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Unfairness and Internet Advertising
Summary of a speech by
Commissioner Roscoe B. Starek, III
before the
American Advertising Federation Government Affairs
Conference
Washington, D.C.
March 13, 1997
Unfairness
Section 5
of the Federal Trade Commission Act ("FTC Act") prohibits both
unfair and deceptive acts or practices in or affecting commerce. The FTC
promulgated an Unfairness Policy Statement in 1980, which the FTC applies
when addressing issues raising unfairness concerns. Congress amended the
FTC Act in 1994 to specify that an unfair act or practice is one that
causes or is likely to cause substantial injury to consumers that is not
reasonably avoidable and is not outweighed by countervailing benefits to
consumers or competition. The Commission alleges deception far more
frequently than unfairness. The Commission has pursued unfairness
allegations in several court actions.
The
ongoing public policy debates on tobacco and alcohol advertising have
raised new questions about the relationship between advertising and
underage consumption of these products. The proper role of government
regulation of advertising, including the applicability of the Commission's
unfairness authority, has been called into question. The last time the
Commission publicly visited similar issues was in 1994, when a majority
decided to close an investigation of whether the R.J. Reynolds Tobacco
Company had engaged in unfair practices through its use of the "Joe
Camel" campaign to promote Camel cigarettes. The Commission said then
that "[a]lthough it may seem intuitive to some that the Joe Camel
advertising campaign would lead more children to smoke or lead children to
smoke more, the evidence to support that intuition is not there." As
the statement said, the record did not show a link between the Joe Camel
advertising campaign and increased smoking among children sufficient to
justify a charge of unfairness in violation of the FTC Act. Since then,
Congress has expressly barred the Commission from relying on public policy
considerations as the primary basis for an unfairness determination.
The recent
decision by the Distilled Spirits Council of the United States
("DISCUS") to end its forty-year voluntary ban on liquor
advertising on radio and television suggests that the Commission may again
find itself weighing in on the relationship between advertising and
underage consumption. Although DISCUS's action has precipitated this
debate, there really is no basis to distinguish the concerns raised by
distilled spirits advertising from those raised by advertising of other
types of alcoholic beverages.
The
Commission testified to Congress in 1990 that the evidence of a link
between advertising and alcohol consumption was inconclusive and failed to
show that a causal relationship did or did not exist. The Commission
suggested that these studies and their underlying research methodology were
perhaps incapable of accurately measuring any relationship that might
exist. At that time, the Commission called for further research. Two years
ago, the National Institute of Alcohol Abuse and Alcoholism ("NIAA")
issued a similar call based on a review of existing studies of the effects
of alcohol advertising, promotion activities, and mass media presentations
on attitudes toward drinking, actual consumption, and alcohol-related
problems. According to NIAA, existing studies were inconclusive for
methodological reasons and the lack of sufficient data.
Of course
the Commission would be concerned about ads for alcohol or tobacco directed
at children. Concern, however, is not in itself sufficient for the
Commission to initiate an enforcement action based on our unfairness
authority. Even if alcohol or tobacco advertising appears to be targeted at
an underage audience, the Commission cannot act unless it determines that
there is reason to believe that the advertising is likely to cause
substantial injury.
It may
seem obvious and noncontroversial to some that an increase in advertising
and promotional efforts by a manufacturer will lead to increased
consumption of its product. Firms spend a lot of money on advertising --
why else would they do it? But there are two important issues to keep in
mind.
First,
advertising and promotions frequently are undertaken simply to induce
consumers to switch from one brand to another. When this occurs, there may
be little or no net increase in total consumption, because one brand's gain
is another's loss.
Second,
much of this advertising is also undertaken to differentiate one brand from
another -- to convince consumers that rival products are actually poor
substitutes for the advertised brand. To the extent that firms in a market
can successfully differentiate their products, price competition between
rival brands may actually decrease, allowing each brand to raise its price.
Although each firm may actually sell less than if no firms had advertised,
the ability to raise prices makes this strategy profitable. Thus, an
increase in brand advertising could actually result in lower overall
consumption, especially by underage consumers who are likely to be
particularly sensitive to price increases.
