lh~ ~xploitat~o[l' ~f chll0r~n*a adveetlaillll 0II TV * • * [S]uch COndUCt and exprrssiolIs tram his own mouth and I)~n a~ [lear as ~ords and ~ll¢lt~ef e~n hflicate an 'irrevocably ~]OS~ mind' • • • ~lnd ]1¢* SilO/lid reel]gO llita~[f; and fallial¢ thl~ ttte C0lltt sholll4 .~r~ler ills dlsCua]iilctlUo~ from [~arncil~atlon in th~ l~rOeevl21nl~ ' [d ut ~7. • ~,lr p~rtsehuk ilpOanrs ~oe~iitIy to bav~ wlthdrawl~ 8t Iea~t temOorartly, f~m Ole ohm drill's adv~Ctis]ng ru/emal~ill~, but hl~ aetltltl will not I~rev~ttt b[a~ed Cummlu~inllera from tr II to pa 1¢ p te lu oLh*'r ru m~k Ilg I~nder the p~otevtloa of the "uu~Uere.bly clO~i m[ad~ ~tand~rd b,~ ~.~.....~

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167 thatI)1 uhlic considers to ha "unfair," Or Congress could estebfish a specific test by which the Commission would be required to measur~ *Lunfair" trade practices. In dealing with commercial practices other shun adiertlsing~ as an aiteraotlve Congress could reqdire that the issue of unfairness be e~ldressed only in an industry-wlde rule rather than a litigated proceeding. Congress cou]d also require the i@C to tell it in advan~ of a rulemaking proceeding "ust what the Commls: sion believes to be unfair trade peactlots ~a~¢t Congress could exer- aise a form of veto on any such practices Congress finds are not If the Comlnlssinn. retains .an~ discretion in determlning, unfair- ne~a, we believe that Comrmsslon orders based on this standard should be only prospective in nature and not be a predicate for any retroactive consumer relief sush as restitution or corrective advertis- ing. Fundamental fairness dictates that an individual or compan not be penalized or deprived of property for acts or practices whin~x were not known to be ]llegal at the time they were committed. This rlnolple is recognized in Section 906 of the Mavio~otionUSOn-Moss Act. p~ That section provides for consumer relief for of an FTC order and re uires thot the act or practice to whlsh the order relates be ~one svhlc~ a reasonshle man would have known under the eir- eumstonees was dishonest or fraudulent.'j This prinelpIe should also he applied to FTC enforcement activity which is not predicated on Sect on906 ,' - . .... :. .• ~ -,!,~.. • 2. The Na*um and Scape Of Federal Tmd.e @em~{*den RuZenm.~- inV.--Even with greater delineation of the standard of ~'unfairaess" the f~t remains that rulemaking under the Magauson-Moss &e~ is |awmaking. Yet, absent the enactment of S. 1991, Congre~ss has offered the FTC inadequate instructions on the exercise of t~ais leglv ]atiw aothoritly. The result has been rulemaklng designed ov]y ~9 foster the FTC's subjective views of unfairness or an onerous rul~ affecting an entire in6ustry, based upon the acts or practices of an tmscrupulousfew - ~,~ ~ ~ . : .... :, ~ ~ ' WP ~*,r~e with (be nrovis~on in ,q. IgPl that ~'~qui~s the ]~ederai Trade Commission to base any ru]emaking proceedinlgu upon a find- in~ that unfair ¢¢ deceptive acts or practices are ~prevaient" through: out all nd~st , ..... The Com~mttee report states that the Comm~sstoa may consider tbe extent to which unlawful conduct causes significant economic injtlry in deciding whether to commeneo a rulemaking. We believe, however, that consideration of economic in'ury should be statotoriiy mandated and that the Commission shoui~ be required to find sub- stantial economic injury to consumers resulting from certain unfair or deceptive acts or practices before proposing a rule to deal ~vith them. ..... ~ , , The substantial economis injury should be clear and present, not an estimate of some possible future harm, Future t~ro'ectipns of theoretical consumer iniury should not serve as a bas~s ~or present cor-ts to industry, especially since these costs are invariably passed on to present consumers. We also believe that failure to make the required determ~notinns of prevaleaxc~ or of substantial economic iniur~ should be a basis for a

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158 Federal Court of Appeals invaIidating a Trade Regu]atlon Rule• ~e. tlmrefom, disagree with the provision in S. 1991 which subjects the Commission's determination of pre~aIanee to olllv a "reason to be- lleve" standard, thn~ barring judicial review. Thi~ standard reduces the Comm]sslon's determlnation of this issue to a mR~ ?fro for~t exercise rather than a measure o~ ~hen FTC rulemaking may serve the public interest. The time has come to direct the Commission away from social policy meandering and tnwards those unfair or deceptix;e acts or practices which have a demonstrable adverse public effect, n~melv those that are both prevalel t ~nd cause subs an a econom c ln]l]ry to consun]e'~i~, We also urge Con~e~ to consider the effect of the Commission's applying its broad remedlal authority to rulemaking n'ovisions. These require all affected indnstrv members to p~)vide their customers with certain notices and disclosures; failure to do so is 3 violation of the ruIe and carries a )ossib]e fine o f 810,000 per violation. We believe t lot tbe Comm ss on s remedial ~%verki]P~ was one o1 the factors which recently led the House of Representatives to agree to a b~,n on Commission ruIemaking involuting the funeral industry. The original FTC proposed rule would Imve required lengthy itemized disclosures and notices. Similarly, the vocational school rule, which was recently invalidated by the U.S. (:curt of Appeals for the Second Cimuit,1 contained 19 diffet~ent appendices, izleludhlg mandated l/at ices and consumer contracts that all industry members would have to use. Failure to use any mandated provisi~n would have been a vlolation of the rule. The problem is that the Commission has ~ailed to distinguish be tween a vitiation of the substance of tile ru]e (i.e. that portion of the rule which declares that a certain action is unfair or deceptive) and violation of the remedy contained in the rule. 3foreo~-er. tt~e remedial • , , T ' pro nsmns are so bread and techmeal m nature that they gn'e the ~ C almost nn]imited proseeutoria] discretion. If the Commlssion is to retain remedial anthority in rll]emakln~, it should be limited to certain statutory" standards (such a~ a require- ment hat it impose the least restrictive alternative remedy avai]~hleL Commission rules should also desicnate which provisions are sub stantlve and which are remedial7 Penalties or consumer redress for rule vi(~latlons should he based primarily on violations of the rlde*s substance. Consequently the Congress shbuld mandate that the Com- mission formldat~ a two tiered system of penak~es: one for violation of the rules snhstanee, and a lesser one for violation of the remedial provisions. Purely de ~dnlm~m violations ~f the remedial proviskms should not trigger enforcement activltv. 3 The Commissions 4¢~thorlty ~r~uler ,qectle.,~ ,5(m of the FTC A~:t. Coil~less ~honld aIso amend ~ee ~on o ml of t le FT ket I Sectlon ~051 a) of the hla~ous~)l} ~lnss ~ket) by deleting the pl ~,visipn that enables the FTC t~) brin~ a ell'lJ action agalns~ a company for vie ~',~tha,~,e ~fbb~ S~vvl (rnc / • Fro" i~lle Op N(~ 1123. et ~¢q 2~i ¢lt (Dee 12 197~1 *'~-e n*d, Ihat the ['~ C(*llrr of Apl)eals held that F']'C~ ~tll~s [~romulg~d nn,/er ~h~, Magnnson-no~s Act mn~ ~tnte -*~th ~*~¢lflel±v be*th ~he ~,~seclbe,] unfair o~ *l#eeptlv~ ~cts or [,ractlees ~nd th,~ vemedi~O pr~*~islol~a Kufl~at~¢* (;~ .~ch~ ~ ITC ~lllta ~V~ r*,~tir~ the Comm~so~ to de~ea~e which pr~,Ls]o~ a ~/ib t~ntive and ~bich a~e remea~al ix2 ~n

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159 Iation of a litigated (~ase and desist order which it has obtained against another company. Under this provisi~n the Conmlis~ion may obtain penalties of $1 fi,000p*er violation of "the "rder. As a resuk, th'e order which is based entirely on the conduct of one company, becomes an indutsry w de standard, 1 kea trade re~tlation rule." ITnllkq a rulemaklng proceeding, there is no opportunity for other affected in- dust~w meinbers to participate or to submit evidence on either the legalist}' of the practices on which order is based or the scope of the remedies in the order. It is fundamental unfair for an entire industry to he subject to re!quirements that are developed in this way. Moreover, FTC has very broad remedial powers. When a particular eomponv is found, after a litigated proeceding~ to have engaged in unfair gr deceptive acts or practices in violation of the FTC Act. the Commission's order against that company ma~- go beyond ust pro- hibiling those practices and may include'certain "feneingdn" pDovi- siom% which are remedial in natllre ~nd which often uire ~me affirmative actitm~ such a di~:losures. A]tlmugh such retrial provi- sions may be appt, opriate because of the colnhm¢ of that company~ other innocent companies may not warrant the same burdens. Although the Commission ires not yet used this authority, Chairman Pertsehuk stated at the Senate (~ommerce Consumer Subcommittee oversight hearings that the remedial provision of a lift ated order might h~ served on other industry members as notice o~ an unfair trade practice for purposes of Secticm ~05. ]n fact, the Commission has served a mnnber of companies with copies of litigated orders ob rained against other companies so that they will be no nowise of these orders, and .thus possibly sub ect to civil actions under Section 205. This prowslon m ~ graphic example of proceeding from the specific to tile general and carl IHllV l~snlt it1 burdensome regnlation. d. The FTC's A~thoslty to Enjorve t]~e Egua~ Credi~ Opportunigy Act.--Because of the history of abuse by the FTC Cort~"ress should also delete the provision of the Equal C~edlt Opportunit~ Act which enables the FTC to enforce a violation of the Act as though it were a trade regulation rule. The FTC has used the threat of overwhelm- ing e~vil penalties to extort consent orders based on technical viola tions of the intricate provisions of Regulation B, which implements this Act. 5. The FTC's Subpoenas Authorlty.--Another problem which has been exacerhated by ~he Commission's rulemahlng allthorlt7 is the manner in which th~ FTC and its staff have abused their aufl{orlty to iss][{l SldlpoellRS and ordoL~ to ffIe special repot~ts. Before the Com- mission engaged in mdemahin~, the.re was little incentive to subpoena records o/" obtain reports from industIv members in the absence of suspicion or ~vason to believe that the corn any was vioisting Section of the FTC Ach With rulemaklng, the ~ot~unisslon may Subpoena a number of industry members in order to determine how pre~'alent a particular practice is. (~omldi~nce witb these subpoenas is both ex- pensive arid time conslmfintr. The burden to industry is not justified by the information to be obtained, especially since the issue of prev- alence I~ould be determined in a rulemaklng proceeding. The Commi~ion'~ a~lt}lo[.it~ to iss/~e subpoenas or" order~ to file reports ~it(~u/d be limited to reason to believe that a member of in- dustry hag engaged hx a particular violation of the law.

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:. I~S 1991, tho Federal Trade Commission Authorization Act $p ars . ~ ". . to limit subpoenas and orders to file special reports used in the .~ ~7 ¢~2(" '~1 k . nmnt o~ S~etion 5 ~)f the Act, as it perbalns to unfair or deceptive acts . .~% ,'~" ~",: . or praet!c~s. We support this provision. We respectfully dlsagre3~ ho~'- ~ - . •., ever, z~th the Conanittse's detsraunatlon that the limitetlons m ~ - S. 1991 on this ~uthority should not rohlbit the Commission's sweep o -;: r~" ,. ~txstry making certain advertising clauns, Tile Comm]ssmn has a "- '~ proven record of construing advert~sm ela~ms m the broadest ant] , -- .,~: tbeso~llegedrep~seutations. Wef~dtkattheCommlsslonmustbave ,~ ...,,,r~ ~:f~iome basis for either disbelieving the claims or suspecting that they ~ 7~ ~,~ ~.~maot t~ substantiated and believing that they have resulted in sig- :.'~ ~ oifieant economic injury. V~Lithout such a basis the ad substantiation "~ ~ | .~ ~" 6rders gre only an expensi,~ nul.ano~ :~or ~rnpanis. that [ee.eiye tllem ~ ''~ a31dawasteoftheConmazsslon'sresourcestor~vmwtherm .~'~ ?:a'p~ :~m ~ x -l~W~ also believe tl~t S. 1991 should mabe elear~ as the Commies:on . ~" ~g~ Xeated in its letter of November 13 1979 on this provision that reason "* ~ ~..~"~- "~ to believe there has been a violation of Section 3 may not be predicated ~ -. ~-~-(" \k- solely on con~uraer complaints since these "are not probativ%[~., ~ ~ . :;;~ pportunitytomectwithyouoramemberofyour .. ~. :,, which ~ve h~ve raised. ~ff~.a6~0 ~ ~ 'r~( President. .. T,*an~portatlon U~. 5'enate, Wa.~Aing~,n, D.C. C~n~x~ ~ORD: This etter W~ provtde the views o~ the ~'ational Retail Merchants Association on certain issues related to the araend the Federal T~d~ Commission &et actlcular these comments focus on the ~mmission ("FTC") ~gulation of ~'un- practices FTC compulsory process and related confi- issues, and the authority of the Commission~ under section 5 m) oftbe Act to bring a civil action against a firm for acts or praetices fmmd to I~ unfair or dece Jtive in a previously litigated ease. We ask that this etter be made a part of t lo record of the con- siderationofthisissue. ~. . • ..i~, . ,~, ,7~ :~.~::) . ~,:By way of baekgrougd, .N-RMA is a uation~l, aofiprofit tra~e a~- so~iation composed of over 3,500 members who operate more than 35#00 department, thaln ~nd speeia]ty stores in the general mercha~ diso retail industry. Oat' member~ have an aggregate annual sales vo]ume in excess of 895 billion and employ over 2.5 million workers. Some three-fourths of cur members are small businesses with armual The Commlssion's abuse of the discretion which Con~s has given it has led to the present legislative proposals to reduce the F~C's

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powers~ to prohibit Lhe exercise of those p~wers in certain specific i~]~aile~sI aild ~o in~r~s~ ~l~ ovF~[~ight b~ Cong~ss of all o~ ~he Commission's activities. NRI~L~ applauds ~'o~lr efforts and tho~ of your colleagues ix proposing and pursll~ng the~e solutions to the Com- u]ission Is I!X(~p~S. U~'FAI~ ACTS OR pP~CTI~E~ The Commission's authority to promulgate rules or bring eases ~o halt "unfair" acts or praetice~ is one of the broadest powers posse~sed by oily agenc3~ sh .$.mer~ean government~ federal, state or local The FTC has an enormous responsibility to exercise prudence and disore- tlnn i~ n~i~, its powers, In N~MA~s vie~ t}lc ~onlnl]ssion and its ~ta~ have failed to restrain themse yes. Instead, they have take~l broad ~nd ambiguous interpretatioa of tim Commissi~m's power and stretched it beyond reasonable Iimit~. [n so []ohlg~ the (~omnd~ione~ and tbeir staff ha~e t~o often declal~d that ee~ttin acts or pcac~ices ar~ 'unfalr" ~impIy beeaus~ they ~onfiic~ witL tbeir ow~ values. ~s the publicativn FTC Watch recently commented: n s~atute banF~ing ~u]~f~lirll~!~ is ~o vague and is s~lcll u~dqtm grant of power (ha~ i~ is a ]egi~lative contradiction of one of tile lessons out' forefathers thought they had learned from histolw, From that perspective, one might expect ~ho~e in charge of administering the statute to tread most care fully; to inch rather timnleap forward; to demm~trat~ ex- traordinary sensitivity to the ~pplieation of ~ueh an uncharacOeristicallv bl'~)ad gran~ of power. Instead. in recent years FTC admin~trators~ have vowed to ~e just how much elasticity had been built into Section 5 of the FTC Act, to find out~Imw far the "unfairness stau~e" could be stretched before it snapped. FT~ Watch January 11, 1980 at ~% What i~ needed is }or Congress to redirect the Commission beck to soeiety'a view of wha~ is unfair. The Commission should be directed to cite specific expressions of soeistal values, m(~hlding state and local laws, court decisions (including state court & eisions) oil the common law and statutes directing other afiencics to implement Con~rcsslonal statcmcuts of poller and to identify substantial economic injury to ctmsumers e~r others before it c~n suetain an allegation of "u~air- hess." ~ This klnd of dlrecdon will establish that tl~e Commission ls acting on publlc policy grounds rather thai, its own paroshialism, and will provide courts with a standard by which to review casc~ brought by the Commission2 • This f~rmulatl0~ o[ a tet ~or de[erm[~h~ what ]s 'u~lf~ir uithin th~ m~ing of the FT{7 Act i~ ~enttalb th~ first ~n(I third element~ of the Com~ls~i~s 19~4 Iotmu orlon ~a t~ @t~elaea~ of ~a~k~ a~4 P~rp~e fo~ the Ctgarette Advertising k~le (2~ Fvd R~g 8355 (~964)) The ~ewnd ¢]emea~ of the Commission s earlier form ,[anon w~ a much ~,rn~der gron of (once ~t~ ~ne[uding ~(t or praetice~ the (,)mm~on ~=m~ ~n be im moral urtet~caL a~p~¢ ~e ~ uu ¢~up~tl~u~ ~M k relieves that the C0mm~ss~0n sh0uld not he ~l[o~od ~his hrea~d latitud~ In the ~0~ea¢~ ~f a ~¢ifi¢ ~o¢ie~a] ~x0re~ou tha~ an ac~ or practice is unfair" W~ere s~ell au expression exists, the t,~o ~ur~ ~es~ de. xerihed shove ~ suflS~i~nt ~fhe (,ommls~ion s ~nt[tr,lst auth~wlt~ is a[read) similarly confined: it extea~is beyond the s~eelhc provision, o[ the ~herman ~ud ('layton antitrust laws ])ut limits the Commas. sire s wandering ~o ?ho,e methods *ff oomoerl~ion ~lmh at~ of the ~*¢t ~h]eh tile <~m. mort la~* and erimhml ~tatates h~*e 1~ deemed w~*t~ to pubic pollvy ' FTC v ~t' Kcpp~l • Bro*, lne, 291 F.S. ~0~ at ~12 11934} 59 O~ 6q ~0 g_"=--~m..

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~' ~o l I i •

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163 special orders have been issued broadside withou L the existence of any apparent reason to propose an actual complaint and whether or not compulsory prc~esg is focused on conduct whish could poteniia]]y be the subject of a ease. The central point ws well put b, Commissioner Robert Pi~ofsky in his Sepal~te Statement to the ~ommlsslon's November 13, 1979, letter to you. I see nothing wrong and indeed a net benefit in an amend- meat requiring the CommiSSion to be more specific in its Jnvestlgationa[ demands in eonsunmr pn~teetion e~foreement. The Commission will be required by such amendments to think more clearly and thoroughly what information it ga~eks, and the recipients of investigative demands will be in a better position to resist unnecessary investigations or comply in a reasol:able, way. In the long', run more specificity in. infer-. m~tla~ demands should dlscour~g~ rather than mwte dila- tory challenges. In consumer protection work, there is no reason why the Comr~fission cannot know in advance of an investigation she nature of the conduct that is concezned about and no reason why it c~nnot disclose that filformatten at the beginning of any investigation. ~rh~le Commissioner P~tofsky llmited his comments to the consumer protection area, the abuses of compulsory process have extended to all facets of the Commission's work, and NR?*fA strongly urges pas- sage of legislation requiring that subpoenas and special orders be issued only if the FTC has identified potential illegality states pre- cisely the focus of its nvesti~'a~ion te. nvest get one rose ut on, and requests only materals which are specifically related to that focl,s. NRMA would like to point out the particular problems retailem have encountered in responding to FTC information demands for the subetantitation of advertising claims. In addition to the~rob]ems both described above overbreadth und fishing expedltions for ex- ample), retailers have also had problems spawned'oy the characteri- zations of the advertising claims made by the Commission staff. The staff's characterizations fl~cquentiy bear little resemblance to the llt- oral or suggested meaning of the advertisement. This makes the poo- duction of documents to support the advertisement, as so character- ized, all the more di~licult. Proposing a soluGon f~r this problem is somewhat perplexing, and we are therefore calling your attention to the ~rob]em for ~urther inq~dry by the Congress. ClOSely related to [he problems associated with eompulanry process are those a~sncisted with the CommissioTgs use of information col- lected. Even where the Commi~¢ion's interest in anti need for the information is clear, the problems in obtaining an agreement to her such information confidential, and repeated breaches of such eon~- deutialitv agreemeiits, ha~e contributed significa~ltly to business re- sistance to complying with subpoenas and general alarm o~,er FTC uctteifies. It is di~icult to ar~m with the Commission's ~eking information (in a properly dr~wn demand) for its internal, confidential u~e. On

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I64 the other hand, a business is clearly justified in resisting turning over highly sensitive, secret information when there is no advance assur- ance of confidentiality, when the agency has a track record of "acci- dental" disclosures to the public when the agency refuses to limit its rise of the information to the purpose at hand, and when the agency has a policy of passing infcwmation to other agencies of goverrmaent, who may or ma not agree to hoht it collfidlmLiah Thl!~e concerns ttt~ heightened by t~e fact flint the FTC has such a hroad area of interest that demands for information relate to every eoncelvab]e aspect of a business' activities. The proposed new Section 21 of the FTC Act (Section 15 of S. 1991) would provide valuable new safeguards. NRMA urges pas- sage of thaL provision and consideration of additional measures to ensure timt confidentbd commercial and financial material and trade seerels are not disclosed. In addition, NRMA asks that an apparent oversight ia the curpent provision be nor rec:t Ed, The protections sbou]d also be extended to mateiial covered by privilege, such as the attorney- client privilege. This is an important area of concern, and there is fie evident reason for its ~rai~¢ioa here. We appreciate this ¢pportunity to provide these comments. If you have any questions concerning NRMA or our views on this issue, please do not hesit ate to cent ~ct me. Sincerely, Vrx~toK O. FRr-~cm Senior Wive President, Gtovermner*tal Affair*. N Aa'IO~4 A L Co t'~r 42 [L OF SE~xOl~ CI EIZENS~ INC.* Wa~hlnggon, D.~., ]~?ta~.y 31,1980. Hen. HOWAI~D W. C ~O~. Chairman, Setbate Cc*mmlttee an Cc~m~rce. ~qdem:e, and Transporta-tion, Dirh*en Senate O~Tce Building. Washington, D.C. DEXR M~, Caazn)ra~': We would like to thank you for soliciting the views of the National Council of Senior Cirizens and are bopeftd that our remarks can h~ made a part of the record. Our eonstihumey bas traditionally been very supportive of the FedEral Trade Commie sion aml we feel strongly that any attempt to m~l~ fy the "unfairness" concep~ in defin~nff industry violations would constitute a further incursion into FTC authorit~'. c. • . . AS far back as 1938 ( en~ress recognize I the d~fl~eult3 of cstnbhsh ing It statutory standard more ~[acifie ~hnn the ~eItl!ta] eolleeM of "unfidr or (b eep~ive." It ~a fidt that no list could be develvt)ed w ~ ch would anticipate the ntlmerons soecifie practices that sho~llcl he defined as "unfair," The curIent definition has eaolved over many )'ears and was uoheld by t he Supreme Court in the S&I I case. NCSC believes that such unethical industry tactb'~ as bi~b-piessm e sales, misleadln.~ advertisements and fa~l~]g to discIos*, pertinent prod e informs iota. live mo~t ~ueee~sfllllv a )plied to eb]erly vo]l- sumeIs. This has been ~e/] doenmeuted in FTC inxesti~ations of the eyeglass, hearhlff abl and funeral indllstadEs. _~tn O~ goln~ stlI£P," bv the FTC of 3Ied]gap insurallce sales has revea]ed that older pdople tO t.a

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¸ ; 16 are the prime tarsus for a variety of ~raudulent or deceptive ~a]~s practicfs. There is no defmltion under which such tactics could be construed as anything but unfair. Apparently the FTC has becom~ industry's '*straw man" in the federal {4overnnlent tuld as far ~ts we ~l,e ~oneerlled. this is 8, clear si~ that tile¸ age.my is doiltg a good oh. We bdi~ve that th~ ~pplic~tion of the "anf~irness'~ concept ougilt to remain • judgment of the Com- mission and its members. If a hearing is held on the issue~ we would appreciate an opportu- nity to elaborate cn the views we have expressed. Sincerely~ JACOB CI~Y~AI~ PT~sn~. ~HI2 C*EoIt ~]g WASHINGTON UN I%~.R£1TY. Was~ingto~, D.C. Februazy 1,1980. Senator HOWARD W. CANNON~ Cha~rrnan~ Comm+~ttee I~ Cornmvr~;~q Seid:~e.and Tranaportaiian, ])EAR SE.~ATOR C A~" N f)N- ; Tlds lettel" is in response to your Commlt- tee~s press release of November 21~ 1979~ invking vi~s on how ~un* fairness" should be defined under the FTC Act. In 1977~ I wrote an article entitled "Regulating Unfair Practices Under the FTC Act : The ~eed for a Legal Standard of Unfain~ess~ which appeared in ~he Unlversky of Akron Law Review. The article was critical of the FTC% failure to define unfairness and pointed ~ut that the Commission had not utilized consistent criteria in app]ylng the theory of unfairness in promulgating its rules. Despite the Cc.nmis~ion's failure to define more clet~rly it9 broad statutory authority~ I (lid not conclude in my article, however, that the Commission% mlthvrity should be dras~ica]]y narrowed or lnoi~e specifically defined by statute. I believed then, and continue to believe now~ that the best solution to the dlf~cult task o~ protecting consumers against ~ myriad of e~er changthg un~alr and deeeptiv~ practices is to leave the FTC with eonslderabl~ leeway under its statute. To se- verely limit its authority would be to severely limit consumer prole¢- tion in tile marketplace. ~Vhi]e I beliere the Commission's eai]y ns~ and development of the unfairness doctrine resulted in some far-reaching proposed rule% in reg(!Ht f~llll] r/lh!S1 I filld stl~lIl~ v~iden('c that tile Commission is devel aping a svund approach to the unfairness doctrine. In its statements of basis ~nd purpose for reeem rule% the Commission has ~ullv a~icu- ]ated sound and consistent criteria foI determining un~ah~ess. Its regnlatm'v, focus bas been appropriately placed vn existing [)ractices hntl/lhl[ll ~1 fu[lyerlmi~etl~lv~n'~?~tke al'lcl hat eanseeeononnelnjurv tO COIIS(HHeI'S. T/IO notm*o:th eganq)les of calefull) de~eloped anc~ well documented rules are the I{-~ Mue Rale August 97, 19~9 ) which mandates disclosure of the R vnlllOS O~ llonle insll/Uti¢~n materials and the Eyeglass Rule (dune "-' 1978 t hich ~mblbits ~tu[e and piiva~e 1 eSt I ic~ ~IIS OTI the l) lice adveltis~ng of e} e examinations or eyewear. Through these rules which are based on ~be unfMrness doctrine, the Commission is pl~moting competition in two impdl~ant areas of ha- 5: tO

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tional eoneem--~nergy and medical costs--where prices ate high snd fair competition is particularly important to consumers, in these infla- tioaary times, such regulatory actions which promote competition should be supported. I believe your Coramittee should take a close look at the ar tieulstion of the unfai~aess doctrhae as it is set fortk in recent fino/rules. It appears to b~ sound and very much in the national interest. Sincerely, T~I~8~ M. SCHW.4~Z, Enclosure,

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167 Akron Law Review Vct~ll 11 SIJx~llml 1977 NIIXQ~t 1 REGULATING UNFAIR PRACTICES UNDER THE FTC ACT: THE NEED FOR A LEGAL STANDARD OF UNFAIRNESS l~m FEDERAL TRADE COMMI~ON (Commission) has become one of the T most powerful o0mumer protection ageo~iez ia the federal govoramoaLt Th~ sou~cc of this vAde-ran#ng authority is the Federal Trade Commission bet (FI'C ActL~ a broadly worded statute which mgkes tmlawi:ul "unfair or deceptive acts or practices?' The courts have interpreted this language broad/y to give the Commission considerable leeway in defining illegal practices.I In additical, tecen,t ]~gislation amending the FTC Act has clarified the Com- mission's rulcmaking autholity.~ Under this legislation the Commission can go beyond ease-by-case prohibitions of unfair or deceptivc pract/c~ by issuing trade regtdation it~es wl~ch proscribe sucll practices on an iadtlstry- "~Prof~or of Law, Gcorp WaShington Um~slty; foimacr attnraey.adcaor to FTC Col~mJe~oncr Mar] G~diElcr Jolly; J.D., George Washington U nivepsi~. ~ For de~r~tlo~ ~f ~ ~E'~S rc~tly aeqltlted powerg, ~e Nelson, The poJiti~q~tion a~ I°TC RulemaI'iltr ~ ~. L. P~V 413 (1976); I~tner & Smith, T,Se Emergence ot the Federal T~e Comm~$1oa ~ a F~"mMable C~mmner P~oteetlon ~gen~y, 2~ Mm~c~l~ L. ~v. 651 (1975). • I~ USC ~ 4~Ca)(I)(~pp V 1975). a See F12C v R. F. K~!~I & Bn~l~c~, ]uc, 29t IJS ~04 (19~4] in which a Iotte~ mctb~ el selling ~dy to ¢h[[dm~ ~1 held to eo,l~i~u~e an m~ t~acti~e. In considering th~ ~mmi~o~'~ a~lthor~ to ~IIc u~l~r practice~, the Court stateg~ "It ~s unneee~y to st~empt a r~mpr c'le~i~e d~l~t ~aa ol ~ ~a~r m~t ho~ ,,vl~ k ~¢ han~, cvl~ [~ it w~re !~ibl¢ to d~,..New or dillcre~t p~¢ti¢~ must be con~e~ed ~ Iile~ ~-ii~ i~l ~e hght of ~¢ ci~¢~ lr~ WM~ ~ey are employed." ld. ~t 313. ¢ Acc~i~g to 15 U SC § 57a(a)ll)(B)(SUl~p V 1975). "[t]he Comn~ioo may pr~¢ribc •.. nll~ wl~ e2~ donne ~lth s~c~ciP~ ac~ or practl~ whie~ are /mf alr or de~ep~e a~ or l~ra~¢e~ m ol ~e~llng ~mcr~ (,~at~n the meaning of $~¢tlo~1 4~(a)(]) ~ tNi tlt/e). gut~ • may melt~ r~!~¢mea~ pre~enh~d for zhc Imrp~ of I~e~c~it~l~ such a~ or prior to thi~ ~na~tmcn~, the ~TC h~d il~l~l ~adc re~lladon i~/e~ u~der 15 U~,C. § 46(g) m~d its aut/~r~ty to do ~ had beea upl~eId in Nafio~el petroleum Rcfmer~ A~'o v. ]~C, 0~2 F.2d 672 (D C C~r. /97] ), ¢~rl denied¸ 415 US 95I (I974) Once a r~le !~e~ effect, ,,a ~ubs~ql~at ,,,i¢latio~ thereof shall ~l~tltu~ ~ ttnf~ir or deceptive a~t or I~¢ti¢~ i~ vlol,~on of ~ection 451a)(1/ oi ~ fillc~ ~ml~ otherwise pro~ide~i by t~ Cem mi~ion. 15 USC ~ ~7(d]13){S~pp V I976). It i~ un~2¢~r whct~er ~mi[ac ~u]emalang ~t~tl~o~ity ma~ b~ ~t~I~ed by thc Commisliou to pre~i~ ml~lr mcIhods o1~ ~mp~lltmn. The ~ta~ut~ s~ifie~ll~ ~o~ not ~ect any emsti~l aut~rily, w~ltev~ that authonty may bc. Id. § 57(~)(2]. [1]

