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18
8
N.D.
Report
The Consumer and the Federal Trade
Commission critique of the consumer
protection record of the FTC by Cox,
Fellmeth and Schulz. 67 pgs.
Monday, June 29, 2009
Page 1 of 1
THE CONSUMER
AND
THE FEDERAL TRADE COMMISSION
A critique of the
consumer protection
record of the FTC
by
Edward Cox
Robert Fellmeth
John Schulz
This report is the product of a
three-month empirical investigation
of the Federal Trade Commission conducted
during the summer of 1968 with the
assistance of Ralph Nader.
Project members: John Schulz, Director
Judy Areen
Peter Bradford
Edward Cox
Andrew Egendorf
Robert Fellmeth
William Taft, IV
0 Copyright, 1969, by Edward Cox, Robert Fellmeth and
John Schulz
i
Biographies of Project Members
Judy Areen: AB, 1966, Cornell University. Third-year
student at Yale Law School.
Peter Bradford: AB, 1964, LL.B., 1968, Yale University.
Special Assistant to Governor of Maine.
Edward Cox: AB, 1968, Princeton University. Pre-
architecture and law student at Yale University.
Andrew Egendorf: AB, 1967, Massachusetts Institute of
Technology. First-year student, Harvard Law School.
Robert Fellmeth: AB, 1967, Stanford University. Second-
year student at Harvard Law School.
John Schulz: AB, 1961, Princeton University, LL.B., 1968,
Yale Law School. Assistant Professor of Law, University
of Southern California.
William Taft, I.V: AB, 1966, Yale University. Third-year
student at Harvard Law School.
ii
TABLE OF CONTENTS
TOPIC
PAGE NUMBER
Introduction
1
1. Background
2
2. The FTC and the Consumer: Scope
of the Report
4
3. A Brief Overview of the FTC and
its Consumer Protection Legislation
and its Procedures
4
The Crisis
9
The Failures
19
1. Failure to Detect Violations
22
2. Failure to Establish Priorities
24
3. Failure to Enforce with
Present Authority
24
A. Decline of Formal
Enforcement Activity
40
B. Shift to Voluntary
Enflrcement
44
C. Inadequate Use of Formal
Enforcement Tools
46
D. Failure to Enforce Promptly
55
4. Failure to Seek Effective
Resources and Authority
65
A. The Need
65
B. Failure to Seek Adequate
Manpower and Money
66
C. Failure to Seek Adequate
Legislative Authority
68
Techniques of Masking Failures
74
1. Commission Misrepresentations
75
2. Secrecy
81
3. Collusion with Business Interests
95
The Core of the Problem: Personnel
101
1. Partisan Political Activity
102
2. The FTC and Congress
105
3. The Collective Background of the FTC 110
Protection of the Poor Consumer
112
Hiring from Minority Groups
114
Problems of the Higher Staff
117
4. Hiring of New Attorneys
120
Situation of the Lower Staff
122
5. Need for Professional Personnel
Other than Attorneys
125
iii
TABLE OF CONTENTS, CONT'D
TOPIC
PAGE NUMBER
Findings and Recommendations
127
Appendices
138
Appendix 1
139
Appendix 2
140
Appendix 3
147
Appendix 4
148
Appendix 5
149
Appendix 6
151
Appendix 7
153
Appendix 8
154
Appendix 9
155
Appendix 10
162
Appendix . 11
163
Appendix 12
164
Appendix 13
168
Appendix 14
177
Appendix 15
181
Appendix 16
182
INTRODUCTION
2
1. Background
As the representative of the American consumer in
Washington, Mr. Ralph Nader has recognized the benefits
which might accrue to the consumer from a Federal Trade
Commission which lived up to its full potential.
In order to determine
what this potential is and how the FTC is fulfilling it,
Mr. Nader brought together a group of law students to commence
a unique study.
Providing their services without pay, seven students
worked on the project at varying tasks during last summer.
Their personal motivations covered a wide spectrum, but to
a certain degree they were all convinced of the need for
peaceful change, based on a rigorous and thoughtful examination
of our existing institutions in the light of present. realities.
This they saw as an alternative to the violent means of
change advocated by certain of their contemporaries.
They came to Washington at the start of June, 1968, having
read the small number of previous reports and featured articles
on the Commission. They conducted interviews of selected
high-level personnel, simultaneously noting and requesting
all possible written reports, memoranda, data sheets, computer
programs, and other materials at the FTC useful to such a
study. While the limited materials made available by the
Commission were being assimilated, other personnel in the
Commission were singled out for in-depth interviews. Outside
people who had an intimate knowledge of the Commission, either
from having been there previously or from daily contact in line
with their work were also interviewed. The students made a
total of forty internal and twenty-five external interviews.
In addition, an undetermined number of informal conversations
were held with persons both inside and outside the Commission.
By the end of the summer the vast amount of information
3
collected had been roughly assimilated and categorized.
At this point the students recognized that their report
in its final form would have to be unlike any report done
previously on a government agency. The paradigm of all
previous reports had been the law review article which
usually ended a longwinded and tiresome discussion of the
law and organization of an agency with a recommendation
for reshuffling the organization chart. Over the summer
the students had come to know the FTC too intimately to
ignore the obvious fact that the Commission's troubles
stem in great part from specific weaknesses in personnel. The report
therefor searches thoroughly into personalities and
attitudes of high staff members, since substantive reforms
in Commission performance will be impossible to achieve
without imaginative top. and middle-level leadership.
i
This report is exclusively the product of the students
efforts and its conclusions are entirely their own. As
such, it is a possible prototype for similar studies of other
governmental agencies. It is by no means a final document,
but rather should be considered an interim report in a
continuing study.
4
2. The FTC and the Consumer: Scope of Report
An early section of this report analyzes developments
in American society which seem to threaten the already pre-
carious position of the consumer.
The Federal Trade Commission is the major federal govern-
ment agency for consumer protection. * It is the only agency
with a potential for effectively policing business frauds
in many parts of the United States where state and local
laws are inadequate, and it alone has the potential resources
to control the practices of nationwide business empires.
The FTC does not and cannot, however, fulfill its potential
at the present time, as the remainder of this report will
demonstrate. The toll in consumer abuses which continue to
flourish due to the inactivity of the Commission is impossible
to calculate. The agency must be reformed immediately.
Because of the pressing need for reform of the FTC in
the consumer-protection sphere, this report is devoted entirely
to that subject. It does not deal with the equally large and
important topic of the FTC's antitrust duties.
3. A Brief Overview of the FTC and its Consumer-Protection
Legislation, and its Procedures
The Federal Trade Commission is an independent regulatory
agency created in 1914. Its regulatory duties are divided
between direct consumer protection and antitrust.
The agency's consumer-protection duties are defined by the
Federal Trade Commission Act (FTC Act) and several specialized
statutes. The former generally empowers the Commission to
*
See Appendix 16 for legal and historical arguments in favor
of the propositions that the FTC has important consumer
protection responsibilities and that Congress intended it
to be a vigorous enforcement agency.
6
enforcement under threat of contempt and for criminal
sanctions for failure to respond or false responses.
The only coercive legal enforcement tool generally
available* to the FTC is the "cease and desist order,"
which imposes no retroactive sanctions, but merely prohibits
future repetition of the sort of conduct against which it
is aimed, Once a cease and decist order becomes final
(after 60 days or appeal to U.S. Courts of Appeals and
Supreme Court), it remains in effect permanently, and any
violation may be punished by an action in the Courts of
Appeals on behalf of the United States for recovery of
Ucivil penalties" of up to $5,000 per day of violation.
FTC Act, Sec. 5(1).
Formal adjudicative proceedings leading to the issuance
of cease and desist ordersare prescribed by Section 5 of
the FTC Act and the Commission's "Rules of Practice for
Adjudicative Proceedings." They are begun by the Commission's
filing a "complaint"; Section 5(b) directs the Commission to
file a complaint
Whenever the Commission shall have reason
to believe that any
person, partnership
or corporation (subject to the FTC Act) has
been or is using any
unfair or deceptive
act or practice in commerce, and if it shall
appear to the Commission that a proceeding by
it in respect thereof would be to the interest
of the public
The "public interest" requirement was written into the
statute to enable the Commission to plan its enforcement program
free of the requirement that all citizen and merchant complaints
be acted upon.
FTC Rules also provide procedures for securing "consent"
(non-contested) cease and desisterders without going through
the adjudicatory process (hearing, initial decision, appeal,
In food and drug cases and under the textile and fur statutes,
the Commission has the additional powers, in theory, to seek
preliminary injunctions and even criminal penalties.
7
Commission decision) involved in regular cease and desist
order cases.
The Federal Trade Commission presently uses several
additional enforcement techniques which do not lead to
issuance of cease and desist orders (and thus cannot draw
on the coercive powers underlying enforcement of cease and
desist orders). Two of them are methods for dealing on an
"industry-wide" rather than individual basis with practices
found upon investigation to be widespread; these are
proceedings leading to issuance of "Industry Guides" and
"Trade Regulation Rules." Two others are designed to deal
with individual merchants: (1) a means by which businessmen
can solicit and receive "Advisory Opinions" on proposed courses
of business action. (2) procedure for acceptance by FTC of
informal "assurances of voluntary compliance" in lieu of cease
and desist orders.
The FTC presently employs some 1230 persons, including
473 attorneys and 464 secretarial and clerical employees.
These employees are divided between the agency's principal
office, located on Pennsylvania Avenue in Washington, D. C.,
and eleven field offices in Atlanta, Boston, Chicago,
Cleveland, Falls Church, Va., (serving Washington, D. C.)
Kansas City, Los Angeles, New Orleans, New York, San Francisco
and Seattle.
The FTC staff at the principal office is divided into
administrative offices and operating bureaus; the latter are
structured primarily along "program" rather than "functional"
lines, that is, according to statutes or programs administered
rather than the kinds of tasks performed by employees (e.q.,
investigation, litigation, etc.) The major operating Bureaus
are those of Deceptive Practices, Economics, Field Operations,
8
Industry Guidance, Restraint of Trade and Textiles and Furs.
This report deals with Deceptive Practices, Industry Guidance,
and Textiles and Furs, for the most part.
The major administrative offices are those of the
officer
Secretary, Program Review , General Counsel, Hearing Examiners
and Executive Director (including Office of Administration).
This study focuses on the General Counsel Office.
The Commission itself is composed of five members
appointed for staggered seven-year terms. It has delegated
some of its statutory authority to the Chiefs of various
operating bureaus; however, the overall decision-making process
of the Commission remains highly centralized, for no powers
have been delegated to personnel beyond Assistant Bureau
Directors, all of whom are located in the central office.
