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  • 1. Lecture 9: Advertising and Consumer 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 Against Deceptive 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
      • 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 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.
    • Idea: if an industry regulates itself effectively, the government will not interfere
    • BBB OnLine (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 &