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158 2 AUcN L~.W Parcmw [VQ/. IIA wide basis. In recent years the FTC also has been given additional enforce- ment tools to obtain ¢o~aptiaace with its orders and run,' Opcratthg under its bro~d statutory mandate~ the Commission has dexntmstrated that it will be an aggressive and imaginative rdie-maker, partlsdi~xly in exploring and expanding the definition of "unfMr acts or practices." This flexible and elusive statutory standard is bffmg utilized to address many marketplace practices which have not been regulated under traditional theoti~s of deception or unfair competition, For example, the Commission has promulgutcd and proposed several reade reguIatloa rides which treats n~w leg01 standaads going far beyond any previously rcco.~aiz*d by the Commission. By rule, the Commission has limited the holdcr in due course doctrine in consumer sales~ mid pro- posed to ctiminato restraints on prescription dragT and eycgia~s* advertising. Tho Commission has also proposed innovative rd]es to regulate unfair practicc~ by sellers of bearing aids,~ funeral services,:~'and used motor 5[a 197~, ~* rider to tl~e Tr~tn~.AIr, Mca pipehne Aoth~rizatlon Act incJe~ed the penalty lot a violation of the cease arm de~i*t order flora $5,000 to $10,000 and gave the FI'C pewit tL, ssck pr~[h~a~u~ lod pcrm~uent inlullCdor~. 15 U.S.C. §~ 4~(I), $3(b)(Svplx V 1975). Ill t975, the Magmlson-Mose W~-r~nt~, . Federal Trade Cor~li~ior* Improvem~t Act w~l ~m~ into law. The Act ~ro,dded the Commi~mn With ~we~ ~ ~eek ~ vinery ol ~xmr~ onlered r eraedle~ for ~ers, such ~ ref~rma0~ or i~sei~io~ of e~t~t% m~nev ~fnnd~, dmm~ return ol ~rol~ert~ and p~b]ie n~t[~eat[on ~f law "~olati~ns 15 U.S.C 57b(b)(Su~p V 19751. The Commi~slon'~ e~e and ,l¢~i~t order w~ traditionally a vel~ weak remedy, r~!lltrlng ~nl~ that I~t imla,~t0 ~ndu~ be lerl~latl~. ]JR reeenl ye~l~, the I~C h~ ilu~r~pt~d to strengthen it~ orders by indudil~g rlN~lirement~ of ~enlative action on the p~rt ol re~onae~, gueh ~ ~rrectlve ~,e~tiNn~ te, disr~[ t~e elfeets ~ prior deeel~fio,~ a~d r~u~ldmt to i~imed eon~e~ See ~'ea¢~ll~, T~i~. Correel¢~e ,td~erri~m~, F/,cory a~ Cases. 1~ N.Y.LF. L ([9731~ Note, ~o~e~l~e .4d~erlssi,~o The Ne~ R~oome to Co,lemur D¢~pI~,L 72 ~tu~. L R~V. 41~ (1972)i N~te, F~de~al T~d~ Comm~s~oe: D~,~elo~me~I~ in AdveeIl~l~g N¢~faao~ a~d Amllr~l t~ol/c~. 41 ~o, We.s~t. L l~gv. 8~0 (1~173). Tlle aut~lor~W to i~lllire ~rrec~ve ~e~[~ has Ilol yet ~n e~Mlenged ~ coult. T~e C~,.~i,~'~ ~er re, or~ler re~*lmtlo~ i~ it~ cease ~d desist r,r~e~l, ho~ev~. w~ s~eeesff~l]y eh~llenSed in tho Nngle eom te~t of thi~ CommissioEs power to d~te Heater v, FFC, ~03 F.2d 32I (gth Cir. 1~74), The Co~]ou did riot ~c~k reyle~ of ~h~ c~e by ~e SIl~reme CouI~ so ~l~ authority xemzll~ in dOUbt ~ee 713~ ~IJ,XT & TI~ R~ RlU, (BNA) F 1 (Feb. 11, 197~L II i~ clear thai ll~ Magn~o~-Mc~l Warranty FTC Imprr~vement Act ~ not ~ended to r~tn~t or llmlt the Com~i~n'~ e~uiiil ~we~. Ti~e new r~e~es ~-e ,q~ additlon, ~d ~t in lleu Of, any other remedy ... ~r ovi~led by State or F~eral l~w" 1~ U*$.~. § $Tb(e] (Sg~. V 197~L *40 Fed lleg. 53,5116 (157~) e40 Fed Reg. 24,031 (1~?$). pro¢~lln~ ¢oncer~n8 thi~ iule have bee~l [:~t~o~xl i~- definitely The Commission i~ of the vJ¢~ that ~e ~opreme Cour~'l decision in Vir~,inla gt~tte Board of Pharmacy v. Virgi~lia ~tlzens ~mer Council 425 U.S. 74g (1976). where a V[rglnla law which banned ~mmcrcleI a~lve:llsiRg of prescriptir~l dxll~ pri~ ~41 Fed Reg 2399 (1976) ~40 Fell. I~IL 26~646 (1975). ~40 Fed. Reg 39901 (1~757.

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169 S~v~cr, 1977] U~pAm p~'~c~ U~ ~ FTC ACT vehicles,n Debt co]lectinn practices may also be regulated by fumr~ FTC Ingles fi" This article will examine the Commlsslon's past aud proposed use o[ the uafalraess theory to i~tify these trade regulation rules. It is the thesis of this article that the Commission has not defined adequately the pat~tmeters o~ the amorphous statutory ter~it *'~nfahr... aOs or praetiee~" nor analyzed the term sufficiently or consistently in its application to trade regulation rules, By purposefully /earing the mffalrness theory vague, the Commu~alon invit~ judicial reversals of its reguintions~ and lcgislafiv0 l~Jta~s on its authotlty?~ 1141 F~. Reg I089 (19Y*~). 11 40 Fed Reg. 16,347 (1975). a~P, court h~ jltris~ietlon to ieview the FTC'~ rttle~ in accordance with ChBpter 7 of Title 5 o[ the IJnited Slat~ C~e, T~e ¢ot~ ~ell hold u~la,~f~ ~ set amde the rule or~ any ~rou.d specified ~u ~ub. ~za~ph~ ~A), (~L ~C~, or (D/ ot sect[~ 706 (2) o[ Tid~ J (talung ~e ac¢o~I of the rule. of prejudic]al error ), or ifw (A) Thl ¢t~url fi~d~ that the C~3mmismon'~ action i~ riot st~!0orled by submra~fial cadence in the fulcra ak/~g record,,, take~ a~ a ~.hole* o~ (R) The co~rl finds thai- (i) a Con~mi~ston ~Ietetm[t~a~oa utMet sub.cotton (¢) of t[~ sectioa ~al the pe~ J~ioner i~ ,~o, entitled to CO,Oust ¢~o~,'~tm~natlcn~ ot ~ke rebuttal ~ ub~i~io~, or (il) • Cor~mi~sion rule or ruli~ trader su~eetlon (¢) o[ thi~ ~ection llraifiiag tile petinoner'~ ¢rc~s~xamirletion or rebuttal ~ubmh~on~, ~ pre¢ hldetf d~sclosuz¢ of displued m~teria/ [acts which w~ neee~ry for fur det ercm~ afion by ~ht* Cot~mi~mon 0f the rlde~ eking proceeding take~ a~ a whole, 15 US~ § ~7(¢)(3)(Supp V 197S) The grounds ~,eetl~d in ~b~amgraph~ (A), (B), (C), or (D) of se~uou 70~(2) of Title include: agency 0¢~i,~, ~nohngs, and eonelmi~tm ~u.d to be~ (A) erbltraxy, ~aprlcious, ~rl abt~e of dlscr~i~l~, ¢~r ~tI~ero~ase ~ot ia ~¢ordoal¢~ ~lh tB) c~n Ir~/to ¢onltltlttit)nal rightl I~r~wer, plS~ileg~ ot h:nmtt~it y~ (C) ~t~ exee~ of stal~tory j~rlsdichon, authority, or hmitatio~s, or ~horl of statutory righl; tD) w[~hou~ observance r~f pr~edurc r~qtured by law .... J U~.C. ~ 706(2) (1970)¸ R~, u~[n~ ibe term -ttnfalr. ac/s or pr~¢llee~' ~n¢on~tently, the FTC ©specially invites judicial invnlid~floa ~[ its r~le~ ou th~ ground~ ~ ~rbittary capr~¢io~ aztio~ m ~¢bseehon (A) above¸ ~ Sirtce the FFC w~ etea~d by alld de~iv~ its po~ve~ ~rom ~latttte~ euaeted by Cotl~-~, Cot~gr e~s may cttr tall this powe~ by enactir,~ [imlt mg le ~i~d~ion. One e×,x~g,l¢ o[ ~ueh aCa~n ~ the Cig~rcl~e L~el~ng e0d Advettlsi~g Act of 1965, which ove~x~aled the Fq'C'S ru]i/tg oa th~ e~e s~b~eet ma~er. See text accol~l~0nying 50tee 15~5 ~ra. Congress rn~v ,03o restrict z,d,nltxi~t~iv© a~encle~ tbco~gh its ap~roptlafion power. See g~ner~lly K~ap~, Congressional Contto~ of Agrw~dt~ral Cot,serially1 Policy: A ~2~e ~u~y of the Approp~ ,~lco~ Pra~e~, 7] pO~. ~, Q 2~7 (1956); Maem~ho~, Co~grexslorazl Overnight ~ Admln- l;~ratlon: The power of rh~ p~rse L 58 PO~ S¢1 Q 161 (19a3) 3 O~

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170 4 ?¢110¢1L~W REX'~W [Y~L ll;l I. E~LY USE OF THE UNFAIRNI~$$ D0~TRIN]~ A. The ¢Ig~eue Rule The Cotamissioa's first use of the unfairness theory to support an industI~'-wids rule occu~d in 1964 when it promulgated tis Trade Regu- lation R~e for the Prevention of Unfair or Deceptive Acts or Practices in the Sale of Cigarettes?~ "[he rule ra~e it an unfair or deceptive practice to fail to ~sd~ in cigarette advertising m~d on cigm~tte packages that dg- ax-ette tmoklng is "dangerous to health and may cause death from ¢~cer or oflier ~.~'~ explaining the unfairness theory to support this rule, the Com- ~dstion listed three ¢firerth by winch a practice could be judged u~air: (1) wl~tber the pr~tlca, witbeut uecessariiy h~ving b~en pr~viovofy e~dsred ualawf~, offends public policy a~ it has been established by statme~, the common law, or otberwise~-whether in other words, it is within at le~t the penumbra of so~ comment law, statutory, or other~se estahlished concept of unfalnae~; (2) win~er it is immoral, unethical, oppressive, or uns~rupuinus; (3) whether li. causes snli- stantlal injur3, to e.onsm~ers (or competators el other buslnessmen),t" The Commission dki xto~. indicate whether one, two or all three ~oferla must be satisfied to ¢on¢Iuds that a practice is unfair to consumers. Further- more, the Commission provMed little i~sight into its definition of these criteria in applying the Unfairness theory to the practices of the cigarette imlustry. For example, the first cnterlon, whether the practice offends "pubbe policy", was not addressed specifically by the Commistion The fact that the criterion is amo~beus, of course, does not iustify a failure to explain how pBblie policy is to be derived or its ~ignifie ae.ce in the u~aimess art aiy- sis, l~deed, the nebulous nattwe of the term dsm~ds that it be addressed ff it is to be a meaathgful edtetion of unfairness. tS,fe~, 3r~ad~ Reg, lfla~on RUle for the Preze~tion of Unfalt or Decept~w Aet~ or ptaetlees in the Sale of Ciffarctt~, ?.9 F~. Reg, g325 (1964). Tat fu~¢ w~ a~ emremely innovative a~ion by tit¢ Comt~i,~io~ for two re~ot/~ Fffst, O~ Comxr~sslon ~Ild ,~ot re['/ solei~ on a deception lheory ~ut tet forth as an in~ffependent ba~i~ for the rule the unfttietJ~ theory. Second, ~e Commission acted t~rouRh lu~t~ti~e ~lemakifl~, although the attthorlty for su¢~ acuon w~ ~ubjec~ to much controversy at ~h¢ time fhe substantive ft~emaki~g authofRy ~.a~ not iudlclai[~ ~B~aiued ~tnUI 1973~ arKi not Butll I~TS W~I ~he ~maty ~tab[hthe~l by ~L~Ute $~¢ note 4 supra 1.29 Fed ReE gJ2t~ ([~4). eo , ~ ,..~-.~ ..~

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7~ 171 Summa., 15.77] UNFArR Ptacllc~.~ UtOEe The FTC ACr 5 Nor did the Commission speinflcally ~malyze the second criterion, whether the practice was "immoral, unethical, oppressive or unscrupulous" in reference to practices of the cigarette industry. It d~d find that advertising without warning of the dangers is "exploitive," partlcifiarly with regard to ehildrell)s Its finding was based on facturo such as the attractiveness of the product to ebiifiren, its widespread availabillty, the nature of the danger which does not manifest itseLf immediately, the habit-forming nature of ~Okthg and the adveriJsem~ts aifiI ed at the yauth market3~ The Commission also found that the marketing of cigarettes without ti warning w~ unfair, although it was unclear by which criterion the Com- mlssion wa_~ making its determination It eonoAuded that large sedie mass media advertising was urduir to consumers when it had the cumulative effect of creating a "barrier to adequate pub]ic knowledge and appreciation of die health hazards of smoking,"~ The extensive advertising the Coon- mission found, gives the advertiser great power vis-a.vis consumers and requires "fair dealing" toward them, particularly where a hea/ifi hazard is eonee.rnl~fl~ The Commission did address tile third criterion, i.e., whether die pran- tines canse substantial consumer injury. Relying largely on the I964 Report of the Surgeon General Advisory Committee on Smoking and Health, the Commission found substantial injury to the health and safety of comnmers from cigarette smoklng.~' The mix of prominent factors upon whadit the Commission found unfairness thus incinded powerful advertising, vulnerable audiences (chil- dren and those ldiled into apathy by the adve~sdig) and a substantial health hazard. The absence off a pub]it policy derived from "statu*es, the com- mon law or other~vise" may have been justified in the Commission's view by the presence of thes~ factors. If such was the case, however, the Commissinn should hay= so indicated in order to explain its application of the unfairness theotT, h fdiling to analyze its own criteria of unfairness in adopting the role, the Commission left many unarlswered questions abotlt the theory, the criteria upon which it was based, whether or how these criteria might ~eld. at 8358~9. ]~ld. at 8357¸ • ~Tnc Commission cnnc]udcd that "deception to one side, ¢[garette adverd~Jltg by "/[rtue of iL~ magaiLud¢, t~chrliques, ¢ontaaL media, and other /actors. and ab~w all by itl fatlur¢ to disclose th~ dangers of smoklng i~ unfair to th~ public... ," I,L .~/d at 8329.3X The Coram~ion ~1~o took into account the ecn~omlc ilijUi~ *~ the indl,~try w~eh the rule m~ilt engender but fotmd the h~iu~v s~¢~ulati~ Id~ at 8363 64~ Thtm. aLdlough th*~ b~nc¢ of ~at~r~st~ wa~ t~ot proraiacnt in the u~lairn~ ana]~[~, ie w~ a part ~f the C~mm/~ion's delibcr,aion~ ~"=m=la'-- 00 t...~"~=

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172 6 AI~N hw R~VIEW IVol. II:I be balanced against each other, and flow the t~eary mlght b~ used to address exlstmg industry practices, Shortly after pr~mu]gatlon ~f this rule, Congress passed lhe C~garclte Labellng and Adv~rtls~ng Act of 1965~ which elfecl:ively overruled the Commission's trade regulation ~uI~. ~ut while the Act overrode the Cc~m- misslon's p~riicu]ar rule conccrning cigarette labeling, it also Sl~C~fically pro- vided that it ~h~uld t~ot be c¢~nstr~ed as limiting lh~ Commission's ex~ting jurladictic~n or auth~fi~~' Altllough the Commission thus wa~ flee to app]y th~ unfaJn~ess theory to practices Jn other Jnd~s~es, it was ~ewral ~ars before the theory again etnerged,~ B. Th~ Care Labeling a~id OCtane Rule~ I~ 1971 the Commission again utilized an unfairness theo~: in con- jaa~tJon wltll a decepgo~ theory to support two trade ~gulatiw xuI~, ll~ issuing b~tll ~ule~, i[~ Commissh~tl J~nr)red the cigarett~ rule er~ter~i and failed t~ state any new c~ter~a by which unfalc pracuccs cc~Ict be defined In ad~it~c~n, tb~ Coirim~iOlt'S ~ii~fainl~ss ai~al~,ses ~:ere il~¢onslsletlt With ~aeh otheL TI~ c~r¢ lab¢l~g cu]e required a perraanentJy a~xed la~el o~ clothes p~-ovid112g Jl~$tructions ~or ease an(~ maintenance.~ Th~ C~3ttlrriissi~tl con- eluded that it was a de~epl~w practice I~o~ to provide this [lJfr~fmatiol~~ and a~o "tl/idliIy oppr~s~Jvc aIld ui~faJr to c¢~n~me~s" in ~h~t ~ubslt~ntial e~ ~1olfl~ /osses ~J[~ o¢~i~ to c/)rt~It~rl~ who clther ~ama~ lhclr apparel through improper care or who unknowingly purchase clothing ~vhich ~- qllires expelis~e iT~aint~ati~, Th~ Coml311ss~i~ c(~nc]ud~ thal it cou]ci profit pra~:lic~ ~.~ isI~fair ~poll ~ t~ncllng of E's~Jb~ta]311~ ee~l~oy~[e ill]ury to. a si~sJ~caYd l~umbeT o~ cOn~'mcr$.~ The Commission Jri fact did coltsJder factors ~t]~r fh~ri ¢onsu~t~er ~ajury in issuing the rules, Le., cost and feasib~lJly of permaaent labeling arid a]tel~lative mcaiis of ob~ail~in~ lhe desired inforraati~ll~;~ but it~ ~n- ~ 15 USc §§ t331-1340 (1970) ~41d. at § 5(¢). ~JT],is Con~ional reaction to the I~C rule is a rCndnder tha~ th~ ~C's legJslatlvc r~l~m~khlg r~ay be overturned qulckly if i~ ~ cvntr~ry to public p~Jicy ~ perceived by legislative vet(> within sixty day~ ~i any agc~cy reg~E~tlo¢1 ~,~e ~enaraI~ 3~ Fed Rcg 23,85~ 8~ (I~7]). ='The C~mm~[ol~ f~und that nc~ci~c]~ure is ~Ic=eptive "~v~,en silence on this ~ubject can =ithcr mlslc~d the public ~mo using a =are ~rocedure ~Vh[ch J~ h~rrafal, or fr~trate a "~xJe ~utnulto~ inherent in the i,~iti~] purchase that t~ ~pe¢ial and ~.O~tly m~tcn~¢ will b~ required. 1' Id at 23 989. ~Id ~t 23,876

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m 173 $~tmmer, I~771 UNP~ p~C~¢~ U~m~ ~ FIC ACT 7 [aLrae~ st~mdard as broadly stated did not t~veal the weight to be given such factors or whether such factors should be balanced against economic injury to consLtrllers. The second trade regdlation rate, which reqinred the posting tff minimum octane numbers oa gasoline pumps, like the care labeling rule, was based on theori~ of decsption and unfalm~ss,a~ The deception theory was very weak~ however, and liffle evidence was required to support the unfairness tbeo~'Y Failure to inform the consumer, said the Comtmssion, resulted in unfairness since "it does not afford to the consumer information with any degree of preciseness as to the range of octane ratings available." and thus cOUld resdlt in tile consumer's purchasing higher priced gasdlale than was n~e*sary for his car'2 The amount of savings consumers might enjoy as a result of this rule apparently was "speculative", but that factor did not deter dl~ Commission. Even if no savings occurred, "the consumer is entitled to have octane information made available to him, regardless o| the amount of money saved."~ This view seems quite inconsistent with the Commthifon's focus on "substantial" consumer injury in the care labeling and cigarette ~les. In both the care labeling and octane rules, the Comrrdssxon concluded in summary fashion that the nondhelosure practices were unfair. The first two criteria of the cigarette nile (public policy alld seller exploitation) were not considered at all, and the third cdtelion (substantial consumer injury) was treated as not essential to the unfairness maMysls. The CommJssion's statements appeared to open the way for a hmJt[ess an'ay ¢2f rules requiring product information die.Insures whether or not such information was vital to consualer interests. The unfairness theory was so vaguely and variously defined by thes= rules as to result in an unworkable legal standard. C. The Equ~ry Coun Analogy In 1972, the Supreme Cottrt in FTC v. Sperry & tIutcgsmwn Co IS&H)~" affirmed the Commission's breed authority to proscribe unfair practices whi=h are neither directly nor traddlonaIly d=ceplive, nor auri eomi~tiflve. The Court summarized the Commission's authority over unfair practices as fdlIows: [L]cgislative and judicial authorities alike convince us that the Federal • . statement o~ B~w and Purpo~c, Trade Regulation Rul~ regarding the p~atlng of o~ta~¢ r~t [tt gs on gaso[[n~ disp~lia g pump~, 36 Fed. R~g 23,871, 23,875 O971), a~'the decep~J~ pr~ctlce ~moun~ed to the "faille of ra~rket~r~ to disclose th~ octane rating'* whe~ su¢h in Ior marion is important to the consumer, /d~ a2ld at 2~75 ~ld~ ~I 23¸877¸ ¢-~ l'$

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f 174 ~ato~ l~w R~vl~w [Vol Ii:t Trade Commimio~ does not arrogate excessive power to itseif if. in me~ufiog a practice agemst the elusive, but conl~essinnally mandated siaudard of fairness, it, llkP a court of equity considers public v~Jues beyond simply these enshrined in the letter or encompassed in the apint of the antitrust inw~.~' This general o0acluslon was the basis for finding error in the determination by the ¢~urt of apgeah that Section 5 of the FTC Act proscribed only tmfair practices which w~m eontrar~ to tim imter or spirit of the ~titrust lavrz)~ The Court did not decide in S&H whether the FTC acted within it+ eqmtabte powers in firtdthg the challenged practices unfair but remanded the case because the CommL~icn in its proceedings had got applled the nzffalrness theory which it was urging on appeal)~ Once again, the Com- mission's analysis and application of its theory were inedeq'aate, ALthough the Commission 'won the Court's general approval of its broad statutory mandate, it received little guldaaoz as to bow it sbeuid have applied it~ eqmtabM powers in this case, or how li shoutd function in the future. The Supreme Court did not attempt to specify the nature of the "public values" to be considered by thg Commission in defining un- fairue~ but i~ did refer in a footnote to the Commisslon'~ own cigarette rule criteria as an example of st~mdards e~ unfairness)~ A}though the court =~/d~ ~ 2A~ (cmph~ added) (foatnot~ omitt~d). ~l The Fif~ Clr cult, with ]udge Wisdom in aliment, conCluded that: ~ be the typ~ ~f peactlc~ tllat the Comm~ioa ~ the I~w~r ~o dee]~re "unla~r" the act ¢0mp[~ned of mu~t I~ll wJIbin olle of the foEIowlt~g tyl~:~ o~ vloIations: (I) a pe~ ~e vioIafion of al~titrt~ ~]icy; (2) a viohtion of the I©t~¢r o~ ~ith~r the Sherman, Cla~on, or Robln~on-Patman AOs; nr /3) a ,~olatJ~n of ~he s~int of lh~e Acts ~ r~eg~ized by the ~u~rer~ Court o[ the lJni~e~ Stat¢~. S~r~ & l-lutch~nsoa CO v FTC .432 F2d I46. 150 13th C[~ 1970) (footnut~ ~[tted). ~,Tne Col~rt [~l~n~ that the ~nll~*ion~ opinion ~ ba~e,~ on ,'th~ ~lassic antltro~t ~tJon. ale of r~lr~nt ~f tr~e and injury to ¢om~litlon.~ 403 U~. at 249.~0, T~¢ thr~t of the ea~ w~ thai S~M~ imbed testn~tioas on the fr~ transfer and ~edemp~oo of trading staml~ ~ne PTC dM not dispute the ~pellate ~ttr~'s findings that ~lr~ ~r~fi¢¢z did not violat~ th~ ant~trmt la~. but m~d o~ ~0pe~ ~hat su~ prncti¢~ w~r~ ~lla,~ ur~dcr Section 5 ~ tile FTC Act in that th¢~ w~re uniatr to consumers ARhough the Suprcme ~rt suggested ~t the CommJ~ion's fin6m~ of f~c~ might support an ~nion le~ti~ on the new ~ory now urge6 ~n apI~l~e, unf~rne~ to ~onsurne~ th~ Coatmi~iorCs ~p~ioh ,~ not based on th~ tgeory and reconsideration ~f t~ ¢~e ~s ~05 12 S at ~44 n5 ch~, ~ Fed Reg 8324 (1964) In that ~arae footnote tl~ Cot~r~ ~t ~n to d~gre~ wilh ~H~ pomtic,~ that the F~C had committed it~el[ t~ the ~io~ that cts~6u~t fo~l~d m ~¢ ini~io~ to ¢ons~mer~ under the thi~ crlte~ia ,~cmkl ~s~ "u~f~ir" oa[~ ~l it ~m~t~l ~ m~mh~t under o~e ,~f ~e ~rst t¢~ ~rLteri0~ ~ well T~* ~tlprer~e C~let, quot~t,g th~ FfC htlt adding tts OWn emghasla, faund that air the I~ ~ad said ~as that '~S~ w[d~ variety ~f de~is~on~ hlterprctlnu th~ CJ~sive ~ncept of un[alrne~ at le~ ma~ cl~r tha~ a l~¢thod of ~elllng vJ~lt~t~ Sectmn 5 if ~ i~ e~IMoidve or [nequilab[e and iL in addition to N-~ng morally objectionable, it is seriously delril~e~tal t~ consumel~ or other~'¸ ~05 US. at 24~ ~ S /hu~, the Suprem~ Court

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175 S~, 1077] UW~ ~ U~ "i~z FTC ACT 9 did not teehrdealiy approve the aigarette rdie etiteda, it left little doubt that tho Commission must develop aad apply some clear standard of unEairness ff its rnguint~ry actions are to be upheld by the CouR." Shortly after the de.clsion in S&H, the Comnhrsinn in P~zer. Inc. found that it was an unfair practice to make product dalrns without a reasonable basis to suppprt these elaims,'° Even though die complaint agaimt the respondeat was dismissed far lack of proof, die Commission diseu~ed at length the unfairness theory and emphasiTed 1be amorphous nature of the theory. By focusing on the equity court analogy in S&H rather dim on the Court's implicit direction to establish unfairness stand- ards. the Commissic~ summarized i~ concept of urdalmess a~ "potenfiaEy a dyaamic, analytical tool capable of progressive, evolving application which can keep pace with a rapislly changing eetmomy Tom as consumer products and marketing practices eliange in number, complexity, variety and function. stmidar ds of fairness to the consumcr may al~o change."~t Althtmgh the Com- mission quoted the cigarette rule criteria in its opinion, ,it did not ufili~ t~c~ criteria in establishing its unfairness standard for advertising sub* stanfiation, le fact, the Commission's statements indicate a dramatic de- p~ralTO from the unfairness theory aanouneed in the cigarette rule. Too standard described in Pfizer consists primarily of an ~onomic analysis of marketplace practices, in which the eongieting econornie in- terests of consumers and sdIers are balanced against each other, to determine bow costs shou/d be allocated between consumers and sailers tO promote rational consumer ehoices a.d enhance eompethlon. In applying this nn fairness standard to the practice of umubstantinted advertising, the Com- mission concluded that "neanamieally li is more rational and ImposEs far leas cost on society, to require a manufacturer to eonhrm his alfirmative product claims rather than impose a burden on each individual consomer test, investigate or experiment for himselL" tmem~t inclined to re~d th~ I:rfC's o~vn criteria as broadly as possibl~ thereby enctluragmg Lhe d©velol~m©r~I of the unfaJrne~ Iheor/. t~Th~ Ct~t foo~6 the CommL~iOlt'm ac~io/i eo~d .or b~ ~t~ta~n~d becaus~ lh© Com. m~ion in tts opinion hact faU©d tt~ assess I/~e ~racllces in lerm~ o~ I~le~ tln~irrle~ tr~ t~mlmners ~r d~velOp0d ~ny startd~rds for doing ~,/~ 4O5 U~S~ ~t 24t~. ,ogl F~C. 23 (1972). • t/d. at 61 (|oomotea orai~ted) The com~ai.t agains~ p~lzer a~leg~d that t~e company ~ntd e.~aged in dew.five and un~alr advertising of it~ ~unbur~ olnlra~ in fa~Hng to • ub~antiate its efficacy dalm~ b~ scle~t~fi¢ ~ests Th~ ~ommi~siol~ dlsrn~ed ~he ¢~r~plai,t, flatlitlg there w~s no dece~t]o~ and that th~ standard for ad~rLi~ng subst~ti~tio~ had b~ ~rrorleous~v ~tal~d by cornr~laff~t ~aun~eL Tile Ccrmm~io. w~nt tm to stat~ that liner the unfairness ~heor~, ~here rou~l be a "rea~onabI~ bas~' for amrrna~e l,r,M.et o~ d~m, eom.m~r rdla~c and lil~ con~¢qu~n¢¢~ o~ falle ~/aU~ls, /d *tt 64. ¢~'--L- l'O