The Chairman has extensive powers and responsibility in
the management of the FTC, for he is its top Administrative
Officer. He is thus responsible for hiring and promoting
persons on the staff.
THE CRISIS
10
Throughout the history of our country, the American
people have presumptively relied on the forces of the
marketplace to determine their economic destiny. American
business has traditionally modified its practices in order
to take advantage of new technology and new opportunity.
But another force in American society -- a force of conscience --
has opposed the unmoderated exercise of economic power and has
sought to keep the new mechanisms and forms of economic power
from bypassing the theoretical market checks to deceive,
injure or exploit. This force has acted in several ways,
including self-regulation by ethical businessmen, the formation
of consumer groups exerting power in the marketplace, consumer
education movements, and public pressure on government for
legal regulation.
Traditionally, the most serious threats to the American
public, the most dangerous economic crises, have occurred when
changing business practices bypass market pressure and subvert
the legitimate operating principles of free enterprise,
sometimes becoming in themselves reified symbols of worship.
In such a case the resultant system can resemble in practice
the monolithic structure of a communist economic system -- the
economy allied with the state in an impregnable combination.
Only by keeping government separate and strong in relation to
economic forces, and vice versa, can a balance of power be
sustained that will promote a democratic government and a
desirable economic system.
As for the worship of the forms of free enterprise, it
is always important to prevent an association of specific
business practices with the genuine operating principles of
11
free enterprise such that their mere utterance, like
magical incantations, dispels legitimate worries and
assuages justifiable fears. Such results pose a constant
threat to rational analysis and viable adjustments.
Many times in the past America has paid a heavy price
before recognizing the futility of worshipping the forms
and not the substance of the free market. The growth of
trusts in the last century, the impure drug and adulterated
food abuses early this century, the Great Depression, these
are all examples of dangers which required the intervention
of forces outside the market for correction. But many paid
the heavy price of injury, poverty or loss before substantial
corrective action was taken. There is no reason why America
should have to pay that kind of price now, and indeed one of
the putative characteristics of rational man is an ability to
predict the effects of present trends on existing institutions
in such a way as to meet change without sacrificing valued
elements of those institutions.
Past experience suggests that healthy business competition
helps preserve a successful free enterprise economic system.
In this age of growing economic concentration, however, it is
no longer wise nor efficient for government to rely solely on
fostering competition to do the job. Government must now begin
to direct its energies towards direct protection of legitimate
consumer interests as well. Minimally, this means guaranteeing
that consumers obtain adequate and accurate information about
products available in the market; it should probably also
include some control of types of sales approaches which
constitute overpowering appeals to strongly irrational elements
12
of human psychology. And in addition, government must make
certain that all consumer products are safe for consumption
when reasonably used.
The chief destructive trends in the economy which must
be taken into account in planning for consumer protection are
the following:
1/ The rise of the corporate economy and its accompanying
phenomena such as intra-corporate tyranny over executives, price
leadership, oligopoly or shared monopolies, conglomerate
empires, tacit agreements precluding challenge to mutual
vested interests, corporate domination of regulatory agencies,
product fixing, manipulation of credit, and other subtle forms
of coercion which block new competitors and new ideas.
Where industries have very low cross-elasticity of demand,
and where competitors within each industry manufacture products
of a similar nature, the consumer will not learn the negative
aspects of such products. No manufacturer will advertise against
his own product type and no one will advertise against a product
that is not competing with his own. This oligopolistic model is
a rapidly growing characteristic of the new economy The result
has been a glut of information regarding what are in reality
contrived distinctions between identical products, but a
dearth on the drawbacks of any particular product type. Cigarette
ads have long been the paradigm example. But one rarely ever
hears about the disadvantages of mouthwashes (which many dentists
say irritate the mucous membranes of the mouth), detergents (most
of which now add particles to your clothes rather than remove
them, many of which can irritate the skin), cars of all types,
drugs of almost every variety, deodorants (which now clog pores
*
Concentration is increasing the most rapidly in the consumer
goods industry.
13
to promote the magic of "dryness"), "brightening" toothpastes
(which contain abrasives, see appendix 10), diet soft drinks
(some of which can harm internal organs), and so on.
2/ The communications revolution, including increasing use
of nationwide television and the rising cost of access to this
public forum. This development has made it possible for
businessmen to perpetrate fairly blatant frauds or deceptions,
bilking large numbers of people of a small amount in a short
time without feeling any significant market check. A recent
example of this is the chinchilla ads on TV last year (see
appendix 14). Another example is the extremely efficient TV
chopping and grinding demonstrations by a number of products
which are purchased by mail and almost invariably perform in
a manner vastly inferior to what is represented. It is indisput-
able that it is now easier than ever before to reach large numbers
of people with more subtle forms of influence.
3/ The information explosion, including increasing use
of mass data-handling techniques to attack the privacy and
autonomy of the consumer. This trend has made possible
social-psychological analysis of the various potential markets.
Market researchers have divided and subdivided the market along
various lines to make possible special appeals to different
social groups. Most of these appeals are based on distinctions
which have nothing or very little to do with the products
themselves, but are associated with them to produce "empathy."
Virginia Slims are marketed to appeal to feminists, Camel
cigarettes to appeal to he-man, Lark to the suburban set, and so on.
4/ The growing sophistication of the science of applied
psychology, involving influence by suggestion, subtle deception
through image manipulation, and the creation of demand through
associations with sex, fear and power fantasies. These
advances facilitate subtly effective appeals and unapparent
deceptions. Some of these seem ridiculous when directly
explained, but nothing testifies more to their effectiveness
than their consistent success. Not only do businessmen attempt
to utilize the most accomplished psychologists in the academic
world to appeal via symbolic ties to the public's fears and
frustrations in almost psychotic association attempts, but they
experiment increasingly in more direct forms of forced
persuasion, as in the micro-second flashes of Aqua Velva lotion
or in the hypnotic waving of keys in front of the screen in
Washington D.C. during the Fairfax Plymouth ads with the
accompanying deep voice intoning over and over, "you will
I
buy a Plymouth at Fairfax motors."
There have traditionally been three major arguments against
government entry into the field of advertising. First, is the
argument by business interests that the "perfect" or all wise
consumer can not be deceived. Second, there are appeals to free
speech and subsidiary interests (the desire for imaginative ads,
etc.). Third, there is a general feeling by some that the
problems are unimportant, unreal, or will go away.
The answer to the first argument is contained in the
analysis above of the consumer's plight given contemporary
trends. It is worth adding, however, that although corporate
giants justify the system and their activities by constant
reference to the omniscient consumer, their ads reveal their
true estimation of him. Briefly, he is an insecure, sex and
attention starved, paranoid neurotic with an attention span of
10 seconds. Even if today's consumer is capable of understanding
15
the complexities of, say, comparative reliability
characteristics of standard automotive engines -- which
industry moguls pretend he is -- these moguls will not give
him that information. Instead, they prefer to sell sex and
power in relation to various phallic symbols, undulating women
and potent wild animals.
The second argument is admittedly a valid consideration.
There is a competing interest in favor of the free exercise
of communications capacity and indeed in favor of diverse and
clever ads. But this does not mean that the trends now
evolving within our economy do not present questions of the
greatest importance. Sadistic appeals by Silva Thins or
paranoid appeals by Listerine are not symptoms of a past era,
they are precursors of a new one. Further, certain issues
presented by the trends above are capable of easier determination.
When the question is not irrelevance but deception, that is, the
deliberate creation by advertisement of an impression which in
actual fact does not represent the performance of the product,
there is no substantial claim of competing value. Larceny by
deception has been a crime for many years at common law. There
is little free speech interest in the right to say "your money
or your life,' nor is there much in the right to say "if you
give me X dollars I'll give you y object," fully intending and
subsequently delivering, inferior 2 object.
The third approach to the problem of deceptive practices
is to minimize its importance or duration. But given the evolution
of modern society this problem must not be underestimated. It
is easy to dismiss the matter because many deceptions are hard
to detect. If a false claim is apparent it is ignored and faile.
If it is successful it is often not recognized at all. Even
when the product is deficient it is often not easy to trace to
16
to a specific deception. This is particularly true when
the deceptive claim is relative to the products of other
competitors with direct comparisons unlikely. How many,
for instance, will buy two sets of tires to see if one stops
faster as claimed. Finally, it is easy to make small lies of
omission or implication which generate great market advantage
and attract little attention. It is foolhardy to minimize
the effect of these processes, for they can eventually
threaten general promotional credibility to the detriment of
everyone (but particularly the honest businessman and the
consumer).
The increase in deceptive practices in advertising is
manifest throughout the trade. It is clearly a rising
phenomenon with more current abuses than any single person
or group could document fully.
The longstanding practice of relabeling substantially old
products as "new" with every successive ad campaign has made
the term meaningless. Detergents are particularly guilty of
this transgression, but so called "new" cars, appliances and
other product types are all guilty.
During the first quarter of 1968 ten specific products
(not corporations) spent over thirty million dollars on TV
advertising alone (see appendix 3). Deceptions are widespread
among those products most advertised on TV, For example, Salem,
Winston and Kool were among the top advertisers over this period,
spending almost ten million between them on TV over three months
trying to convince millions of people that death-and-disease-
dealing smoke is actually analogous to fresh air, spring, and
cool mountain brooks. The current Newport ad repeats the word
"refreshing" five times. Another three of the top ten for the
17
first quarter of 1968 were analgesic companies, with Anacin
leading the pack with expenditures of over four and one half
million. All three ads are blatantly and persistently deceptive:
Anacin claiming that two of its magical pills "contain as much
of this (unnamed) pain reliever as four of the other (unnamed)
extra strength tablets," pointing out, of course, that one
shouldn't take four of the other; Bayer advises that "Doctors
and public health officials" recommend aspirin when flu strikes
as one of three recuperative steps, and that since Bayer is
pure aspirin ; Bufferin claims to go to work "in half the
time" (see appendix 9).
Other ads currently flooding the TV networks which are
deserving at least of inquiry are the Dyno dollars, Esso
gas station and other game gimmicks implying advantageous
odds of winning substantial prizes, the Firestone Tire claim
that its wide oval tires are "guaranteed to go through ice,
mud and snow or we pay the tow," the Shetland vacuum cleaner
test with the machine's suction supposedly drawing a resistant
bowling ball up a plastic tube, the mock Ken-L Ration butchers
who can't tell the difference between Ken-L Ration and real
beef the Colgate toothpaste claim that it is "unsurpassed"
implying superiority, the assertions of Crest ads, the use of
government tar statistics by Pall Mall, the Johnson lemon wax
demonstration with unnoticeably disparate rags, the new Geritol
ads (in open defiance of a rare standing FTC cease and desist
order, see section on compliance, p. 49), the Coldpower claim
to "germproof, the Bravo wax representation that detergents
absolutely can not dull the surface, the Mrs. Filbert's Diet
Safe Margarine ad implying that if you can pull 1" of flesh off
*
This group, with no butchers among us in any form, had no
trouble differentiating.
