Deception In Advertising Essay, Research Paper

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Deception and Unfairness

The Federal Trade Commission (FTC) was founded in 1914 after the enactment of the Federal Trade Commission Act. The Commission is headed by five Commissioners, nominated by the President and confirmed by the Senate, each serving a seven-year term. The President chooses one Commissioner to act as Chairman. No more than three Commissioners can be of the same political party.

The Federal Trade Commission enforces a variety of federal antitrust and consumer protection laws. The Commission seeks to ensure that the nation’s markets function competitively, and are vigorous, efficient, and free of undue restrictions. The Commission also works to enhance the smooth operation of the marketplace by eliminating acts or practices that are unfair or deceptive (Federal Trade Commission, 1999). In general, the Commission’s efforts are directed toward stopping actions that threaten consumers’ opportunities to exercise informed choice (Federal Trade Commission, 1999). Finally, the Commission undertakes economic analysis to support its law enforcement efforts and to contribute to the policy deliberations of the Congress, the Executive Branch, other independent agencies, and state and local governments when requested (Federal Trade Commission, 1999).

The primary responsibility of the FTC is to keep the United States economy free and fair. Section 5 of the Federal Trade Commission Act empowers the FTC to prevent unfair methods of competition and unfair or deceptive acts or practices (Barnes, Bowers, Langvardt, Mallor, Phillips, 1988).

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The Federal Trade Commission Act also prohibits unfair or deceptive acts or practices in commercial settings. This enables the FTC to govern and regulate a broad range of activities that disadvantage customers. In regulating activities the FTC would need to prove an activity is deceptive or unfair. If the FTC decides to proceed against the alleged offender, they must enter a formal complaint. The case would then be heard in a public administrative hearing called an adjudicative proceeding. A FTC judge would preside over this proceeding. If an appeal were desired the FTC?s five commissioners would hear the case. After this step would be the federal court of appeals and then the U.S. Supreme Court.

The Federal Trade Commission reviews deceptive practices on a case-by-case basis (Barnes et al, 1988). The court system often defers their judgments to the Commission’s determinations. Actual or proven deception is not required; a practice likely to mislead a consumer is also deceptive under the FTC Act. The Commission may require sellers to substantiate their claims by showing a reasonable basis for making such claims (Barnes et al, 1988).

The FTC may begin an investigation in different ways. Letters from consumers or businesses, Congressional inquiries, or articles on consumer or economic subjects may trigger FTC action (Federal Trade Commission, 1999). Investigations are either public or nonpublic. Generally, FTC investigations are nonpublic in order to protect both the investigation and the company.

If the FTC believes a violation of the law occurred, it might attempt to obtain voluntary compliance by entering into a consent order with the company (Federal Trade

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Commission, 1999). A company that signs a consent order need not admit that it violated the law, but it must agree to stop the disputed practices outlined in an accompanying complaint (Federal Trade Commission, 1999).

If a consent agreement cannot be reached, the FTC may issue an administrative complaint. If an administrative complaint is issued, a formal proceeding that is much like

a court trial begins before an administrative law judge: evidence is submitted, testimony is heard, and witnesses are examined and cross-examined (Federal Trade Commission, 1999).

Section 5 of the FTC Act also prohibits unfair acts or practices. The FTC focuses on consumer injury violations. The injury must be substantial, must not be outweighed by any offsetting consumer or competitive benefits produced by the challenged practice, or must be one that consumers could not reasonably have avoided (Barnes et al, 1988).

The person, partnership, or corporation so complained of shall have the right to appear at the place and time so fixed and show cause why an order should not be entered

by the Commission requiring such person, partnership, or corporation to cease and desist from the violation of the law so charged in said complaint. (U.S. 15:45).

The FTC can order a respondent to cease engaging in a deceptive or unfair act (Barnes et al, 1988). The FTC can also order a respondent to disclose information related to the deception or unfairness (Barnes et al, 1988). The final remedy the FTC can order is for a seller to do corrective advertising (Barnes et al, 1988). The seller would be asked to retract and republish the advertisement. The FTC can also take a seller to court seeking civil penalties or consumer redress (Barnes et al, 1988).

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The court shall have jurisdiction to grant such relief as the court finds necessary to redress injury to consumers or other persons, partnerships, and corporations resulting from the rule violation or the unfair or deceptive act or practice, as the case may be (U.S. 15:57b). Such relief may include, but shall not be limited to, rescission or reformation of contracts, the refund of money or return of property, the payment of damages, and public

notification respecting the rule violation or the unfair or deceptive act or practice, as the case may be (U.S. 15:57b).