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176 10 A~ON Law R~*~W [VCI. I1:1 1L BROAD NEW FOCUS ON UNFAm PRACTICES A. The Holder in Due Course Rule Only one t~ade regulation rule based solely on the unfairness theory has been promulgated since $&H. This raM, which is entitled a "Trade R~gulatioa Rule Coneetding Preservadon of Consumers) Claims 0rod De- fenses,"** is designed to eliminate three practices, including the holder in due course doctrine, wlfich cut off a consumer's contract claims and deCeases while continuing his ountlactual obligation to pay.'~ Drawing on the S&H decision for its authority, the Commission sum- margy announced that it had functioned as a commercial equity court/and "weighed competing equities in the market in reaching [the] conclusion thit the mechanical altrogurioa of consumer c/alma and defenses is nlxfalr (o COllSumer$."s~ In the Commission's view, the nnfalmess arises in several,ways. When a consumer's claims and defenses are cut off, this mechanism too frequently subjects the innocent consumer to substantial unjustifiable losses brought on by the merchant's breach of contract.~ Furthermore, consumers, us a result of the great disparity in bargaining power, emmet bargain for alter- native provisions to preserve their defenses. Additionally, the holder in due course doctrine protects and encourages disreputable sal~ practices, since the merchant can sell the promissory notes and continue this source or pa)~nent while failing to perform the promises made under the sales contract2* The first objective of the rule is to bring the cost of seller misconduct to the lowest possible level.*~ This should occur as a result of creditors "F~licing" the marketplace by not gureheslng notes from unreliable mer- ~40 Fed. Re~. 5L506 tt975) • ,Tee ru]e ellmlnatm the use of promlcsory notes which can be sold to ~ holder in due course who then is entitled to payment from the consumer, despite the merchant's failure to l~erform ~mler ~he s~les one,race The rule aho eiiminat¢~ the ose of "w~iver of defel~es,, provjslons in contracc~ by which t~nyers agree In pay the credit company wilhoUt reg~ ~o )he seller's breaCh of contract Finally, the rule wouEd ~]1o~ ~oltsumers t,~ raise contract claims and defenses a~ainst • /ellder wl~o h~ extended credit dlrecfl~, to th~ consumer if t~e lender shzses a course of ~¢a]~g wilh the merchant or ~hete th~ merchant has torched the buyer to the lender (vendor r:lated Io~n~ ), Id. • sld at 53,523¸ • ~Con~tmec~ could be i~formed of the hOlder in due course d~cnin¢ on the face of theie ~cle~ a~d ¢,~ct~a¢~s. However, i~ wt~uld b~ ¢Iil~uh ~o fi~d appropriate Imlg~age to apprts~ the ~on~ttmer a~]eqt*~tely of his l]ab~litic* Zlid to ~tlre th~ the langu~e ts read ¢,,*0 Fed Res ~09 (197S) While the c~snmer t~chnlcally h,~ an action for bt~Xeh of c~ntract a~ain~t such a ~eller, th~ recoume is not realistically avsilabl~ ~o a~sor~ ¢otl~umer prelacy[on ld. a~ ~,~11 12. ~B/d. at 53,523, ¢,..~

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177 Sua~m~, 1977] U~PA~t PI~A~c~s Uh~ER ~ ~ AO" i 1 chants, thus mlnimlz[ng those losses Both consumers and reputable mer- chants should benefit from this effect. The second objective, when seller misconduct costs cannot be noted, is to tptclilaJlge those costs so that consllmer pr~ees for c~¢dit ira~is- actions reflect their true costs. Although not conceding that itlterost rates will rise as a result of the rule,~ the Commission appears to have concluded that any increassll cost spread among all consumers who purchase credit is preferable to having large, unexpected losses fall en a small percentage of consumer& The Commissiolx summed up its philosophy by saying that "only wb~II prices at)preach or appToximate reflI social costs do consumer choices in the market tend towards optimal allocation of society's resources.''~ Thus, the Cornmisslon, acting Iike an equity court, reallocated the risks of obtalnthg and extending credit to the credltor, who is th~ party in the best poBtion to reduce those ri~ks or spread the costs of those risks The Corn missthnls rationale is similar to that undcr?inninll the ~apidIy growing common law doctrine of strict products ]~abilltp.n It uIso reflects the Corn mission's adoptlcn of the broad P~zer standard of unfairness with ceonomin and marketplace considerations predomln2tllng tile Commission's analysis The consumer's Iosses, the lack of consmner bargaining power to reduce thos~ losses and the absence ~f commercial iustifieatlort for the holder in due course doctrine substantiated the need for the rule. Public policy consistent with the rule was considered peripherally in thB Commlsslon's statement accompanying the rule, and it was found in state rather than federal law T~e primary u~e of the state law de- veinpments appeared to be in making the factual determination that credit costs would not hncrease under the FTC rule since they had net increased ur, d~ similar state statute&j~ The fact that forty states have recognized the holder in due course problem and taken some legislative action, and that many recent judicial decisions hold /he doctrine in disfavor, indicated to the Commission "widespread public concern about mechanical abroga- ,ITc3timony intricated thal ~t~les which had slatutc~ ~imilar ~o the FTC rule had nol ex~ri~nced increased cost or decreased ~allabillty of credit, toL at 53,520~L "See Greenman v. Yuba pewer Prodnct~, Inn, 59 CoL 2d 67, 27 CoL Rpt¢~ 697, 377 P.2d 897 (1963/. ~Thls ~oneluslon wa~ hotly ~om~ted by retail merch~m~ ~mall butanes,men ~,d f,~anc~a] [n~t~tllt~on~ ~ho n~aalt~il~ed liner Ih¢ rute would damage their b~inesses~ 4O Fed~ Ite~ 53,$17 ]~l (197~L However~ 1here ,#as ~u~xtan~hd e~h~n~c, ~ncludmg ~e~t~vny ~rom propcmcn~s of st,*¢e~ wah ~dutes ~bmtar ~o ~ho rule, ~hat the r~[e v~ou]d not irtcr~ase costs el decrease the awilabd~ty of er~ht ¢--""='=1.~ 00 CD i'O ~-[ ~-="="m ,a,

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178 12 Alines I~w Ravmw [Vol. ll:t rinds of consumer rights."#' However, the FTC rule o0mpletely abrogates the doctrine and thus differs from most state restrictions," and the rule nms coutrary to the Uniform Commercial Code provisions" which =~xist in m~ny ~tates. Thus, this r~le leaves uncertain the importance and defmitlon of public policy as a determinant of unfairness, B. Proposed Trade Reguhatlon Rules Based on the Unfairness Theory The Commission has proposed a number of trade regulatlon nde~ based in whohi o~ in part on a tl,.eory of ~nfaimess. These rtties can bo ~roupod. according to the i~'pe of m~rketplace practices or circumstances which they address, into the following three categories: 1) ~les to prohibit contractual providons which favor setters and c~odttots and adversely attest conzumers; 2) rules to promote or require disclosure of material information about products or services; and 3) rules 1o protect particularly vaI~erabte consumer gioups from un- ¢onsaionable selling practices. In announcing these proposed rules, tile Commission tt~s set forth several d/fferent standards of unfairness and, in some instanees~ it has not yet eleariy set forth a standard. An examination of tttese naes and standards, or lack thereof, follows. Rules to Prohibit Certain Provisions in Consumer Contracts The Commlssinn h~s proposed a series of lrade reguthtion rates which address oIingedIy unfair credit practices.~ These rules would make unlawful various provisinn~ in consumer contracts which are now permitte.d by stat~ statutes or the common law, The proposed rules, inter alfa. would p/ace ~e- strlctions on the amount of a deflaieney jodgment a sailer might recover after debtor default,s' limit or res(riet provisions requiring that a debtor pay attorney fees or ¢oIlectinn costs," elirainat¢ confession of judgment or other aimitt ar provisinns.~" zod bar creditors from communicating with certain third p~x~2es in the c~urse of eolhieting a debt.~ s)/d at 53,508. ~1/d. The C0mr~L~sit~n concluded that many stale stalmes are inadequat~ to afford con- ~UC.C ~ 302.305 (1972). ~ prope~d Trade Reg~hti~n R~I~ on C~dil Pracllc~, 40 Fed Reg 16,347 (1975) Se~ genera~l~ Sy~po~m ~ C~dtt p#aet~es Rtde. 8 CON?~ L l~z~ 45O (1976). ~'40 Fed. Reg 16,]47 (197~) In d~termln[n~ th~ amount el ~he deficiency jud~ne~t, the ~¢btOr ~ould be given credit for the ¸'fair mark¢~ re~il valve" of th© probity ml.en "~y repossessiort ld. ,~/d. at 16,347~8 ,~lJ at I6¸347 g,'l

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179 Summa, 1977] U~,~ pl~:n~ U~ r~ FTC ACT 13 la its brief statement of reason for the proposed rule, the C~on cited S&H as its authority for acting like an equity court in prohlbith~ unfair ptacllces2~ It proposed an unfairness standard which would be met if: I) the creditor imposes upon consumes ¢ofltra¢t~ of adhesion , . . which cnntaln provisions disadvantageous ~ consumers, or the creditor fails to include in tho contracts of adhesllm pro'dsions beneficial to consumers, all to ll~ consumers' detriment; and 2) tbJs detriment to consumers is not offset by a m~,mabl0 me~ur¢ nf v nine r~calved in retuiiL~ There requirements focxm on the power of creditors vf$-a-vi~" ¢onsnmt~ and the injury snf[ered by collsttmers. On its fac~ the standard de~ not appear to invulve a broad bala~alng of economic interests suggested by lffiser and the holder in due coarse tale. Instead, it appems t~ consist of the ~o0nd at~d third criteria of the cigarette ruin, i.e., oppm~slv~ or cxpiultive practices and consumer injury. However, the third eriterlpn of the al~ rule was ~suint~rdial injury m consumers" while the criterion here is limply "detriment to consumers." which may impb that a l¢~er degree of injury is necessary to find unfah-ness. The first criterion of the eiga~c'ctc rule, i.e., public policy, is not included in the formulated standard. The Commission termed its propo~d standard, "tentatiw" and inulted public comment and analysis of thh theory or other thcmdes of unfairness under Section 5 of the FTC ActY In addition, the Commi~ioa asked for i~'ormatinn concerning effects of the iu]e on bu.siness and llm relation of the rule to state laws goveznin g creditor remedies, thereby indicating that it may utilize the interest balancing test of P[izer. The tmfairness standard proposed by the Commission appears to Im a departure from that originally suggested by die staff. In its memorandum proposing the credit ruins to the Commission," the staff foct~ed on two criteria of unfairness -- ptlblJc policy and consumer iniury -- each criterion involving competing interests which must be balanced, For example, if sub- standal consumer injury is found, it must be balanccd against commercial neceedty2~ In assessing tile publis policy interest, its importance and rclevmace must be weighed against the business interest served by the bu~in~ ~*/& a~ 16.348 n.I *,1~ ~t 16¸349 '[hose cr~teri~ were ]~ted ~ necessary foe the ru]m dealing with cognov~t provision% attorney fees, ~nd c~macts to lhird p~rlle~, amomt o~he~s, Addlt~ona[ ¢c,n- sidezatio~s were ~pl[cable to p~ov[sions dealing with dcficlcncy iudsmcnt~ ,~nd c~sigr~, ld. *~ld. ~I)i~]sion ol Special proiects of ~he Bureau of C~naumer Prote~oa ol ~ Fe6e~l Trad~ Comm~on. Creditor Remedies Proiect 49 (1974) (on file at the FFC. WasMng~on. DC ) [herein/after oiled as S~a~ Memor~ndOto] tl Id. tI JI. g

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180 14 AlOaoN I~W Rxvmw [VoL 11:1 practice,~ In the staff memorandum, it was urged that sources of public policy should be federal and state ccmthutional doctrines,~" statutes,~ and deeisionaI law,~ hut it w0s not e~p~ained how specific ur how prBvainnt a state or federal policy must be in order to support a Comnriss~oa rule. Ac- cording to the staff, consumer injury should not be limitod to economic losses, but should include damage to the consumer's physical and emotional health,TM and outrage, frustration 0rid unrest.~ The staff did not attempt to quan~y Iheze injuries or rmak them in importance. A balancing test which does rot thcludo an explanation of the weight and interrelationship of the faetor~ In be balzmced permits excessive latitude iu defi~g ~mlair practices. For instance, under its broad test, the sta~ proposed ons credit practices rule which runs contrary to widespread sxist/rig state laws, judicial decisions and propesale for reform. This rule would make it ~ unfair practice for a creditor ia tile course of collecting a debt to com- municate or threaten to commumeate with any lkird party (other than the debtor's spouse or attorney) who is not liable for the debt, including the debtor's employer.'~ To iastify the proposed rtgo, the staff balanced very general national pelleiez favoring one's right to privacy mad employmentTM agahast policies evidenced by specifte state laws anti judicial decisions per- miring rng~onable third parly eontact~.¢~ The balance was struck in favor of the broad national policies despite the fact that existing state poIinies and proposals for reform which are contrary, to the staff's blanket proposals • t/d at SS Th~ concept of ~nnfaJrness ~s no~ cocxtcnsiw v,a~h unconstitutlotmh~y WhJ[e ~h© Iatter test is stlg~ti,~c~ i~ c~.n~o~ bc di~posiLive of Commie,[on actlon~?' ItL ~ ld~ ~t 56~ Stat~ law ~hat ~stops ~hort o~ outright p~hlb~fi~.r~ is ~o~h~le~s offic~a~ rec~ nition of ab~e~" /d~ ~s/d at 5~$. Ex~nples ~f equitable pfincip~0s v2hieh the courts h~w developed arc uni~st ~r~c~ ~en~, unclean hands, and rn~t~gauc.n o~ dama~s. n'/d. a~ 7176 Me~L~I diSlT0SS ¢a~ ~15~© from thrcat~ to jobs gad w~ge% Jn terror~m tacUes and harra~ment dur~n~ debt collection. /d. ~Th~ Staff adm[t~ t~ Ih~ ~at~oD" i~ c~r~alnly t]~e mos~ difficuR to a,s©ss, bu~ J~ ~no less r~ai ~or t'o~t rlason " and shr~uld be w~ghe~ in the balance. ~40 Fed l~c~ 16,34~ (1975). ~AceordJng lo th~ ~la~, Ih~ p~b]ic pohoy fawri~g th~ ban on Ih~l~ parl~ ¢onl~cLs i~ ~h~ policy a~insl cocrctot'1 decal o~ di~p0tc rc~o[~tiott in ~he itldlci~l ~yS~rCL, inwsiort of on~ rlgh~ ~o ~rlvaeF a/id employment. S~ff Mcmorandun, ~upra n~tc ~ ~t 5004)2~ $1ne~ th~ Consanaer C~.d[t Prot~lit)n Act, 15 US.C. §§ 1601-1681(L) 11970), prolfibils a~t emploF~r fYom firing the ~mploye~ o~e~ his wages ~ garmshed. ~. § 167~, lh~ ~m~o~cr may wsh to discharge the employee ~mm~d~tc]y or~ learm~g o~ the debL $~aff Memr~ra~ldum. s~pra note 64, ~t ,t87~ potential It)ss of a job or [~ senou~ ~n. jurle~, such ~S embarlassment and dlm~shed reputationr occur with oth~r confacts mad~ ~o farafI), raemb~rs arid frLend~. To prevent the~e iniuries, ~onst~mers m~y pay ~ieb~s they dt~ not owe, and th,~ be deulc~ ~cce.s to d~ pruc~s r~ghL~ ]d ~,t ~-~, a9"?. ,~T~ S~a~ prO~des at, ex~enslv.* I[gting of c~0 upholdlng tl~ credRor's right ~o rn~k~ reasonable ~hi~d p~r~$, controls. ~.taff MemorandUm, ~upra note 6,¢. ~t 492 n 20. i'¢ ,,d

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/ 181 agalnst third party contacts would normally be expected 1o carry a great deal of weight.~+ + Th~ staff also utilized the balancing test to a~al~¢ ~o conflicting in- t crests of consumers and creditors which are affected by thhxi party contacts. l~ so dffmg, the ~taff recognized that third party £ontacts arc advantageous fix that ~hey afford an inexpensiv~ colIectlon d0vic~ for creditors, hut fotmd that these advantages were outweighed by consumer injuries such as potential loss of employment, embarrassment, and diminished raputafio~J° Unless the balancing test is morn fuUy explained in terms of the weight to be given tim factors considered and the relationship be~,v~n the~e factors, it wi/l appear sufflcleatly makeable to j~stily any t~le where some consumer injury appears possible. 2. Rnle~ to Promote Product In formatlon Diaelc~'ares For many years the Commlsslon exercised its power to require a~rma- five d'tsaic~ures about produetsy but until reeenfly tiffs 'authority has been based on a theory of deception, a theory width over the years took on a very broad meaning. H~slodcatly, deception was not Kra~ted to falso repre- sentations by the seller, but included fa~ures by sellers to reveal matetiai facts about wh2¢h the p~chaser had made false assumptions)" It was nec~,~aty to show only that the practices had th~ capacity to deeaive consumers, not that consumer~ were actually deeeb:ed or that they had actua/ly made any false assumptions.TM Recently, however, the Commission has been utilizing tho unfnlmass theory, rather th~a the theory of deception, when addling nondisaio~ut~ practices. For example, three proposed trad~ regulation iul~s based on the unfairness thec, ry would eliminate, inter alla, stat~- and pdvatdy:tmposed rc.~tr aints on advertising the prices of prescription d~ugs,~' optha]mi¢ goods~ rsAItetnatlv~ prr~posals whi¢h ha'Co been sugg~t~l by re~ponl~lc consumer organtzations h~¢¢ not i~cl~ded bhnkeI proh[bit~on ~galnsl I/~irO part,/ contact. The Consumer Credit Act prohibits "unre~nnahl~ pt]blieatian" ~d ~h¢ Natior+a[ Commission ~ Co~- ml~mer Fiaan¢o t~ermil~ third party Contacts when the d~bIor ~ /~ot g/yen wru~en ¢on~e~lt. /d. at 507 69. ~+$ee note 73 ~t~pr~. ~r~'e¢ ~ B Willlam~ CO v I~rc. 381 F~I 8~4 (6th C~r. I967); K©¢1¢ Halr & gealp S~e~l[~ts, In¢ v F]C 275 F2d 18 (St~ Cff 1960)¸ 7sSee Bunham Bvoks, Inc v Frc, 27~ F.2d 680 f2d Ci~ 1960), ce~l. den~d. 364 US. 819 (1960)+ (deceptive practice to omit on paperback book t/~at it was a~r~dged or r~ titled); Ketran v. ]~1~2, 265 F2d 246 (1Oth Cir. 1959), eerl. denled, sub nora. Double Eaglo Re~nlng Co ~ FTC, 361 U~ g18 11959) (d~c~pllv¢ no~ to Jabel ~1 ~ re ~fa~ed). :~ Ch~rle~ ~[ Lh¢ Ritz Diltr~butor Carp¸ v. FTC, 14] F2d 676, 680 (2d Ci~ 1944). s~40 Fed. Re~ 24,031 (1975). ~141 Fed Re~ 2~99 (1976). ¢._~

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152 16 Ano~ l~w I~'amw Ivol. I1:1 and funeral services." For these mM the Commissinn eomistently has ~t forth an tmfalmess theory based on two eritesia: substantial harm and public policy. Each criterion is to be e~tablidsed by a balancing test which walghs ¢onfiietnlg interests at stake. Nondiselosure of prices, aeeoedthg to the Commission, may be unfair if "[i~t creates s.bstantial harm (i.t.. its economic ~ti social utility to the public is substantially tess thma its economin and social dismili~ ) and it offends public policy by being basically coatrary to dear national policy and not vital to achieve importam stat~ policy ~.-It "/lae Cenm~ssion has not explained why "clear national peticy" must be present to justify ~ese rttTes but not in order to promulgat~ the holder in duo course and credit praedces rules. The reasoa may be that federal antitrust laws reflect a national policy eonsistertt with the provisiom of these t~onthsciosur= rules m that this criterion of unfairness can be easily met. To emphasize the public policy crtiex[ort only when it can be found in national legislation and to ignore tis importanco otherwise, however, appears inec~sistent and requires some jttstifiealiou by the Commission. To date. the Com~s~m has act ptx~ided the public with a ingal analysis of the unfairness theory t~ support these nondlsein~ar~ ruios, but in some instances, Commission slaff reports comalnlng such analyses haw beta publicized. They deseiflit the interests to be balaxlced in assessing whether practices are unfair and aIso pro,Ade a uselu/ insight into tbe potential development of the theory. 3. $'ta~ Report ca Preszifption Drag Fifce Disein~ures In 1975, the staff pmpttsed a rule2' based solely on the unfairness theory, to eliminate state and privately impo~ed restraints on pre,scdption drug advert~thg and to establish a required format for dlseTaffonary adverfisinli. ha propo~,~g the rtde, the staff rejected an "unfair method of eompe- titioa" theery. It reco~ized that restraints on presctiptlon drug advertisthg could be analogized to illegal priee-fixiog, but because the praedees have a dino~t and inamethate impact on consumers, the staff concluded that 1~40 Fd Rcg 39,901 (1975) ~41 F¢d, R~. 2401 (1976). (opth~n~c de'dee~l), m~ST~*p I/~pOlr TO ~,m F~t.I~,L T~t~ O0~l~tO,L pZ~CS~qlON D~O~ p~¢I~ DIS. CLO~S, ~9 (pt. IV at 1~) I1975) [htreinahet c~tea ~ ~r,~r~ I~r¢~'] The ~ta~l ~cj~ctcd a d~¢tption th~o~, Mt~ough ~dmitlil~g that the h~cm to coi~tlmm'~ i,1 p~rt e~mes from mi~ken a~sumpfion~ T~¢ prim,try mju~, how©vet, eccms because the n~a- d~¢]o~llr~s "make it ¢~trcme]y dif~ctflt for [¢omonlerS] to e~m~ta~e prices Io obtain Ih~ lowest cost meAi~alJoml cons~tent w~th th¢~- ~lteMs (a 'lnazke~pla,~ f~lrn~s' confide-ratio=) .... ,, id ~t 298 ~1 (pt. V at 1 ~*A). tO

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183 Sampler, 1977] UtZ~aJm p~c/lcl~s U r~laml ~R FEC Ac~ 17 e~mplete reliance on the "tmfair act or practice" theory was justified,u The staff proposed an analysis which focused first oll the myriad ways in which consumers are substantially injured by the pr~adce of nondiselo~ttre of drag grices. Consumvrs unable to make price o~mparisons pay millions o~ dollars mote than are necessary for drugs?~ ~ilae nondisd~s~e ge~fices also lead to tmeon~Cmnakly high grieege and deceptions by retail se/lers,n Furthermore, the group most adversely edited by the practices are the old, infirm, and economically disadvantaged.** Against this harmfal effect o~ consumers, the staff balanced the bene- fits of the non-thsclomare praadem. The opponents of the rule forecast numer- ous adver~ re, nits of drag price advertising, such as increased drag abme,~ lowered ~teem of the pbermaeeuticaL profession," and a reduedo~t ia the drug mohitoring of patients by pharmacists?~ The staff concluded that these unde.~rahie effects would not emerge as a result of drug price ad- veedsing, or, that if minor ill effects were to occur, they would be outweighed by the benefits ol the ru~s:~ m~ It is lint ele~r that the FTC has rtdemakaag ~owcrs with rcg~d lo attbcom~tifivc prac tiee~, Se~ aote 4, ~upra. The staff ~g~zed this directly and reeomraentt~d p~oceeding *tSaA~t the non~dmclo~me practices Only as ,,~a~r a~ts or practi~e~.~ ~1~ R~ro~f, supra note 84, at 320 (pc V at 1). Sr~J~s Rr~o)r, supra note 84, at 299-300 (it V at 11-12). IrTh~ COSt o~ the s~J~e drug me*y be as much as fi~ tim~ that charged by another dnl~t in the s~me eo~uml~, aeeor~ng to the ~T~rl, i~Polrr. Although un~nzcionnllle a r~h~tic ~,l~ib~t~ where t~e i~ no oppctlunlly to compare pr~r~ I& at 302 (pt. V at 14), ~ I~cept~v¢ rei~e~t a~io ~ that dsug~ are being sold at a low ptlce or ~is~t~t are fvstered by the se~y of pric~, since ~he elatm~ cannot he vel~fied by the ¢ensum~. Id at 303-114 *t~¢ Ng~ifiean~ of the economic injury is not to be ~cw~l only ill t~ms of tol~] doily" I~ bet in terms of the slvere ~mll~:t on individuals of £roup~ ol indlvldOal~ that ~ae ~lgamcnt in ~1~1~ ol this view i~ that file rule wiU ]e~l t~ inerea~l "prom olJon~P' ~i,~¢,r~ing of prescription d~lg~ which, in tlm~, wiU lead to increased demand rind impr,~'r n~e ~t ~. The FF~ s~'~ vie~ i~ that ~e ra]~ rda~e t~ the di~clos~e of ~1 item~ such ~ quantity and pd~ of dr~ for lhe p~rpe~e of shoppinll an~l not no rel~tio~sbap bclWeen price d~cIC~r~ ~lld drug abuse X& at 322-70 (pt. V(BICI), at ~' Even ff ad~,erd~i~g drug prlce~ woul,l lower the s~tu~ of tl~ profession, ,~ fact which the PTC staff woll~l not ~olu.,xle, tb¢ s~f[ ¢onehid©~ tha~ rely negative effects ~re vastly outwehl~ed by the e~n~lmer bet~et~l~ tn be nbt~ne~ [rom the r~le ld at ,~22-32 (pt V(B)IS), at I 11), ~A~¢l~rdiflg to tl~e ol~po~le~l~ Of tile r~0, pl~l"~laNi~ inonRor their c~to~lcrs~ tn[~l drl~ in,aide tr, ¢he~k for p~ible d~Ug rcac~ion~ and Jmeraction~ If c~tome~ "~hop around' for the b~t price, t~ ~elwlcc ,~fll nn longer be ~ible. T~e staff found [h&[ monkt~dng p1~etlc~ ,,:er~ spnra~¢ a~ld ant very el~clent in prevemi~l~ ad~,erse drll~ r©actio~, ~nt that even il ~rt~ disclosure wotlld d~cre~e monitoring, w~Jch concision ~,~ s~ecu~at~ve at ~s~, it ~hould not deter Commission ~ctlon in light of ~le be~el~ts to a~tle In ellN~racp~ IIOlD I~1¢ reg~lali0a. /d al 371-72 (pL V(B)(21, al 1.25}.

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184 111 AD.~¢4 Lt, W R]avmw lVoL 11:1 Beyond balancing those pr~artiy economic interests of sellers mid buyers, th~ sta~ onalyzed the ruhi in terms of that dualvs team, "nadonaI policy." The staff looked to numerous federal stamte~ which directly or indirectly encourage price competition, such as the antitrust statutes, the Truth in Lending Act and the Fair Packaging mad Labeling Acts?' Further, they pointed to goveammental rules and reguhitions issued by the FTC itmif lnd by other agenal~, oamed at providing further information to eoll~umersfl~ Against this federal interest the staff balanced the state laws which run ¢on~aey m the rule. State law weald take precedence over FTC rt~e, accotcfmg to th~ staff, only ff th~ gate law is "vital to achinw.., important stat~ policy goals.TM Since the staff fottud a substantial federal interest, the "state ~mti-advertisthg laws must be essentially indisponsibhi to achieve critical state policy gems if they arc to be spared pre*mptlan."" Since th© staff conchid~d that the ruhi would not a~ect state goaIs or that alter natives to anti-advertising laws "~rere avcilable to achieve those goals, the federal nile should prevail2~ This bahincing of state versus federal interests is appropriate in tim unfairness analysis, but, again, the aualysh fa~s to take into account the reimive importance of the factors to he balanced. For example, it is highIy quc.stionablc whether the FTC should rely on its ov~i prior non- diselcs~e rules to find a "public policy" favoring disclosures of materlal h-~ornlaffon to consumers. This bootstrap argument should carry little weight. Furthcrmoreo the other sources of pubgc policy, i.e., general federal disclosure statutes, which might inclaffe the recent federal warranty law,~" could be used to support any Commissici~ disciesure rale and render the public policy coasideratthn almost memalnghiss. On the other hand, federal antitrust statutes which encourage price competition, and consumer stat- utes, such as the Truth in Lending Law, which are specificMly aimed at assuring clear price disclosures to consumers, shou/d be weighed heavily in that they clearly enunciate national policies closely aligned with provhioas of the proposed rules. Tl~e uninirae~s theory will be less einsive 0aid Lake on more memlhig if each interest and source of polley ~Not onlF did Ihc ~taff iLst federal statutes, but it al~o considered statements by the Prezide~t. government of~ial~, a?ld texlbook authors ~ Io the desJrabil[ty 0I low prices and informe~ consumer ghoice ld, at 307-0g (0~ V(A)* at 19.2~3). ~ld, at t09-I0 (pt. V(A) al 2t-22). ~ld. at ]16 (1:4. V(A), at 28). ~ld at 317 fpt V(A), at 29) • , Id. ~,t 30 ~115 USC ~ 2301 (sbpp V 1975) i"O t.~ ~,...~-..-n

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i85 sm,m*~, D771 UNF,~m pm~c~lces U~O~ ~s FI'C AC~f D iS evaluated on the basis of its felev~ce and ~ladve brlpor~ce to the ~S an~sis, In addition to the three rules p~motl.g price diseiffsures, two other disclosure rules have been proposed ba~ed oa both a d¢ cepti~*e and unfairness theory. LU neither instance has the Commission articulated a clear standard for its unfairness theory. Tile first of these rules requires that certain ntttaltional thformaffon be disclosed in food advertising i~ nutritional dauns are made by the setier/~ The second tale mandates that certain th~closures he available to purehas~r~ of used c~d.1 4. Nutritional Adveltlshag Rule While the Commission has not yet indicated whether or how it might apply file unfatraess theory in this rulemaking proceeding, it did publish the staff analysis of the urdaimess theory for tiffs rule, which may be usehfl in forecasting its l~thle me by the Conamission,*~ Tile staff emleiffdad that unfairness cou]ti be established upon a showing that nla- tfitional iffformatioa is materiM to consumers, and that absent this infor- mation the). cannot m~e basic detgrmthations about the product, such as its value and suitabtiisy for their needs,x°~ This fflmplisbo approach is reminiscent of the oet~me nile theory of unfairness, which was ba~d on "speculative" or nonexistent consumer injury. If the Commission were to adopt ~ueh an approach, the ~nfaisness floctrine could easily tie applied to a myriad of products without consideration of such impf~rt~at ~aetors as dJsclosure costs and substantiality of injury to consumers. Fortunately, the staff did not rely exclusively on this approach to unfairness but focused or* two other factors: sabstai,tial consumer injury and public policy. The staff srgued that the practices to be regulated by the nutlStiorlal rule are more unfair than those practices prohibited by the octane and care labeling rules ha that tile injury suffered is n~t only economic loss, but also may ineiffde an unwlee food choice which affects health.:~ Additiomdly, staff argnaed that food is a major consumer expenditure and a necessitY,~* le~39 Fed Reg ~9,8d2 (197'I) ~a*41 Fed, Reg 1089 (1976} lo~ 39 Fe6 Reg. 39¸842 tl974). The staff urged the Commission to plopos¢ a rule which would have reqmred nut, ill.hal inft~rmaUon ~u all food ~dwrdsing. sot jmt whorl voluntary ml~rltional claims rare made Although ~he Commission deer,nee ~o an ~o, it pubr]xhed the ~taff pr~p~l a~d invited the p~lie to commcnl up<m it. lot at 39,S~1-52. For a deseripfi0n of the original staff pro~malsl see Schwartz, P~o;ectln~ Confiner Heahh and Surety: The Need f~ Coordl~mred Regu;ation ~mo~g F~d~ral Agen~;~, 43 GF~. W~ L. I~v 1031, 1~6 (~9q5) ios~9 ~¢d. Reg 39,S~8 (197,*) 1~* ld ~e* fd~ 0~ A7