10
the tricep of hubby he is too fat and will therefor die
prematurely (unless saved by Mrs. Filbert's of course), *
the Ultra-Brite sex appeal (brightness) claims and the
MacCleans whiteness test (see appendix 10 for ADA preliminary
warning), the Goodyear tire "up to double the mileage"
polyglas tire ad, and on and on.
*
It is worth noting that at 6'1" and 165 lbs. this author can
easily pull 1" and more of flesh from his tricep (underside
of upper arm).
THE FAILURES
20
The statues in front of the FTC building in Washington
D.C. represent the purpose of the agency in the eyes of the
sculptor. Their symbolic message is accurate with regard to
the founding statute of the Commission, but stands in stark
contrast to the recent history of the agency -- both in
philosophy and in practice. The statues depict an unruly and
powerful horse -- American business, a danger and a menace
unharnessed, being restrained by a strong and determined young
man -- the FTC. Such a juxtaposition does not in any way
represent the performance or the attitude of the prevalent
powers in the FTC. The FTC is not young or young thinking,
it is not strong nor does it seek to be strong, and it has
no desire to restrain. It would rather give the horse its
head, only occasionally throwing a small stone at it. Indeed,
the Commission does not view American industry as a wild horse
at all, but rather as a docile beast who now and then needs
guidance, and every so often a mild "whoa."
The responsibilities of the FTC demand that it see business
for what it is -- a sometimes unruly animal. The lack of such
a posture is evident through the attitudes of its present Chairman.
In a typical address before a business audience in North
Carolina, Mr. Dixon opened his remarks as follows:
"I've come here with the high hope that I can persuade
you that the Federal Trade Commission is not socialistic,
bureaucratic, damyankee, tool of the devil that may have been
pictured to you. Instead, I'd like to convince you that you've
got a friend in the FTC --- a real friend
11 "Needed: A
Combined Attack," Before Joint Meeting of the Better Business
Bureau and Advertising Club, Winston-Salem, North Carolina,
21
Jan. 8, 1968, p. 1.
It is worth noting that even if the FTC vision were a
correct one, and even if it were appropriate for the agency,
it would still have one difficulty. For if a businessman were
to encounter a competitor's practice of any kind that he would
rather not engage in, he must either lower himself and engage
in it or commit economic suicide. If he complains to the FTC
he is going to have to survive in virtuous poverty for years
while the case is being litigated and his competitors rake in
their fortunes. Such a businessman would not only have to be
pure to fit into the FTC mold -- but he would have to be either
dumb or suicidal. Most American businessmen are neither. They
are no more pure, concerned, dumb or suicidal than the FTC is
a young, strong force restraining the economy for the public
welfare. - The statue lies.
This attitude of the Commission, spawned through connections,
backscratching arrangements and cronyism, pervades every aspect
of FTC activity. When viewed after a cursory examination of
FTC public relations, the failures of the FTC reveal one
outstanding feature of its operation -- its continual and con-
sistent violation of its own statute with regard to deceptive
practices. The FTC itself is one of the most serious and blatant
perpetrators of deceptive advertising in America. It has avoided
congressional or other investigation or review for a decade by
consistently responding to the vector theory of power --- feeding
and serving those who would or do threaten it. Substantially,
this means feeding and serving big business and congressional
interests attached thereto.
For the FTC to work with any effectiveness it is going to
have to: 1/ detect violations, 2/ establish priorities for the
most efficient expenditure of enforcement energy, 3/ enforce
the given laws with energy and speed, 4/ acquire effective
statutory authority where present authority is insufficient,
5/ remain independent from illegitimate interests which could
distort, blunt or block enforcement.
1. Failure to Detect Violations
The assumption discussed above concerning competitor notice
of deceptive practices is one of the two more or less exclusive
means relied upon by the FTC for the detection of violations.
The second is not much more useful, given present economic struc-
ture, than the first. The second assumption relied upon by
the FTC is "mailbag notice"* -- reliance for detection primarily
on complaints (called by the FTC "applications for complaint")
from the aggrieved consumer. These complaints from the public
do not provide notice of many problems. Because of product
fixing and product complexity, the consumer often doesn't even
know he is being deceived. The FTC is not going to receive
complaints from a person who is not seriously injured, or
who can not trace the difficulty to a particular product, or
who does not know of other alternatives, or who does not know
what is happening to him either before or after making a purchase,
or who perceives the historic futility of appealing to the FTC.
Another fallacy in the mailbag approach can be found in
America's ghetto problems. There, as finally shown by the
Commission's own study of consumer deception in Washington D.C.
(at the insistence of Senator Magnuson), the system contradicts
the Commission's assumptions about deceptive practices. The
See the 1967 Senate Hearings of the Independent Offices
Subcommittee, p. 1,64 for a discussion of this practice.
**
A consumer will not be motivated to complain about petty
frauds (even if on a massive scale) since the FTC has no
refund power, and no private civil suit can be based on
an FTC order.
VEN
23
victims here do not care about the flood of inferior goods,
they are numb through the lack of any higher expectation.
If they were to complain they would not know how. They don't
have lawyers and they don't know a thing about the FTC.
The mailbag source of complaints is certainly useful,
relevant, and can often be indicative of certain types of
outright fraud (as in the chinchilla cases). But this source
is not sufficient. The FTC must establish vast new means of
detection. It must initiate aggressive and intensive
investigations, particularly into ghetto areas. It must
monitor TV and radio carefully in a general surveillance
effort. It must, perhaps, establish FTC investigative teams
in every trouble spot, particularly in ghetto areas. It
must, perhaps, require pre-submission of certain categories of
advertising
At present, the FTC monitors haphazardly** and occasionally,
and several sources have confided that the one TV monitoring
operation extant (which consisted of several matrons watching
the set) was discontinued because they "paid too much attention
to the programs (mostly soap operas) and would leave for snacks,
etc. during commercials. It is obvious that there must be alert
and extensive monitoring operations with pre-screening by expert
engineers, doctors, and other professionals.
It is also obvious that one ghetto investigation, which was
According to Advertising Alert No. 2, Feb. 12, 1962, the FTC
monitored 50,000 scripts from TV and radio pre-submissions.
Investigation has revealed this claim to be doubtful at
best, but even if true, such monitoring would do little toward
the detection of visual deceptions, nor do experts pre-screen
copy.
Monitoring brings in only 10% of the investigatory targets of
the FTC according to the 1967 Senate Hearings before the
Independent Offices Subcommittee, p. 464.
25
Washington D.C. Vicinity*
Year
Number of Orders
Last half
1964
2
1965
2
1966
6
1967
9
First half
1968
11
TOTAL
30
Sample Size = 248
Total % from D.C.
vicinity = 12.1%
*
"Vicinity" is defined as within approximately a thirty mile
radius.
**
Cases are classified according to business location of
violator.
26
to personal problems of Congressmen living in the District or
in surrounding suburbs (see discussion of personnel). It is
worth noting in this regard that there are several cities in
Tennessee which approach Washington in terms of inordinate
concentration of attention.
Ideally, priorities must be carefully set to help those
who need help most. Deceptions and other practices which
endanger health and physical safety must come first. The number
of persons affected must also be a factor. Practices affecting
the poor must be given priority because the poor can afford to
lose less. Unconscionable practices engaged in by large
corporations must be given great weight, for they have greater
potential for harm if unchecked. Most important, the
Commission should not proceed in purely random fashion on
the basis of complaints received, or on the basis of extraneous
motivations--political, geographical, or personal which distort
the criteria of maximum efficiency appropriate to an enforcement
policy.
While conducting one of the first studies of the FTC in
1924, Gerard Henderson found a general lack of any system of
priorities for case selection: "the Commission is handling too
many. cases, and it should exercise a greater discretion in
selecting those cases which involve questions of public importance. "
Henderson, The Federal Trade Commission, p. 337 (1924) There
has never been any argument that the FTC should handle these
lesser cases if it could obtain the resources to do so in
addition to more momentous problems. But since limited
resources are imposed upon it by Congress, it should deal
with more important issues. The FTC has not tried vigorously
to
27
expand its resources (see section on seeking authority) but,
moreover, it has not established an explicit real system of
priorities. In addition to its fear of big corporations,
its decline in activity and its ineffective enforcement, it
is allocating what dwindling energies it has left to the
prosecution of the most trivial cases. Its system of
priorities, if there is one, is according to the origin of the
application for complaint, not according to the importance of
the problem. If the source is a favored Congressman (see
discussion of personnel) some action is assured. Otherwise,
one relies on chance or a personal contact with the agency.
Twenty five years after the Henderson report, the Task
Force of the Hoover Commission made its study. The situation
was unchanged: "As the years have progressed, the Commission has
become immersed in a multitude of petty problems
The Commission
has largely become a passive judicial agency, waiting for cases
to come up on the docket In the selection of cases for its
formal dockets, the Commission has long been guilty of prosecuting
trivial and technical offenses and of failing to confine these
dockets to cases of public importance." Hoover Commission Report,
pp. 125, 128 (1949)
More recently, Professor Carl Auerbach conducted an intensive
study of the FTC on behalf of the Administrative Conference of
the United States. He too observed that "the important question
is whether the Commission has a system of priorities by which it
is guided in discharging all the tasks entrusted to it by
Congress. To date, the answer is no." Auerbach, "The Federal
Trade Commission, " 48 Minnesota Law Review (1965)
And according to the statistics and all available evidence
the answer is still no. Just this year the Commission reconsidered
28
for the third time a case which had occupied over four years
of Commission and staff time on the issue of whether or not
a watchband chain representing less than 1% of the value of
the finished watchband should be explicitly labelled as
originating in a foreign country or not. They eventually
decided that it should.
What is particularly frustrating about these recurring
criticisms is the fact of their persistence for some forty-
four years. Still, nothing has been done. In fact, despite
numerous specific suggestions, nothing has even been attempted which
might improve the situation.
