Lecture 9: Advertising and Consumer Protection

1. Lecture 9:Advertising andConsumer Protection

2. Need for Consumer Protection • Businesses may be large; consumers are “small” • Consumers make “whim” purchases • Individual consumer loss may be small • Not enough to justify a lawsuit • Total consumer loss may be large • Consumers do not easily organize • Government can act more effectively • Tremendous enforcement powers • Government is a heavy threat • Sometimes threat to regulate is enough • Federal Trade Commission (FTC) • State laws (“little FTC acts”)

3. Federal Trade Commission (FTC) • FTC Act, 15 U.S.C. §41ff (1914). • “The Commission is hereby empowered and directed to prevent persons, partnerships, or corporations, [exceptions] from using unfair methods of competition in or affecting commerce and unfair or deceptive acts or practices in or affecting commerce.” 15 U.S.C. §45(a)(2) • “Commerce” means “commerce that may lawfully be regulated by Congress, e.g. interstate, DC, airwaves, Internet

4. FTC Action AgainstDeceptive and Unfair Business Practices • What’s “Deceptive”? What’s “Unfair”? • Deceptive. Likely to: • mislead consumers; and • affect consumers’ behavior or decisions about the product or service. • Unfair. The injury it causes, or is likely to cause, is: • substantial; • not outweighed by other benefits; and • not reasonably avoidable

5. Advertising Practices Regulated by the FTC • Deceptive pricing, 16 C.F.R. §233.1 • Use of the word “free”, 16 C.F.R. §251.1 • Product endorsements, 16 C.F.R. §255.0 • Advertising and marketing on the Internet • Internet prompt delivery rules, 16 C.F.R. §435.1 • The “Mail Order/Telephone Order (MOTO) Rule” • Pyramid schemes • See FTC advertising guidelines • See FTC DotCom Disclosures • Journal of Interactive Advertising

6. Sample FTC Cases • Fraud • FTC v. TLD Network Ltd. (N.D. Ill., filed Feb. 28, 2002) • Defendants used spam and appeals to patriotism to sell non-working domain names ending in .usa for $59 • Pyramid schemes • FTC v. Linda Jean Lightfoot (S.D. Ohio, filed March 29, 2002) • Email campaign promises a Multi-Level marketing (MLM) Gifting Program that can’t fail and $10,000 in cash gifts within a few months of joining. • $41 initial fee. Cash when you generate 3 levels of 10 members each = 1000 members @ $10 each = $10,000 • FTC wants to halt the scheme and freeze defendant’s assets

7. Sample FTC Cases • Fraud • In the Matter of Palm, Inc. (FTC File No. 002-3332) • Palm deceptively claimed to offer PDAs with “built-in access to the Internet and email” • In fact this required a separate extra-cost modem, extra-cost software and an extra-cost subscription to Palm.net • Palm.net coverage is not available everywhere in the U.S. • Proposed settlement: Palm must • Disclose hidden charges • Disclose that non-wireless PDAs can’t access Internet • Disclose that Palm.net does not operate everywhere

8. Telemarketing and Consumer Fraud and Abuse Prevention Act, 15 U.S.C. §6101 • “Interstate telemarketing fraud has become a problem of such magnitude that the resources of the Federal Trade Commission are not sufficient to ensure adequate consumer protection from such fraud.” • Telemarketing Sales Rule, 16 C.F.R. §310 • Disclosure of terms, limitations, restrictions, costs • Prohibits credit card laundering • Prohibits “abusive telemarketing acts” • Telemarketing Sales Rule review • Internet issues, cookies • Competition between Internet and telemarketing • Increased cross-border activity

9. Comparative Advertising • Permitted, even for famous marks! • Unknown mark may be juxtaposed with well-known one • Requirements (FTC) • Objective truth • Product comparisons require advance experimental data (“reasonable basis”) • Demonstrations must show the product under normal use • Subjective truth (not calculated to mislead or deceive) • No likelihood of confusion as to source