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186 20 Aih~x¢ LAw RJsv~W [VoL 11:1 winch bolsters the /mportant consideration of whether consumer injuW is substantial. However, if "substaatial" consumer injury is a prereqtasim to finding a I~aedee unfair, that term may reqinre expansive reading if ~ ~u]e is to be justified tmde~ the uafakncss theotT suggested by the staff. health h~za~d of buying food without nutritional infotmailon dc~s not ~ar¢ to the signLfieaat health hazard addressed by the ~g~ett~ rule. Furthermore, while feed is a major consumer expense, the e,tteial issue is thv economic losses suffered duo to lack of nutritional information. If the Commission rotaths its "substantial injury" csiteriea as a meanthgfin determinant of unfair practices, it must determine the extent ~d nature of consumer inith'y dh'eedy attributable to the chalIenged p~actic~. In analyzing national puinic poticy favo~ng thv ruin, the staff pointed to the mJthrmtdthg provinons of the Food, Drug and Cosmetic Act mad th© nutritional labeling regu)atlolis promulgated thereunder ~y the Food ~d Drug AdmJmstrafiou (FDA). Tbe staff argued that it would be tmfai~ to dilute the impact of the FDA's labeling rule by allowing the advertising of food without nutritional ~orcaaifon.'~' This arg~m¢~ is faulty in that it may be se~sthle to coordinatv the FDA and Fq'C regulations for maximum effe¢ifveness, bug it does not necessarily follow that practices winch ddute th0 e~ccilven¢~ nf the FDA)s regttiatiotas are unfair to co~ttraers, I~ is the policy emmcimed in ti~e Food, D~ug ~im Cosmetic Act ~d the par~icuthr FDA regulations which should be re]evatlt to the unfairness a~alysis Draw'rag on the unfail~ess analysis contained th the cigarette nile, the staff also argqted that sellers of hig.h]y advertised products have a ~peciM duty to consumers when they emphasize the desirability and pleasure of tbeil" pl~Xluets without refereno¢ to health and nutrition,TM According to th~ staff, fond advertising h&s btunted pubhc c~u~ern over nutrition and ea~eouraged ehoice~ in food purchasing which are not healtlffuI. This analysis aligns the tlllinioaess theory with th~ deception theory. Although consumers may not be deceived, they arguably have reached the point of not caring about certain information as a resuif of reliatlce oa a wealth of favorable advertisthg. In one sease, th~s theory is m~re limited than the deception theorY, a~ it is appbeable only where there hsa been m~ssive advertising over a Iong period nf tlmc suf~cieat to dull consumer thter~st th important product in[ormati~rl. However, the theOl~t may also have broad appbcadon, a~ it could be used to address an abundance of advertlsing practices which are nnt deceptive bul are simply not In- tos?d, at 39,859. t~r Id at 37,~5~L

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187 Slammer, 19771 UNFAIR P~CTlemS IJtlt,BR TLIr. FfC Afar 21 formative. In this ~:e~pcct, the unfairness dicoPj may be developed so as to open the way for an array of affirmative disclosure rules governing heavily plomoted products. To date, this theory ha~ been included only as an aitemative ground for Commissic~l action JR the cigarette ru]~ and the proposed nutritional advertising rule. If developed as ~ independent basis for Conlmlssilln actiolI under the unfairness theory,, howevcr~ it hits fax readling ramificatiom for advertising in this country, 5. Used Motor Vehicle Rule This proposed mandatory disclosure rule would require sellers of used cars to place a statement on all used cars which would indicate, inter alia, the nature of prior governmental or commercia/ use of the ear, a description el any wnrk by the dealer which may affect the performance of the car or which exceeds $100, and the make, model anlJ year of tile earJ~' The regulation also sets forth spcctfie language to be used by the sealer who disclaims any impbcd warranty.'~ Unfairness to consumers may occur in used ear sales, according to the Commission, from wi~aholding "information essential to informed consumer purchase decision.TM Again, there ~s the absence of a formu- lated standard specifying criteria for establishing unfairness. Is informed consumer choice a sufficient determlnant of unfairness, without substantla/ consumer injury? As cars are major consumer purchases, the insses to large numbers of indlvldu~ls atJslng from uninformed purchases may well he substantial but, if this is important, the Coramissicn should so indicate. In its s~atement accompanying the rule, the Commission also referred to the "national policy regarding the protecmin of purchases of used ve- hicles,TM although it did not indicate the source of this public policy, The warranty discI~mer provisions of the rule e~rry out the principles underlying the new Magnuson-Mcss Warranty - Federal Trade commission Improvement Act, but provisions iilaldiating affirmative disclosur~ seem to go beyond the new law, wMcb requires disclosures only ff the sober chooses to provide a warranty but does not apply to the ease where the seller elects nl3t to do So.Itz Ultimately this rule may be more than a disclosure rule, A staff pro- gosal, Oll whicb the Commission invited Conlment hut which it did not 1~ 41 Fed. Rcg 1C)S9 9C) (1976)¸ ~a~Fhe Commi~j~ language both ~r ~he ~f~,rcmcnt on ~he car and ~, the ~alcs ~ontract sp~cttl¢~ Ihat no warranty ~s given and that the ~urch~ser rlttst bear ~he ~t,tire e×pel~,e of ~ny repairs I~. ',~S~¢ 1~ U S.C~ ~ 2301 230~ [Supp. V 1975) ~--,=,.=.--. ~D l'd

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188 22 Ax~oN LAW I~wxw [Vol. 11:1 thcQrporate into the proposed rule, would allow an opportunity for the purchaser to obtaul a pro purchase inspeetlou ~f the used car by a third person)~° This may be, of course, the most effective way in which to judge a complex product, such as a car, to avoid large losses. Particularly when the implied warranty is disclaimed, it may be d~sirahin to know the true condition of the car "as is," hut this requirement, even more than the disclosure provisions, would go beyond the public policy expressed in the new warranty law. Thus, if this provision is adopted, it is encumbent upon the Commaission to d~fine with specigcity hle standard of unfairne~ss utilized t~ insfify this far reaching mgulaticm. 6. Rules to Protect Vulnerable Consumers Two proposed rules based on unfairness a~ld deception theolinS addres~ selling practlees aimed at vulnerable clmsses of consumers. The proposed rdles would govern the bearing aid industry~t* and the funeral h~dllStl~gttt In proposing rite hearing aid rule, the Commissiog set forth no staladard of u~finrness. The two factors which appeared to be important were ecc- tlomi¢ injnr) to consumers and abusive selling practices. Economic injury may o~ur when o0nsume~ purchase hearing aids from wl~ch Lhey receive no "slgnJlicant benefit or uddltional h~neltt''u~ and may be eHused by a e, omgination of circumstances. First, the natur~ of the product may require actual use by the buyer before iLs benefits to the individual can be ascer- tained,n' Second, the class of consumers, which to a great extent is com- prised of the old and impoverished, is especially vulnerabIe to strong sales promotions; the fact that they are also hard-of-hearlng compounds file problem)'* To remedy this problem, th~ rule provides that pumhasers be given a thlrty-day trim period of actual use of the hearing aid, within which tim~ the buyer may cancel his purchase contract omd return the hearing aid *~0 The ahuslve sales practices, judging from the ruin's provisions, include deception~ and high pressure sales taetics in the buyer's home. The Com- mis~olt stated that "unfairness to consumers may easily restllt from sales pro- 11,41 Fed, ~¢8. 109[ (1976) u4a0 Fed Rcg 26,646 (197S) ~,~d0 Fe,I, R~g 39~901 (1975} u~40 Fed. Reg. 2665I (I9751 ~, 40 Fe~l. Rcg 26,$47 (t97~l "*td. at 26,6II l,~ln coatrast th~ Frc rul~ prom~dgated in 1974 provlde~ oMy three day~ m which a consumer may ~¢[nd a ¢omract for ~o~s or secvlce~ "~al~ed at $2~ or mor~ which is mude in cokmecdon with a door.lo.d~or ~te 16 C I- R § 42~ I ~ 1~74 ) '~Th¢ ruI~ ~ based on ~ decep6on theory 0~ ,~tL ~rld Ih~¢~ ~,~ numerous r~lulrcm©nl~ [or ctcar ~li~¢lo~ur~s and prohlbltlon~ agaln~t l~]se claims. ~ee 4~ Fed Re~ 26,646.5D (1~7~)

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189 Smmm~, 19771 UN~alx P~lc~.~ U~ ~ FTC A~ 22. mmtation~ to which consumers have had no watnlng and for which they are frequently tmprep~red."~'' To remedy this problem, tho role requires that a seller obtain, wrliten consent before visiting a buder's home ot p!ace of ~-f Tile absence of a sugg~tcd standard by which to judge the unfairness of tho marketing practices is dlStulbing, particularly in light of the far reaching remedial measures provided in the rule. Some of the practices fail under a traditional deception theory and need liftln expIanaflon, but others do not. The Coinmisslon's lack of a legal standard aeaves man)' questions unauswered, ls it sufl]aient simply to f~nd consumer injury be cause the product cann°t be judged adequately:prior to purchase, or must widespread abusive sales practices exist in order to meet the standards 5f unfairness? /s the vulnerability of the consumer a significant factor" in the standard, and if so, how signlgcant? How are the various factors to be weighed or balanced against each other? ' " • ~ ~ ~ ; -; ; 3 .: Another proposed nile that deals with vulnerable consumers is the fungral industry ruin. As noted abow,a!s that ru[c sets forth an unfairness staudard for eliminating bans on funeral price disclosures; it also promulgates tl~ following different standgrd for iudgaig the utffalmess of other :funeral 'Ihc practlc~s.., arc unfair if the.-¢ ~ause substantial harm (i.e., their economic and social utility to the public is sub~tantiaqy less thau thek economic mad social disutility) and they result from the inequ~tabIe t~se of the superior bergalning position of the funeral servlne industry : membersrela'iveto~ttofcon~umerbuyersLl~,:~i~,f ~,,; ". ".' ~"' 'Ihis standard thus reflects the substantial harm criterion ol the price disclosure rules,n* but it omltg the national public pollny criterion of those rules. The superior bargaining factor in the funeral rule was also important in the holder in due course rule'~ and Ih~ proposed credit practices rule.!~~ t.tld, at 26,647¸ SinCe th~ ~ureha~er is in h[~ own home or ~l~ce of employment, h~ is the ~ale~man, ~s he CO0M in a ~tore Ht* o~fions are to fisten ~o the sails pitch or take the ~ggre~p/tt st~ o[ ~kiog th© gal~O~t/~ol, to lea,,e, a choice many ~a~nsumcr~ find dimcult. ,~ See text aexompauyln~ not~ 82.83 aupra, ~ . ~ •~ ~, ~ ~, • ~,. ~> "~ • .. L~0 Fed Reg. 39.902~0S (197~). Tltis ~t~n~[~ is proposed to ~ddr¢~ ~ucll ~ra=tiec~ ~l pr,~vMinl~ tmrequest~[ ~1~ ~uch ~ embalming, faiHng to com#y wifll cu~{omc~s' requests ¢,an¢crnlng burial service, ovcrehar~ng custome~ for scrvlccs 0ro~,letl hy third parfi~s, ~ueh a~ cemetl.ry charge*, ~d disparagiog a customer's concern for [,rice Id~ I~ See text ~ccorrpa~ying ilot~ 83 ~,~p:a .... •, ~ ~ .... J!~See text aeeompanylng notes ,*6*47 supra. • ~ ~ L ~ = ~ j

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190 24 AmLON L~W ~W [V~l. II:l Clearly one factor important to this role, however, winch was missing from the other rules, is the unique vulnerability of the consumers a~cted by the funeral industt7 who are largely those whose ability to make reason~i choices is almost nov.-existent, given time, pressures, bereaved condition of the consumer and lack of knowledge concerning funeral proceduresJ~" The importance of this atiditional factor is not indicated, although clearly it will be rcI~v~t t) tho factual detcrmination of substantial harm ~d the inequitable use of bargaining pow~. C. Future Regulation Under the Unfairness Doctrine The C~mm~iou has initiated investigatlous into a number of indust~ pra~iees which could leati to farther regulation under the broad unfairness doctrine. Several of these investigations are aimed at ascermiinng the n~d for providing more product information to ~nsmners, thus indicating the Commission's oontinued interest in increasLng informed purchasing deels- ions, Fc¢ example, the Commission has autbedz~d its .staff to investigate tim life insurance indus~E7 to determine whether adequate cost information is provided to life insurance pumhasers2~ At tke early investigative stage, it is impo~ble to know whether FTC regulatory ~etinn witi be forthcoming and, ff so, the legal rationais w~Jeh wi~ support the action. In keeping with its past d~.cLc, E~ m rules, however, such as the octane and care labeling rules, the basis for ~demching may well be, at least in part, the unfairness doctFme. In keeping with the Commission's int~cst in promating pric~ advct- ti~, the Commission has initiated an invasfigation into go'~crmm:ntal and ptivate restrictions on advertising price information relating to dental seaw- icesJ~ This investigatiotl includes a review of numerous practices which ha~ traditionally been viewed as methods of unfair ¢empethinn,'.~ but tim Commission may resort instead to the unfair practices theory iS it ¢ho~..es to regulate the practices by trade regulation ~/e.:"~ The Commission also has thdisat~d a continued e~cem for ~peclaffy vulnerable groups, such as the eIde~ly and the young. It has initiated an investigation into particular actlvities of th~ proprietary nutmeg home in- ~s~4~ F~I. Reg ~9,904 (1975). ~as FT~ News SIm~mary (Dec. I7. 1976) .at L The staff had fo~md ~id¢ va~atior~ in the CC~L el simili~r il~uranc~ po]ici~ and SUrmL~d thai one re,on for such dlspadli¢~ might bc the inability of consumers to mnke cost c~mlpmqsoas dim t~ th~ iaaclequate ¢.~mlabiSt~ of o0~t information. ~FTC press R¢]c~ (Jan 14, 1977). ~..Th¢ havcsti~a~ioa will ~x~min~. rn~er alia¸ b~J~ers to eaUy into Ihe practice ~ dealJsu% llcer~i~g pr ae/~ce~ and t~t~cfion~ on ownemhlp of practi~./d l~lt is unclear wh©ther the FT~ has nd~a~ng allthocily to proscrfb¢ uafslr me,hods OF competa~on. S~¢ hole 4 snd te~a a¢compan Fing nol~ ~5. ~upra I 0~ 0~

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191 Su~,r, 1977] UNr~ P~S U~ ~ FTC ACT 25 dustry, such ~ hamifinfi of patients' money, and contractual disclaimers for the health, safety or property of patlents.~ A nile gox'cmmg the nursing home-patient relationship, like the funeral home or hea~ing aid industtT riles, apparently would be based on the need for special protection for a consumer group which is especia]]y in need of protection due to old age, ill health and lack of funds. Finally, it appears that the Commission is taking a new look at the advertising and marketing of cigarettes." The investigation now underway at the Commis~on is intended to determine what motivates people to smoke and to select pa~eular brands of ¢igurettcs.'~' Such information could well lead to recommendations to curb mivexfising directed toward the young. or to limit the scenarios of print advertising which imply that cigarettes at~ sMe or that one cigarette is safer than another The Commission in 1964 found that cJgurette ativer tislnfi is "exploitive" with r~fiaIx] to children.,t=" A sirnllar finding under current standards of uoJ'airness is mot tmJikely. Explintative practices combined with seriou~ consumer iniury to health might well be viewed as justification for further regulation of cigarette ads • ~¢r rising under the ~ofMrne~ docwin~. Ill. COUCLOSIO~Z The Commission frequently has ¢tied S&H for its authority to pr~- mulgat~ and propose far reaching trade regulation ruIes based, at Ieast in part, on the n~ffalmess theory. The Commission, however, may over- estimate the significance of S&H mad the Court's comparison of the Com- mission to art equity court. S&H was a case involving an adiudicative pro- ecedinfi in which the Commission's role is amilc*gcus to that of a c~urt. It is not at all clear that the equity court analogy fits the Commission when it acts as a ruIemaker, which is a role more akin to that of a legis- hilalre. The difference between the roles is more than a technicality, and there: are reasons why the S&H rationale should not be applied to the Commissioffs quasi-isgishitive role. In genera/, an agency's decision has a more pow~rfo] effect when it is promulgated as a rule rather than aa an order; an entire industry may be subicct to a Commission =role, whsreas only the parties are subject to the Commission's order in an adjudicated tls Frc News Summary (Sept 10, 1976) The invcsti£at[on wl]l also focus on deceptzve practlces aed mxrsing home requirements that pattents pttrch~e dcugs and ~er,dees from tte~i~nnted stq~pliLTS, fcL 1~' Bt~ W~K, lUly 5, 1976¸ at 50 The C~mmlss~on's ~ubptJem~ t~ th~ six maiar tobacco cvmpanles demand all market research lur the p~t twelve ~e~tra. th~ i~dtcat[ns the bread Icope of the in~e~tigaaon ll~Sre tex~ a¢¢ompanylng trot= IB ~upra ¢-'="tt.~ Gt~

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192 26 AgxoN L~w 7,~vx~w [Vol ll:l cage.I~T More specifically, the FTC has attempted, in some instanlx~s of its tulemaking, to preempt state law or create obligations formerly considered within the }urisifiction of the states:~ Thus, the arm of this "equity court" has a longer reach than that of any traditional court. On the other hand, rulemaking doe~ have some advantages over ease- hy-ease adjudication, Rules clarify what practices are proscribed and thereby give fair warning to merchants. Rules also subject the entire industry to the same standards, thus fostering even handed regulation:" Consequent/y, from the standpoint of business, reguintinn by rule may be the fairest, raogt equitable approach to law enforcement. Other advantages are that it is a more efficient manner of regifiedon in term~ of the agtmcy's resourcesa'° and the fact finding is more exhaustlve~ particularly under newly enacted procednres,t'x However, to proceed equitably by rule, a legal standard of unruliness must be defined prior 1o rulemaldng in order t9 advise p~licipants and those to be regulated by the rule of the standards by which the ehuilenged practices wdl be iudged. This was the inapticit directive of the Supreme Court in S&H.x'~ Too ~requemly, however, the Commission has not defined the legal theory in its rulemaking proceedings. Additionally, factors which are prominent in one rulemaking proceeding, such as public policy, are ignored in another or referred Io so generally that the fo~tor is rendered meaningless When a standard of uofairnes'; is set forlil which varies markedly from prior forrnuiat/on9 of uofalrnes*, lhe Comrifisslon has made tto effort i~of course¸ cornran[es which are ~ot bound by th~ order re~o~ize the pteeedential value ~f Ib¢ decided case and may conform their praetie~ w, Ihe ~tmndal'd~ enlxnci~Eed in ih~ Commisslon opinion~ lssSee ¥¢rktUl, Preempnon ol Stare Law by die Federal Trade Cotaml¢vlon~ 1976 DOK~ LJ. 225, 247. for the corl¢luslon that the Commission I~gs the power to "preempt state a~i,qdes that conflict with Iederal regulations,'* ,,~There have been numcrou~ mstancc~ where smMI ¢ompm~ics in an [n~lus~ry ~lave b~et~ [he t.qrge~ of FTC a~fion, which has resulted in ~n atlvers¢ ~onomi~ impact to them not shared by the larger members of the same itldu~lr~ engaged [~ ~he same pr~ctlees~ See T,% Escala~i,*~ .g~ag~le Be~,ee,t the FTC a~d B~ess, BUS~ Wf~K, Dec, 13. ~'76. ,it 54. ~eSO~co~xl o~10,,~ll~lolll xh~ J~.es~m~lo~, HotYs~ COM~ ON I~vtt~rr~.-~ ~.~o FOR EIO~ C~!~M~R¢~, 't4~h Cong~ ~d Se~s~ REI'ORT O:~ F~D~.A~ RE~Le,~ON ^'40 RL~IrL~TOay RLVO~t~. (~t. II at 78) (Comm. Print 1976). The Subcommilte© urged adda~a~a[ ~ of ~ulemaking au~hc~d~y [n certain are~ ~o more e[fectivel~, utilize its resm~rces~ b/ a~ I¢], 86. The ]e~isl,ifive ~tltent i~ the ",lagnu~ Mo~s Wm-ran[y--FTC Improvement Act also was m encourage the use of rulemakin~ alxdlodty, The Conference 10.~,)ort on file b~[ ~ated~ "Beczu~ U,~ p.ohlbk;ot~s o~ sect~,~ 5 ~f the Act are quke 13r,~acL t~ad~ ~-~l~,~o~ rul~ ar~ needed m define with ~cel flc ks condect that vlolat cs die s~anlte and to e~mbfish ~n]awful co nd ~ct." H.R. R~. No. 93 1606. 93d Con~. ~d $ess~ 31 (19~4) mFor a full d~cmsiol~ of the ru[emaklng I:rOCCdUteS ao~ [n effecL see NelSon, T/re Pol~iclz~ion of FTC R,,Wm~ing. 8 CO'*~L [ R~v 413 (1976) ,~. Se~ no~e 39 and accompanying text sl~pra~ iV

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193 s~m~ 19771 "J~Am p~A~ES U~ ~ FTC ACT to harmonize the variations. Thus, it is tmalear whether the latest standard replays the older standard or is simply an additional standard which has been developed to fit the marketplace practices to be addressed. This is not to suggest that a rigid definitxon of "tmfalr practices" is ~ecessary, but to suggest that a single st0ndard be developed and. used in judging the unfairness of practices under Section 5 of the F]TC Act. lit this author's view, tile predominant critelJon in tiffs single st0ndard should be substantial harm, involving the balancing test the COlnmSssion IDs armounced in several of its proposed ~lcs, i.e.. that the "economic and social utility [of the practice] to the public is substantially less than its economic and social disutillty''t*~ This ctqtcrinn gives the CoromJ~qion con- siderable latitude but focuses on an economic and social ana~ysls of die marketplace to determine the injurious effects of praqtlces ~n consumers and businesses and the commercial justi~cation for the practice. In its analysis, the Commission should clarify the nature of the conumer injury d~rectly mlobutable In the proctlc~s Where noneconomlc injury occurs, the Commlssion sheuM clarify the weight to he given that injury in halarteing it against cx~mmercial justification. In examining the utility of the industry practice, file Colomission should consider file economic consequences to husdi~g and consumers of altering those praetlees to reduce or e]imlnate o~nsumer ingiry. In addition, pubfic lx~lisy should be defined mid consldered in every rulemaklng prceeeding. Evldence of policies favoring or disfavoring the rule provisions can be found in IccM, state and federal statutes, regulations. court d¢cisio/ls 0aid a Inalthude of other sources. The sources of public policy, hc~vever, should be identified and their importance evMuated Where the policy is not widespread or not closely allgned with the ruin provisions, it should be weighed accordingly. The interre]ation~hlp between the etSteria of urffairness should be addressed by the Commission. Where there is scant evidence of public policy supporting the rule provision, for example, the Commission should correspondingly demand a strong showing of substanrial consumer injuD' without corrtmerclal justification to overcome the absence of supportive pub]al policies. Tile unfairness theory can be utigzed to address a wide array of market- place practices which are not deceptive or traditionally ~ntJcompetitive and has potential as a powerful enforcement tool At present the theory ap I'~Thi5 bMancing t~t was reed in ~o~ed rule~ ~overMng the advertis[ng uf ~,e~dption drug prlee~, opth~lrnt~ g0o:ls pric~s ~nd funeral serwe~ See text ace~,m~anymg no~s ~0 83 t-""="lt~ t¢

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1O4 2g Am~o~ [~W RBVmW [VoL lI:] peara to be undefined, and ir~ content shifts accordJ,g to which undesirable trade conditions the FTC wishes to regulate. However, the very fact that the theory is so potemially powedai means that th~ Commission should b¢ rcstrathed in its use of the theory so as to avoid the promulgation of unduly liurdemomc or arbitrary rules. Such rcstraait could b~ accompIislicd by the development and consistent utilization of a st~dard of nnlairness which requires balancing punic injury and public policy as the pdmc determinants of tmfairncss. Such a standard should yield ratio~M and warranted consumer prob~ctlOlt rhics which cnh~cc fair dealing and fair competition hi the marketplace witlitmt being oppressive to business. I~N ~IRSITy OF COLORADO* Colov~lo RFrlnge. Colo., Febma~?l 6, 7980, Horl. WEt¢IJ~!LL H. ]POND) C]tai~an~ ~oz~u~r~v SuSr.emmittee of ¢t~ Se~ate Co, mm~ttee on Com. me~ce, ~q~ienee. and T~aportati~n. Dirksen Senate O~ce Build- ing, Washlngton. D.C. I)~AR Mm C~m~A~ : I woulcl like to make the following comments regarding your review of the concept of "unfairness" as t~ed by the FTC: " I. /q'rom it.~ inception the ]Federal Trade Commission has been charged with ths responsibility of preventing or proceeding agMnst *~lmfair methods of c~mpetlfioa'-~wen before th~ ~Wneeler Lea .~.ct specifically )unended the FTC Act clearly to include un~alr or decep- tlvo acts or practices" which might injnre consmners without proof of injury to competition. ~. Deceptive acts ar~ outlawed because they are unfair--not vice versa. The assumption that the free market system nnsv operate thl~ou~ h the mechanism of coml~tition is that s.cl~ competition will b¢ fair. Acts such as those that al~ deceptive or e~I]usive, etc. are wrong and illegal because they are unfair--unfalr to other competitors as w~]l ~s ~{) eon~/l~er s. There is nothing "deceptive" about "body attachment,) as a cred- itor's remedy for default; it is clearly an'"unfslr" practice which doesn)t restore payment to the lender but in fact makes such repgyment ~rfuully iml~)ssibi~. Should such practices be left unregulated ? Many oth~r specific examples of %nfalr~wss" could be listed high pressure selling tactics, bait and sw~tch sefilng, etc.). It is essential that fed era] re datlon continne to investigate and p~ceed against such unfalr as wel~s deceptive practices; such efforts should not be weakened or ]ess~n~ti, 3. Beyond the clear logic that ~ives the Commission responsibility to seek oltt and act against unfalr nols aff~'tin~ commerce, thorc ~s yguson to nmintain that respmedbifitv snggestvd hy other meehnnisms which serve to protect consumers fronl nnfath or deceptive practices, Gi~'~n budget) time) and manpower ~vstrictions on regulatory agen- t~ ~...-'=--==~

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196 ~:I~+~BU ['~guI~Ct,IUJL U¸,~ L ~pUII~IVI~. LIL'~U~t L ,T 1~ ~ IL,~'~ V L,U,~ ILU,, s[l~eleut moans for protecting consumers from abuses of the market system. At the national le*'el the National Advertising Division of tim national Council of Better Business Bureaus and the National Ad- vertising l~view Board serve important functions in discouraging deceptive advertising. While such industry self regulation might m- vest gate and pub cize what it feels are deceptive ads~ without a strong FTC with urisdiction over unfair and deceptive promotional activities and advertising there could tm no enforceineat against such abuses of marketing whmh clearly harm consumers. Only as long as ~lch self reg~flatlng bodies can forward complaints against noncom- plying abusers or deceivers to the FTC for legal action can this neces- sary and beneficial industry self reglfiatJon work. But further where is there a self regulation organization or mecha- ulsm to investigate and debate issues of unfairness to consumers~ Better Btlsiness Bureaus obvionsiy have no enforc~ment powers. SVhi]o individ~ml bnsine.~s firms ~ well as trade associations or other business collectives can easily generate funds to provide for legislative or court actions against competitors or practices which they feel might hurt them, consumers do not have the ~unding alternatives or re- sources, the formal organization structure, nor the lobbies to represent them in issues dealing with actions th*t constitute methods of eompetl tion which may be unfair to them. Consumers must rely on the FTC to pl~vide such a for~lm for rcLpre~entation. 4. It seems to me that it would infringe upon consumer r'rg~hts, needs and desires to further actemp~ to limit the FTC's powers and jurisdic- tion. In spite of some imperfections, the FTC is one of the few federal agencies which serve to represent consulter interest~ften against well 5mdrd and persuasively articulate lobbies of various business interests. It has long been a federal policy to allow regulatory agencies expert discretion in administering i~]es ~nd laws for which they are responsl- hie. It is critical and essential that suck discretion continue lobe grant- ed--espeeially to ~hosc agencies whoae work impinges dramatically on vasil}lls flspl!cts of the consumer inteI~st. The FTC's recently, inereas- h~g use of consumer and marketing expe~s. (~f consumer research and the like demonstrates that it is seeking sound, factual data~b,sed answers to questions about ahusive or unfair practices in commerce. The concern for "ovem'egulation" expressed by you and by Senator Danforth clearly is not supporred by nationally, representative opinion polls of ~oters. The recently completed higldy sophisticated investi atlon of (Yo~su~ ~m at t~2 C~,os~roads~ov gentry Insurance and ~uis Harris and ~%.ssociates shows that 61~ of consumers want the same amount of goven~ment regulation or more 31% want more while only ~T.v want less regulation Q. 18. 'Fable VI-9 p. 69 en- closed). Consume'rs want the free market swtem to ~ allowed to operate unham ered by unfair and deceptive prm flees. 5 [ urge tile ~enate (~ommittee on ('ommerca Sciem~e and Transpor- tation to he re~pons ~e to t le c ear v expressed desires of the nmjority (61~) of eonsm,ers a~ shllwn b~" tbe Sentry Co~*sumerism study : Do not weaken the FTC by Iimiting its interpretatmn ~f ~mfnirness. U.S. busPle~ses ,nd consumers need a strong active BTC ~lhich can el- i'¢