The Commission can also issue Trade Regulation Rules. If the FTC staff finds evidence of unfair or deceptive practices in an entire industry, it can recommend that the Commission begin a rulemaking proceeding. Throughout the rulemaking proceeding, the public will have opportunities to attend hearings and file written comments. The Commission will consider these comments along with the entire rulemaking record–the hearing testimony, the staff reports, and the Presiding Officer’s report — before making a final decision on the proposed rule (Federal Trade Commission, 1999). A FTC rule may be challenged in any of the U.S. Courts of Appeal. When issued, these rules have the force of law.

The cases we will review all have relevant violations of the FTC ACT section 5. The court will decide in individual cases if the material is skewed in any way, and if the consumer in an impartial circumstance is inclined to be mislead. Businesses have been identified as using false or misleading claims such as U.S. Marketing, Inc. in the case FTC v. Mitchell D. Gold et, al (Thorleifson, 1998). In this case U.S. Marketing Inc. has been operating since 1994 as professional fund-raisers. They contract with nonprofit

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organizations to solicit on their behalf. U.S. Marketing has been named for routinely misrepresenting to induce customers to donate. The counts which state the companies violations include count one, misrepresentation of caller identity, count two misrepresentation of local benefit, count three, misrepresentation of program benefit, count four, misrepresentation that most of donation supports particular programs, count

five, misrepresentations about advertising, count six, means and instrumentalities, count seven, failure to substantiate claims, and injury to public interest.

It is not surprising that companies find deception easy to market a product when since the truth about a product is rarely persuasive. Too often businesses lose to deceitful advertising. Advertising has required regulation by the Federal Trade Commission due to corrupt practices. There are businesses that have found the truth about their product is not persuasive enough for the consumer, so they may embellish or imply something the product is not, to achieve success (Williams, 1998).

The FTC has cases directly against individuals as in the FTC v. Kevin Trudeau (Damtoft, et, al 1998). This case involves an individual who has been involved in several

businesses where he has advertised erroneous statements. The FTC has determined the defendant has made unsubstantiated statements through radio and television broadcasting.

He was the king of infomercials that contained false and misleading statements, which constitutes deceptive practices.

In the case FTC v. Screen Test USA the FTC claims that the company violated the Cooling-Off Rule, 16 C.F.R. Part 429. This rule pertains to unfair and deceptive acts in connection with door- to- door sales, due to the business being conducted outside the

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sellers business such as hotels. In accordance with door-to-door sales this defendant did not supply the buyer with the right to cancel the sale (Davidson, 1999). In this case Screen Test USA claimed that after signing the contract individuals gave up their right to return or request refund on products and services received. This Notice of Cancellation must be included in any direct marketing or door to door business, with two copies given

to the buyer. In this case not only were individuals not given this information when they contacted the organization they were denied the right to cancel.

The Federal Trade Commission makes decisions on cases everyday. How this decision is reached requires not what the advertiser meant but instead what is implied. The FTC considers the person delivering the statement, a normal speaker of English, using the words in circumstances in which they were used, then decide if deceit was implied (Posner, 1995). The FTC has the dilemma of reviewing advertisements, and stating what can and can not be practiced in advertising.

In the case FTC v. National Scholarship Foundation the FTC intends to secure injunctive and other equitable relief, including rescission, restitution and disgorgement,

against defendants for violations including deceptive acts and practices. The FTC reports that National Scholarship Foundation violated Section 5 of the FTC Act by

misrepresenting material facts in connection with the offer and sale of their college scholarship search services. NSF falsely represent that consumers will be provided with a portfolio of scholarship and grant resources from which they are likely to obtain at least $1000 in grants and scholarships. NSF would falsely state that it would refund its fee if $1000 in grants and scholarships were not received. The fact is that NSF does not readily

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refund its fee if the consumer does not obtain $1000. NSF also encourages consumers to check with the National Business Reporting Bureau to check on the validity of NSF. NSF directly or by implication reports that NBRB is a separate entity that reports objective and reliable results. NSF never informs the consumer NBRB is owned and controlled by the same individuals that own NSF.

In the case FTC v. NSF the FTC intends to prove that the defendants have injured, and will continue to injure consumers, this is in direct violations with the FTC Act section 5(a). Due to NSF deceptive acts or practices consumers have lost all or part of the fees they have paid to defendants. The FTC finds that unless these practices are discontinued consumers will continue to suffer financial injury.