10. Regulatory Status of the Internet • The Internet per se is unregulated • Some laws apply to the Internet as well as other media • Contrast: TV content is regulated by the FCC • Tobacco and alcohol advertising is banned on TV • Tobacco and alcohol advertising are not banned on the Internet • The FTC’s authority extends to “unfair or deceptive acts or practices,” not to dangerous or undesirable products

11. State Consumer Protection Acts • States now enacting protective legislation dealing specifically with the Internet • California Business and Professions Code §§17530-17539.6 • Real estate. “It is unlawful … to make or disseminate any statement … over the Internet, in any language in this state, concerning … any real estate located in this state or elsewhere, which is known to be untrue and which is made or disseminated with the intention of misleading.” • Second-hand goods. “It is unlawful … over the Internet to advertise, call attention to or give publicity to the sale of any merchandise, which merchandise is secondhand or used merchandise … unless there is conspicuously displayed … a direct and unequivocal statement … which will clearly indicate that the merchandise … is secondhand [or] used. • “surplus”, newspaper circulation, “prize”, “tear gas”, “steroids”, “energy conservation”

12. California Prompt Delivery Rule • California Business and Professions Code §17538 • “It is unlawful … for any person conducting sales or leases by … the Internet or other electronic means …, whether payment to the vendor is made directly, through the mail, by means of a transfer of funds from an account … or by any other means, and then permit 30 days, unless otherwise conspicuously stated in the offering or advertisement … to elapse without doing any one of the following things: • (1) Shipping, mailing, or providing the goods or services ordered • (2) Mailing a full refund • (3) [P]roposing the substitution of goods or services of equivalent or superior quality, and … offering to make a full refund … within one week if the buyer so requests …” • Penalty: 6 months and $1000

13. Legal Definition of the Internet • “ ‘Internet’ means the global information system that is logically linked together by a globally unique address space based on the Internet Protocol (IP), or its subsequent extensions, and that is able to support communications using the Transmission Control Protocol/Internet Protocol (TCP/IP) suite, or its subsequent extensions, or other IP-compatible protocols, and that provides, uses, or makes accessible, either publicly or privately, high level services layered on the communications and related infrastructure described in this paragraph.” California Business and Professions Code §17538

14. State Consumer Protection Acts • Web site that accepts orders must comply with statutes of all 50 states or there are criminal penalties • Constitutional question: “impermissible interference with interstate commerce”?

15. Banner Ads • User searches for “Estée Lauder.” Search engine displays a banner ad for “The Fragrance Counter” • Is it trademark infringement? False advertising? Deceptive trade practice? • Brand scanning services: BrandScanner • Brand Awareness Service

16. Self-Policing • Idea: if an industry regulates itself effectively, the government will not interfere • BBBOnLine (Better Business Bureau) • International Chamber of Commerce (ICC) Guidelines on Advertising and Marketing on the Internet

17. Advertising to Children • Children are gullible; respond to small offers • Children are not responsible • They require a high degree of protection • Better Business Bureau • Self-Regulatory Guidelines • COPPA (Children’s Online Privacy Protection Act)

18. Unsolicited Email (SPAM) • May be the subject of FTC TSR rulemaking • FTC has no jurisdiction unless “unfair” or “deceptive. • FTC position: “unsubscribe” links that do not function are deceptive. FTC is using “current law” to stop spam • Much pending federal legislation • California Bill 1629 (1998) • Permits ISPs to sue senders of unsolicited email through ISP (if prohibited by ISP policy) • $50 for each e-mail up to a maximum of $25,000 per day • California Bill 1676 (1998) • Requires opt-out with free telephone number or email address • Ads must be identified in subject line • Nevada similar

19. Unsolicited Email • Washington State: Unsolicited Commercial Email Act (1998) • Illegal to include false or misleading information in the subject line in any e-mail sent by a Washington resident or to a Washington resident’s e-mail address • Sender is assumed to know or have reason to know that a Washington resident is the recipient of such an e-mail if the information identifying the recipient as a Washington resident is available from the registrant of the domain name contained within the recipient’s e-mail address

20. Q A &