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196 fieientlv proceed against any acts in commerce that are llnfair metheds of egmpetition. I strongly qrge that you do not remove the basic raison d'etre from the Commission as omvided in the leg slatloll whieb founded t. Far more today than 111 191i the complexities of the de- personalized mass media self-~erxdee marketplace demand such an agency with that pmx~r to net against unfair and deceptive acts or pratt {ce~---t o include advertising, promotion, and other sueb c ~tegories or activities. Thank you, JoHn" A. MmLea, D.B.A., As~odate Pro]es*or o~ Marketing. V ~'I~'EI~8 t T y Op ~VISCO~SIN--~ADrSON~ Mad~:~o~. Wis., FebmaTT 5, lOgO. Senator 1V~xDALL H. FORtl. Uo~nu~r Subeml~mitte¢ of She Se~a~e C~mlttee o~ (?ommel~e, ~q' el- enee and Transportation Dirksen Se~ate Office Bui~ng, Wash- aptera, D.O. DE,~R S~:¢AToR Fern : I a m writing to u r~e that the power of the Fed- eral Trade ComuPssied to attack 'hmfair" trade practices under See tion 5 of the Federal Trade Commissioh Act, a power developed and refinedbytheComn i~slonandthee lrtsformorethana aif-eemurv. be maiidained. I am distres~d by reports that your C~nauner Sub committee i~ /zlvin~ ~erious eon~idelution to ram!hi nf this funda mental authority of the federM govarnment, tracked by rainy stat~.s, to ferret out and ellmin~te nefarimls prwztlees wkixout the ine~icien~. uneconomical and tlme-consumlng proee~ of passing a specific stat- ute to treat each individuM unfair praeti~c. As an FTC em )]oyee f~m~ 1961 to 197k I ealue to appreciate the importance of havm~ existent authority which ant hm'ized plvceedinps against unfair practices, In my present position as a law professor and practitioner concerned with commereial law trade re~lafion iaw ~!nd eonsuuler protection, I hav~ had the opportunity to view the pld)lie benefits gtdned from comrol of mffah' busineas aetivlty by the FTC. I bMiave that tbe u~lfairness e~neept is a valtlaIde and, to nly mind, indispemslble weapon ia the llmited arsenal available for the pro t~eti~n of the market and the purchaslnz public from ~ omnlerciM prac- tices that oppt~ess and take improper advant alva of eons~mmr~. The concept of un fairness, as developed bv F'FC action and judicial deeishms, is applied in situations where ~ubstantial lmrra t~ consumers results from h~ain~,~s condo, t that offends public policy--whether l~e- cause the condnet vioTates the boundaries o~ an exi~tlng stat~da~d of ~alrness derived from statutory or eon]] 1on law, or ]~ more geoneI'~lly 0ppressive, unconsclonable vr tmethleal..ks the United States .~upreme COtlI~ recogtlqized in the FT(" v. Sperry ¢f, Hlttchlnson case. an a~sess- mellt of lt])lllllil! vnhles" net!e~:sllri/y enters hlto the detelmination whether ~ gd~en act or practice is an II~/fai~ C, fie. ]3eeause (~OI]g['0~¢-~ cannot adequately investigate and re~oond to each i~stan~e of com- mercial activity that may riolate public values, it ]on~ a~.o deleffated ~sponsihilitv to the FTC re fiesh ~mt (subject to jedicial review) the contours of fairness i/~ bll ine~ eorlduet, GO ¢lb._~ k.._ all

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¥@os9

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198 •i¸ teehnlqu~ which enconra~ children to buy more candy than they otherwis~ would have (in the hopes of winning hnmls package~ ~f the concededly inferior prochmt cnntalning e~tra candy and prizes) was an unfair trade practice: both because it took unfair advantage o~ children~s i~abillty to comprehend the ~'gambllng" inv~Ived, and be- cause th~ practice diverted business from more leffltimate mercl~an~s. There was nothing that appeared necessarily to be deceptive or mis leading abo~t the ads a~td marketing techniql~e~but pllblic ~alues certainly ~ho~ld be gi~e~ some chance to come into pl~y in cases like this. The u~fairness doctrine provided that chance. Congress never could ha~'~ dealt with the myri~d sltu~ions impli ~ating unfair practh~es th~L arise ~n the cot~text of the market without diver~in~ itself from other }mpvrtant le~'slat~ve tasks, Yet even manu- facturers of hom~ ir~ula~ion lauded the FTC rnle ~verni~ their product~ ~ncI advertisers ceased broadcasting their danger-i~duein~ messages witho~ discernible harm to their profits. These results, it is submltted, came about because the concept of unfairness allows the FT~ th~ necese~ary flexibility for prump~ u,spensc to the rcaliiy of behg~vior in i~lld i1 )ira ~h~ mnrke~, I firmly bel eve t 1at alterat on of the ~mf~i~ess standarcl w~uld ~m~scul~te th~ FTC2s power to treat continually evo]vinm new f~rms of improper commercial beha~'ior. -~fany of tl~ese new ¸forms of be- havior ,~re so related to new technology or to n~vel mode~ ~f selling that a rigid s~tutorv approach to such ~r~blems would be flffile. T~ the extent that tile ~nfalrne.~s r]octrine is dismantled, the con~llmin~ public will Io~ one of its m~ im ~ortant pr~,c~ions ~gnin~ th~ nn sc~. pulous and harmful c~nduc~ of ~that sman group, of buslnes~es wdllrt~* ~o i!~lg~g~ iJt stte}l t~ondllct. |,s~ of such tac~l~s 1s uil~lr riot only ta the consmnin~ public but to the vast m~iorlty of h~nest bnsi- nessp~oDle unwillin~ to utilize such tactics despite ~fle competitive injury t~ey ma5 suifer as ,~ res~llt of their circumspection. Th~ autharJtv of the FT(? to attack unfair trade ge~ctic~ ~hould be maintained i~t it~ presen~ form; al~era~io~ or repeal would o~[y harm the t)~lb]ic ant| our competitive system. Si~erely, Associate Professor of L~w. Uni~e~ity of¸ Wi~con~i~ ASSO~IAT~()~ (IF ~ATIfIN~I, AI)VEI~TISEII~, ~N(:~ D'a~h~+~gt~n, D.C., February 6~ 1980. tIom W~D~LL H. Fore>. CS. Sen~zte, Wosh~ngton~ D.C. DI~R S~-,,ATI)R F,~RI) : I am pl e~l~ell l]lilt y~u. throll~h x-onr (3on~l~inel. Subcommittee. have decided ~o h/~es~igat(~ tho FTC's autho:Ry to regulate ~llnfair" adve]'t}sln~. "iVe have alreadV. throllgh oIir ~'eneral c~)unsel flied Ii fol'mal tu/emenr ~n the isaac ~hh )'~/tl ~ntm(m~mittee. Howewr. l wmdd like to t,~l;e this opportunity to offer my ~wn "com- monsense" views o]~ the subject. (2:---"-*

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~}~hen advertiser s attempt to se]I prodnef~, they choose certain prod ~et eh~araete~isties to highlight. 'l'h~se characteristics, however, are often not th~ one~ tl~t the FTC feels sl~oultl be hlghllghted. When t]~is l~ppel~s~ the FTC s~ys the ad is deeeptlve or m~f~ir by olniss~on of m~t~Linl fa~t. In reviewlng the ~etions of the FTC over th~ past few 3,ears we~ eonelnde~l that beertuse of ~he vagueness ~3f the term ~ur~fMr ~et~ and, t~raetices,~ the ~geney l~s become guilty of tb.o~ sires which i~ seeks to eradicate. The s-~me z,g~r~es~ wllieh st~ttes fh~t l~usiztess should be forced ~ substantiate el~im~ nqftde in adwrti~ing h~ bsen ~eti~'ely promotin~ itself, without ~00nefit of substanti~tti~n~ ~s the savior of th~ peopl~a s~a~,ior with the wisdom and the power to determine wlm~ is ~fair~' ~d "unfair" for the American people. Tile FTC h~s d~eeot~vely implied that its ~als ~re tlle. goals of the goblie al, l~rge • nd l~as, without sldtabl~ rliselosm'es, taken on the tasks of engine~r- ing society in its own imago. The FTC tl~s been unable t~ ade~tu~tely interpret the term ~ur~f,~ir . . . ~tet~ or pr~tetiee~.~ Th~ term "unfair ~ets ~nd practices~' is tr~ublesom~ because of its w~guene~. Co~gr~!s~ lu~d t mnlde d~!fi ning it. Fi)r thi~ re~tsnn~ Ct~n g r e~.~ chose t~ delegate its pewer t~ preserib~ unf-air or deceptive ~ets or practices to the Commission. l~nfort~nat~ls~, th~ Commlssion also had trouble dofin~ng '~fair,~¸ and so~ has strayed from its Congression- ~llT-intended task. The A.N.A. legM brief, flied with th~ C~nsum0r ~ubeommlttee ~n Jam~ary ~ 1981% l~t~ the rea~n~ tile FTC should be restricted from interpreting "n~fair.'~ We ~vould like t~ offer our opinion as t~ why the FTC eh~s~ to t~y. We h~pe tha~ by expl~r~ the ~h~t ~nd the ~why~' of tbe iss~e. ~o~ will rem:h the convolution that ~h~ F]?C does filet need tilt, p~*~-er ~l) [irorrtt/l~R~ rlll~s ba~ed ttDon ~;u/lfaJr . . . ~tets lit pl.~t~[ ~!s.~ For the past several years, the FTC h~s £ound itself with fewer ~nd fewer m~lrketDl~ee atlll~ee, to pllrsue. Commi.~sioner Pitof~ky sp~ke ~n t]~is issue last year at the Pari~ (~onferenee. ~... the sharp d~eline in gowt-nment easerby e,~se err fore~llll~n~ tl~ sl)ltl~, e,~t~nt h}ls o(,t.llrred }lel!~lll~e tlJlre~;trRi/l~d f~nd 13~terl fr~udu]ent ad~ertisi~ practices of 10 ~nd 1~ ~ears ago h~'ee virtu- ally disappeared a~ a result ~f voltmt~r~ restraint b~, ad~r~i~er~ ~tnd their a~erteie~ . . .~ Between I~61 and 19~. the number of FTC ¢o~se~t deere~ fell frr}m ~7~ to ~. ~ot eoineidertta]l~,'~ 19g~ w~ tbe year the C~mmi~iort spearh~lded ft rle~ toroee/lllre e,q]lec] the tr~lde l.~.~llfttioll rid0. j~_s you know. h~ /975. Congl~s passed the .~Iagnnson-Mo~s Act which go,re the ~T~ the power ~o proceed ~v~th these rules whieh have the power" ~f Inw ~nd can re gol~t e srt ertti t'e industry. ~.~,Tmt h~l~ lhl~i~i~em,d ~l~ the FT(! sh~ ~h~tt time is hi~ttsry Instead of u~rtg th~ power "~ested i~ it by )dagnu~n 3d~ss t~ im ~r~ve ~he ]i~.e~ of ~i~ e~nf.utller, the ITTC /1,~8 ~,/llftnd~r0d thi$ iPo~vet• oft ~t seri0s /l~ ex ~11~i~e. iilllrJ?., eonepil-t,d ,qnd imp/)~ible to enfor~o rll]e~. The chi[llre]/~s l'Ule ha~ ~o f~r ~'os~ the ~lxl/aye r~ more than a milli/m dollars ~ut of rl~ F']'(~ I/udffet al~/ne. That ttde sef~ as its ~oal (,~ e~'ord- ing to the FqJC~s "~978 Prc~gr~rr~ Budget ,It~tifl~atio~ to the Congress)

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21D to "reduce the number of poor and/or irrational product choices by children." By their own admission, then, the FTC i*s not eoncerne~l with preventing deception, but in altering children s product choices into some FTC-endorsed diet scheme. We contend, therefore, Lhat trade regnllati*m rules have become ve- hicles to lake tbe PTC farther away from its original mandate ant] into areas of social enginee~ mg and that the situation wmdd only be worsened by allowing tbat agency to rcguh~tc an (ntire indnsttT on the belief that m pattie.hit trade practice may be "unfair," Deceptive, .mtTathfnl arlveltisin~ ~s nev(;e sanelloned by ~espon~i ble companies. The FTC realizes that bnsinez~¢ baxe lx.en successful in1)lreventing this type o f adver tieing. Per baps tc~ success tub In a speech last year before the anmla] meeting of tile National Ad vertising Review Board. tbe industr3°s self reglfiato%" mechanism, FTC Chair.nan Michael Pertschuk s~dd : "Day in and rtlty o.t at lhe FTC ~e ring away in pulmlit of the ideal marketplace: entrepreneurial, immvative, .nfettered and above all competitive. But we also have competkor~ m~d in one ;narketplace we're taking a beating: the competiflon to c]e~n n ~ shoddy and de- captive advertising. Tim .'gARB has shamelessly cornered the market. You've skimmed tile cream of deceptive ads, outl~ageous frauds and misrepresentations. Thanks to you, tize latter day an<esters of the silver t~mg.e snake ei] put'vey~sr has been t~nglle tied... It's n~ tha6 we ve bad t~go hJoking fq~t' wink. but .~(m vt ..... left us tie tou~,bes~ ones: subtle fvrnls of deception, half truths unsubstantiated claims and the mine field of psvchologb:a] manipulation. At the Paris Confere~*ce, Commissioner Pitof~ky ~tated : aI believe it's fail' to say tilat most American re~ll]~tor~ bel eve t tbe overwhehning ml, jolity of agxertising is truthful and fair. They do accept that market piessures will stbnnlate diseiosure of key prod- uct information most of tl~e time. That does nc~ mean the FTC is or is likely to be less active, hnt rather that more of its a~tention will be dlzoete~ toward industrywide p~aieets to elimhmte re~tr~tints in ad- vertifiing or veqllile (]isch)sure of hl~rnlation ill thosl! rare hl~aln!es in ~hlch ~he market is h~adequate. Time will tell whether this ebange in emphais is justified." The i$slle of "lln f airness" is a longh one. (7ongress has been hard t?tl[ to define it. And, as we have seen, the FTC had noL been able to a~te ~uatel) intet])ret it. Don't allo~ the FTC to elray fm'iber from the atent~of Collgress and the interest of the American people by allow- i~}g "fair" and ~unfair" to be defined aeeordlng to the philosophleal viewpoints of the current FTC cbai:mm. The FTC already has the power to deal with Iintruthfu/, deeei)tb.e advertising Oilier t'e~ulu for;' ~)gl, ncies eurzentlv exist wi£fi tile llm~r Io deal v, itb the snfety and efficacy ef )i'oducts. TiiaFs all that i~ noege(h Advertisers she.hi retaill ~]le ~' ght to dis~eln hate. ant the pll 1] e ~holl # reta n t 1c I g It to recei:¢e~ trut]lf.I I(lvel tisill~ Ill sll fe~ legli] products. Sincerely, ~ X',IUEL PHrT~3t, ~%rtfo~" Vice P~ l,sid~nt ~V

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201 ZI~I]~ER-~[CC [,A~k[Ey-L~WI81 Louisville, Ky., Feb~uam/18,1980. Hon. WE.~'D~LL H. FORD, Ckairmo~ Subvommittee ~ O~Tr~,er~ of g]~ Uon~ittee of Oo~n- meroe, Science and Tra.~portation~ U.& ~S'e~ate, IVa~glny~o~, /9.0. DEAR SEX.~TOR FO~D: This letter is senC t~ you to expte~s support, for Section 7 of S. 1991~ the Federal Trad,~ Commission Act of 1979) which would dimhiate any FTC authority to zegulate so called "un- fair" advertising through rule-making proceedings. This letter is also sen~ to you to urge you to support addltio.ml leglslatioa that ~ould clearly eliminate any FTO authority to regulate so called "unfair" advertising through adjudicative proceedings. Ziramer 3IcOlaske~-I ewis (ZML) s an advertising agency w tha staff of approximatei), 70 pe~ons at its offices in Louisville, Kentucky. ZML's clients are primarily based in the Ohio Valley region, and its curt, ent annual billings are approxhnately $20 millio~. While Z-ML is pl,aud of its adfievements it is not one of the giants of the national ffdvertismg indus iy~ and ~ts coneern~ abou this legisia ion reflec the prac~ical problems of the small and medium sized hnsb~es~.s who an. its clients. ZML believes that your subc(,nmittee should not forgeb as the FTC often forgets, that American business does not consist only of General Motors, Kellog~os and other companies in the Fortune 500. Similarly, not all ad~eltis ng is created and paeed by advert sing agencies of the size o~ 3. Waiter Thompson and Young & Rub[cam. ~[an ~ agent:k ~ the size of ZMT,, and the clients nf such ageneies, must also bear the brnnt of the FTC's excessive zeal. • c¢ . . ZML a~rees wholeheartedly ~ ~th the fact that Seetmn * of S. 1991 would co tlnue to allow the FTC to prohibit false or decepti e~ corn mercial advertising by male-making proceedings. ZML takes great pride in the advertisements it creates, and ZML would never know- ingly make f~lse or geeeptiw ~taternenis in adwwtisinff or continue to do business with a c?lient that wanted Z~fL {i) create fa]~ or ~]eceptlve adv~rfislng. ZML agrees with this portion ~f the law on moral and ethical grounds; furthermore, Z3IL has found that it has nc practical dlf~eultv in ¢omplvlng with exlstlng prohibitions agalnst "false or deceptive" advertising: The truth or faIsity of every statement in an ~dvertlsement can be tested by c~rn ~ari~on ~xith ohieetivelv determina- ble facts. F~r example, an advertising statement that a bank leasing eonlpnnv }ins ~nnnced over ~,2f) million w~rth of bu~ines,s nnd indns- trial equipmellt for hundreds o~ eomDmies in this rezlon s~ne~ 197~ can be determined beyond a reasonabIe donbr to be either true or false. However• Z3IL has no coml~arahle way of determining in advance ~hether the statements in this or any other advertisement ar~ "fMr" "lhc. Oxford h]nff/ish ])ic:tinnarv, the most authoritative sonree of which Z)fff~ i~ aware, ~ives the prilnar5 meaning elf "nnfair" as "not fair or bemltiftdY Z3IL assunms that this meaning is not what the FT(! l.,s in mind when it reviews advertising. The same dk'tion~rV glve~ the secondary meaning of hmfair" as %vleked, evll or bad, ndt ~alr or oqnkab]e. ~nh~st." 17nfortunate]v, it is these highly suhfective word~ thnt the FTC appears to have i~ mind when it co'tends, as it g t¢ 00 I/

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2O2 has contended recently, that certai~ advertlsm~nts ar~ "unfair." Not only does ZML hays ~reat diificulty in attemptin~g to apply these sub- jective terms to the content of advertising, but Zh~L~ ~e~ermination nf "fairness" may differ greatly f]~m that of an FTC staff member~ just ~s airy such d~termin~ttion m~y wry ~rom str*ff member tn st~ff m~mber or from ttc]mildsLratdon to ttdminis~[.~,~ion. O/it so~!iety in/s lon~since p~ssed the time, if it ever existed~ widen general agreement could be reached on what is "wicked, evil or bad." The same is true a~ to what is "uajust" or "n~t ¢qukablc." Only witldn the ¢onfine~ of the FTC does there appear t~ be complete confidenc~ as to what is Rnd is not ~qln fail~~ For examplc~ the activist ~t~ff and membet~ cf tl~ FTC, unlikc~ ZMJ2~ haw lind no digicnlty in d~dding that the adve~ising of pre sw~et~ i/ec~ breo, k~as% cere~d~ al3d c~nily ~o ~hi]dr~!rl is ~lln f~tir~ t~!l~l~e slmh ttdvl~rt]sing lilts no~ di~l~ tlutt :,u~ar can i!~r u~ dental cavities. The FTC apparently does net contend~ and ZML sees no basis on which it could coatend, that it is "false or deceptive" t~ advertise that pre-sweetened breakfast cereals and candy are tasty, crunchy and possess the other ~m'ib~tes ascribed to them in tele~'ision advertising. The FTC apparently does not contend, and ZML sees no basis on which it could contend that these advertasement~ fail t~ disclose a hidden product defect or d~n~er known to the m~nuf~teture~ bt~t not to e~ot/sum~l~, b~q~Inl~ i~ i~ ~nc!rll]]y l~lll)l~l ~veTi itmon,~ chi]d[~!n thai stl~ar ( ~-~dlllbilled with poor detlta] pl~cBice~,) i~tn ~tll:~t! iIellL~,l C&/dies, Furthermore, it seems to be well rec~ized that consumption of pr~- sweetened breakfast ~reals~ standing alone, is not a majer c~use of deatal cavities. Pl~blems arise only whea there is excessive consump- tlOl~ or when theFe are o~h~r sources of ~llbSt artdai $t1 ¢~ p C~ilS Lllllpt~on by th0 sam~ perslln Newrtheh~ the FTC clmtl!nlIs t]l~t the~e ILdver tisements are "unfair." Z.~IL str~gly suspects ~h~t ~m FTC does aot real]y believe that advertisements for these prodac~s are "unfair" in ~ny sense. What the IrTC really believes~ ZML s]]spects, is that tile products ~hemsclves are "wicked~ evil or bad" and shou]d not be made a~al]~b/e to cllildren, ZML does not deny that pre-sweetened breakfast ce]~ea]s and candy raise issues o~ public policy that could be, and perhaps ~ll~uld be, ad dressed h~" Congress. Perhaps thep~blic SCllcols should provide addi- tinnal informa~lon on nutrition and dent~l heMth. Perha is additinnal legislation or expenditures of federa] ftmdn in the areas of food aJld den~a] heMth are advisable. ZML~s )oinf i~ th~t such steps are prop ery withi~ the jnrisdiet]on of Con~ress itself ~nd other ]x~E~datory agencies~ nob tile FTC. Tile cont~x}versg, over pre sweelc.ned eel~al£ and candy invol~'es nlany ~ssue~, but it does not involve false and vie ceptlve advert isin~, ZM~ does not. at least at the prese~ time~ handle ad*'ertlsin~z for )re-sweetened cere.'llg and ¢*~Ildv. It (lees. hov~e~er, hai~dle ad~'ertisina ~or ~ myriad of ~thcr flr~lll(t~ a~£~ ~er~ice~. ZML ie quite concerned when ~ FTC Colmnin~ionel wlites, as FTC CoulnPssioner Pitofsky has I~ ritten in the [lc,~.ard Late Ire ,few. th~lt a noadeceptive advertise- ment ~}muld bl! regarded as "u~fair:' if it fails to ~ provide con~umer~ wit]~ information lleCe~sarv to make clear c]]o]ce~ ~LlnOnff i'oll]petlIl~ plX)ductsd: There is scarce]y a produc~ or sel vice which Z3IL advec- t¢ {k.,~--,m..9

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iq. 203 tises whiei~ is not in competitioa with Iflher produet~ or services. ZI%fL believes that its role is to eMI attention to the advantages of its clients' l}l'o£hlct8 ~Dd ~rvices~ SO a~ to a~lS~ cons/llnei~ in mal~ill~ infoi'~l]ed deeislons. However. Z~IL does not belleve fllat, its role is~ m should b% toput a a ,e.~singi~la Cc~umdr. ~ep~tsW. pe fmma~, whch COITl~MtlOS tilt! S )O31~C~[IOnS ~nd ~rlCeS ~nd other ~ ~rlbn ~ Of our clients products mid s~m'i~s with those ~f competitors. W]le*~ ZML ad vet~,ises ~ha~ ~ ~nk leasing company lm~ handled $30 million in leasing tran~ctlons for hundreds of con~pKldeS hz this region since 1974~ c~n ZML be sm~ thst this adverCise~ent is not "un- fair" un]ess it discloses the amount and scope of leash~g activities ol the competitors of ZML's client t if so wmfld Z~IL be r~quired to di~ cI~ such facts on y w th De,spee~ to o~her b~nk leasinG companies m" ~sa to nonba~k leasing cmnpanies ~nd only with respect to e~rnpanies based in the Ohio "~ Mley ~ t~a or also to n~tional comp.nics ~ Can Z3IL be sure tim t s ave • se ~n~ is not "unfMr" m~less i~ discloses the different t~x a~tributes of leasing s~ opposed to purchasing! If so~ would ZML be required to obtain an attorney% tax ~pinion m sub stantiat~ saD, such st~wments? Can ZML be sm~ that this advertise- merit is ~mt "unfair" if it does not disclose that equipment leasing may not be lhe h~st business and financiM practice in ~Ii circmns~nc~s ~nd does not disclose the a]tenmfives ts u, .ipm~nt Ieasin~ If so would ZML be reqmred, to h~re an accountant ,t~ [,rupare a cash flow analy~lS Of ~, i It t~rna~lV~S in order tO sub~llblaLI5 Rliy ~-uch ~L~*~elnellt~ ~el- h~ ps, if the FTC% view of advertising, erer in4x Mls... advertisingagen- cles will. ItO Jollier ~ { K~.h~ed to wt~l~t~ advei~ls~g ~tlld tllllst rel~, oil the advlc~ ~nd tlsslStallc~ of ]a~lyel~% almount~n s g~d~ a!be'ge a ~ bu reaucr~t s, in order m pmvlde enough in formstihn for "clear choices." Pcrhaps~ if the FTC% ~ie, w ever prevai]s, the FTC will decide that some choices are so "clear~ that ee,#ain roducts should not be ~dver- rise& In f~cc, is this no~ what the FT~ has apparently decided al- read)- ~bou~ pre-sweet~ned c,~roa]~ Imd eaudy ! On~ .... migh~ respond to this hyp~othetle~] ~rg~m~m~t. ~onc~rnin~= ~n eqtllpnlent lea.sing advertlsemellt by slating that businessmen are less likely to be misled by this ~ype of advertis-ment th~n a~ children by adv~r~ib~em~ilt~ for pl'~ swe~tei~ed cereals slid c~lldy. Howev~I'~ ~ doubt if t}m adlantages I,nd disadvantages of equipment leasing are lnm~ wideJv, known amon~ all bnMnessmen than J~ the fact known srnong childc~n da,~t sngar causes demal cavities. There is, moreover, ~n0ther ana]o~ here. even though the two sltnaions may not seem comparable at lirst blush. In both skuations, le~thhnato que~thms of le~islatiw policy e~m b~ raised. Perhaps ~ tax code ~hich encourages equipment ]easin~ instead of equipment purei~ing by buslnes~s is ns% in the ~c~st in~rest~ of our society. In any evenL perhaps banks should not be permitted to enga.-e in this /ntsineas. if so, these i~.~ucs should be dealt with by Con~le*.s .'rod tl/e valioli~ :e~u/atory a/_x.ncies ~11~o have jurisdictiolt mer the merits of this problem. Ye~, we can foresee the <l~v if fi~e FTC~s exee s]ro zeal] is not cheek'ed, vhen The FTC~s residorlt econ- !INdSI~ ilta~ H!eOlllltl~lnl IN []l[ttcl~ OIl a ii id~ Itit.ie[i Of hll~]ilt~5~ i}Ya/!- rices hv prescribing "m/fah"' adrertisin~ in casos in which tho merits c~f the m'oblem at, e entirely outside the imisdiction of the FI('. 'rhi~ i~ p~dselv what the FTC has done in the chiklren's =dvertisin~ ~re~

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2O6 committee as mere sour ge?pes from business lobbyists. In fact the substantive cha!~ges proposed to be made in the law by the bill as it came out of the bubcommittee were few and modest and their preserved all of FTC's traditional authority ever consumer fraud anddecept on. Typ cal of the mlsgel~cptLun by the Conm~ssion was the charge that removal of nn f~ltIilOs~ f roll1 Sect lOr1,5 of the .A.~t would eina~,cu [n~o the FTC's ,~d subst antiat hm p rogeam. The truth is that pro~lr~m is carried out trader Sections 6 9 and 1~ of the Act, the infol~mati'on and re err- Lug Sect ons, and not under Section 5. This program requires a~er- tism~ to submit to FTC on request data coneermng substantiatLun for advertisLug c]abns identified in the requests, and it provides for pub- licizing the informat!on so obtaLued. Legislation which w0u]d steer the Commission awa3 from regulation of non deceptive advertising would not llmit FTCs auihority to ~ntinue the ad substantiation program. i should like to thank you and the membel~ of the C~nHumer Sub* committee for the constlue~ive way in which you have approached the task tff legislative oversight in this important area of commereid speech. In its recent pronouncements nn First Amendment protection for adver rising, the Supreme Court hns recognized a dangyr n ~o ,era- meat regulation which ~,~e~ l~vond fidsc, d~eepttve or misleading ad- vertising~ ai~d has said that the consumer's interest in the free flow of commercial ~nformatLun "may be as keen, if not kemmr by ~at', than his nterest, in the day's nm~t. . .ur~ent.p°Iitical. debate". The Snb~om m ttee ~ cn firm g~und In this inquiry and Is dealing wl i a ~%anda- mental freedom, nothing less than uncensored speech. Sincerely, V;oe Proficient and Ge~'a~ (]mz~t.~el. Enclosure. COIT?¢Sl~L~ ~ROWN ~ WILrAA~ISON TOI~A[3CO CORPOI~AT~0]qI L01:lS We should like first t¢~ commend the Commerce~ Science and Trans- portation Committee and its Consumer Suhewnmittee fvr the deter- ruination and persistence in the face of unfair and deceptive criticism with which they have c~nsistentlv presented a balanced and c(mstiuc- tire approach t~ their task of legislative oversight, The bill which the Commerce Committee adopted hv a vnt~ of 16 t~ Ih Senate 1991, was in all respects an excellent one. ~ettln~" ~rttl appropriate nnd ezrof]dly crafted remedies for the rulemaklng excesses of the Federal Trade Commission ~hich h,~d been identified in ~he earIier beariags. I ]lope tha~ the Congl~s will enact and the President w~l] sign that men llre into law. We are glad that the Consumer Subeommlttee has decbled to bold further oversi.o'ht hl!aring~ nnd ~vatt, flll f~r the oppoltl]nity ro ~]ve our ~ lows on the issues raised in the cnrren~ debate, oxer tile "unfair'- hess" doctrine ns interpreted and ~pplied by the FTC, And we }rope that the FTC, itself~ will this ~ime make a greater contribution to the t

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207 debate. During the earlier hearings, the Chairman of FTC related pitiful portra>als and spoke of "the viaces and the pain of l~a] peo- ple who feel they have been victimized" by unscrupulous businessmen, but avoided serious discussion of the issues raised by the Sub- committee..~1em hers ol the ~ubconmfittee raised thoughtful questions about the extreme bieadth and vaglleuess of the statutory term "un- fair" and the suitabditv of using such an indefinable and therefore, fimit le~s term in deisga~ing legislative authority to an administrative agency. But Chairman Pertschuk's response was to cite the Washing- ton Post for the proposition that this is all sour grapes from iadus- t,-ics that are begiamng to feel the bite of FTCs regulations. O~liy Commissioner Dixon acknowledged caadidly to tim Sut~-nmmis{~e th at ia the Federal Trade Canmli~sian Act the Congress had broadly dele- gated to the FTC virtually all the legislative authority it possessed in the field, and that it was right and prope~ f(~r the Congress to con- cera itself over the question of wbctber or not i5 wan~ed tbe agency to bavo sHch brood )ower. You know', Commiss oner D xon sad to this Subcomndtfee last October, "tbe Commission has the very powers of the Congress. You delegated that when yvu created this agency." The Corffmisslon's ex- pansxve concept of "unfairne~" m~kes Mr. Dixon's statement quite litera]]y accurate. The Commission's theory of it~ own power {o redress all tbe inequities it pmceives in the stiueture of our society and eeon- omy--sneff as the "imbalance" of w~alrh and ~phistiaation t~.Lweem corporate se]ler~ and individual buyers--would render superfluvus all years.the consumer-The P"r~r°tectiancouid do itle~lone,iSiati°n enacted by Congress ~n recent The concern that th~ Commission is acting beyond its l~wful pew ers is not simply the eompluint of special L~terest grottps who arc begdnning to "feel tbe bite" of PTC~s rules. It is tbe conclusion of many thoughtful and disint~ra~ted nb~erver~, For example, the American Cbdl Liia'rfies fJnlon protested a~ainsf the Commission s assertion of au~horit~ to ~flate non-deceptive ad- ver tiaing in it~ proposed rule or~ child~n's televisio~ advertising. The special project report of the Admlnistrative Conference of the United States described tfi~ Commission's evolving "unfairness" doc- trine a~ r~n extremely plastic, open-ended set ~f tlmories, ' ~ng iden- tiffed its fireadth and novelty as a critical factor contributing to the problems with Commission rulemaking arid requiring substantive change in the agency's authorizing legislation : If ~he Commission remains free to frame broad and novel theories to support il~ rules, to decid~ issues ot~ a best estimate basis fronl arl ineoilelusive recm'd hlld to rely on a wide ~a- fiery of evidence to support its eenelnsions, then the ploe~ dural safeguards incorporated ~n tbe statute may seem fairly illusory .... In short, procedural safeguards may not fie an ~ldequll~l~ substitute for gllbsta~ltive standards in control- ling agency diseret ion. and file ht~k o [ s~ andards ma~ corltrib- ute to procedural difficulties. On tll/~ other hand, sllpliorroi~ of tile Commission have been heard to say tha~ Congress does violence to ~he rule of law when it steps in G~ I'¢