The fact of the present preoccupation with the trivial
is reflected in statistics and examples ad infinitum. A
recent and rather typical reflection of FTC priority failure
is found in the 1968 Senate Hearings on appropriations. For
some five years the Commission has been mentioning imminent
studies of the food market situation. Meanwhile the problem
has become more and more critical. Several reports were
compiled, none of which seemed to have had any effect. Senator
McGee suggested the necessity for a continuous examination or
study of the food industry from which concrete and effective
action might be taken to correct dangerous trends and rampant
practices. The importance the FTC attaches to such an effort
relative to its other activities is revealing:
I agree with you, the Federal Trade Commission
was created by Congress to carry on this type of study,
but this is something that if we are to carry on, the
necessary money should be supplied. For you to say, well,
why do you not do it out of what you have - you are
going to give us a terrible management problem. At the
present time we are receiving some 9,000 complaints per
year and we have not as yet dared to say to anyone, 'we
are not going to look at your matter, because it is not
as important as some of the rest. 1 We are having difficulty
in handling our increasing workload with our available
staff.
I hope you will restore the $225, 000 and that you
do not overlook our new program to do something about
nearly $1,00 million worth of wool imports into this land.
29
Chairman Dixon before Senate Subcommittee on Independent
Offices, pp. 430 (1968).
The fact that Mr. Dixon's statement carries numerous and
quite typical misrepresentations, such as the implication that
the Congress has failed to supply the money when it really has
never been actively sought or requested, the fact that although
the applications for complaint are many and increasing, the
workload of the Commission, as performance records show clearly,
has been decreasing, are matters that will be treated later.
What is noteworthy here is the priority allocation given an
investigation into a multi-billion dollar industry of necessities'
which is reaching a crisis stage versus the FTC's favored on-
going operation of wool and textile "inspections. 11%
But this is not the only example of wool and textile fixation.
FTC preoccupation with these specific laws reflects a theme
which ran throughout our study, that is the great importance
attached to anything which involves the protection of American
business interests. This is not a situation which deserves
only condemnation -- certainly many of the FTC's legitimate
activities, at least theoretically, benefit honest businessmen
as well as consumers. But these laws are an ideal "out" for
the Commission. They can spend great energy on their enforcement
- - offending mostly Japanese and other foreign producers, while
spending relatively little on deceptive practice transgressions
or for that matter restraint of trade activity which offend
American big business interests.
The FTC pretense is that Congress specifically requested
enforcement in these matters. Of course this is true, just as
Congress has called for the enforcement of deceptive practices
and restraint of trade. Because these latter issues are more
complex and required a more general statute, does not imply that
*
These inspections are part of the program of enforcement of
specialized textile statutes. With one exception. they prohibi
such trivial deceptions as the mislabeling of wool or furs.
30
they are less important. Indeed, it is up to the FTC, not
Congress, to allocate its own resources in the enforcement
of the full panoply of its legal obligations according to
some sensible criteria. This does not mean automatic deference
to one particular law over another solely on the basis of the
timing of the law or on the basis of political or economic
friends who might be alienated.
Further, an examination of FTC priority determinations
within the textile and fur category reveals a final myopia.
Textile and Fur Breakdown:*
1963
1964
1965
1966
1967
'ool, Fur
and Textile
208
90.8%
218
70%
189
87.7%
201
94.4%
179
94.2%
lammable
abrics
21
9.2%
94
30%
54 22.3%
12
5.6%
11
5.8%
'otal T & F
lases
229
312
243
213
190
The flammable fabric cases within the Bureau of Textiles and
Furs represent the most important category of violation because
the protection of life is involved. The statistics above could
reflect merely a smaller number of violators in the flammable
fabrics area. There are several other factors, however, which
give the statistics greater significance. First, there is the
small number of civil penalties invoked against flammable fabric
violators, despite the potential danger involved. Although the
act was passed in 1953, the first civil penalty action was not
brought until 1966 (FTC News Summary, Aug. 8, 1966) and there
have been altogether only three civil penalty actions in the
field (see section on civil penalties). In addition to this,
interviews and conversations with staff and Commission members
*
For FTC presentation of this breakdown, see 1967 FTC Annual
Report, P. 32.
31
reveal a lack of concern or a lack of awareness about the
need for a higher priority for flammable fabric enforcement
vis-a-vis wool, fur or textile.*
A more explicit example of myopia in this sphere (which
also involves collusion and secrecy) is a recent episode
concerning a shipment of flammable Japanese rayon. Chairman
Dixon cited the assurance of voluntary compliance obtained
with regard to this shipment as an example of the advantages
of "persuasion" and industry "guidance" before the 1965 House
Appropriation Hearings. And indeed the FTC had barred future
shipments of the dangerous materials into the country. But the
Chairman failed to mention that most of the shipment had
already been distributed to clothes manufacturers, and that
the staff had strongly recommended to the Commission that the
rayon then in the hands of the manufacturers be seized. In
fact, the enforcement order or agreement which was the subject
of the Chairman's boasting represented a gross and mysterious
concession to defense attorney Peyton Ford. Not only is this
*
"Commissioner MacIntyre: I wish you could tell us in a
letter just what you think we ought to tell Congress in a
situation like that about these consumer protection laws such
as the Wool Products Labelling Act; the Textile Fiber Identif-
ication Act, the Fur Labelling Act, the Flammable Fabrics Act.
Mr. Schulz: I didn't mention that one. I think that
is an important one.
Commissioner MacIntyre: How do you distinguish it?
Mr. Schulz: Because that deals with physical health.
Commissioner MacIntyre: But consumer information you
don't care about?
Mr. Schulz: No, I care about it, but I think it is
more important in some areas than in others.
Commissioner MacIntyre: I thought maybe there was
some reason for distinguishing it."
FTC Consumer Hearings, Nov. 12, 1968, Afternoon Session,
transcript pages 137-138.
32
episode indicative of the callous lack of concern for a
matter affecting the fundamental health and safety of the
American consumer, but it is an example of the lengths the
Chairman will go to protect those interests more dear to his
heart, and the brashness with which he will cloak his activities.
That rayon is right now on the backs of American men, women
and children who are unaware that it is dangerously flammable.
Apart from the failure to attack important problems, the
FTC has failed on every aspect of the reasonable priority
test described above. It has not focussed on matters which
involve physical health and safety, as shown by the above
chart and as demonstrated by such failures as the avoidance
of any significant action in the area of medical devices.
The FTC has not favored the poor or the elderly except for
the recent Washington D.C. report. It has not given appropriate
attention to the largest companies.
FTC claims of priority planning for the benefit of 11 "those
most in need" is a typical example of Commission empty rhetoric.
Indeed, the only example the agency can come up with in the
annual report of 1967 is that attorneys assigned to the field
offices sought out opportunities to address meetings of business
and consumer groups to give them a clearer understanding "of
the FTC's purpose.' 1967 FTC Annual Report, p. .67. The idea
is to alert these people of trickery, which the FTC points out
hurts the low income people the most. But poverty lawyers in
Boston, for example, report virtually no such activity in the
ghetto areas. In any case, lower class people are generally
not organized into consumer groups. An analysis of the groups
addressed by the Commission's Chairman (see section on business
collusion) indicates the more likely audiences.
33
Aside from the wool and textile concentration and the
watch chain country of origin identification examples above,
there are a large number of specific examples of FTC
passivity. For while the Commission either ignores or
delays requisite enforcement activity against Geritol, analgesics,
Firestone, the home improvement frauds, auto warranties,
medical devices, the ads mentioned in the first section, and
so on, it has spent great sums of manpower and money on
the following trivial matters which have been extracted from
FTC News Summaries over the past four years:
1/ From News Summary No. 34, July 3. 1964:
The Federal Trade Commission has ordered Korber
Hats Inc., Fall River, Mass., to stop using the word
"Milan" to describe the material of men's straw hats
not manufactured in Italy of wheat straw."
From News Summary No. 25, Nov. 4, 1965:
Parfumerie Lido, Inc., 115 W. 30th St., New York
City, is charged in a Federal Trade Commission complaint
announced today, with misleading and deceiving the public
as to the identity of its toilet preparation." (resemblance
to French names).
3/ From News Summary No. 2, January 26, 1966:
Ogus, Rabinovich & Ogus, Inc., 304 E. 45th St.,
New York City, has consented to an order forbidding it
to falsely invoice and advertise fur products
The Commission's complaint charges that the concern
has omitted and abbreviated required information on
invoices covering various fur products."
4/ From News Summary No. 19, June 17, 1967:
The Federal Trade Commission has issued a consent
order forbidding Adrian Thal, Inc., 345 - 7th Ave., New
York City, a retail furrier
They are charged in the FTC's complaint with: omitting
and abbreviating required information and setting it forth
in improper sequence on labels. Making fictitious pricing
and savings claims and omitting required information in
newpaper advertisements."
5/ From News Summary No. 6, Feb. 8, 1968:
The Federal Trade Commission has issued its consent
order forbidding Alex Kirschner, a paint and varnish
brush manufacturer trading as Kirschner Brush Co., at 58 W.
34
15th St. , New York City
The Complaint charges that, contrary to these
representations:
1/ The brushing part of the brushes marked "Pure
Chinese Bristle" is not made entirely of hog bristle imported
from China, but is in fact composed of a mixture of bristle
and some other material; and,
2/ The brushing part of the brushes marked "All
Pure Bristle" is not made entirely of hog bristle
11
These examples are not extreme but are quite typical of
FTC priorities. They were selected almost at random from
a larger sample. A study was made based on this sample, a
summary of which is reproduced below. The sample consisted
of all cease and desist orders from July 3, 1964 to June of
1968. These orders were divided into two categories: 1/ textile
and fur cases (except for flammable fabrics) plus cases which
involved country of origin misrepresentations and 2/ all other
misrepresentations. It is worth noting that the all other mis-
representations category is not in the least devoid of trivia
itself, but the first category generally includes only those
matters which are unimportant to the American consumer relative
to the many things happening in American ghettos or, for
another example, on nationwide TV.
The "all other deceptive practices" category is already
less than half of the total number of orders issued over this
four-year period, but the category can be broken down further.
The first chart below presents the number and progression of
the first two categories and the second chart below attempts
to analyze further the "all other" grouping. When dismissals,
the selling of re-used golf balls and oil, the use of fake
prizes to entice people and mislabeled soldering irons are
subtracted, there are only some 188 cases left from the total of
562 formal enforcement actions over these four years. Of these
188, 30, or almost 1/6, are in the Washington D.C. area. The
(Text continued on
page 37.)
35
ENFORCEMENT ANALYSIS*
Textile and Fur***
case or matter
involving country-
All other
Consent
C & D
of-origin protection
deceptive
Orders
Orders*
for business interests
practices
Last half of
1964
77
28
60
45
1965
75
27
49
53
1966
108
22
58
72
1967
106
32
78
60
Last half of
1968
72
15
41
166
TOTAL
438
124
286
276
*
Source is all FTC News Summaries over the period indicated
Normally computed from initial decision stage
Does not include flammable fabrics
36
Further Analysis of "Others" *
TOTAL "OTHERS"
276
minus dismissals
31
minus re-used oil and
golf balls
11
minus fake prizes,
fake "regular" price
tags, mislabeled soldering
irons, etc.