Methodologically
sound studies are the best way to determine whether a particular ad
campaign for a particular product causes consumers to switch brands,
attracts consumers who have not used the product before, increases
consumption by existing consumers, or results in some combination of these
effects. Without these studies, it is difficult to determine the real
relationship between alcohol or tobacco advertising and underage
consumption.
Nonetheless,
the absence of conclusive scientific evidence on the effect of a particular
advertising campaign on consumption is not dispositive of every unfairness
inquiry. The unfairness standard requires thes Commission to find that
substantial injury is likely, not that it has actually occurred. The
Commission look's at the entire record and consider the flaws or
limitations of every piece of evidence in assessing how much weight it
deserves and, ultimately, whether a preponderance of the evidence indicates
that an ad campaign is unfair.
The most
recent Supreme Court decision regarding whether restraints on alcohol
advertising survive First Amendment scrutiny indicates that Court's
unwillingness to rely on anything other than the evidence when considering
the relationship between advertising and consumption. In 44 Liquormart, a
plurality opinion confirmed that, in the absence of evidence, courts cannot
assume that an advertising restraint will significantly reduce consumption.
Instead, the government must establish a causal relationship between its
speech restriction and the asserted state interest that the restriction is
intended to directly advance. The Court also found that its earlier
decision in Posadas
-- a case which involved a ban on advertising casino gambling -- gave too
much deference to the legislature when assessing whether a speech
restriction directly advances the asserted governmental interest.
However,
44 Liquormart could also be read to leave open the possibility that even
without evidence that the advertising restriction directly advances the
government's interest, the Court could defer to the government's judgment
when the restriction concerns advertising about unlawful behavior. Because
alcohol or tobacco advertising directed to children promotes unlawful
behavior, deference to a legislative judgment according to this reasoning
may be warranted.
The
difficulty, of course, is that when it is directed to adults, alcohol or
tobacco advertising concerns legal behavior. Without evidence that a
restriction on this advertising will significantly reduce consumption by
minors, the speech restriction may not survive First Amendment scrutiny.
Advertising
and Marketing on the Internet
Section 5
of the FTC Act applies to online commerce -- a medium that may present
problems and opportunities not found in other media. The ease with which
consumers can surf the Web also enables law enforcers to seek out
potentially deceptive online advertisements. Commission staff regularly
monitor the Internet and online services, and some investigations have come
about as the result of online solicitations received or found by Commission
staff.
Online
cases so far have involved fraud, including credit repair schemes, business
opportunities, and pyramid scams. The Commission obtained a restraining
order, followed by a stipulated injunction, shutting down a scam that
relied on online technology to work. Ads on the Internet enticed consumers
to download a program to view the defendants' "adult
entertainment" Web sites that -- without the consumers' knowledge --
disconnected their computers from their own local Internet service
providers and reconnected the computers to a phone number in Moldova.
Even after consumers who downloaded this program left the defendants' Web
sites, their computers remained connected to the international long
distance number until the consumers turned off their computers. The
defendants failed adequately to disclose that consumers would be billed for
an international long distance call to Moldova or that they had to
turn off their computers to end the call. As more advertising occurs
online, the FTC will have a more active with respect to non-fraudulent
advertising.
The
Commission also is actively examining online advertising to assess the
implications for consumers' privacy interests. Consistent with its usual
market-oriented approach, the Commission is looking first to businesses to
address privacy issues through voluntary measures, rather than assuming
that an expanded government role is necessary. There are no plans now for
the Commission to issue privacy guidelines or regulations.
Advertising
on the Internet raises complicated questions of choice of law and
jurisdiction that can pose barriers to effective enforcement by governments
and to effective compliance by advertisers. Legal requirements may differ
depending upon the country in which a consumer accesses information. For
instance, some prominent U.S.
companies that market to children have received inquiries about their Web
sites from Denmark,
which prohibits children's advertising. Some nations do not permit
comparative advertising, which, of course, is common in the United States.
Similarly, some countries do not permit advertising certain products or
using certain depictions that are permissible in the United States.
Once governments
begin to regulate or try to enforce their own laws against advertising on
the Internet, we may be left with a Net containing only that which violates
no country's laws.
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