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~08 before the Commission completes the entire ey'ele in promulgating an inilustry-wide r~]e. Specifically it is said that like masks at Halloween, the initial proposals fron/ the staff may he fri~ldm ing, but tile final outcome will not t)c henri3 so bJLd. At the sllrn~ time this i~rgalment is m~de~ th~ Cominissinn ex]fibits at least a tmnporaJT pulling back from some of its rn~st obvious abuses of power. Foe example, during the Senate debat~ on S, 1991 the FTC announced it would restrict the reach of the automobile subpoenas. C}lrys]er had estimated that it would cost $10 million to comply with the subpoena issued last .fuly by the FTC. GM had to spend $7(~I,000 just to determine what its cos~ of compliance wm0d be, aeeorilingto a federaI district udge in Micbi g~n. The judgo went on to tktd theft G~f's ultimate eo~t ol (:ompli~mee could reach $16 million. One must ask whet|mr Om overall r~eoril *if the Comnfi~itm's per (m'manet~ will justify relict/ reliance (In the Pbllhlwcen (hlctrinl. Is iL fair to ask the Congiess and. the counu3' to wait and see whetker FTC has a trick or a n'e~t in mind~ The Chairman of FTC ailnd-tteil dm'- ing the oversigl~t hearings last October that "the overzealousness of some of the Statt in some of ti~ese proceedings had eau~d, ~nil justi- fiably caused, a groat ileal o~ the animosity anil the anger and outrage of some of the mdustrk,s involved", He m~ntioneil particularly the vocational sch(ml proceeding, tim he~llng ~ild premeedmg amJ tile fu neral proceeding. The conduct of the ~ntitrust investigations of the automobile con> l)~nies anil of the major oil companies evinces the same excessive zeal which undermined Some of the Commission's r tilcmaklng work. In one FTC office ~e see people concluding that the funn~ of world- wide automobile production inevitably dictates g~ter concentration because of the very }~eavv inrestment needed to make fuel efficient, Iton-pollllting and Prasb proof ears. [n another office of the same Corn mission, we tind peoph hell bm~t ,m fi~ding a way to in~ak up O~e Ia~ge U.S. automobile companies. Meanwhile, Toyota and Nissart con- tlnue to ship in more ~uld R~ol.e cain mali~ in d~pallI whe l.e tile govern- ment is a principal all)' rath.,r than ~ princil~l adversary of industry. In the oil company im'estigation, Texaco found that it had to en- cumber 700 people working 70fl0 rnandmurs at a cost (ff $~00,00~3 just to determine wbac its cost of compliance with the FTC subpoena ~oald be. if i~ were enfmced. Exxon said it would cost $150 million and 6,752 , , <g man-years for t~ to comply w~th the FTC s subpoena. In ~ classic ap- plication of tile IIalloween dcK'trine, tile FTC staff' eliminated some of the frightening pails of il~ suhlmem~ and pr~senieil a 1"200 age subpoelm~ down from 1800 pages. The FTC's Adminlstrative ~aw Judge conchnled th,~t the subpoena sl~oulil not be i~ued because it WOllld prodli,ze ~;~iI OV(l.whelnling and unreasonable burde~l and aft unmanageable ease." The ztaff appealed tiffs decision to the fu]] Corn mission which took 9 months but was no~ uble to give birIh to a ruling. Finally the slaff wit h,h'ew its a ) ~eal and caused a much more ]irrdt ed subpoena to be issued. P~oduetiol~ of matvrial s now imderwav. It is ironic to note that the Corot of AppeMs for the Ninth Circuit ~sked a d str ot eo~ o, ly as 3lag to otermine whether the F'rc act ally had any ; rea ~m rn believt" t}mt the < Olnldaint a,4,ins~ tile oil (ore pa Ilies WaS j/lsti~ell ill the ]~r-,t p[act! back in 1U73 when the Exxon case was started ill s~tch a hut r y. t¢ ¢/I 61.~'IIm'l

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,L 2@9 Turning precisely to tim iecord of tile Commission in promulgating final trade regulation rules~ the FTC% batting averag~ in the courts on completed rulemaking would indicate tha~ something more than Congressional patience is required. Two months ago, the United States Court of Appeals for the Second Circuit set aside the Con mission's Trade Regulation Rule on Pro- plietary Voc~t,bmal and Home Study Schools as unlawful ~md in ex- cess of its authority. Even tim dissenting udg~, who argnled that the Rule was lawful under the FTC's very broad grant of legislative power: recognized the legitimate fiucstinns and fears such power raises : The potltioners' major assault on the Rule . . . is that it ushers in a new era of N.R.X.-ty )e industry-wide codes. That fear s not ground ess. Whet ~cr codes of the type exemp ified by the R~Ie challenged in this case are a somld way toptroteet eonsun~els flora misleading trade practices and whether the resulting burden of regulation ~, worth the benefits are policy issues for the Congress. When Congress gives an agency sub: stan¢ivo rule making authority7 it accortls it a large mea.~ttre of legisia ~ls'e power. I t is the resp~m~ility of Coheiress to de. be~w~ine how ~iaely that p~wer is bei~vj ~sed. (/dmpha~is supplied.) More recently, the United St~ta~ Com't of Appeals for the District of Columbia Circuit set aside all but ¢ne section of the Commisslon~s Trade Regulation Rule on Advertising of Ophthainlle Goods and Set'v- ices and remanded the Rule to the Lommisslon: questioning whether the Commission i~ad not exceeded its authority tl: pre-einpt slate laws and gratuitou~]y intruded on the exercise of the police power of thB staves. It found insubstantiM evidence to suppoVc the FTC's conclu- sion as to the need for the rule in light of t~cent Sup~em~ Court de- cisions striking down state prohibitions of professional advertising. 3"he Commission's Orwellian determination to regulate for the sake of regulation was higldighted by the courtrs d~:usmon of the agency's approach to the subject of state regulations. The Virginia State Board of Examiners in Optometry, in response to the Supreme Court's de- cision in the Virginla P~a~n*tcy case, had adopted revi~ed advertising rules which imposed numerous affirmative disclosure rules oP, adver- tisers. The Commission Staff audited these tulles, the m~st restrictive e~taIIt aIIlong tbe states, and concluded : I~ Virginia, even with the rigorous dlsclom~re requirements some price advertising, (sic) has occurred. 3lany of the bene- ficial attrihmes of advertislx~ have been exhibited by these advertisenlent~. Offers of multiple pairs of eej'eglssses at re. duce~I rttt(!s, offers of prOdllet ffl]al~ntees, 2211d Vi~orous price ~'onll)eLitiort have O~cLIrred in the advertisements. Thus, st,~fl cannot eoltehldf% based on tile available eridenee, (hat even tb~ nl(Ist ri~orol] ~ di~closnrl~ lsw eiltlet ed to date hits resulted ill snbst antial injury re consumers. Nevelthele~s. the Commission udopted the seaff~s recvmmendation for a fide barrin~ ~ucb state i'cffula~ions beCall~e~ OleOleticallv, carried "to the logical extreme, disclosure requirements could be use~i to effec- tively ple*ent all advertising. ]h~s blatant lack of restraint--acting g

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k &0~900~9

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211 cult to think of any cam in which the Commission hrm acted ~nder the present law in which it could not have acted with the same effectiveness if tha law had been worded as i have suggestedi We belleve that raider any statutory standard, there is far greater potential for harm m FT(! rulernakl"ng under the present terms of section 18 of the Federal Trade Commi~ion Act than in case-by-e~se adjudication. Since th~ Act was passed in 1914 it has been recoguized on all sides that a legislative deflnitinn of unfair methods of competi- tion and unfair ordeceptiw acts or pr~ctiee~ was neither wise nor ~easible. . Yet, in. the. _Magnuso. .:~o~q• .ket Con. gress ~,~ave FTC p*,e msely such Iegsslatlve power to define nnfan" coluiuch I b~lieve the Congress actedtoo has,fly. I~ aceeptad too uncritically the FTC's rep rc~cntadons that industD,-wld~ rulemaking power was needed becau~ it w~ more effective and equitable than ca~-by-cnse detern~hmtlon ~'hich?~p lied to only mm eompan$ at a time ~utting i~ at a competh lV£* disadvant~.ge wltil respecL to ItS corthpetltOrs who were DOt sub~ jeet to th~ re.~ulting cesta-and desist order and who could continue to pursus the same unfair or deceptive practices. This is misleaduig. Before Magnusoa-~iess the C~ngress had addressad and remedied th,s very pmble*n, adding a provision to section 5 of the Federal Trade Commission Act wlfich hnposad civil )can]ties on any pelion who en- gaged n any act or practice with respect to which the FTC had i~ued a cea~ ~*d-desi~t ordar, even though that )etuon was not sl~b'ect to the ordor~ so long as h~ knew ~t~out 1~. Iil o let words~ Co~gre~ lad already provided industry-wide effect for individual ce~-~nd desist orders. Furthermore the Congress had given FTC t&e authority to go to ¢our~ to obtain an immedinte injunction against an)" person believed to be violating the Act pending completion of FTC's adjudication o~ the ease. Thu~, Congress had passed legislation to remedy the shortcomings of the cease-and-desis~ process before ~fagnuson-Moss, The important thing added to ~lC's arsenal by Ma~mson-Moss was not the power which FTC already had to define unfair practices with industy-wlde effectiveness but the~p(ower to prescribe industry-wide remedies and dictate mandatory codes rd uniform business conduct ~or all m~mbers of an industry. This unprecedented power was tucked away in a subsection of Mag- nusom~foss, Section 18In) (1) (B) "of the Federal Trade Commission Act. which says: "Rules under this subparagraph may include re- quirements prescribed for the purpese of prevenBng such acts or practices." This is the pm0vlsion which Judge Newman of the Second Circuit Cour~ of Appeals aelmow]edged "ushers in a new era el N.R.A.-type indu~ry-wlde codes." It enables the Commission unfairly to sentence businessmen whose practices have been honest and fair te the same penance as those whose practices have been unlawfub The result is like a curfew which confines tim entir~ community bet!ailse of the n~isbe= hadior of a ~ew. This was illustrated in the vocatlona]-schoo] rule which has now been set aside by the Cou~t of Appeals; it required all schools, regard- less of their eardi]m~nt practices, to make tuition r~fun~ on a ~rict

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212 pro rata basis to all students dropping out before completing the ~o11~. T]I~ ruts was ado|)l~ed becau8~ seine 8drools indiscriminately recruited ~uld enrolled students wire were unsuited for their courses in order to profit from a p~dictably high drop-out rate. tIowever, other schools did not engage in such practices and they are unfairly penal- ized by pro rata refumds which do not reflect the substantial costs tha~ are fixed a~ the time of enrollment. The straigh~-jacket effect of such industry-widr remedies is the un- avoidable product of the code-writing authority whish Congress has given FTC, and it illustrates the nnwisdom of cl~a~ing the power in an admJnistra~ve agency t~ reform the business conduct of an indus- try according to its own concepts of "fairness". Th~ problem would be greatiy reduced if the sentence permitting FTO to impose affirmative requirements were deleted ~rom FTC's rule-making authority. Reme- dies shoa]d be prescribed in individual cases--let the punishment fit th~ crime~not on an indiscriminate industry-~idB basis. The courts have given the FTC very broad discretion to fashion~ appropriate affirmative remedies beyond mere cease-~nd-desist orders th individual eases. If individual hard-tore violators were to persist in evading in- dustry-wide rules defining unfair acts or practlces~ by inventing new wrinkles not literally covered by the rules, FTC retains the ability to proceed agains~ them individually and promdigate striet~ affirma- tive remedies to keep them in line. The FTC's ability to obtain im- mediate injunctive rellef~ pins its ability to impose affirmative require- ments that will place the offender at a disadvantage vis-a-vis his com- petiter~ who are 1]o~, so eneumpered, are potent weapons which diminish the incentive to skirt the rules and should forestall serious pt~blems. The substitute for code wrlting authority does no~ have to be an en- larged hureaucracy--ln effect~ putting a cop on every corner to ¢atsh th~ robbers one by one. Present FTC re~collrce~ are sD.l~¢ient to do a professional job of appl~hending enough dishonest operators to ~erve as an adequate detet~ent. This wouId refiresen~ a deeisicm to rely mor~ on business to contain it~ eutddity and more on eonmlmers to pm~ect th~B]S[:]v~s find l~ss oR the ~overnrllellt ~s all omniscierlt (lli~Ptol" of hnman affalr~. MaEt]al~orT~" eodt!~ O~ IIIISiDeSS Pondlltt which inh]tli{ [nnovfttion aml competition are a burden to all. We believe that if the Cr~mmi~i~n is denied the power to dictate affirmative rules of basines9 behavior on an industry-wide bests a considerable part of the problem associated w th ts expansive coneep~ of %nfairness" wifi be resoh-ed. As a very lllin]mmll~ the Conffr(,ss should r~quire that ai~2,, al~rmative r~qllire- merit reposed by r e ak ng tho dd be supported oil tt~e record by finrfiil~ that sneh reqtdrenlent is necessary to pre~ ent widespread and ~ersisterlt oeellrrolle~ o~ ~ho ii/~air ~r deceptive ac{~ or ~rfletJeos defined te the rule, and that it is tbe ]east ~e~trietive /alternative nvail able te aeeotnplith that pnrpose. l'nder the preselat law, the Commission nlay i[npt~se affirmative or prac~lOeSr w ]2 o stalld~rd of ~ec~s~lty. [iF eVel2 res~iRiD~, to ]ln21t~

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213 its discretionary aathority. This gave FTC virhlM]V a hl~nk check to impose on businessmen its own ideas of Imw their" basiness ottgltt to be conducted, Congress ought to spell nut mole pre~ise ~andards in4isafing how it intends £he ~'TC to ca luLv out its mandate. ~'rA~MEnT OF BRUO~ MUI, OCK~ A.XAL~'ST IN C01~-SlTXt~R A~?JRS1 ECO~,"OMIeS I~VlSI~N~ C0X(~SI01~AL IqE~.RC~I S~VlCE~ LIm~ARy OV CONORXS~ i~U~StA~y The Federal Trade Commission is the principal Federal agency concerned with the regulation of nat}onM advert islam. While tket~ was no specific reference to advertising in the Commission's emddisg l e.~is- lation, its role has been fimly established by ~mmerous court decisiom~ during ~be last sixty years and by subsequent legislation. The 1970s have witnessed the development by tim Commission of ney¢ ~pproaah~s to advertising regulation to ~ugment its efforts to make advertising more truthful and to encourage product information disclosures that will aid consumers in making inh)rmed purchasiilg decisions. "~qmt- ever combination of legal approaches, enforcement priorities, and remedies tile Commission utilizes in the future is likely to be geuuiLded on the foundations of the past. Advertising m, guiatmn ha~ been an evolntionary process. l NTllODrI(3TIC*N Tile Federal Trade Commission ]~TC) has been for many years the princi[}~l Federal agency concerned ~¢ith the regulation of national advert ruing. At its inceptisn and during its early years, however, this r~le was negligible. This is so because the Commission's crumbling legis- lation, the Federal Trade Commission Act, was passed by the Con- gress at the reejuest of President Igoc~ row ~¥ils~n after, a lon~ poll-. tlcal fight arising out of what was then called the trust problem. President "Wilson envisaged an agency of experts to protect business- men from unfair acts by competitors. Consumer protection including protection from unfair and deceptive advertising, was n~t one of the agency's itdtial concerns or zesponsibilities. In the origgnal 1914 Act there was no specific ~ference to advertising or consumer protection. It has been through a slow, evolutionary process that the Commis- sion has assumed its present day importance in the field of advertis- ing regulation. This report examines the Federal Trade Commis- sion's activities in thls ~rea over the last 65 years, p]ackng spiels] emphasis on new devein ~raents during the last'decade. Part I offers an }fistorieal perspective on the growth of the adver- tising industry since the turn of the century, part 1I provides a brief di.~!us io~t of the legis]aii~e frame~m'k within which lhe FTC oper- ates. Despite the increase in vigor of the Commission's regulation of advertising that began nat about a decade age, its legal authority that gnverns this fi(Id has cllan~d relatively little over the ym~rs, The few changes wifieh have taken place have evoh-ed mainly from changes in approaches to enforcement and reinterpretations of exist-

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214 ing legal ~uthorit~y, Part III presents a summary of the tradltion~l approaches that the Commission has employed in carrying oat its mandate to protect consumers and competitors from f else. misleading deeep lye, and unfair adver lsmg. Part IV reviews new dcve]opmen s ~t advertising rcgulatlon during the last decade. HI~TORIGAL pER SpECTIW~ Modem advertising is a key element of marketing for business en- terprise. IC has flourished chiefly in countries and in periods in which private industrial capisaiism has been able to aelfieve rapid and sus- tained economic gl~wth, su )port a considerable degree of leisure activity, and prowcle a high eve of consumpt on for the bu k of the population. Adver rising in some form has operated in societies whose markets have been state-controlled, and to a small degree in even thrived in pre-industrial .kmer!ca and in 18th-ccntury England. In neither form, however~ ,lid it resemble the t~pe of advertising wlfich has developed during recent decades in the Engilsh-speaking natlons~ and particularly in the United States. 19tg eentu~J develop~r~t8 The imiqae importan~ and complexily of the advertising industry in America is clearly the result of a cmmber of factors wbich~ though not individually res~trieted to tbis couatry~ have been combined per- hops more favorably in thi~ country than anywhere else. The indu~- tralization which accompanied anc[ fogowed the Civil War opened th~ way for manufaaturer~ to seek ever btr~x!r markets within which their expanding production could bc~ a¢ ¢ ommod~ted. It was also during this period that many food processing and con sumer-gcods manufacturing films began to advertise thsir brand names, to package goods under their ]abels. a~d generally to induce consumers to look for their products on4.tvre shelves. ~P~viousl3~, mq~st consumer goods sold in retail ~hops were "generic" goods (not differenL]ated according lc~ manufacturer~ften not even identified as to the ...... ~ource) MaJ~y H~lu~ts were ~old from barrels or "am, with R0 e~0rt to in fornl t le eousulner as i) hi! iilanl] ~a[! urer's nalil(!= The last third of the 19tb Century ~as also marked b) a continua tion and broadening of the transportafio~ revolution. ~hleh had al- ready brought to tbe American economy' improved waf_,on highw tys. steam av ga on on inland ~ "aterwa~'~ "oceans,, canal~,~ al~ll the steam r~.lll~d. Indeed as has hcen sald~ the late nlnet eenl' h eentnr~" belonged peculiarly to the laihoad. The construction of railroads absorbed an enormous portion of fl.lnerlcan resources aild ener~_~es. ]be new rail- roads, in turn. were of critical h~portanee in 8tiiilkgatil]~ [!conoy[~Je expansion. They ~ere the cemmercial llfellnes of an indtlstrlallzing society.~ Simultaneously. inn,s media exp~lndcd on a ~eale made possible h5 the cheapness of~newsprlnt, new teelndllHes itl periodical publishing, an increasingly mobile population and the genera 3 po~crfu] pc/it- 1 Sehe~e~ Harcy N.. I~a~e~d G vatte~ an~ ltam)~d U ~aulk~r, American ~conouaie ~Ii~t~r~• iNew ]~ork, I~srper a~d BOW• I97~• D 259

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215 teal influence of publishel~ who were able to obtain legislation favor- able to the wide clrcn]atlon of ~riodicais at low costs to tbemselves. As a consequence of these and other development& estimated expend- itures on advertising--mainly in newspapers mid inagllzint~, but also on billboard~ and balms alongside roads, and in streetcars ~nd railroad stations-~rose from only about $8 million in 1865, to $900 million in 1889 aa~d m alrnos~ $800 milliol~ by the end of the c~ntury.: Pre- World War 1 By the tlm~ the Federal Trade Com:inssicn was established in 191., what has been called the "golden age of advertising" was in • ,, . -¢ . • r . , . fldl swing. I.he ad~ertLmg agency. N ~. A~er. & ~on, whmh w~s f ied n 1869, t ad air ty ob~ ed ~] e fir~ $1,0f)0,0(]O ec roll and launched the lilsL lmLiona] t:ampmdgn --fdlt" Wnee(l~ [Psc/lit using ]let~ s. ~laP~ n]agaziiles ~/id OtlLdO(~r fld vertisiil~. Au Lonmhile adver- timng was already big business. By 1914, the ear makers were spend- l/lg more than $4,000,000 ~ veer to advei~ise The country was alret~dv very nmeh advertising°conscious. The :ktlan~ie Monthly and the Yale Review ran articles on the subject of advertising, declaring it to l~e the [licit #onspk~/lt)us felltHr~ of American life. Concern was ex- pressed abou~ ks effect on the nmmtls~ tastes and health of tile nation? I~deed, during the period between 1900 and World War I~ concern about ~dvertlsiIig was very great. Tbe iilucl~rakersl as they came to be known, unleashed a furious attack on >Irony advertising starting w th patent med cnes. Nex~ came exposos ()f fraudulent gnanc a advertising. In 1910, Cyrus Curtis~ d~e Incur successfld magazble publisher in America. formulated the C.r*i~ Advm~isinz Code. which sot forth in specigc terms the kind of advertising that would not be carried by Curtis Publications. This covered mainly copy "knocking" com- petitors, medical copy claiming a cure~ and advertisements for alcoholic beve~ ages.* What has since l~eoina the Adveirisiuff Federation of America helped launch s campaign ill 1911 for truthful and ethical advertis- ing. The association drew up a code and adopted the slogan "Truth in Advertising, ' Subsequently. Printers~ Ink, the industr.v:s leading magazine, joined the campaign and published the Printers' Ink Statute. which was a model stat( law penMiz~ng ~alse and misleading advertisila~. Working to)g,ether, tbe ma~#;na~ine and the federation I~b- bled the mode] statute through 37 Sta%e legislatures by the time the FTC Xet was enacted. TI~e waryears F~l]cwing lhe first World War. during which time much advei~is- in~ was devoted to tile w,'lr egret, business en nved a marked ex }atl- s[on. A muss inarke~ for Itut0tllobliee ettl)m into beinm and advertls- dl,. ,aw ndllion dollar bll(l~et~ beeonle, fairl), comnmna1))lace, !Vith a ma or ass st from the new nXedlum of radlo~ to al ag~ertlsln~ ex- gchelher *t a]. o 25~ l~.w It W~s In Ad,erl~Mn~ 177~t97~. Compiled by the editors of A~vertislng Age Crate Book~ Chleaeo ~1978L ~ ]10 • Dunn Samuel %Vat,on and Arnold M Barban A], ert~lng; It~ K01e la Mader~ Market. I~ I)rovd~u p¢~ HIngda]o, Ill ~1§7~) p. 32 52

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216 penditures inerea~d from $9,289,000,000 in 1919 to $3d26~000,000 in 19292 Wi~h the Depression~ advertising volume slm~npod some 95%~ falling back to about its 1915 level. During the 1990s there was a searclzh~g examination of the economic system vhat had allowed sueb a debacle as the Depression to happen. One of the frequent targets was adver- tising. Critics attacked not only its ~xcesses and the products it pro- mote¢l, but also the very eoltcept of ~dvei'tising. A parade of bess selling hooks "exposed" advertising as ah unscrupulous exploiter of the consumer. Some of the opposition to advertising was directed toward legis- lative initiatives. The proposed Tugwell bill, for example~ called for compulsory grade labeling of canned goods, drugs, and cosmetics, A much-mod~ified version of the bill was passed in 1938 as the Food~ Drug~ and Cosmetic Act. And~ it wa~ against this backdrop that the ~Whechw Lea Anlendment of 19~8 was passed which substantially broadened the power of the Federal Trade Conmlission to regulate advertising. Advertising began to thrive again with t he ~dvent of World War 1D Unlike World War I. there were few advertisers who abandoned or reduced their advertising efforts for the duration. Despite shortages and scarcity, advertisers deemed it prudent to keep their brand names prominently displayed even when their branded products could not be purchased.7 This approach paid off hi an unprecedented demand for pc~t-war products and services. Modern advertising The period since the close of World 1Var II has wimes~d a number of developments that have been conducive to a dx~anlatlc growth in advertising expenditures. The extraol~tiaarily strong and diversified growth of the post war economy has been, of course, fundame~tah 2"his growth brought with it a rapid and sustained increase in discre- thmary income which paralleled and contrfimt(d to a shift toward pt~nduet differentiathm. For a nm or pmtion of the population, the l)ost-war period nle~Int a dramatic increase th eollsumer choice and a significant blerease in the money available to speml o1~ those choices. Probably the most significant direct contributor to the growth of advertising expenditm~s in this period is television. Printers' Ink made the first computation ()f television ad~,ertising expenditures in 1949; $57 million, By 1977, the figure bad risen to well o~er $7 bill ~rL 'l'he advertising indtl~try today* is large by any stal)datds ar)d con- tinues t¢) D] av ~tn ilno¢ ['t }/nl role in tiLe cecil omy. Advertisin~ expendl lures totaled esti~mted $42.9 billion in 1978 or slightly more than ~% of Gro~ National Product. :End, it is estimated that advertising ex* pendit ures will increase at an annual rate of ~ percent over the 1978-$3 period, r, aehii,g b93 hiPlot~ by 19~3,s L~.I SLA'r IVE ~'RA ~t EWOI~K The F:deml Trade Com¢~i.sslon Act The Federal Trade Commission Act, passed to 191t, providc~ the basic federal audlot'dy for colltlolhng advert/sing ~hl]~. Sp~c±ficsil~ Advertising: ]ta Role In M~darn 5Iar ke[ing p 34 ~(~ohe~ Dow~th A,lver[ising ff~hn Wlie~ & ~(~. N~W Y~rk 1972 p. ~4 US. ~epartlaeot ot Commerce. 979 Ug. al ua • a Ont ook, I). 49

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217 Section 5 of the Act gives the Commission its basic mandate by con- ferring 'jurisdiction over "unfair or deceptive acts or practices in commerce. The legislative history of the Act indicates that tins wss to be an expansive grant of authority : The committee gave careful consideration to the question as to whether it would attempt to define the many and variable unfair practices which prevail in commerce and to forbid their contil, uance or whether it would, by u general declara- tion condemning unfair practices, leave it to the Commlssiotl to determine what practices were unfair. It cencluded that the latter course would be better . . 2 The first ease to reach the courts from the new Commission in ~olved tbe rc~uIation of adverCishlg. The Seventh Circuit upimld the power of the FTC to control deception in adver~ising~ declaring thst the Commission had authority to "stop all those trade practices that . , , L.xjm,¢ competition directly or through deception of purchasers," :0 'x'hus, promotional advertising quickly became a J~.r~t ia re~dation of business practices. In the 1922 case of FTG v. Wi~s~e~ Hosiery Co. ~ the St~ m~me Court added its aDpro~,al of such i~gulatory ac- tivity by holding that labelin~ seeds contahdng less than ten percent wood as awoolen" was deceptige and injured commerce by diverting trade form truthful frms. In three other early cases, however, the Court interpl~eted the Act so as to limit significantly FTC power over ad verfising. In 19~0, a ma- jority held in FTU v. Gratz ~ that it was proper for the courts to re- view de novo Commission determinations that a given practice waJs an "unfair method of competition" in violation of sl, ctinn 5. The Court, further held that the range uf m~f.ir practices within the Cem~mls- slon's jurisdictioa was limited to those unfair raetiees regarded in 1914- as opposed to go~d morals or ~against public policy because off their dangerous tendency unduly to hinder competition or creat~ monopoly.': ~ Tiffs was in large part fhe cut,sequence of the preoccupation of the frsmer~ ~f tim Act w~th the Cmnndssi~n's role i~ s~pplementing ~nti- trust enforcement. Thus~ the Commission s intended role~ if auy, as an agency for protecting consumers agains~ fraud except in the un- likely circumstance in which fraud might facilitate mon~poiy) was left wholly undefined2~ In FT~ v. Kie~nsr ~ nine years later, the re- quirement was established th~ the harm to the public interest caused by an unfair practice must be %peeifl~ and sul~ikntikl,' The ra(~st set.i ous obstacle to FTC poliein advertisik activit~ was presented by ths Court's 1931 holdin~o in t~TC v. I~a~aml Co,'~" that the Commis- sion m~st find that competitors and not merely crustiness were in÷ j ured by the misrepresentation. I 8 lte ~ NO ~97. ~l~d ~'ongre~s 2d ses slnll, 18 ~1914) ~25~ CS 4N& "~58 fig. ~121 (1920). ,~ v s l(I. at 42T. ~e~, De elopme~t ill the Law--newp~tve Allve~tlslag, 8O N~-v. I~ Ilev. ~posner Richard A R~glllaflo~ of Ad~e~tlsi~tg by tb~ ]:"pC. Wllsbi~gt~l Am~vieab N0 !errlrlse ]ll~ tttllt e fll~ l~llbl]lll*~licy lle~arell (1 r~.l ) I) 1L $