46
188
Of the 188 left of potential importance, 30 are in the vicinity
of Washington D.C.
Of the 158 potentially important matters outside Washington D.C.:
flammable fabrics = 28
bait and switch
= 25
collection agencies 22
aluminum siding
= 19
chinchillas and
insurance
= 17
*
Source is all FTC News Summaries from July 1964 to July 1968.
rest of the nation accounts for the other 158. Of the 158
all but about 40 fall into one of six categorics.* Five of
these categories represent real and important, although
very specific, deceptive practice problems. The sixth is
the rather primitive bait and switch tactic which is of
some importance.
But even the statistics regarding these five areas
creillusory. The most important category, for example, is
probably the home improvement frauds. But the 20 or so
cases treated by impotent enforcement procedures have not
even scratched the surface. These frauds are so widespread**
and so severe in their effects that people (usually those who
are poor and trying to raise the standard of their home and
neighborhood) are virtually robbed of everything they own.
Often their house is taken, their wages garnished. A number
if them commit suicide every year. The effect of the racket
on the victim is similar to the impact of the chinchilla
frauds (see appendix 14 for sample letters from complainants),
but it is much more extensive and the abuses are particularly
aggravated throughout America's ghettos. Further, the situation
has been getting progressively worse for a number of years.
The Commission's response to this need, aside from the five or
six scattered and toothless* orders issued each year as a
gesture is contained in the Chairman's response to Senator
Magnuson's appeal for action:
See appendix 11 for breakdown and pattern over time.
"An official of a large lending institution has estimated
that there are over 50,000 firms engaged in the sale and
installation of residential siding and storm windows." Letter
from Chairman Dixon to Senator Warren Magnuson, Nov. 28, 1967.
"The Consumer Council's Report lists home improvement fraud
as one of the biggest areas of consumer deception today."
Commissioner Mary Jones, Non-Agenda Matter Re: Home Improve- =
ment Cases, Feb. 8, 1967.
*** "The home improvement situation is one of these in which
the ultimate enjoining of fraudulent practices is not an
adequate deterrent to the unothical operator. Letter from
Chairman Dixon to Senator Magnuson, Nov. 28, 1967.
30
Due to major manpower commitments to the
packaging and cigarette programs, the District of
Columbia Consumer Protection Project, the automobile
warranty and softwood lumber inquiries, bait and
switch practices in the sale of frozen food and other
promotions, the insurance investigation, and many
other efforts reflecting a high degree of public
interest, I can give you no assurance that additional
personnel can be assigned to attack this swelling
workload promptly. Letter from Chairman Dixon to Senator
Warren Magnuson, Nov. 28, 1967.
Bait and switch tactics in the sale of frozen foods?
Chairman Dixon's attitude is further amplified later in
his response both to the problem and to the suggestions by
Commissioner Jones and others that the FTC intensify its
enforcement powers for cases of this sort involving personal
fraud. Dixon wrote to Senator Magnuson:
One important factor, constantly on my mind, is
that while much of our effort is in the interest of the
consumer, the great majority of honest, reliable home
contractors in the country are equally deserving of
this protection. Letter from Chairman Dixon to Senator
Warren Magnuson, Nov. 28, 1967.
The Commission gives much lip service to the final factor
in a rational priority system, the size of the company involved
in the transgression (see section on misrepresentations). Yet
in actual fact the FTC does very little when violations involve
larger companies unless those violations are extremely trivial
in nature.
The many examples of deceptive ads or at least marginal
ads listed in the first section of this report primarily
originate with larger companies. A cursory examination of
FTC actions reveals the extent of its fear or friendship with
big business.
Appendix 4 analyzes the size of all companies on the
FTC docket for the first quarter of 1968 in terms of sales.
29 of the 33 companies involved are so small that they are not
39
listed in any major financial directory, which means that
their total assets are below $500 thousand. Only one
company had sales of over 500 million.
The reluctance to go after big companies is often caused
by a fear of their vast staffs of brilliant legal manpower.
This fear is particularly strong when formal action is
envisaged. But there are, in addition, instances of outright
pressure from various corporate or legal contacts, often
exercised through the Congress.
In a letter dated October 25, 1968 to John Schulz,
Chairman Dixon answered a question asking for the size of
all deceptive practice respondents in terms of annual sales
by admitting that "annual sales are not maintained as general
information in deceptive practice matters. This is simply
because sales volume is frequently only one of many considerations
in assessing the impact of a particular practice " In other
words, since this is only one of several elements in a rational
priority system, it is not computed at all.
40
3. Failure to Enforce with Present Authority
The Federal Trade Commission's failure to perform its
enforcement duties properly under existing law has several
aspects. For one thing, there has been a general decline of
formal enforcement activity and an unwise shift towards greater reli-
ance on "voluntary" II enforcement tools. Even worse, complance
practices have also become almost entirely voluntary. Finally,
all enforcement programs are vitiated by excessive delays.
A.
Decline of Formal Enforcement Activity
The decline in formal FTC enforcement activity can be traced
back to the early 1960's. Since that time, formal activity has not
only declined relative to such indicators of need as the GNP, the
growth of the advertising industry, and the increase in the number
of applications for complaints received, but has declined in
absolute numbers. Except for a brief resurgence in 1967, the number
of complaints issued by the Bureau of Deceptive Practices has been
steadily declining since 1963 (see chart below). This is in the
face of unprecedented economic and advertising growth. Such decline
is not indicative of increasing compliance with the Commission's laws,
for the applications for complaint have been steadily rising.
COMPLAINTS ISSUED BY THE COMMISSION
Through
3d qtr.
Fiscal Year:
1963
1964
1965
1966
1967
1968
Restraint of Trade
230
95
26
94
124
11
Deceptive Practices
129
129
66
48
108
27
Textiles and Furs
72
85
69
52
89
44
TOTAL
431
309
161
194
221
82
FTC Annual Reports, passim.
Another indication of the increasing passivity of the FTC
41
in the face of increasing consumer, ghetto and advertising
problems, is the trend of investigative activity. The number
of investigations completed has steadily and sharply declined
from 1964 to the present. This is illustrated by the following
chart:
COMPLETED
INVESTIGATION CASE LOAD
Through
3d qtr.
Fiscal Year:
1964
1965
1966
1967
1968
Restraint of Trade
467
729
492
321
139
Deceptive Practices
1090
981
981
737
422
Total
1557
1710
1473
1058
561
FTC Annual Reports,
passim.
Finally, FTC passivity is reflected in the increasing
scoping effect in its enforcement efforts. The intense and
increasing scoping phenomenon can be seen in the chart below.
The applications for complaint are now in the thousands in the
deceptive practices area, (6,399 in 1966 and now approaching 9,000).
Yet investigations now cover only one in every eight or nine
applications for complaint. After subtracting Congressional
applications which are rarely ignored, this leaves an even lower ratio
for response to applications from the public. Note that this
application figure does not include every crank letter but is
pre-screened to include only those with apparent relevance and
appropriate jurisdiction. After this elimination not even one in
ten of the investigations results in a cease and desist order. One
out of four, however, does result in an assurance of voluntary
compliance (see mext part of this section for description)
Altogether then, about one of every thirty five applications for
42
complaint results in an assurance of voluntary compliance,
and approximately one out of every one hundred twenty five
applications for complaint results in formal action of any sort.
The chart below also demonstrates the trend of this
scoping pattern over time. The direction is self apparent.
DECEPTIVE PRACTICE CASES
Fiscal Year:
1961
1962
1963
1964
1965
1966
1967
% of avowed applications
for complaint that are
investigated:
30%
19%
25%
23%
19%
14%
11%
% of avowed applications
for complaint that result
in the issuance or approval
of a complaint:*
8%
4%
4%
6%
4%
2%
3%
FTC Annual Reports,
passim.
One qualifying point concerning the scoping trend deserves comment.
For the existence of some scoping can indicate a coherent and rational
screening system of priorities. Even the existence of such a system,
however, would not alter the fact that less was being done relative
to apparent need in terms of numbers. In any event, the section above
on priorities demonstrates that this explanation is not available to
the FTC.
It is true that the numbers referred to in the preceding charts
are not in themselves conclusively condemnatory. It is only in
combination with the rising need for action, the lack of a priority
system, and other factors treated in this report that they reveal
the FTC's administrative failure. Chairman Dixon's increasingly
frequent criticisms of the "numbers game" are justified in so far as
they apply to the fallacy that more prosecutions of insignificant
*
Not all of these complaints result in the issuance of formal orders.
43
cases represents significant activity. But this does not work
in favor of the Commission in light of overall decreasing trends
and in light of the other findings of this study.
The 1965 Civil Service Report's evaluation of the Commission's
work load substantiates our findings.
The traditional measure at the Federal Trade Commission
has been casework expressed in such terms as numbers of
7 digit investigations initiated (this is a code identification
of cases designated for formal investigation), complaints
issued, and cases docketed for litigation. By all of these
7
measures caseload has been declining. Several managers
expressed the fear of running out of work.
With the changing mission orientation since 1960 there has
been a decline in formal cases from 1,931 that year to 1,421
in fiscal year 1964. During this same period, the number of
cases docketed for litigation also decreased: from 503 to 49.
(Using the same years, employment increased from approximately
700 to 1, 150.)
Despite these caseload and employment trends, the agency
expresses itself in dire need of more employees while giving
repeated assurances that the employees in the enforcement
bureaus are fully occupied, if not with casework, with providing
advice and counsel within the framework of the "new approach.'
Beyond these assurances of management we must also consider the
following, in concert with the workload data above, in making a
judgment as to whether the Federal Trade Commission has enough,
or perhaps too many employees to accomplish its mission:
(1) On the basis of widespread comments there appears to
be less than full utilization of Hearing Examiners
(2) High officials spoke openly of the rapidly approaching
time when there would be no more case work to occupy
the staff
(3) Trial Attorneys, as a reflection of this, expressed
concern that they would soon be out of work
(4) It has been suggested, in consideration of the above,
to abolish the Bureau of Industry Guidance. This
suggestion is perhaps motivated by the apparent
paradox that this Bureau was established to provide the
kind of advice to industry that the Federal Trade Com-
mission claims is accounting for that part of the time
of the staff in the enforcement bureaus not devoted to cases.
(emphasis added) Civil Service Commission Report, P. 26 (1965).
Since 1965, when this Report was issued, the situation has deteriorated
even more (see above and agency's own statistics in appendix 2), even
though the strong language of the Report above indicated an already extreme
limit had been reached. All of the suggestions of the CSC WETE ignored.