In researching these cases we have found that it would be impossible to adequately state in words exactly what an implied deception consist of. In all of these cases it is blatant that deception has occurred, now the decision must be made in stopping these practices. Unless the companies Screen Test USA, National Scholarship Foundation, and U.S. Marketing Inc. are completely and permanently cited for violating

the FTC Act will these practices stop? If we examine the case with Kevin Trudeau, his separate businesses were Eden?s Secret Natures Purifying Product, Sable Hair Farming

System, Jeanie Eller?s Action Reading, Dr. Callahan?s Addition Breaking Technique, Kevin Trudeau?s Mega Memory System and Howard Berg?s Mega Reading. If the FTC cited him in the first business would he have gone on to create 5 more companies using the same deceptive techniques? The FTC Act is challenged on a daily basis. If we can recall just five deceptive promotions or advertisements without much effort we can only

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imagine the vast number of cases pending at this moment. This act was established in an effort to protect consumers. The FTC enforces Section 5 of the FTC Act that prohibits deceptive acts or practices in affecting commerce. The Commission may initiate federal district court proceedings to appoint violations of the FTC Act. The FTC also secures such equitable relief as is appropriate in each case.

The FTC regulations of deceptive and unfair advertising may in some instances collide with the First Amendment protection of commercial speech. The First Amendment is titled ?Religious establishment prohibited. Freedom of Speech, of press, right to assemble and to petition?. Amendment is defined ?Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise there of, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.? However, the First Amendment has not been a major obstacle for the Commission because the constitutional protection given to commercial speech does not extend to false and misleading statements. Therefore, the First Amendment does not protect deceptive advertising.

Commission requirements for sellers to substantiate objective claims about their products by showing that they have a reasonable basis for making such claims.

The reasonable consumer test protects the seller from liability and the consumer from every outrageous misconception they may entertain. For instance, this test would protect seller from liability if an American company advertised they were selling Belgium waffles, and the consumer wanted to sue based on the argument that Belgium waffles can only come from Belgium.

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Material information is essential to the consumer who will buy products according to product differentiation. When material information is omitted, the FTC is there to regulate and ensure that the public is not deceived. Deception usually occurs in warranty, safety, cost and effectiveness of the product.

Another aspect of the FTC Section 5 is governing unfair acts or practices. The FTC reviews behaviors that are not exactly deceptive acts, but is more concerned about consumer safety. To qualify as an injury, the FTC would have to prove three things. First they must prove substantial monetary losses or safety risks have occurred. Second the FTC must prove a sellers failure to give the consumer proper information on the product or service. This could give the seller an inappropriate advantage over the competition. Thirdly the FTC must prove the consumer could not have avoided an injury, either from high-pressure sales tactics or proving the seller did not make all information available to the consumers.

The FTC can enact proceedings to protect against deceptive acts or unfair behavior. Sometimes while protecting or reviewing unfair or deceptive practices, the FTC will propose an order to cease engaging in the deceptive or unfair acts. This action is called a remedy. Other examples of remedies would be for the company to do corrective advertising. The seller?s future advertising must correct false impressions that were created by past advertising. Sometimes after it has proven that a seller has been deceptive , the seller will have to comply for all of their products including new introductions of products. This would be considered an extreme case, but not unheard of.

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The FTC is important to business because they create an even playing field. Their rules and regulations provide needed guidelines and promote fair trade practices among other businesses that may be competing for the same consumer dollar.

Our group is in agreement with the FTC regulations. We appreciate that the FTC is interested in fighting unscrupulous advertisers for our consumer protection. We find this body of government a necessity in today?s society. The FTC helps police questionable and corrupt business advertising practices.

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References

Barnes James A., Bowers Thomas, Langvardt Arlen W., Mallor Jane P., &

Phillips Michael J. (1998) Business Law and the Regulatory Environment: Concepts and

Cases. United States: Irwin/McGraw-Hill.

Damtoft R.W., Pagar C. B., McGrew T. M., & Tortorice M.E (1998) Northern

District of Illinois Eastern Division Federal Trade Commission v. Kevin Trudeau

individually. Available: http://www.ftc.gov/os/1998/9801/trudeau.cmp.htm.

Davidson Virginia A. (1999, July 27) District of New Jersey Federal Trade

Commission v. Screen Test USA, Inc. [Online]. Available:

http://www.ftc.gov/os/1999/9905/scrrevd.htm.

Federal Trade Commission. (1999, August 11). [Online].

Available: http://www.ftc.gov.

Posner Richard (1995) The Problems of Jurisprudence Cambridge, MA.Harvard University Press.

Rucoba Laurie E. (1997) Southern District of Florida Federal Trade Commission v. National Scholarship Foundation, Inc.; D.B.F. National Business Reporting Bureau, Inc. [Online]. Available: http://www.ftc.gov/os/1997/9711/nsfcmp.htm.

Thorleifson, Tracy S. (1998). Central District of California Federal Trade Commission V. U.S. Marketing Inc., and North American Charitable Services, Inc.

[Online]. Available: http://www.ftc.gov/oc/1998/9811/complai4.htm