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218 Later during the 1930s the Conmlission was accorded a more recep- tlw treatment by tJ~e Court. Recognition of the value of flexibility, in determining the hounds of legality under section 5 replaced the static conce~ptl ion of "unfair methods of competition" expressed in Gratz.t~ The FTC~s potential ability to deal with novel deceptive practices was bolstered further by s narrowing of the scope of review, so that greater deference was given to the Commission's determinations of public interest:~ T]te WTt~e~e~'-Lda am~dnt~nt8 A number of these conflicts were resolved and the j uris~iction of thB FTC was Rfiqrmed by th~ Wheeler-Lea amendments of 19~8. The im portant SeetioR 5 was rewritten to read : "(a) (1) Unfair methods of eornpetitioR in £Ollllilerce~ alld unfair or dece )tire acts or )ntc~i~es ill commere~ ai~ hereby declared unlawfuh" ~ The additlon o J~ tlm phras~ "unfair o1" deeeptlvc acts i)r p r~.cLices~) made i~ no lon~er uecess~ry for the Commission to show that eompetitioR was injured. If thet~ was ~n ury to the public the FTC was empowered to act.. Th~ legislative hist0r3 of the amen clments affords stroltg evidence that Congress believed that the new Section 5prohibition of "unfair or decepttve acts or praetice~~ (~s well as special see~ion~ covering the advertisement of food, drug, s, medlcal deviees~ and cosmetics), pro vkted the Commission ample authority to regulate advertising: The definition is bro~d enough to cover ever), form of ad- vertisiRg deception over which i~ wcuM be bunmaly prac- ticable to exercise government eont~h It covers every case of imposition on ~ purchaser for which there could he a practical remedy:° Subsequent eom~ decisions ha~e confirmed the co~clusion that tLe Whee]er-Le~ Act firmly est~hllshed th~ jurisdiction of the FTC over advertising:~ The ~Vbeeler-Lea Act, however, did not provide the FTC with much greater scope than had been granted prior to 111~. It~ cent rihntlons lic In the confirnlatiou and c]arifleatiou of the Commissions authority over all types and degrees of dece~pti~n and its improvement o~ proce- dures ~or enforcement ?~ Previously the FTC w~s required to go to the courts for enforcemen~ of an order. If an order was v~olated, the Com- mlssion had to ask the Court of Appp eals f or an inj ur~ction directing the vie a ors to obey in 1938, the "Wheeler-Lea Act gave final e~ec o orders issued by the Commission if such orders are not appealed by th~ rcspondcnt~ withiu 60 clays. However, cease and de~qist orders arc: still reviewable by the U.S. Court sf Appeals and thereafter upon writ of certiorari to the U.S. Supreme Court. u in 197~ .,in o~ ~ffec~In~ commerce" was substituted for ,,in c~mmeree,." public Law See, e~. Fre~ Cro~r* P~serv¢ Cor~ • FT~, I-5 F-d 917 {~d Cir 19~} (falSe ~zown. Wllli~m ~' q-be F~der~[ ~£rade Cotu~l~ion ao~ F~e A#J~e~t]~[~g II~ Jou~n~i of Marketing (Oe~obee 1947), I) 201

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9T2~900S9 -- iiii _ . I1| n I _

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220 was limited. T]m second series eft einhns desi~rmted the number of tubes in the radh* (e.g. "Eleven-Tuber m~perbeterodyne with Rotor Wavemag~mt Aerial"}. Tile Commission defined tubes as devices that per f¢*rm" 'the ~rhmLry ~uneliou of detectlng, amplif)dng ol receiving radio signals.' "" Several of the "tubes" Zenith relied on to arrive at a tot~l ituinher o f eleven had to do with tunin or converting alder- eating current into direct current and therefore~id not quallfv under the Commission's definition. The Comr~fissinn held against Zenith after finding that a substantial portion of purchasers bcdieved that a radio is better andmore powerful if it ha~ a large number of tubes. In affirming the Cormnission's decision on both sets of adv(~rtising claims, the court of appeals concluded : The Commission was not required to sample public opinion to determine wbat the petitioner was represe~inng to the public. Tbe Commission bad a right to look at the ~vertise- ments in questlon, coilsider the relevant evidence in th~ record that would aid it in interpreting the advertisements, and vhen deckle for i~self whetber the practices engaged in by the pe- titioner were unfair or deceptive as charged in the complaint (emphasis uxtdcd ) .*' Dee~p~C~e eo~rtpara~e p~ve ad*3ev~slng One of the traditional enforcement approaches which best illus- trates the shift or change in emphasis whici~ began approximately ten years ago concerns the FTCs 1958 (]uides Against Deceptive Pricing.z~ During th~ 196(Is ~.~ many as thirty percent of all cease:and:deslst orders sought by the Commission related to deceptive (i.e.~ "fictl- tious" price claims such as claims tha~ a ~oroduet will be sold at ~*10% offlist~' or at an "all time low price.' With ~he exception of instances where deceptive price claims have been a part of a broad pattern of fraudulent operations, enforcement of this provision dur- ra the last decade has been negllglble. ~udging from deeepti~ e priei}~g cases brol~ght prier to 1969 in which the Con/nllssinn wrote an oplnl~n~ thg seller's r~presentatinn was usually ~eur~te~tbe sale price was lower than the former price~ the compared price was the bona fide manufacturer's list prlee--and tl~e Commission's cornplaSr~t was that the seller did not have many sales at the former price, or that, due to widespread discount selling in'the local area, the manufacturer's ligt price w~s not a common selling price there. StilI~ the pi'obh~m ~tb most fi~'titious price eases is the qttestion of determining whag possible consumer or competitive injury eecurred. For the mo~t pa~ consumer~ realize that the p~iee reductions are eom- Inonlv m~t i~-ated by t he seller's inabilit y t~ mov~ t he tern at the former prie~ ~nd that inan~ products are never s~ld at the manu faeture~'s list price2* The Comlmssion~s policy to deemphaslze enforcement a~ainst alleged d~ccpt~ve ..... (fictitio~a pr{ein~ thereby ~llowin. g some exa~era- atlon and ambiguity lU price claims, appears consistent with the pr n ,i 143 I" ~d at ~l. ~ ihld ~ posg~. Richard Sepllrare sla~emeut ~I~ rel~O~t of the AI~*. Comml~l~r, ~C~ ~t~d~- l'0 /v

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L,h

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222 In the 1969 Resp(or~ of the American Bar Association To Study The Federal Trade ~ommigsion, Richard Posner goes into considerable detail describing hun&~ts ~f c~¢es he reviewed invoI~drtff forced dis closure* of what he believes to be intolerant fact~ Posner concludes that insignificant eltses "eon~it utea significant part of the FTC~s torsi output (r~er tim yeal~" and that the FTC achieved "precious little con- shiner protectloltd' ~r NEW ApFROAf2HE8 TO ADV~IIT[~I*NG ]~I#W~kTION Beginnlnngs about 1909, the Federal Trade Conuaission has initiatal a btrffs number of proceedings which ~have chttllanged major national advertising campai~m as false, misleading, or unfair. Duriltg this time there hare been unprecedented efforts b)" the Government to requite by mdem~king and adjudication the disclosure of relevant product in formation. These l~t!e nt off nits al~ ht Sllttrp eontra.¢t to tb ix, co o~ ~t'Iiec years which iacluded many challenges against clMms made b}" small ¢ompaaies selling re-refined oil~ hair rest orers~ combination fruit trees, etc. And whil~ the traditional rules ~ncerailtg deceptinn, the use of "puffery" in ndvertising ~s a defgnse, sad CommiSsion authorit ~ to de- ternline the meazling of ads tutv~ e~ntinuad to govern the disposttion of most advertisirtg cases in the la~ decade, tbe FTC ha~ take~ major ster)s to augment the pl~oteetinn these principles afford. First, the FTC has developed a~separate category of "unfairness" violatinns, including the failure to undertake prior substantiation of advertisament~. Second, the FTC has shifted its efforts away from protecting competitors and toward ¢ncouragtgii corn letitlon. . It has. accomphshed thin m large part by ~-~rtuall abandoning ~ts extenmve prior efforts to raged ate comparative price ~c~alm s sad mock-up demon- strations as discussed in the preceding section. FinMIv, the Con~ruis- sion has undertaken some significant irmova¢ions ia tl~e in,position of remedies. "Unfairness" v~ola~6~r~ The 197~ decision in FT~ v. Speerry & llutchin~on ~.~ has encour- aged the challenging of edvertislng clalms that are "unfair" as opposed to deceptive. Sperry & Hutchinson S&H) had tried to suppress oper- ations of trading stamp exchanges~ smM1 firms in the business of swap- ping or selling for a fee stamps aecessary to fill books for the redemp- tion of merchandise. B~ arguing that section 5 applied only to practices wbieh violate the letter or spirit of the antitrust laws or are repugnant to public morals, S&H suecesMhdly defended aeainst an FT0 su~t cha l~nging its practice as unfair, In reversing, the decision, the Supreme Court auihorlzed th~ ~TC to enforce section 5 "hke a court o6 eqlntv ~ taking into account such factors as whetber a )raetiee 1) ~twithou~ neces sarily having heen previously considered unlawfuI, offends public polb:v" as established "by statntes, the common law. or ot]~erwise~: (0-) IS ~tlalJnoral~ unethical, oppress]ve~ or unscrupulous ': or (3 causes "substantial injury to consumers (or competitors or other I)ll~irt es~n~ ell ) .:r a~ TF ~ ~rr¢ & $/utchi~on 00.4O5 US 2~3 (197~) 1" Ibid.. p 244~5. O b3 ~=~

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223 Although the Supreme Court's broad grant of authority to the Com- mission to develop new rul~ in the at~ of consumer. , . protection is not. . speel~C enough to provide meailllagfu] ellforeelllerlt guldehnes~ three types of nondeeeptlve advertisements emerge that might plausibly be regarded as "unfair" : elalms published without reasonable prior sub- stantiatlon; claims which tend to overreach or explolt particularly vulnerable groups ; instances in which sellers fail to provide consumers with the necessary information upon which a choice can he made from among eompetin~ products. There is evidence that prior to I07~ advertisers frequently published claims for which they had little prior substantiating data.~ That situ- atlon changed rapidly~ however, as a consequence of the FTC~s de- cisio,~ in the Pfizer case.'~ Although the I~'TC has required since 1963 that advertisers have substanti~tlon for claims relating to health and safety prior to the dissemination of the advertisements in which the claims are made~ it was not until the Pfizer decision a decade later that th6 prior substan- tiation requirement was extended to other types of c]ahns. The ca~ involved rialtos by Pfizer that its product "Unburn" con- tained a special ingredient that anesthetized nerves in sunburned skin. The Commission challenged the claims and unanimously held that i~ is *'unfair" under seoLmn 5 to make an ai~rmative product claim (puffeiT excepted) without ~v~asonahte prior substantiation. A1- ~houffh the law al J~ady r~.quil~l lhat claims m u~ be nondeceptive and truthful wbel/ made, the Pfizer decision ~ent fresher and concluded that even nondecepglv~ ~l~ims not. relatlng to ilea ItS1 and ~,:~f~ty would be in vlolation of the law if they were not supported by adequate prior suhq~ntiatlon. The Pfizer opinion notes t]~t it impractical to expect individuM constlnlOrS to rtlll t~l~ oll t~le LiltJ/LWaIIdS Of pr(Mltlef,B ~hey plLI~ha~ and ~hat it is more efficient for the ~fier Lo run tests once for eac~a produet claim. Beyond this. tile opinicm e~s~rts that c~usumers ai~ "entitled" to the subsmntiatlon information ~nd "should no~ be com- pelled to enter into an economic gamble to determine whether a prod- uct will or will act perform as represented." ¢~ The opinion however, is vague in explaining the justHication for ad substantiation and fails to consider the costs that might be gertelated by a substantiation progl'aHl. During fhe ilrst few years after the Pfizer decision the FTC launched a seriss of publicly announced, indusbrywld~ "ad subeLan tiatlon rounds" in which all major ~dvertisers of a p~rtioui~r plXal- uet. or all advertise[~ making a certain tve of claim were r-qu red go tut~ over their supporting da~a to the~TC. T'be nmteriM is ex: amined by tht/ Comnlis,~iem eontl~lainls are L~sl ed where b e FTC thinks claims are unsuppm~ed~ and eventually t]m data are made public. ~S~e Consumer ~ubcot~m of Senat~ Comm 92d Colt~-, 2fl ~es.. ~taff Report t~ th~ Federll[ '~ r ad,~ C~mm~ on o~ ~h~ A~ ~;ubsra~natlot~ p r ogralla (1~72 I ,~ pfizer, Ins, 81 F.TC 2~ 1.9721 p~lzer, ~e., 8I F.T.C, 23 (1972) ~t ~2

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224 In the l~st few yea~. however, while the Commission has routinely soughg substantiation of ad claims fr~rn individual companies tbat ~:t h~ inv~ti&~ted, it has onI • infrequently asked for a~] sub,rant aton on an indust rywide basis. ~n 1978, for example~ only one suc 1 request wl ch ....covered ~ds that promo ed en~vgf" so, v n~¢~ apse anc~s and ~ther ~e.~wes was mihated, One reason~ as l~ecently conceded by C a rman 2[tchael Pertschuk. ~s that industry self-regulatory programs have been effectiveIy ¢~riTing much of t,he burden nf keei)ihg national ad vertising honest,~ BIlt ther~ is concern at the Commission th~ advertisers and adwr- Qsi!tg agencies ma~ be get~,ing complacent abo~ the threat of FTC action and tha~ the Cormni~ion may be losiltg seine ¢ f the nmmentum it built up witk it~ hlghly publicize4 cases of • few years ago, One of the ma or forces behind the heavy use of ad subst~ntia on rounds n the firs~ ~ew years ~fter Pfizer was the influence of Robert Pit~fskv who pioneered it~ use when he was chief of tile FTC's Bureau of Cons~nmer Protection in the e~rlv 1970s. New that be has returned to the FTC its one of its c~mmi~onet~, i~ is felt b, a nun ber of in- dust~- observers that blue program will again receive heav'~, emphms~s. In JanualT 1979, Commi~icner Pitofsky, speaking abot~t industry- wide ad substantiation rounds, said, "It's a bit, of a burden on the staff to analyze th* data, b~t I tldnk it~ awfulIy effective at p tng re~ie~ers of advertising [inside companies and agencies] in tbe posi- tion of saying, ~V¢ need rids substantiativn before you can make that claim.' "~ Vulnerabt~ y~'o~p~ Another catcgor~ og "un fai,~u~" w c e FTC has ~g~ ~ to at- tack dur ng the b~t decade ~once~rts the exploitation of vulnerable ~,ndienea,s. This conet.pt could be relied upon to declare certain ads illegal even if the ads were trae because they offend some oth~r stand ard of ace~ptabi]it~-; ~' de'me tenth d~ffere~tb" wken ads are directed to special audlenees such as children~ ~o or dupiicafe the eoacept of deception ~]rea~]y in the law So far, the only ( onlruinsion decision dealing with unfairne~ since Sperry & Hutcl~on has been its c,ts~ ~gainst ITT Continental Bak- ing CoW That ease dealt with tb~ charge that the advertising for Wonder Bread w~s 6ot~ deceptive and unfair because, in stressing special nntrltiona] ft'atlltX~S of the progllet by broadcasting dramatic growth ~quem(~ of children, it ':exploit[edq the aspirations of ehg dren ]and] parental conce~s for r~picl growth amI ~]eve]op- ment...," *~ zkft er holding that tile ad was (h cepliv~, the Commission stated that although ffte same prnefic~ could eoneelvahly g~ve rise to both an unfairness and a dem,ptPm viol~ttion, the record in tbe ~Vonger Bread eaac failed to provide evidence of a sep~rate unfairness v]obt tlon.~a • ~lcharff, Gordon L ~TC eye~ sllbatanflat~ofl ~erfvaL Advertising Age .Tart 2~ i~7~ ~ a',~,. 'CAt I¢~s~ to the ~'.~nt that stleh ~efl.n woul0 ~t0L violate ~h~ first ameadmenL For ,~8 FTC ~, mvdtfl~d, g3 FTC 1105 (19",~}, a~gd. ~:~2 ~2d 207 I~d Clr 1976) I'¢

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225 Writil~g in the HaI~'ard Law Review. Robert Pitofsk$ said, "Reli- ance on 'unfairness' in the regulation of stylistic excess in advertising is likely to be nfinimab First standards for what constitute~ 'exploi- tation~ of ~vulnerable' gs'oups will be exceptionally elusive. Moreover~ cilarges that an ad, though not deceptive, tends to take ax~vaat age of a vulnerable group ~ill usually raise controver~sia] questions of exces- sive government patemla]ism:" ~ Of course, tbis is exactl'¢ th~ charge that has been made in response to the FTC's cvntroversml proposed tl"~de regulation rule on children's advertising. Pitofsk~- concludes his discussion on the subject by saying, "Thus, despite t~e blank-check authotlzation provided to the Commission in S & H. new limitations on ad "exploitation' grounded on unfairness have not been devel- oped." ~' On~ year later, the FTC staff repoi¢ on cbildren's advertising broke new ground by citng the S & H case and this principle in sup- port of their propesal.~ Failure to disclvse The most fafi-reaehing charges the Commission has taken in the are~ of "~mfainacss" eonce~ax last ances in ~hieh seller~ fail to provide con- sumem with information necessary to make choices among" competing products, xArhile traditional advertislng enforcement, i~cluded efforts to force disclosure of lreI~inent information, stwcf,~ was relatively limited. One of th~ traditional appro~.cbes attacked advertisements for de- ception ba~ed on silence. This approacb is exemplifiexi by the advel"tise- ments of the iron tonle "Geritol'. The iulpre~sion conveyed was that if yon suffered from "tired blood", the iron in Geritol would perk you up. What the ads did not t~ll yo~J (hence, alleged deception through fuilm~ to disclose is) that most fatigue ("ti~ed blood") has nothing to do with iron ilefleit, l/e~ lnl~ifda The other traditional approach required a finding by the Commis- sion that, in light of expt eas claims in an ad or the nature of the prod- uct, failure to disclose pertinent information would be misIeadlng. Thus, in a case in whieb the FTC failed to make any such findings of deception or of other special circqmstanees it was reversed with the appellate court notilt~" that the Co~ami~ion do¢~ not have the author- ity to require advertisers to provide more infurmation2~ In contrast, the (-'olnrnission tla~ bFollgbt nun~erous eases in recent ears based on tbe principle that the faih~rc to dlsc]¢~ is hlufair'. At ~ast a dozen ca-ses have involved vocational school advertlslng where thei~e was no disKlosnre of the percentage of enrollees who fal]ed to complete the course. [wrcentage of graduates who did not obtain em- p ~ymen . and the salaries and em plover~ of ~ 'ad~ atc, s w o did ohta n jobs ; "along simila~ lim~s, in ~:omp] aint~ challenging allegedly fraudu- lent land sa]es schemes, separate violations hale b~en charg-ed for not di~losing specific informa~io~ about future land development pro- p~d~¢~I Trade C~mmlsslo,l: graft Repor~ va T~levlsl~n Adv~rtl~lt~fr to Cla]dret/ [Feb- nl~lty 1~7~] 24~ 4~rt,~ ~ F~r 1 2 F (1 ~B fDf? {?l~ I e~rt tleoied 340 It~ ~S ~UJbll) :4~, ~g, Laatest~ r:,*~tta Co~/~, I197;~ 197~ Transfer Binder 'Trade Re app. g2CI~) S(L 20.499 ~ TC I974) 6~ntro Da~a Gorp~ {1970 IgT~ TrttI3~fet ~ln,]e~ Trn~e Reg Rt.p (CCIt) No. 19,98~ (b~32~2 1D72~

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ill i ii ii

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t 227 tire Government remedies against false advertising was compounded by the vi*tual unavailability of private remedies and the paucity of eonater-edvertising by competitors which could expose unsubstanti- ated or exaggerated advertising claims.07 RemediM renovation at the (3ommi~sion has concentrated oil efforts to eliminate tl~s s'aeuum in law enforcement. In a consent order agreed to in Aprlt 1919 involving d. Walter Thompson Co, the world'slurp- eat advertising agency, a new ren,ediai approach was offered as an alternative. In ~ ¢onsen~ order settling Government charges that it pro tared deceptive dishwasher advertisements for Sears the ~dver- rising agency was offered ~a alternative to its responsibility to substantmte clienL product claims: adldse the client of "all perform- ance claims" it ieasonably believes are contained in the ad. The burden of ~ubstantiatloa then would be largeIy on the cEent."a 6'o~ective adveetisi~g Pl~bab]y the ino~t ~[gnifieal~t development hi remedial innrsvation~ howevei has been the use of corlective ad~-er tlsing. These orders direct advertisers found guilty of disseminating false azld misleading claims to htforza eoztsumers~ usually through the same advertising media that was originally used to ¢lisseminate the false claims~ of the facts with respect to the claims. The FTC has a~serted sevelal times shz~ 1970 in~ view that it has the nut]rarity to impose vorrective advert~sing~ but it was not until i9~7, ia a proceeding against $~ arnel-Lalnbert involving ~dvertising of the mouthwash Llsteriue~ that the Commission fiaMly got a Federal com't to agree. TI e FTC case~ based vn • 1972 coinpl~int involved the Commis s on s content on t lot fox" lnot~ t tail a la f a century a sterine ads have created the false impzes~inn that the product prevents or les- sens the ~verity of colds and sore throats. In April 1978, ~Varner-Lavnbert exhausted its iasZ ~venue of ~ppsa[ wh~ll tile Sul]reine CQ[~ct [*z~/[sed to [.e%ib3w ~ ~ to 1 court of appeals decision that upheld a 1075 ]?TC order requiring ~hat $10~00,~00 of future Listerine ads carry the message, "Listerine will n~t help pre- vent colds or sore throats or l~ssen tbeir seeerity." Th~ lower court ba~, however, deleted frqm the FTC's cozrectlon a "confessionaI" ~hras~ ("contrary ~ prior a~vet~islng') the C~mmission conslder~d impsr rant.** In the only major corrective order contested in the c~mrts sinc~ the Lis er ne case, an FTC adm aistrative law judge ordered l~st Septem- ber that $~4,000.000 of future ,X, naein ads must disclose that "Anacin is not a tension reliever," .\merican Home Preduets, the maker o~ Ana- ein, is one of thl'ee companies n~mod in 197~ complaint.s ehallengin~ F • ps forrnance elam~s for their analg~sn% products. 'lbe SPA,000,000 figure is the FTC's estimate of the u~erage ~mm~al h.naein ad budRet [rum 19~8 to 1973. The one year run imposed fo" he eo "reetion is the s~me rule of thumb upheld by the courts in tho Listerine case.~ Ewn pttof~ky. Hob~r~ ]~yond N~der ~ I $ W~ t~e Thompson s~ttte~ U ~ e~argez t~at i~ Dr*lmarerl ~ee~pUre ad~ for ~eara. ~¢~11 ~tree~ Joul.naL .~vr %¢,. 19~9 ~ 71~ • *Iql~h Oonrt A'.oldi L[~t~rin~ A~ Cage? FT¢" I'ena]ty ~raUd~. Arl~ert[sIng &g~ 2.pr 10, ~F'rC ~llflge GLve~ Ana¢tiz $24 000 ~ he~.dat he. 2*dyer t1~i~$¢ Age, ~pt. ]~. I~8. p. t 0~

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228 though the tension relief ¢lamas were dropped in December 1973, ch6 ~llOg8 said $11.%1; BII~ 8Vlstenc~ S/lOWell colbl~lei~S cOll£~ne ~o bellevo DIItLL tX~llSlOIl l.elie~ IS all 1231portflI15 9~fi~rlbute of .~fl~l/l. A~lw~'igy to e~de~ corrective ad~ertislng Th8 Coannis~ion has no~ brought any major eolre~iv~ ad c~sc~ re- cently. It ha~ howeverI negotlgt~d (lUaSl-C~)Fllb~lV~ seLtiements with b'irestone aild ~IP. fl-~ with all F'£C remedial authority, the 9ower to order corrective adverusing stems from th~ broad delegauon of ins~renon ml~er s~- tion 5(h) of the Federal l'rade Commlsston Act, which emi~wers the Commission [o order parties to "cease and desi~'~" unfair or deceptive Bets or practices in eormnerce, Traditinn, lly, the ~urta have accorded the Coraminsion wide latitud% particularly ill antitrust enforcement, to develop r e~me dini approaches.~ Critics of che corrective advertising approach focus on the es- tablished rules that all FTC orders must be "prospective" and--a ~- luted poin~that its orders must not be putative.:~ They ~rgue that the process of trying to rectify past wroags places the remedy beyond Comlllisslon authority, Proponent~ say the fallacy" of this argument is the assumption that FTC remedies must be exclusively prospective. This, they maintain, is aa interpretation of Commission power that the agene~ has never accepted and the courts have not imposed. To che contrary, bhe courts have said that the real ques~inn is imt whether remedy is prospective but whether it is punitive2~ That FTC orde~ prevent some si&miticant future illegal effect is the only requirement ampc~ed, and corrective advertising meets tha~ requirement if tile effects of prier deceptive ad- vertising campaigns continue to influence consumer purchasing deci sions for a substantial period of time after campaigns have been discontinue(l,r~ Only the use of (~n'I'ecllvo advertisinff orders they say can dissipate the llngerln~ effects of f~]se advertising. A principal concern o~ those who support this new remedial ap preach is the applicability of the standards mt forth by the Comntis- siort in the Listerine ease to future cases. The record in }VaPn~r Lam- ber~ did support each of the Findings under the formulation put forth by the Commission, }nit the Listerine advertising campaign was most IlIlllSU~h Yl)l' m~re thail ~ty-~ k I~ years, the lll$iiLl~aet u 13Br had claimed in major ad campaigns (broadcast to the date of the suit) that the mouthwash was effecfi~ e in ameliorating, preventing, and curing colds and sore hroa s Add t easily, persuasive ev donee vas presented that purchasers believed the chdm at least up to the time of the suit. Fi- nally~ ~garner Lambert had conducted, at a cost in excess (~f $100.000, its own surveys (to test consumer recall of ]mat advertisements ) which were introduced into evidence against it. It is reasonable to conclude that comparable proof of "deception-perception-menlory:~ in~Bence would be virtually ~rnpo~sible in most advertising cases. t~ limited because the "~ommis~ion lids ~de diseretinn In its choice of a remedy deemed ad e~l.:, t ~ ~ cope ~]0} the i nlq~ful .rue ttv~s In ~hl~ ~rea of trade" } FT~ v, R~bera~¢I ~7~,, 3~3 ~75 4~0, 473 ,19~2L C~r tt~ pu~Hs~n$1 Co. 78 FTC 1~72 1512~18 119~1) ~ plt~ftk¥, Bobevl De~0ad N~der p 69~-~. t¢ t¢

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I 7 $ 229 SD'MY~ARY Pix~durally there are three fllndamental arras in which the Com- mission can initiate change in order to attempt to better carry out its advertising re~llatlon m~ndate. The first area involves the l~gal ap- proaches it employs i.e., the principles of law upon which its actions am .... based. The se~ud concerns the priorities it assigns to the.various khnds of ~nforcement activity that are available to it. The third con- slsta & the types of remedies it imposes on those who violate the rules and laws it is charged to uphold. dGeyaJ apTvoaches Tha last ten y~ars have seen tho Commlssion move away from almost total reliance on "deception" as the basis for developing rules and initiating orders towards the challenging of advertising claims that are "unfair". Following the Supreme Court's 1972 decision in FTO v. Spe~y & Itu~chi~la~n Co. the Commission has attacked various ad campaigns involving three different types of nondeception In P zer claims for the product "Unburn" were challeng~ed for lack of reason- able prior substantiation. In ITT Ccntlnentad Bakit~g 6"o,, unfairness with respect to exploitation of vu]ncrahlo audiences was charged. Fi- imllv, the Cominlssion has promu]ga~ed several oules r~quiring disclos ure "of product information based vii the theory that it is unfair for sellers to fail to provide consumers wldl infonaation necessary to make choices among competing product~ Enfo~ceme~ plqozqt@z In this area the FTC has suilstantial]y deemphasizrd two areas of tl'0-111tional enfo['e[~nmnt al!tiviip. First~ ee~l~e and desist orders related to fictitious ' pricB claiJns have been negligible since 1969 while prod- uct quality claims have been more likely ~o be changed. Second, tim Commission Ires in effect abandoned enforcement in the ai~ea of phony mock-ups in television advertising. Renved~e8 In efforts to devise a set of effective sanctions for deceptive or unfair advertising campaigns, the Commission has experimented with cor- recting advertising orders which direct advertisers found guiIty of dis- seminuting false and misleading claims to inform consumers, usually through the same advertising media originally used, of the facts with respect to ehMlen~d eIaims..~lthough ~be Commission has achieved svlne degree of sl]l!eess, most noMhly in Wa~ner Lacrlbert, it will take ~uture corrective all cases ~o determine how far the Federal Trade Commission cau go. B~IILIO~PH~ Books Brozen. Yale, ed. Adverdslng and ~oeiety. Foreword by Harold S. Geneen. New York, New York University Press, 1974. Cohen, Dorothy. Advertising. New York~ W[ley~ 197~. Cox, Edward Finch The Nadar report on the Federal Trade Corn mi~siou. New York, R.~V. Baron. 1969. How it was in advertising, 1776 1976, Chicago. Ci'aiu Books, 1977. Nieosia, Frances¢o .~,1. Ad~er rising, management, and society : a bus- iness poinl of view. New York, McGraw ttil], 1974. 0~

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23O Pease, Otis A. The responsibilities of American advertising. New York, Arno press 1976. Rockefsiler~ ]~win S. Desk book of FTC practice and procedure. New York, Practlsin~ Law Institute, c1979. Wagner, Susan. the kederal Trade Commissiort. New York, Praeger~ 1971. WrilgJht, John Sherman. Advertising's role in soeisty. St. Psul~ West Pub. Co., 1974. Advertising. New York, l~IcGraw-Hill~ c1977. Ar~Jc/e~ American Bar Association. Commission to Study the Federal Trade Commission. 1969.119 p. Crackdown ahead on advertising: interview with Michael pert- schuk. U.S. news and worlds repart~ Oct. 17~ 1977. p. 70-72. Dunn, Samuel Watson and Arnold ~I. Barbon. Adv~rtlring : its rois in modern marketing, lIinsdale, Ill., DiTden Press, 1978. 741 p. Lsevinger, Lee. The attack of advertising aud the goals of regula- tions. The Conference Board record, v. I0, Jan. 1973~ p. 99~38. Madison Avenue's response to its critics. Business week, June 10, 1979~ p. 42-5~. Pitofsky, Robert. Beyond Nader : consume~ protection and the reg- ulation of advertising. Harvard law review, vol. 90, Feb. 1977~ p. 991-701. Posner~ Richard A. Regulation of advertisklg by the FT~. 1~rash- ington, American ~]Rterprise Institut~ ~or Public Policy Research 1973) 40 D. ' " b " Sk ar, W iam. Ads are finn y gettlng b eeped at t e FTC. B.smess and society review, vok 26, summer 1978, p. 3~46. Stone~ Alan. The FTC ~nd advertisiag reglllation : an examination of agency failure. Public policy, r. '21, spring 1973, p. 999 934. Wark, Lois G. Consumer report/criticism of adverBslng prompts agency crackdown, industiT se]~ regulation. National journal~ v. 9, Aug. 7,1971, p. 1635-1~5. 5J 5J 53