44
B.
Shift to Voluntary Enforcement
The general decline in formal enforcement activity at
the FTC is matched by a shift in emphasis to greater reliance
on "voluntary" enforcement tools. This shift is usually
rationalized as being the most efficient means of enforcing
the law. Nothing could be further from the truth.
The Commission's major induvidual voluntary enforcement
tool, the assurance of voluntary compliance, lacks any sort of
formal sanction. A businessman who gives an assurance merely
promises (not even under oath) that he will not repeat the
specific deceptive practice challenged by the Commission. A
new violation generally brings about another assurance.
The so-called industry-wide approaches, guides and trade
regulation rules, do to some extent reduce the incentive for a
number of competing businessmen to engage in common in a par-
ticular deceptive practice. But guides and rules themselves
are sanctionless, making their effectiveness seriously questionable.
(For an unscrupulous businessman has to deceive consumers
even when his competitors are dealing honestly.) In other words,
the use of such methods of enforcement permits commercial
wolves to take not only one "free bite" (as is the case even
with normal cease and desist orders since even they do not
inflict penalties for past offenses but two or three.
As actually administered, the voluntary enforcement tools
are even more inadequate. Trade regulation rules and assurances
are often poorly drafted, the former sometimes being too broad
(nothing more than restatements of the statutory provisions they
are supposed to elucidate), the latter too narrow (forbidding
only the specific deceptive activity found to have occurred,
rather than other likely tactics as well). Advisory opinions
45
are frequently based on inadequate background information
and tend to share with trade regulation rules the fault of
being mere paraphrases of vague statutory language.
The Commission's methods of checking compliance with
outstanding guides, rules, assurances and advisory opinions
are abysmal. Under the latter (individual) methods, compliance
checks are done by requiring compliance reports, thus sharing
the flaws of the cease and desist order compliance program to
be discussed later in this section.
Compliance with guides and trade regulation rules is
policed by broad-gauged (industry-wide) compliance surveys
conducted by the smallish staff of the Bureau of Industry
Guidance. The problem is that these surveys tend to be inter-
minable and nothing is done about individual violations
discovered until a survey is completed.
For example, the Commission promulgated Tire Advertising
and Labeling Guides which became effective in July, 1967.
Ever since, according to Mr. Thomas Egan, the (single?) FTC
staffman handling it, a broad survey has been going on into
the advertising claims of some 200 tire brands. Interview,
August, 1968. Said Mr. Egan, "no efforts to secure compliance
with these Guides will be made until the survey is complete,"
and he would not dare to venture a guess as to that far distant
date.
Mr. Egan made this statement, surprisingly, in response to
a project member's queries about a recent Firestone ad claiming
that Wide Oval Tires stop "25% quicker. Mr. Egan himself had
strongly suggested (although he wouldn't say it explicitly)
that such an incomplete comparison is a clear violation of
Section 5(b) of the Tire Advertising Guides, which reads in
46
part "Dangling comparatives should not be used."
The FTC's inadequate handling even of its favored
voluntary enforcement tools suggests that the Commission's
major reason for adopting them was to enable the Commission
to take some action in areas in which spiralling demands
have made it impossible to hold the fire under the relatively
more vigorous cease and desist order procedure. It probably
also reflects the sort of solicitude towards business interests
discovered throughout this study.
C. Inadequate Use of Formal Enforcement Tools
Even Chairman Dixon realizes that a voluntary enforcement
program will not work unless backed up by some strict, binding
enforcement techniques, for he stated in the 1967 Senate
Appropriation Hearings:
Now the follow-through comes. If most accept
this (rule or guide), but if one, two or three
or four (or. ?) do not, we must get tough
here, because there is no reason to expect the
majority to stay in line long if others do not
comply.
-- 1967 Senate Appropriations Hearings, p. 476.
The problem is, the Commission does not get tough
with those who violate rules and guides. For example, the
normal way of dealing with these violations is to ask their
perpetrators to submit assurances of voluntary compliance
(not even simple cease and desist orders) Interview with
Chief of Compliance Division, Bureau of Industry Guidance,
July, 1968. This is completely unjustifiable, since even on the
Commission's own terms one major reason for using voluntary
enforcement tools is that they inform otherwise innocently
ignorant businessmen about the requirements of law.
If a businessman
is on notice about the law, his violation should not be dealt
with as though it were essentially innocent (which is what the
47
More important is the fact that the Commission's relatively
powerful enforcement tools and sanctions are under-used and
ill-applied. The remainder of this section will show (1)
that the FTC's program of insuring compliance with outstanding
cease and desist orders is grossly inadequate; (2) that the
Commission makes insufficient use of its maximum enforcement
powers -- to seek preliminary injunctions and criminal penalties;
and (3) that the Commission's explicit enforcement philosophy,
exemplified by the above-named patterns of regulation, is
erroneous.
The Federal Trade Commission does not have a viable program
of checking compliance with cease and desist orders. To begin
with, compliance checks are made only of a relatively small
number of recent orders. Yet, since cease and desist. orders
remain valid permanently, they could provide the basis for
growing enforcement effectiveness at the FTC. All that would
be for the Commission to decide to expand its compliance
check program to cover all outstanding orders.
As a matter of fact, the FTC recently considered doing
just this -- and decided against it. In its Budget Justifications
for Fiscal 1969, it states that:
The initiation of a continuing and comprehensive
survey of existing orders is essential to the
effective operation of the Commission's compliance
program (!)
(But) despite the value of such a program, funds
to initiate it are not being requested at this time,
and it will be deferred in favor of projects con--
sidered of higher priority (!)
(Emphasis supplied)
-- FTC Justification of
Estimates of Appropriations,
Fiscal Year 1969, pp. 95-96
The second problem with the compliance program is the method
of checking compliance with outstanding orders, which relies
exclusively on requiring respondents to file "compliance reports,"
reciting that their objectionable practices have been abandoned
48
and that effective steps have been taken to preclude
recurrence. Since the accuracy of reports is not indepen-
dently verified by the FTC and no penalty is threatened or
imposed for false reports perse, this policing device is
SO inadequate as to be a sham.
The FTC's methods of deaing with cases of non-compliance
are also grossly inadequate, as revealed by analysis of
available statistics and by a candid interview with Mr.
Barry W. Stanley, Chief of the Division of Compliance of the
Bureau of Deceptive Practices. The statutory penalty provided
for non-compliance with cease and desist orders is the
exaction of "civil penalties" of up to $5,000 per day,
FTC Act Sec. 5(1). The Commission invokes this sanction so
seldom, however, that it has negligable impact, as the
following chart indicates; it also shows that most penalties
exacted in the few suits that are brought are relatively small
and that there is a strong trend over the last two years
against bringing them in any but the textile and fur area.
Total Civil Penalties -- July 1964 - July 1968
News Release Reference
Area or Company
Money Damages
10-1-64
Vitasafe
$18,000.
10-9-64
Davidson Vending
5,000.
10-14-64
Time, Inc.
30,030.
2-23-65
W.B. Saunders
$20,000.
4-5-65
American Candle Co.
$1,500.
4-28-65
McFadden-Bartell
$35,500.
11-4-65
Chun King
$70,000.
12-14-65
Americana
$100,000.
3-2-66
wool
$30,000.
6-4-66
fur
$5,000.
8-8-66
wool
$20,000.
8-8-66
flammable fabrics
$35,000.
12-16-66
flammable fabrics
$10,000.
2-2-67
flammable fabrics
$12,000.
5-6-67
wool
$,500.
5-22-68
wool
$15,000,
TOTALS:
16 cases
$416,530
49
This record must be evaluated in the context of a large
number of violations (more or less serious) Mr. Stanley stated
that "hundreds of notations each year" were detected (usually
by complaints from the public or competitors) but dealt with
"informally." Informal handling, he explained, means approximately,
"Go and sin no more thus giving the commercial wolf another
free bite.
The most blatant current example of this general sort
of compliance activity is the much-publicized Geritol case,
In 1967 after years of "investigation" and litigation, the FTC
had ordered the manufacturer of Geritol to stop misrepresenting
the product as a generally effective remedy for tiredness. In
spite of this order, later affirmed by the Court of Appeals,
Geritol's T.V. advertiements have changed little in emphasis,
as most viewers will attest. In an unusual departure from
normal procedure-based possibly on impatience with the
lethargy of compliance division staff, the Commission itself
recently held "a public hearing to hear oral argument to
determine whether T.V. commercials for Geritol violate its
order to "cease and desist." FTC News Release, Oct. 29, 1968.
After the hearings, the Commission issued a finding that the
Geritol commercials since the order
not only failed to comply with the order, but
are no less objectionable than the commercials denounced
by the Commission when it issued its original order
herein. (Emphasis supplied.) FTC News Release, Dec. 13, 1968
Having discovered a clear violation of an outstanding cease and
desist order, did the Commission announce that it would
seek
"civil penalties" against Ceritol's makers? No, it merely warned
50
them to stop "flouting" the order and to file by Jan. 31, 1969
a report showing what steps were being taken to tone down
the commercials; the Commission also threatened [sic] to take
steps to assure that its orders "do not continue to be flouted
by respondents" in case the report is inadequate. One may well
ask what lesson other concerns under FTC orders will learn
from the highly visible Geritol case--no doubt, that they can
feel relatively free to violate those orders without fear of
strict FTC response.
The administrative picture shows that the enforcement
philosophy of the staff chief in charge of compliance with
cease and desist orders is seriously misguided. In fact, in
interview, Mr. Stanley gave the impression that he conceives
of cease and desist orders merely as administrative directives:
violations are not a serious matter in themselves; rather all
that has to be done is to seek to secure future compliance by
gentle persuasion through time.
This view is just plain wrong, for at least two reasons.
For one thing, cease and desist orders represent authoritative
judgments of the Commission (and often the courts) that a particular
practice constitutes a violation of law. As such, they must
be viewed as binding proscriptions on repètitions of the same
sorts of conduct. To permit respondents to play fast and loose
with such orders is to dissipate whatever authority and integrity
the Commission possesses as a Governmental agency.
Even more important is the fact that cease and desist
orders presently represent the FTC's most potent generally
available enforcement tool. For this weapon to be at all effective,
however a belief in respondents and potential respondents that
51
violations will be severely dealt with. The permissive. philosophy
and practices of the compliance staff produce the opposite belief,
and as a result render the Commission's overall enforcement
program even more impotent than it might otherwise be.
