Does The FTC Have An 'Unfair" Future? Regulating Unfair Ads Needed To Provide Industry Guidelines

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Advertisers have an opportunity this year to break a decade-long stale mate over whether the Federal Trade Commission can regulate "unfair" advertising. At issue is whether the FTC should regulate non-deceptive ads that nonetheless injure consumers either physically or economically. An example is a bicycle commercial that depicts a young child charging into the street without stopping to look for cars.

Congress has stripped the FTC of authority to regulate unfair ads on an industry-wide basis for more than a decade and required the agency to act only on a case-by-case basis. Stopping unfair ads one-by-one is inefficient and time consuming. Also, the end re sult-a cease and desist order-falls short of providing advertisers with sufficient guidance and fails to ensure a level competitive playing field.

Moreover, since 1983, the dispute over whether the FTC should be able to regulate unfair ads has prevented the House and Senate from agreeing on legislation that officially authorizes the FTC to operate. The agency continues to function under temporary authority included in its annual appropriations bill. But the absence of an official congressional mandate has diminished the FTC's standing and furthered a trend toward shifting responsibility for regulating advertising to state agencies. Advertisers interested in curtailing this trend, and ensuring a level, competitive playing field, should support efforts in Congress to resolve this controversy and officially put the agency back in business.

The controversy over the FTC's authority to regulate unfair ads began in 1978 when the agency considered prohibiting advertising directed at pre-school age children. The political storm that ensued led to the current stand-off. Advertisers fear that if the FTC's original authority is reinstated, the agency may take drastic action that would ban certain types of advertising. However, it's unlikely that FTC career staff would jump back into such dangerous waters, even under the Clinton administration.

As things stand now the Senate re-authorization bill prohibits the FTC from issuing industry-wide regulations to halt unfair ads. The Senate bill also defines an "unfair" trade practice, thus narrowing the scope of cases the agency can bring against individual advertisers. The House bill preserves the FTC's traditional authority to issue industry-wide regulations as well as to bring individual cases and leaves it up to the agency to define what an unfair ad is.

One possible compromise would be to allow the FTC to issue regulations, but limit the agency's discretion by writing a definition of unfair ads into the law. Writing a definition of unfairness into stone, however, might leave consumers vulnerable because predicting the types of problems that the public may face in five, 10 or 20 years from now is difficult. That problem could be mitigated by requiring the FTC to abide by the definition only when issuing industry-wide regulations.

In any event, the most hotly contested issue will boil down to how the term "unfair" is defined. In 1980, the FTC examined the leading Supreme Court case on the matter and defined two overlapping types of unfair trade practices. The first was any trade practice that (a) causes substantial physical or economic injury to consumers, (b) could not reasonably be avoided by consumers, and (c) was not outweighed by countervailing benefits to consumers or fair competition. For example, enclosing a free sample razor blade in the comics section of Sunday newspapers or failing to disclose octane levels on gasoline pumps are both considered "unfair" practices under this standard. The second was any trade practice that violated an established public policy, e.g., an automobile commercial that depicted the driver not wearing a safety belt. The agency stated that a violation of public policy could, by itself, constitute an unfair practice or could be used as proof of substantial consumer injury.

The Senate bill selectively picks and chooses from the FTC's own definition of an unfair practice and does not include the public policy criterion. If Congress wants to rely on FTC expertise then it should base legislation on the agency's entire definition of unfairness, not just bits and pieces.

Ironically, even if the FTC's authority to issue regulations prohibiting unfair ads were reinstated, the agency is unlikely to use it in the foreseeable future. In order to issue a regulation, the FTC must conduct what is commonly referred to as a Magnuson-Moss rulemaking proceeding. That cumbersome regulatory scheme, which dates back to the 1970s, requires the agency to hold extensive public hearings that can stretch on for years.

If the FTC's authority to regulate unfair ads is reinstated, the agency should instead use it as a mandate to issue guidelines for particular types of advertising. While the FTC can legally issue such guidelines now, the controversy over the agency's regulatory authority has dissuaded it from using this enforcement mechanism. That's unfortunate. Guidelines allow the FTC to bypass the lengthy public hearing process needed to issue formal regulations while still providing responsible advertisers with the guidance they need to avoid trouble.

The current restrictions on the FTC's authority were intended to ease regulatory burdens on business. But in reality, they backfired, merely forcing FTC staff to use inefficient enforcement methods that keep advertises guessing as to what the rules are. Ending the controversy over FTC's authority to regulate unfair ads will pave the way for congressional action and allow the agency to reassume a leadership role. These steps are in the interest ofboth the business and consumer communities.

Mr. Silverglade is director of legal affairs for the Center for Science in the Public Interest, Washington.

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