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Q H 231 FTC v. SPERRY & HUTCHINSON CO. SyUabus 233 FEDERAL TRADE COMMISSION v. SPERRY & HUTCHINSON CO. CERTIOR;~qI TO TI-IE UNITED BTATES CODBT OF A~pEAI.4~ FOR THE FI]PI'H £31RCUIT No. 70-70. Argued November 15, 197I--Decided March I, I972 The Federal Trade C~mmi~io. (FTC} entered a eease~andMesist order against Six~rry & Hutchinson Co. (S&H), the largest and offic~zt tntding slamp eompauy~ on the ground that it unfairly attempted to suppress the operation of trading stamp exchange* and other 'qrec Jtnd open" redemption of stamps. S&I~ argued in the Court of Apl~als that in~ conduct wa~ beyond the fetich of § 5 of the Federal Trade Commlssmn Act, which it claimed permitted the FTC 1o restrain only such prattlers as ar~ edher in inolstion of the antitrust htws, deceptive, or repugnant to puhlls morals The Court of AppeaLs reversed the ]~=I'C, holding that the FTC had not damonslratrd that S&H~s conduct vlotated § 5 heean~ it had not shown that the conduct cnntr&vened eltber the letter o~ the ~plrit o; the ant~trtmt laws. HeM: 1. The Court of Appeals erred in it* construction of §5. Con- gre~s, as prevlsus[y recognRrd by this Court, see FTC v, R. F, Keppel & Bro., 29I U. S 304, define~ the powers of the FrC to protect consur~ler~ as well as competitors &n,~ authorize~ it to determine whether challenged practlee% though imping no threat to cornpetitlsn within the letter or spirit of the antitrust laws, are nevertheless either unfolr methed~ cf eompetitio% or tmffiir or deceptive acts or practlsm. The Wh~ler-Le~ Act of 1938 reaffirms Ih~ broad congre~..sional mandate. Pp, 239~244 2. Nonethnle~ the FTC% order cannot ha sustained. The dora not challenge the Court of Appeals* holding that S&H% con- duct violates neither the letter nor the ~isit o[ the atttitrust inws and its opolinn is barren of any attempt to re~t lm order on the u~lsirne':~ of particular competitive practises or on con- slder~t]ons of consumer interetts. Nor did the F'fC artleuls~e any standards by which *uch olteraatine ~m~me~ta might be made Pp. 24~249, 3. The judgmen~ of the Court of Appeol~ ~ettlng aside the FTC's order is affirmed, but beeolme that court erred m its con- ~truetlon n~ §5~ da iudgment is modified to the extent that the case is remanded with hmtroctinn~ to tett~rn it to the FTC for C~

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232 234 OCTOBER TERM, 1971 Opinion of the Cour~ 405 U. $ f~rlher proceedings not haeunsi~tent with this opltfiolL Pp 24!)- 25ff 432 F. 2d 146, modified and remanded. WltL'm, J., delivered the opinion of the Court, in which all Memher~ joined except POW~LL and RmiN~UlS% JJ, who tc~k no part ha the causiderathan or deci~ou of the ease. Assistant A~tcraey General MeLaren argued the cause for petitioner. With him on the briefs were Solicitor General Griswold, Harold D, Rhyl~edance, dr.~ Karl H. Buschmann, and Richard H. Stern. Harold L. Russell argued tbe eatise for respondent. With him on the brief were Samuel K. Abrcrms, Claus Motulskg, J. Sam Winters, Alan R. We~tcel, and Wayne T. EUlatg Ms. Jvsvtcg WHtcZ deEvered the opinion of tile Court. In June 1968 the Federal Trade Cotilll'~i~iion held that the largest and oldesb company la the trading stamp industry/ Sperry & Hutchinson (S&H), was violating § 5 of the Federal Trade Commission Act, 38 Stat. 719, as amer~ded, 15 U. S. C. §45(a)(1), in three rcspects. The Commission found that $&H improperly regulated the maxhmlm rate at which trading stamps were dis- pensed by its retail ]icel~seea; that it comblaed with others to regulate the rate of stamp dispensation throughout the industry; and that it attempted (ahnost invariably successfully) to suppress the operatioll of trading stamp exchanges mtd other "free and open" redemption of stamps. The Commission el~tered cease- and-desist orders accordingly. 1 On the nature of the industry, ace general]y Comment, Tradll~g ~tampg, 37 N. Y U. L, Rev. 1090 0962) The C~unmi~ion prc- eeedlng~ in the in~t~nt, case are dlscu~ed in Comment, The Attack oft Trading Stamp,s-An Expanded Use of Section 5 of the Federal Trade Corami~mn Act, 57 Goo. L, J 108"2 (1969). 1! ~""WLa th.Z'-----~

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233 ~'lX3 v. SPERRY & HUTCHINSON CO 235 233 , Opinion of the Court S&II appealed only the third of these orders. Before the Court of Appeals for the Fifth Circuit it conceded that it acted as the Commission found, but argued that its conduct is beyond the reach of § 5 of the Act. That section provides, in pertinent part, that: "The Colmnission is empowered and directed to prevent persons, partnerships, or corporations . . . from using unfair methods of competition in com- merce and unfair or deceptive acts or practices in commerce." 15 U. S. C. §45(~)(6). . As S&H sees it, § $ empowers the Commission to re- sfrain only such practices as are elthcr in violation of the antitrust laws, deceptive, or repugnant to public morals. In S&H's view, its practice of successfully prosecuting stamp exchanges in state and federal courts cannot be restrained under any of these theories. The Court of Appeals for the Fifth Circuit agreed and reversed the Commission, Judge Wisdom dissent- ing. 432 F. 2d 146 (1970). In the lower court's view: "To be the type of practice that the Commission has the power to declare 'unfair' the act com- plained of must fall within one of the following types of violations: (1) a per se violation of 8.nti- trust policy; (2) s violation of the letter of either the Sherman, Clayton, or Robinson-Patma~} Acts; or (3) • violation of the spirit of these Acts as recognized by the Supreme Court of the United States." Id., at 150 (footnote omitted). Holdi~g that the FTC had not demonstrated that S&H's conduct violated either the letter or the spirit of the antitrust l~ws, the Court of Appeals vacated the Com- tnisslonJs order. The FTC petitioned for review in this Court. We granted certiorari to determine the questions prese.tad i~l the petition. 401 U. S. 992 (1971). i'J b~ O ¢-'-=--m.- (b..~..---=~

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~w===========-- 284 OCTOBER TERM, 1971 Opinion of the Court 405 U.S. I The Challenged Conduct S&H has been issuing trading stan~ps~small piece~ of gummed paper about the size of postage sta#nps~ since 1896. In 1964, the year from which data in this litigation are derived, the compa1~y had about 40% of the business in an industry that annually issued 490 billion stamps to more than 200,000 retail establishments for distribution in conneotion with retail sales of ~ome 40 billion dollax~ In 1964, more than 60% of all American consumers saved S&H Green St~raps. In the normal course, the trading stamp business operates as follows. S&H sells its stamps to retailers, primarily to superma.rketa and gas sta~ior~s, at a cost of about $2.{}5 per 120~ st~nps; retailers give the stamps to consumers (typically at a rste of one for each I0¢ worth of purchases) as a bonus for their patronage; consumers paste the stamps in books of I~200 a~d ex- change the books for "gifts" at any of 850 S&H Re- deraption Centers maintained around the country. Each book typically buys between $2.86 and ?~.31 worth of merchandise depending on the location of the redemp- $ion centar and type of goods purchased. Since its development of this cycle 75 years ago, S&H has sold over one trillion stalnps and redeemed approximately 86~ of them. A cluster of factors relevant to this li~gation tends to disrupt this cycle and, in S&H's view, to threaten its business. An incomplete book has no redemption value. Even a complete book is of limited value be- cause most "gifts" may be obtained only on submission of more than one book. For these reason~ a collector of another type of stamps who haa acquired a small number of green stamp8 may benefit by exchanging

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235 FTC v. SPERRY & HUTCHINSON CO. 23"/ 233 Opinion of the Court with a green stamp collector who has opposlte holdings and preferences. Shnl]ar]y, because o[ the seasonal use. fulness or i~mmediate utility ® of an object sought, a collector may want to buy stamps outright and thus put himself in a position to secure redemption mer- chandise immediately though it is "priced" beyond his current stamp holdings. Or a collector may seek to sell his stamps in order to use the resulting cash to make more basic purchases (food, shoes, etc.) than redemption centers normally provide. . Periodically over the past 70 years professional ex- changes have arisen to service this demand. Motivated by the prospect of profit realizable as a result of serv- ing as middlemen in swaps, the exchanges will soil books of S&H stamps previously acquired from consumers, or, for a fee, will give a consumer another company's st~rnps for S&H's or vice versa. Further, some regular merchants have offered discounts on their own goods in return for S&H stamps. Retailers do this as a means of competing with merchants in the area who issue stamp~. By offering a price break in return for stamps, the redeeming merchant replaces the incentive to return to the issuing merchant (to secure more stamps so as to be able to obtain a gift at a redemption center) with the attraction of securing immediate benefit from the stamps by exchanging them for a discount at his store.° S&H fears these activities because they are believed to reduce consumer proclivity to return to green-stamp- issuing stores and thus lower a store's incentive to buy and distribute stamps. The company attempts to p~-erapt "trafficking" in its stamps by contractua! pro- oftsr merchandme obtained by redemption is ~ as a gift. aThe efforts of some retailers to rei.~aue S&H st~nI~ aro not in. volved m this c~e. The FTC explicitly Ieft S&H free to seek in. junction~ against r~msmmce. I App. 169. f0¸

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296 238 OC'I'OI~ER TERM, 1971 Opinion of the Court 405 U.8 visions reflected iJL a notice oa the inside cover ~f every S&tt staanp book. The notice reads: "Neither the stanlps nor tile hooks arc sold to Illerldll~ll~ col]eetAlrS Or ally other persons, at all times the title thereto being expressly reserved in the Company .... The stamps arc issued to you as evidence of cash payment to tile merchants is- suing the same. The only right which you acquire in said stamps is to paste them m hooks like this and present them to us for redemption. You must not dispose of them or make any'further use of them without our consent in writing. We will in every case where application is made to us give you per- mission to turn over your stamps to any other bona-fide collector of S&tI Green . . . Stamps; hut if the stanlps or the books are transferred without our con~e.ellt, 1¥8 reserve the right to restrain their use by, or take them from other parties. It is to your interest t]lat you fill the book, and per- sonally derive the benefits and advantages of re- deeming it." (Reproduced at 2 App. 230.) S&H makes no effort to enforce this condition when consumers casually exchange stamps with each other, though reportedly some 20~ of all the conlpany's sta~nps change hands in this manner. But S&II vigorously moves against unauthorized commercial exchanges and redeemers. Between 1957 and 1965, by its own account the company filed for 43 injunctions agahlsL inerchants who redeemed or exchanged its stamps wit~hout au- thorization, and it sent letters threateniag legal actinn to 140 stamp exchanges and 175 busiue~cs that re- deemed S&lt sta~nps. In almost all irkst~nces the threat or the reality of suit forced the businessmen to abandon their unauthorized practices. D

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P [uu~s~.!~ prese ted ~o questiol~s in its l~eti- first being "[wlhether Section l~rade Commisslon Act 'which directs j~e Comm s~ o m prevent :~nfair lfiethods of competi- ... ]~ioa.~>~ m d unfair or deceptive acts or practices.' is limited Lo eon~luct%whieh :viblate~ the letter or spirit antitrust issue rela~tes to the the pract ces ~qIJeS~$ decisloa ~hat the busi- ~e Commlssion violates antitrust rows. Ae- we lntama e no op n on on ~hat xasue and L~ a double one: First does to define and pro- either the lettor qr the spirit ~ws? Second does § 5 empower Commi~ion to proscribe practices as unfair or decep- tive'in. Lheir effect up°n consumers regardless of their nature or quality I~ competitive practices or their effect on competition? We think the statute, its legislative history an~/ prior c a~,,s compel an affirmative answer to both questions. • """~: ~ ..... , ,. • - When Congress created the Federal Trade Commis- •ion H~ 1914 and charted its power a~d responsibility ~Though the Court of Appeals referred to state and federal court deci~on~ that approved S&H'a practice~ our reading of ira opinion le~v¢~ no doubt that 1~ did not rever~e the FTC o~der on *he erl'~n¢~ ous theory that such determlnallon~ might forecloso a contrary FTC §5 deci~io:/. We therefore put ,z~ide tile Goverment'~ ~eeonci quen- tion a~ ir~eiovwat and foeu~ on its first contention. " L~

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238 240 OCTOBER TERM, 1971 Opinion of the Cuurt 405 U.S under §5, it explicitly considered, and rejected, the notion that it reduce the ambiguity of tile l)]Lrase "ml- fair methods of competition" by tying the concept of utifairnes3 to a ~onlulou-IRw or sta(utory 8taJhdard or by enumerating the particular praetiees to wbith it was intended to apply. Senate Report No. 597, 63d Cong., 2d Sess., 13 (1914), presents the reasoning thag led the Senate Comndttee to avoid tile temptations of precision when framing the Trade Commission Act: "The committee gave careful consideration to the question as to whether it would attempt to define the many and variable unfair ~)ractices which pre- vail in commerce and to forbid their continuance or whether it would, by • general dec]aration con- demning unfair practices, leave it to the commis- sion to determine what practices were unfair• It concluded tha'. the latter course would he the better, for the reason, as stated by one of the representa- fives of the Illinois Manufacturers' Association, that there were too many unfair practices to define, and after writing 20 of them into the law it would be quite possible to invent others." The House Conference Report was no le~ explicit. "It is impossible to franm definitions which embrace all unfair practices. There is no limit to human in- ventiveness in this field. Even if all known unfair practices were specifically defined and prohibited, it would be at once necessary to begin over again. If Congress were to adopt the meghcd of definition, it would urtdertake aJt elldless tank." H. R. Conf. Rep No. 1142, 63d Cong., 2d Sess., 19 (1914). See also Ruhlee, The Original Plea and Early History of the Federal Trade Comndssion, 11 Aead. Pol. Sci. Proe. 666, 667 (1926); Baker & Baum, Section 5 of the Federal Trade Commission Act: A Continuii~g Process of Re- definition, 7 ¥'ilh L. Rev. 517 (1962).

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239 FTC v SPEItRY & HUTCHINSON CO 24[ {)[i]nion of the Court Sitter tile sgeep arid flexibility of this alqlroach t~('rc thus made cly~ta] clear, there have twice })ecil judicial attempts to fence in the grounds upon which the FTC might rest a fillding of uafalrllcss. II/ FTC v. Gratz, 253 U. S. 421 (1920), the Court over the strong dissent of Mr, Justice Brandeis (who had been involved ill dr~ftbbg the Trade Commission Act), '~rote that while the "{!~act lIleaair~g" of the phrase " 'unl~ir lnethod of competitimf.., is in dispute," the otliy practices that were subject to this characterization were tbo.ce that were "heretofore regarded as opposed to good morals be- cause characterized by dcceptiotg bad faith, fraud or oppression, or as against lmblie policy because of their dangerous tende~my unduly to himler competitio~a or create monopoly." ld., at 427. Tbis view was re- iterated ii~ other opi,lons over the I~ext decade. See, e. g., FTC v. Curtis Publishing Co., 260 U. S. 568 i1923h and FTC v. S~nclalr Refi~dng Co., 261 U S 463, 475 47fl (1923), The opinio~ of the Court of Appeals' major]ty~ citing Sinclair in support of its narrow view of the FTC's leeway, is in the tradition of these authorities. In FTC v. Raladam Co., 283 U. S. 643 (1931), a tlllallilrlOL!$ CoHrt held that: "The paralnoullt aJtu of the act is the protection of the public from the evils likely to result from the destruction of eo]npetir~ion or the restrictioil of it in a substantial degree .... Unfair tr~le nmthods are not per se unfair nmthods of competiti~L" (Italics ia originaL) "It is obvious," the Court coIItihued, "tha¢ the word 'competition' imports the exlste]me of presellt or potentiM competitors, and the uufair methods must be such as injuriously affect c)r tm~d thlls to affect the business of the~e conlpetit~rs that is to say, the trader whose nletlmds are assailcd as unfair must have present or potential rivals in trade wlm~ busine~ will be, or is likely to be, t~

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240 242 OCTOBER TERM, 1971 Opinion oi the Court 405U.8. lessened or otherwise injured. It is that condition of affairs which the Commtssion is given power to correct, and it is against that condition of affairs, and not some other, that the Commission is author- ized to protect the public .... If broader powers be desirable they must be conferred by Congress." ld., at 647-449. Neither of these limiting interpretations survives to buttress the Court of Appeals' view of the instant case. Even if the first hne of cases, Gratz and its progeny, stood unimpaired, their deference to action takes to constrain "deception, bad faith, fraud, or oppression" would grant the F]'C greater power to set right what it perceives as wrong than the panel of the Court of Appeals acknowledges. But frequent opportunity for reconsideration has consistently and emphatically led this Court to the view that the perspective of Gratz is too confined. As we recently unatfiJnously observed: "Later eases of this Court . . . have rejected the Gratz view and it is now reeognlzed in llne with the dissent of Mr. Justice Brandeis in Gratz that the Commission has broad powers to declare trade practices urffair." FTC v. Brown ~hoe Co., 384 U. S. 316, 320-321 (1966). The leading case that recognized a role for the FTC beyond that mapped out in Gratz, FTC v. R. F. Keppel & Bro., Inc., 291 U. S. 304 (1934), a|~o brought Raladam into question; on both counts it sets the stand- ard by which the range of FTC jurisdiction is to be measured today. Keppel & Brothers sold penny can- dies in "break and take" packs, a form of merchandis- ing that induced children to buy lesser amounts of concededly inferior candy in the hope of by luck hit- ting on bonus packs containing extra candy and prizes. The FTC issued a cease-and-desist order under § 5 on the theory that the popular marketing scheme con- CD t~

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241 IwrC v. SPERRY & HUTCHINSON CO. 243 233 Opinion of t~ Court travened public policy insofar as it tempted children to gamble and compelled those who would successfully compete with Keppel to abandon their scruples by sim- ilazly tempting children. The Court had no difficulty in sustaining the FTC's conclusion that the practice was "unfair," though any competitor could maintain his position simply by adopt- lug the challenged practice. "[H]ere," the Court said, "the competitive method is shown to exploit consumers, children, who are unable to protect themselves .... [I] t is clear that the practice is of the sort which theeommon law and cffm~inal statutes have long deemed contrary to public policy." Id,, at 313. En route to this result the Court met Keppel's argu- ments that, absent an antitrust violation or at least incipient injury to competitors, Gratz and RaMdam so straitjacketed the FTC that the Commission could not issue a cease-and-desist order pmscribinG even an im- moral practice. It held: "Neither the language nor the history of the Act suggests that ConGress intended to confine the for- bidden methods to fixed and unyieldinG categories. The common law afforded a definition of unfair competition and, before the enact~nent of the Fed- eral Trade Conmlission Act, the Sherman Act had laid its inhibition upon combinations to restrain or monopolize interstate commerce which the courts had construed to include restraints upon competi- tion in interstate commerce, It would not have been a difficult feat of draftsmanship to have re- stricted the operation of the Trade Commission Act to those methods of competition in interstate commerce which axe forbidden at common law or which are likely to grow into violations of the Sher- man Act, if that had been the purpose of the legis= lation." ld., at 310.

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J s: 242 244 OCTOBER TERM, 1971 Opinion of the Court 405 U S. Thenceforth, unfair eompetttive practices weft! IJiJt limited to those likely to have anticompetitive cou- sequences after the manner of the antitrust laws; uor were uzifalr pr~tice~ in commerce eont~tned to purely competitive behavior. The perspective of Keppet, displacing that of Rida- dam, was legislatively eonflrlued wheu Cmlgrcss adopted the 1938 Wheeler-Lea amelldmeJlt, 52 Stat. 111, to § 5, The amendmmlt added the phra.se "unfail or deceptive acts or practices" to the section's origbba] ball on "mffair methods of competition" and thus made it clear that Coilgress, through § 5, charged the FTC with protecting consmners as well as competitors. Tile House Report on file a~uendment sumularlzed eou- gressmnal thinkh,g- "[T)hls arnendmetbt ml~kes the eonsumer, who may he injured by an uldair trade prac- tice, of equal conceru, before the l~w, with the merelmat or manufacturer injured by the unfair methods cff a dishonest competitor." H.R. Rep. No. 1613, 75Ot Cong, 1st Sess., 3 (1937). See also S. Rep. No. 1705, 74th Cong., 2d Sess, 2 3 (1936). Thus, legislative and judicial authorities alike con- vince us that the Federal Trade Commission does not arrogate excessive power to itself if, in mcasurlng a practice against the elusive, but congressionally nlall- dated standard of fairness, it, like a court of equity, ¢onaiders public values beyond simply those enshrilled in the letter or encompassed in the spirit of the ~utl- trust laws) Tim Commission has d~crih~x] tile factors it e@tl~il]t*r~ ill deler milling whether a practice Ch~t i~ ]llilh~r in vio]*ttion of th~ ~llti- tl'ttnt ~aw~ tt~r d~e~lJ(iv~ ~s t~tql~[m~ t,Llft~i¢: "(I) whether the practice, without necez~arily having been pro viotmly cnnsid~red unlawful, off(nds public policy :~s it has be,en established by statutes, tile common law, (w olh~rwi~whether in otimr words, it in within al [east the ileaumbr~ of vame ¢~im'aor~-I~w, O~ b3

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243 233 /~C v. SPERRY & HUTCHINSON CO. Opinion of the Court 245 III The ge~Leral conclusion just enunciated requires us to hold that the Court of Appeals erred in its construe- glen of § 5 of the Federal Trade Commission Act. Or- ditmrily we would simply reverse the judgment of the Court of Appeals insofar as it limited the unfair prac- tices proscribed by §5 to those eontr&ry to the letter and spirit of the antitrust laws and we would remand the case for coll~lderation of whether the challellged practices, though p~sing no threat to competition within the l)re- cepts of the antitrust laws, are nevertheless either (1) u.fair methods of competition or (2) unfair or de- ceptive acts or practices. What we deem t~ be proper concerns about the interaction of administrative agencies and the eourts, however, oounsels another course ill this case. hi this Cour~ the Commission argues that, however correct the Court of Appeals may be ~n holding the challenged S&II practices beyond the reach of the letter or spirit of file antitrust laws, the Court of Appeals nevertheless statutory, or o~her e~tabli~hed concept of untairne~ss; (2)whether it ks immoral, unethical, uppr~<~ive, or un~cnspu[ou~; (3) whether it c-aus~ suhstamin] b~jury to eonsumer~ (or e~)mpetitors or ~)ther busiu~*melD." Statement of Basis and Purpose of q'~:tde Bigula- tiun lhde 408. Unfair or Deceptive Adverlising and L~lbe]ilJg of Cigarctn~ ill Itrlafion to the Health Hazards ot S~mking 29 Fed Reg 8355 [1964} 8&H argue~ that a later portion of tbm statement commits the YTC ~o Ire view that mksemldue*, in Tt~pect of Ire third of the*e criteria I~ not Subject to c~ll~lr~int as "unfair" a]:~ellt ~. coneomilant showing ~f m~conL]uet according t~ Ire filet or ~ond of tk~e erit~rks But all the I~I'C sa~l ill the stalernent referred to was tbat '[t]he wide v.riely of decislmu inlerpretlng the elusive concept of unbzirne~s a~ l~t Inak~ clear that a method of selling viol~te~ Se, tion ~ if it ~ exl,luiti~c vr inequilable and if, in addition to being incwally objeetlontble, it is seriou*ly detrimeiatal to consumers or ulller~ " Ibid. iemldmsi~ ~ddedI

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244 246 OCTOBER TERM, 1971 Opinion of the C~uri 405 U S erred in asserting that the FTC could measure and ban conduct only according to such narrow criteria, pro- ceedthg from this premise, with which we agree, the Commission's major submission is that its order is sus- tainable as a proper exercise of its power to proscribe practices unfair to consumers. Its mthor position is that it also properly found S&H's practices to be unfair competitive methods apart fronl their propriety under the antitrust htws. The difficulty with the Commission's position is that we must look to its opinion, not to the argunlents of its counsel, for the underpinnings of its order. "Con- greys has delegated to the admiaishrative official and not to appellate counsel the responsibility for elaborating end enforcing statutory commands." Investment Co. Institute v. Camp, 401 U. S. 617, 628 (1971). We cannot read the FTC opinion on which the chalisaged order rests as premised on a~wthing other than the clas~is antitrust rationale of restraint of trade and injury to competition. The Commission urges reversal of the Court of Appeals and approval of its own order because, in it~ words, "[t]he Act gives the Commisalon comprehensive power to prevent trade practices which are deceptive or unfair to consumers, regaedle~ of whether they also are anticompetitive." Brief for the FTC 15, ]t says the Court of Appeals was "wrong in two ways: you can have an anticompetitive impact that is not a violation of the antitrust laws and violate Section 5. You can also have an impa~t upon consmners without regard to competition and you can uphold a Section 5 violation on that ground." Tr. of Oral Arg. 18. Though completely accurate, these statements cannot be squared with the Commission's holding that "tilt is es~ntiai in this mat- ter, we believe, and as we have heretofore indicated, to determine whether or not there has been or n~ay be an

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2~5 FTC v. SPERRY & IIUTCItlNSON CO. 247 233 0pinion of the Court impairmen~ of competition," Opinion of Commission, 1 App. 175; its conclusion that "[r]espondent . . . pre- vents . . . competitive reaction[s] and thereby it has restrained trade. We believe this is ~ii u]lfair method of competition and an unfair act and practice in violn- tion of Section 5 of the Federal Trade Commission Act and so hold," 1 App. 178; its observation that: "Respondent's individual acts and its acts with others taken to suppress trading stvznp exchanges and other stamp redemption activity are all part of a dearly defined restrictive policy pursued by the respondent. In the circumstances surrounding this particular practice it is difficult to wholly separate the individual acts from the collective acts for the purpose of making ~m analysis of the consequences under the antitrust laws." 1 App. 179; and like statements throughout the opinion, see, e. g., 1 App. 176-178, passim. There is no indication in the Commission's opinion that it found S&H's conduct to be unfair in its effect on competitors because of considerations other than those at the root of the antitrust htws2 For its part, the ' The Commts*ion did explmtly declinv to a~e~ $&H's conduct in light of one leading antitr~t ease, In United 5tate~ v. A~wld, Sch~nnn & Co., 388 U. S. 36~, 379 (1967), this Court held ths(: "Under the Sherman Act, i~ Is tmrea~onahle without more for s. manufacturer to seek to restrict and confine are~ or per~n~ with whom an 0.~i¢]e masy be traded alter the manufacturer ]ass patted with dominion over it. Whi~e Motor [v. Unlted Stc~e~, 37~ U, S, 253 {1963)]; Dr. Msiea [Meahcai Co. v. Path & ~n~ Co., ~20 U. S. 373 (1911)] Such re~lralnla are so obviously destruettve of co~pe~ltion that their mere exmtence i~ enough. If the mmnu&eturer par~ with dam~ninn over h~ pt~luct or travMera rtsk of le~ to another, he may not r~Fee control over its destroy or the ~onditioas of its resMe." Arguably, S&H's practice ta preoeribed hy this doctrine When the FTC deehned to rely on *his precedent, however, it dsi t~ not L-,=,==IL_ g g g

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24g 24~ 0Cq'OBER TERM, 1971 Opinion of the Court 405 U.S. theory that the FTC's decision is derived from its con- cern for consumers find8 support in only one line of the Commission's opinion, The Commission's observation that S&H's conduct limited "stamp collecting con- sumers'.., freedoln of choice in the disposition of trading stamps," 1 App. 176, will not alone support a colmluslon that the FTC has found S&H guilty of unfair practices because of d~nage to consunlers. Arguably, the Commission's findings, in contrast to its opinion, go beyond concern with competition and address themselves to nolmompedtive and consumer injury as well. It may also be that such findings would Imve evidentiary support iu the record. But even if the find- ings were considered to he adequate foundation for an opinion and order resting on unfair consequences to colmumer interests, they stiIl fail to sustain the Com- mission action; for the Colrmllssion has not rendered an opinion which, by the route suggested, links its findings and its conclusions. The opinion is b~rrea of any at- tempt to rest the order on its assessment of particular competitive practices or considerations of consumer in- terests independent of possible or actual effects on corn- petition. Nor were any standards for doing so referred to or developed. to turn to eonsiderations other than those embedded in the anti- trust Ewe, but in*te~d to look for coasideraPons le~s "teehnicaP' 6rid more deeply rented in antitrust pohey: "We do rat beheve it appmprxate to decide the brc~d c~mpetitive queatiom pre~emed in th~ record on the n~rrow and technical basis of ~ restraint on allenstiom The circumstances here are much dif- feretlt from that where produet~ are ~ra~v*ferred to a dealer for reesle. They ~re complicated by the Da~ul~ of the trttding stamp ~cheme, It is e~sentia] in thbs mstter, we befieve, aqd a,~ we h~ve hereto.*ore indicated, to determino whether or not thero ha~ be~n or may be aa mapairment Qf eompetmon. Thus, we intend to look at ~.he Suimt e, ace of the ~(]egedly il~e~sJ practice r~ther tim.n to decide the ca~e by ~pplica'dca of p. teclmicaJ, fotmuin." 1 App, 175-17~ f._~ 1"¢ f~

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247 FTC v. SPERRY & HUTCHINSON CO 249 233 Opinion of the Cour* Our view ia that "the cor~siderations urged here in suppart of the Commission's order were not those upon which its action was based." SECv. Chenery Corp., 318 U. S. 80, 92 (194a]. At the lea~t the Commission has failed to "artlculate any rationa] connection between the facts found and the choice m~le." Burli)lgton Track Lines v. United States, 871 U. S. 156, 168 (1962). The Commission's action being flawed in this respect, we catmot sustain its order. "[T]he orderly functioning of the process of review requires that the grounds upon which the administrative agency acted b~ clearly dis- closed and adequately sustained." Chenery, supra, at 94. Budinyton Truck Lines. supra, at 169. A court cannot label ~ practice "unfair" under 15 U. S. C. § 45 (a] (1). It can only atffrm or vacate an agency's ~udg- ment to that effect. "If an order is valid only as a determination of policy or judgumnt which the agency alone is authorized to make and which it .has not made, a judicial judgment ca~mot he made to do service for an administrative judgment." CherLery, ~upra, at 88. And as was repeated oz~ other oceashem: "For the courts to sabstituts their or eounseFa dis- eretion for that of the Commission is incompatible with the orderly functioning of the process of judicial review. This is not to deprecate, bat to vindicate (see Phelps Dodge Corp. v. Labor Board, 313 U. S. 177, 197), the administrative process, for the purpose of the rule is to avoid 'propel[ling] the court into the domain which Congress has set aside exclusively for the administrative agengy.' 332 U. S., at 196." Burlington Truck Lines, SUpra, at 169. In these circumstm~ces, because the Court of Appeals' judgment that S&H's practices did not vlolate either the letter or the spirit of the antitrust l~ws wa~ not attacked and remains undisturbed here, and because the Conmlis-

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248 2~0 oc'rOBER TERM, 1971 Opinion of ilia Court 405 U, S, sion's order could not properly be sustained on other grounds, the iudgment of the Court of Appeals setting aside the Commimion's order ia affirmed. The Court of Appeals erred, however, in its construction of § 5; had it entertained the proper view of the reach of the section, the preferable course would have been to remand the ease to the Commission for further proeeedlngs~ Chen- cry, supra, at 95; Burli~lgton, supra, at 174; FPC v. United Gas Pipe Line Co., 393 U. S. 71 (1969). Accord- ingty, the judgment of the Court of Appeals is modified to this extent and the ease ia rem~nded to the Court of Appeals with instructions to remand it to the Cormnimion for such further proceedings, not inconmstent with this opinion, tm m~y bc appropriate. So ordered. MR. JUBTIc~ POW~I~L ~tld MR. dUSTIC~ P~HNqUmT took no part in the consideration or decision of this ca~e. © i (tt

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