It is difficult to avoid drawing a pessimistic conclusion
from the enforcement attitudes expressed and implied by the
actions of the staff leadership in the compliance division--to
wit , that these personnel are overly solicitous of the interest
of the businessmen at the expense of those 6f the consumer. This
sort of attitude is found elsewhere in Commission enforcement
programs, as is discussed in detail above. It suggests that
changes in top staff personnel will have to be made if the
Commission is to begin to perform its consumer protection tasks
properly.
The second flaw in the FTC's formal enforcement program
is its serious underutilization of the
strongest enforcement
weapons it does possess in the especially important areas of
food and drug products and flammable fabrics. First, its record
is abysmal as far as seeking criminal penalties is concerned: it
makes use of this weapon about as frequently as it seeks civil
penalties. Thus in fiscal 1967, no criminal cases were brought,
one (involving the fur act!) was filed in fiscal 1966 and none
in 1965. FTC Annual Reports, 1967, p. 91, 1966, p. 81, 1965, p.63.
Second, it almost never seeks preliminary injunctions, although
empowered to do so under all textile and fur acts as well as the
food and drug provisions of the FTC Act.
Section 5(c) of the latter law gives the Commission an
additional power analogous to that of seeking preliminary injunctions,
which can be invoked when / respondent seekscourt reviews of cease
and disist orders. to terminate its challenged activities pending
the outcome of judicial review. To our knowledge, the Commission
has not invoked this power at all in the last several years.
52
An earlier part of this section suggests that at least
one high FTC staff man (the Chief of the Division of Compliance,
Bureau of Deceptive Practices) has a seriously misguided enforcement
philosophy. Interviews with other Division and Bureau Chiefs reveal
that this philosophy positively permeates the top echelons of
the Bureaus of Deceptive Practices, Industry Guidance and
Textiles and Furs. This poses a serious threat to reform within
the agency, and is thus a grave matter.
Even more grave is the fact that a similar view is shared by
a majority of the Commissioners themselves. This is indicated by
their interview statements, and by innumerable speeches (especially
those of the Chairman).
It is further expressed in the following exchange between
the majority and Commissioner Elman over his recommendation that
the Commission make a legislative proposal to the 90th Congress
to centralize the prosecution of consumer fraud in a single
federal agency (not the FTC).
Mr. Elman had been concerned with the fact that presently
a particular fraud might simultaneously be susceptible to
prosecution by the Justice Department, administrative proceedings
by the FTC, action by the Post Office, etc. The majority, in
purported rosponse (their discussion was actually mostly beside
the point), engaged in a general discussion of the relative
effectiveness of criminal penalties and Commission's industry-wide
and "voluntary" approaches as enforcement tools. In that discussion,
the following amazing statement appears:
One of the great advantages of the FTC's administrative
responsibilities to protect the consumer is that the Commission
is not limited to action involving "prosecution for consumer
frauds" as Commissioner Elman proposes. The needs of consumers
go far beyond protection from fraud. Thus the Commission has
power to investigate, hold public hearings, issue guides, prepare
informational material and take other informal measures to
solve a problem confronting consumers. These powers are far
more efficacious than the single power to prosecute after the
problem has taken its toll of consumers even though this power
is also an essential element 01 law enforcement.
(Emphasis supplied.) Commission Statement
at 3.
53
This statement contains a tangled mass of misstatements,
distortions and half-truths which cannot all be discussed
here. What can and must be commented on is the Commission
majority's apparent belief that such enforcement efforts as
issuing industry guides are more effective than criminal
penalties in protecting consumers.
This is simply not true. Properly viewed, the
problem is one of general deterrence, that is, of
keeping businessmen from perpetrating their first set of
frauds. In discussing general deterrence, it is irrelevant
to focus on those who have already broken the law at a
specific point in time; a regulator's major concern must
be to hold the line against those who have not yet broken
the rules. It thus misses the point for the Commission
to criticize criminal prosecutions because they always
take place after someone has broken the law. Rather, it
should focus on the extent to which such a prosecution
will keep other potential violators in line.
This is best demonstrated by a hypothetical example.
Assume that businessman A violates the FTC Act. In case I,
he is prosecuted and convicted of consumer deception (under
an as-yet unwritten amendment to the Act). In case II,
the FTC tells him to stop, requiring him only to write
a letter saying "I've stopped and won' t do it again
(= an assurance of voluntary compliance) Now compare
the likely impact of these differential ways of treating A
on businessmen B, C, D, etc., who all may be considering a
little consumer deception themselves. There is little
doubt that the enforcement method used in case I is more
effective in keeping the maximum number of businessmen
in line.
54
It thus seems clear that since tough enforcement is
much more efficient in its broad impact than a mild,
voluntary approach, it is highly irresponsible of the
Commission to neglect the former in favor of the latter,
while at the same time complaining of inadequate
resources. This is especially true since all criminal
prosecutions sough by the FTC would actually be carried
out by the Justice Department, thus permitting the Commission
to tap some of the Justice Department's resources.
In addition to all this, the Commission majority's
above statement seems to imply that FTC voluntary enforcement
methods, unlike criminal prosecutions, are able to stop
deceptive practices before they have a chance to harm
consumers. This entire report demonstrates how far such
an implication would be from the truth, because of the
prevalence of inadequate means of detecting violations
and compliance, inordinate delays in acting and lack of
publicity.
*
To the extent that the statement intends rather to make the
different point that fraud laws do not cover all harmful
anti-consumer practices; it is of course correct. The answer
however, is not to oppose criminal penalties, but to
advocate expanded categories of consumer crime.
55
D. Failure to Enforce Promptly
In deceptive practice cases it is absolutely necessary, due to
the enforcement mechanisms of the FTC, to process claims with the utmost
speed. The FTC is empowered to enforce its mandate through the issuance
of cease and desist orders. The cease and desist orders are not of
themselves punitive measures. They are merely notices to advertisers
to cease and desist from stated practices. Thus, the FTC enforces its
mandate by bringing civil suit against violations of standing cease and
desist orders for penalties as specified in the FTC Act. What this
means is that if an advertiser engages in a given practice he is subject
to FTC action through procedures which give him adequate notice of
imminent punitive measures. If the process of seeking cease and desist
orders and checking compliance with them is delayed for several years
it becomes seriously ineffective. A cease and desist order accompanied
by enforcement which takes 3 or 4 years to effect is not going to deter
in the slightest a typical ad campaign which by that time has been
over for two or three years. Only longstanding practices like the
perennial Geritol ad are subject to effective enforcement by this
method. Geritol's maker is now flaunting a standing cease and desist
order and is not being sued under the penalty provisions (see sections
of Business Collusion and voluntary assurances).
Following is a chart revealing the average delay factor for
deceptive practice cases on the docket in the first quarter of 1968.
Note that these cases are minimally contested by the companies. The
average number of years from investigation to complaint issuance in
deceptive practice cases appears below. This figure alone is over two
years. And these are not cases which involve the kind of research and
preparation demanded in, say, a restraint of trade case.
The total delay factor averages over 4 years, and this includes
only the time from the investigation to the initial decision of the
Commission on the issuance of a cease and desist order. There are still
(Text continues on
page 57.)
56
DECEPTIVE PRACTICES TIME ANALYSIS
Code:
violation 1 = general
#
2 = insecticide
II
3 = trade mark
II
4 = wool act
"
6 = fur act
II
7 = flammable fabrics act
=
8 = insurance
=
9 = section 12 of FTC act
11
10 = textile act
Time Code: A = average in years from investigation to complaint issuance
B = average in years from the complaint to the start of hearings
C = average in years from the start of hearings to the con-
clusion of evidence
D = average in years from the conclusion of evidence to the
initial decision
TOTAL
= average time in years from the investigation to the initial
decision
Chart includes all cases in process during the first
four months of 1968
Violation Number No. Dismissed A B C D TOTAL
1
38
7
V
2.26 1.56 0.14 0.31 4.37
*
2
3
4
5
6
7
8
9
5
0
3.5 1.3 0.17 0.33 5.20
10
1
0
4.1
Total
38**
7
2.26 1.56 0.14 0.31 4.37
*
Not sum because some are in stages A, B, C, or D now
**
9's and 10's are also classed as l's
57
further measures available to the company, and some have stretched
out litigation over 20 years and more.* Until the end of that four
year or more stretch, the company can flaunt the FTC. There is no
punitive power until after the establishment of the order and very few
are going to take seriously the enforcement power of the agency until
actual sanctions are imminent.
Even in those areas where deceptive practices are of long standing
or where companies are too small to oppose the Commission legally,
there are other delay factors built into the Commission's present
operation which dull enforcement effectiveness. For after the cease
and desist order is established, or the consent order, etc., there is a
need to check compliance. Failure to comply beyond this point should
result in a civil suit by the Justice Department for statutory penalties.
(See section on civil penalties , P. for failure to act in this area.)
But here too there are delays in the process of seeking and verifying
compliance. Technically, there is a requirement that compliance
reports be filed within. sixty days by the company demonstrating
adherance to the order. But many cases in FTC docket files indicate
that long periods of time - - often a year or more - - elapse between
the effective date of cease and desist orders and the date of acceptance
of a "satisfactory" compliance report. In a substantial fraction of the
cases studied, no compliance report is apparently ever filed.
One of the Commission's indirect enforcement weapons is the power
to inquire and investigate. To this end, Congress has granted the
Commission broader investigatory powers. (See Section 6(b) of the FTC
Act) than any other regulatory agency. But here, as with the direct
enforcement means, delay minimizes much of this power. The reasons behind
Section 5(c) of the FTC Act gives the court power to: "make and enter a
decree affirming, modifying or setting aside the order of the Commission,
and enforcing the same to the extent that such order is affirmed, and to
issue such writing as are ancillary to its jurisdiction or are necessary
in its judgment to prevent injury to the public or to competitors pendente
lite." Thus, the Commission has the power to petition for an ameliorative
order to take effect immediately pending further long drawn appeals. To
our knowledge it has made no use of this power in recent years.
58
this delay are less likely to be sloth, inefficiency or bad law than
the delay problems above. They are more likely to involve direct
business collusion, with delay serving as a weapon to cloak an issue or
problem in secrecy and to avoid action on it. The use of the excuse that
something is "under study" for years and years allows the Commission to
keep the matter from public scrutiny under an exemption in the Freedom
of Information Act while at the same time giving the impression that
something is being done or will shortly be done.
The Commission's behavior with regard to automobile advertising,
drugs, auto warranties, food and gasoline games, tires, medical devices,
and many other problem areas can be traced to purposeful delay to protect
certain interests. Some of the delays are necessary, but a clear pattern
emerges from an overall examination of the data in conjunction with other
findings to be discussed in the section on personnel. There is an
announcement of a study into a given area with a target date specified.
This is all accompanied by great fan-fare and solemn expression of concern.
