27.6 Summary and Exercises

Summary

Section 5 of the Federal Trade Commission (FTC) Act gives the FTC the power to enforce a provision prohibiting “unfair methods of competition and unfair or deceptive acts or practices in commerce.” Under this power, the FTC may bring enforcement proceedings against companies on a case-by-case basis or may promulgate trade regulation rules.

A deceptive act or practice need not actually deceive as long as it is “likely to mislead.” An unfair act or practice need not deceive at all but must offend a common sense of propriety or justice or of an honest way of acting. Among the proscribed acts or practices are these: failure to disclose pertinent facts, false or misleading description of products, misleading price and savings claims, bait-and-switch advertisements, free-offer claims, false product comparisons and disparagements, and endorsements by those who do not use the product or who have no reasonable basis for making the claims. Among the unfair trade practices that the FTC has sought to deter are certain types of contests and sweepstakes, high-pressure door-to-door and mail-order selling, and certain types of negative-option plans.

The FTC has a number of remedial weapons: cease and desist orders tailored to the particular deception or unfair act (including affirmative disclosure in advertising and corrections in future advertising), civil monetary penalties, and injunctions, damages, and restitution on behalf of injured consumers. Only the FTC may sue to correct violations of Section 5; private parties have no right to sue under Section 5, but they can sue for certain kinds of false advertising under the federal trademark laws.

Exercises

  1. Icebox Ike, a well-known tackle for a professional football team, was recently signed to a multimillion-dollar contract to appear in a series of nationally televised advertisements touting the pleasures of going to the ballet and showing him in the audience watching a ballet. In fact, Icebox has never been to a ballet, although he has told his friends that he “truly believes” ballet is a “wonderful thing.” The FTC opens an investigation to determine whether there are grounds to take legal action against Icebox and the ballet company ads. What advice can you give Icebox Ike? What remedies can the FTC seek?
  2. Door-to-door salespersons of an encyclopedia company offer a complete set of encyclopedias to “selected” customers. They tell customers that their only obligation is to pay for a ten-year updating service. In fact, the price of the updating service includes the cost of the encyclopedias. The FTC sues, charging deception under Section 5 of the FTC Act. The encyclopedia company defends itself on the ground that no one could possibly have been misled because everyone must have understood that no company could afford to give away a twenty-volume set of books for free. What is the result?
  3. Vanessa Cosmetics takes out full-page advertisements in the local newspaper stating that “this Sunday only” the Vanessa Makeup Kit will be “reduced to only $25.” In fact, the regular price has been $25.50. Does this constitute deceptive advertising? Why?
  4. Lilliputian Department Stores advertises a “special” on an electric carrot slicer, priced “this week only at $10.” When customers come to the store, they find the carrot slicer in frayed boxes, and the advertised special is clearly inferior to a higher-grade carrot slicer priced at $25. When customers ask about the difference, the store clerk tells them, “You wouldn’t want to buy the cheaper one; it wears out much too fast.” What grounds, if any, exist to charge Lilliputian with violations of the FTC Act?
  5. A toothpaste manufacturer advertises that special tests demonstrate that use of its toothpaste results in fewer cavities than a “regular toothpaste.” In fact, the “regular” toothpaste was not marketed but was merely the advertiser’s brand stripped of its fluoride. Various studies over the years have demonstrated, however, that fluoride in toothpaste will reduce the number of cavities a user will get. Is this advertisement deceptive under Section 5 of the FTC Act?
  6. McDonald’s advertises a sweepstakes through a mailing that says prizes are to be reserved for 15,610 “lucky winners.” The mailing further states, “You may be [a winner] but you will never know if you don’t claim your prize. All prizes not claimed will never be given away, so hurry.” The mailing does not give the odds of winning. The FTC sues to enjoin the mailing as deceptive. What is the result?

Self-Test Questions

  1. Section 5 of the Federal Trade Commission Act is enforceable by

    1. a consumer in federal court
    2. a consumer in state court
    3. the FTC in an administrative proceeding
    4. the FTC suing in federal court

  2. The FTC

    1. is an independent federal agency
    2. is an arm of the Justice Department
    3. supersedes Congress in defining deceptive trade practices
    4. speaks for the president on consumer matters

  3. A company falsely stated that its competitor’s product “won’t work.” Which of the following statements is false?

    1. The competitor may sue the company under state law.
    2. The competitor may sue the company for violating the FTC Act.
    3. The competitor may sue the company for violating the Lanham Act.
    4. The FTC may sue the company for violating the FTC Act.

  4. The FTC may order a company that violated Section 5 of the FTC Act by false advertising

    1. to go out of business
    2. to close down the division of the company that paid for false advertising
    3. to issue corrective advertising
    4. to buy back from its customers all the products sold by the advertising

  5. The ingredients in a nationally advertised cupcake must be disclosed on the package under

    1. state common law
    2. a trade regulation rule promulgated by the FTC
    3. the federal Food, Drug, and Cosmetic Act
    4. an executive order of the president

Self-Test Answers

  1. c
  2. a
  3. b
  4. c
  5. b