When the due date approaches it is quietly extended and extended again.
An investigation of the deceptive claims of analgesic companies
commenced over a decade ago. Appendix 9 traces the history and disposition
of the various investigations which have resulted, primarily, in four
dismissed complaints after years of tests and years of still continuing
deceptive ads, (see FTC News Summary of 4-13-65). *
The deliberate suppression of the report on auto warranties (see
sections on secrecy and on personnel) is another example of delay for
political purposes. The report was initiated in 1965 and was only
released in late 1968 because Ralph Nader acquired a copy and pre-released
it at that time. No one can or would dispute that a report should be
divulged to everyone only after it has been completed. But the FTC first
submitted the report, confidentially, to industry interests so that they
*
For other maneuvering, see FTC News Summaries of 7-7-67 and 11-30-67
as well as appendix 9.
59
could check the accuracy of certain data without giving consumer groups
(eg the Consumer's Union) the same opportunity, and then delayed release
although the report was in fact in final form.* The real reason for the
proposed plan for suppression lay in the contents of the report, which
was highly critical of GM, Ford and Chrysler. Whether release would
have eventually occurred is academic now, but there is little doubt
based upon our interviews that Chairman Dixon was determined to suppress
the report at least until after the election to avoid alienating
Henry Ford II and other business interests who were contributing heavily
to Hubert Humphrey's campaign.
The delay and secrecy manipulations with regard to Firestone, in
the face of blatant deceptions, are revealed in an exchange of letters
concerning two specific ad campaigns.
The first ad campaign by Firestone commenced in the fourth quarter
of 1967. It was composed of massive circulation media advertisements
headlined by the message: "Raymond C. Firestone Talks About the Safe Tire.'
The copy went on to say that "On November 10, 1967, the Federal Department
of Transportation issued a new set of tire safety standards. Firestone
tires already meet or exceed these new tire testing requirements and they
have for some time.
All Firestone tires have met or exceeded the
new testing requirements for years." "
A request to Mr. Firestone for substantiation of this statement
went unanswered. Letter from Ralph Nader to Raymond C. Firestone,
January 1, 1968. Since the advertisement appeared first in most major
news magazines in the latter part of 1967, the FTC must have known
about it. In case its surveillance was wanting, the Commission was
notified and a request was made of the Commission to obtain substantiating
data from Firestone. Letter from Ralph Nader to Mr. Paul Rand Dixon,
February 13, 1968. The argument was made that any company soliciting
a customer's trust with such safety claims ought to be ready to back
*
The report, in complete form, was pre-released by Mr. Ralph Nader in
an action unrelated to the activities of this investigative group.
60
these claims up, especially since a reference to surpassing a specific
government standard of safety increases the credibility of the claim.
Refusal to produce documentation makes such an ad presumptively
deceptive. In reply the FTC asked the writer for information showing
the ad to be deceptive, instead of using its unique legal powers to
obtain substantiation directly from Firestone. Letter from
Mr. Paul Rand Dixon to Ralph Nader, February 19, 1968. This is a typical
illustration of passivity by the Commission when it is asked to confront
a large corporation. Chairman Dixon did say that the Commission had
opened an ivestigational file, but not an inquiry under Sec. 6B; the
question of an inquiry could not be decided "until an investigation
is completed," according to Mr. Dixon. Letter from Mr. Paul Rand Dixon
to Ralph Nader, March 26, 1968. An investigational file is automatically
opened on receiving a letter of complaint -- a classification that
permits all such materials to be confidential under the FTC's inter-
pretation of the Freedom of Information Act. The nominalism here is
shown conclusively by the total lack of interest by the Commission in
pursuing three highly promising avenues: (a) a large number of com-
plaints, regarding Wide Oval Tires, in the possession of Senator Gaylord Nelson;
(b) failure of tests by Firestone tires conducted by Electrical Testing
Laboratories for the National Bureau of Standards in January 1966; and
(c) disclosure that the National Highway Safety Bureau had received
results of its safety testing program that showed 8 Firestone tires
failing one Dr more federal safety standards. (New York Times,
November 30, 1968). Although knowing of these developments, the FTC
did not even make an inquiry of any of these sources. The investigation
was a fraud.
The second Firestone advertising campaign of deception also began
in 1967 and continues to the present time. The ad touts the Wide Oval
tire by saying that it "grips better. Starts faster. Corners easier.
Runs cooler. Stops 25% quicker. This is a deceptive advertising
practice per se according to S 5(b) of the FTC's own Tire Advertising
See Appendix 8 for illustrative advertising copy placed in the September
2, 1968 issue of Newsweek and many other national news and business
magazines over a two-year period.
61
Guides, discussed on P.
No investigation is necessary; no substantial allocation of time or
funds are required. These ads comprise a national campaign on the part
of a very large tire manufacturer via the mass media. The deception is
serious, simple and clearly communicated to millions of readers and is
effective in inducing purchases of this type of tire. The Commission,
therefore, did nothing.
In August, the Commission was urged to act, however belatedly, against
this deceptive advertising. Letter from Ralph Nader to Chairman Paul Rand
Dixon, August 6, 1968. On August 15, 1968, Chairman Paul Rand Dixon
replied that the matter "is receiving consideration. You may be assured
that such action as may be found warranted by the facts will be taken in
the mblic interest." Letter from Chairman Paul Rand Dixon to Ralph Nader,
August 15, 1968. On September 20, 1968, Mr. Nader wrote to Chairman Dixon
notifying him that a Ford Motor Co. re presentative had told the National
Highway Safety Bureau (recorded in a transcript) that "The braking
capability of the Wide Oval Tire is no greater than that of the standard
tire."
Despite years of investigations and industry guides, stretching
back to 1936 and extending up to 1966, the Chairman's response to a literal
and specified violation is to refer to yet another investigation, thereby
excusing the concealment of Firestone's answer to a legitimate citizen
inquiry.
It is common to discover that a still pending investigation was used
five or six years ago to justify inaction then For instance, there is
much activity now about food and gas station gimmick games. They are
rather commonly deceptive in several respects, and there are often
restraint of trade questions involved as well. Pressure has been building
up recently and earlier this year, Rufus Wilson, Chief of the Division
of Gneral Trade Restraints, found it necessary to make the standard
cooing about another investigation of promotional games in the food and
oil industries. Rufus Wilson, memo. on non-agenda matter (Petroleum Report)
Feb. 20, 1968. Now, in December, 1968, it appears that a staff report on
this subject will finally be made public--a member of the press having
secured a copy and reported on it. Advertising Age, Dec. 30, 1968, P. 1.
That article reports that the Commission is also finally
62
considering promulgating a trade regulation rule covering these games.
Of course, this means it will hold additional hearings, delaying regulation
for another substantial period of time. But this is not the first time
this has happened. Back in 1963 Joseph Shea, Secretary to the Commission,
wrote with regard to file no. 643 7007:
By letter to William J. Jeffrey, President, Merchanidising
Marketeers, dated Nov. 15, 1963, the Commission granted an
advisory opinion concerning a retail food promotion scheme.
"This is to advise that that advisory opinion is rescinded.
This course is required in the public interest because the
subject matter of that advisory opinion is currently under
investigation by the Commission.'
The Federal Trade Commssion has always considered lottery type
inducements, particularly when deception was involved, as violative
of the deceptive practice laws. Michael J. Vitale, Chief of the
Division of Gneral Practices of the Bureau of Deceptive Practices has
written " the element of consideration need not be present in order for
a scheme to be illegal. II "The Commission found it sufficient to establish
the illegality of the scheme that (the participant's) return would vary
greatly with his willingness to take a chance How then does the
Commission rationalize the need to launch continuous and never-ending
investigations when the only meaningful obstacle to enforcement (the
legal argument that consideration is lacking or that people have to pay
directly for a chance) is not at issue? Perhaps the answer can be found
in the size of the companies involved in these deceptions. Some of the
corporations deceiving via this means include Texas and Esso Oil and large
supermarket chains.
Not only have investigations been launched in 1963 and 1968, but
when pressure contined to mount from complaining consumers after the
1963 effort faded into an empty void, another investigation was launched
in 1966 to fill the gap. (see FTC News Release of Oct. 29, 1966). In
1967the Bureau of Economics requested and received authority to use $ 6(b)
subpoena power to gather information from the game operatiors. In March
of 1968 the Bureau issued a preliminary report which in itself contains
enough information to bring immediate action against a dozen game operators.
*
The source is a memorandum written October 11, 1967 to the Commissioners.
The full statement of the Commission's view can he found in Advisory
Opinion Digest No. 45, May 18, 1966, in File No. 663 7049.
63
For quite apart from the
: that
ust
the game
m to be
deceptive, there are spr
: gam
in
patently
tive even
given the legality of ai
t all
01 11
big pr
Lion "Let's
Go to the Races" is a ty
ex
Qun
from a
onsumer's letter
in the Bureau of Economic
yet
lea
d
1
)rt
arch 1968:
which is broadc
over
is
tl
igh
States and
in our opinion is a
d an
la:
SCi
me
hich the
main factor of succe.
clus
/ DI
3 upor
ion of
atomosphere of a fals
lusio
IL
Go to
Races'
were filmed long time
in S.
ine
Track
orida
(which is not even now
kiste
)
blic
are
also that on tickets wh
they a 2
the
g
horses were already pre
nged by t
ters
chance to win five dolla
heing abr
to ]
The facts in this letter have
substa
iat
hro
investigation
of this group and the report
ins lit
'y hund,
complaining
letters which outline blata
id fraudule
aception
nearly
every part of the country.
A final note is that
ress has help
the [
ssion to
investigate this problem
ep. Dingell h
eld h
'gs on the use
of gasoline promotional
S, and in the
cy's
able forthcoming
staff report, most of t
discussion D
e game:
; opposed to
retail grocery store pr
ions) is t
on FTI
a but on
Rep. Dingell's hearings.
vertis
30,
P. 8, col.l.
The story behind t
suance
FTC report
on the misgrading of SO
d lumber
nothe
cation of the
typical delay factors.
Commiss
is in
troduction:
"The question of por
misgrad
sof
ber has
confronted the Com
in almost
ously
2 July
of 1962. On Marr
1967 (e
adde
hearing
was held on the
efore the
Commi
"
Report D
rading
oftwood
her, May
8, P.
The report here referr
tails the
istrat
story and is a
revealing picture of th
nd and E
paper
ling which
must precede even the m
entary Tt
:
*From a letter which was substantiated by the Bureau's other evidence
and published in the "Preliminary Economic Report on the Use of Games
of Chance" by the Division of Economic Evidence of the Bureau of
Economics, March 1968, P. 20.