Lecture 9: Advertising and Consumer Protection
Need for Consumer Protection <ul><li>Businesses may be large; consumers are “small” </li></ul><ul><li>Consumers make “whim...
Federal Trade Commission (FTC) <ul><li>FTC Act,  15 U.S.C. §41ff  (1914). </li></ul><ul><ul><li>“The Commission is hereby ...
FTC Action Against Deceptive and Unfair Business Practices <ul><li>What’s “Deceptive”?  What’s “Unfair”? </li></ul><ul><li...
Advertising Practices Regulated by the FTC <ul><li>Deceptive pricing,  16 C.F.R. §233.1 </li></ul><ul><li>Use of the word ...
Sample FTC Cases <ul><li>Fraud </li></ul><ul><ul><li>FTC v. TLD Network Ltd.  (N.D. Ill., filed Feb. 28, 2002)  </li></ul>...
Sample FTC Cases <ul><li>Fraud </li></ul><ul><ul><li>In the Matter of Palm, Inc.  (FTC File No. 002-3332)  </li></ul></ul>...
Telemarketing and Consumer Fraud and Abuse Prevention Act,  15 U.S.C. §6101 <ul><li>“ Interstate telemarketing fraud has b...
Comparative Advertising <ul><li>Permitted, even for famous marks ! </li></ul><ul><ul><li>Unknown mark may be juxtaposed wi...
Regulatory Status of the Internet <ul><li>The Internet  per se  is unregulated </li></ul><ul><ul><li>Some laws apply to th...
State Consumer Protection Acts <ul><li>States now enacting protective legislation dealing specifically with the Internet <...
California Prompt Delivery Rule <ul><li>California Business and Professions Code  §17538 </li></ul><ul><li>“ It is unlawfu...
Legal Definition of the Internet <ul><li>“ ‘ Internet’ means the global information system that is logically linked togeth...
State Consumer Protection Acts <ul><li>Web site that accepts orders must comply with statutes of all 50 states or there ar...
Banner Ads <ul><li>User searches for “Estée Lauder.”  Search engine displays a banner ad for “The Fragrance Counter” </li>...
<ul><li>Idea: if an industry regulates itself effectively, the government will not interfere </li></ul><ul><li>BBB OnLine ...
Advertising to Children <ul><li>Children are gullible; respond to small offers </li></ul><ul><li>Children are not responsi...
Unsolicited Email (SPAM) <ul><li>May be the subject of FTC TSR rulemaking </li></ul><ul><ul><li>FTC has no jurisdiction un...
Unsolicited Email <ul><li>Washington State:  Unsolicited Commercial Email Act  (1998) </li></ul><ul><li>Illegal to include...
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46-840 ECOMMERCE LAW AND REGULATION SPRING 2002 COPYRIGHT ...

  1. 1. Lecture 9: Advertising and Consumer Protection
  2. 2. Need for Consumer Protection <ul><li>Businesses may be large; consumers are “small” </li></ul><ul><li>Consumers make “whim” purchases </li></ul><ul><li>Individual consumer loss may be small </li></ul><ul><ul><li>Not enough to justify a lawsuit </li></ul></ul><ul><li>Total consumer loss may be large </li></ul><ul><ul><li>Consumers do not easily organize </li></ul></ul><ul><li>Government can act more effectively </li></ul><ul><ul><li>Tremendous enforcement powers </li></ul></ul><ul><ul><li>Government is a heavy threat </li></ul></ul><ul><ul><li>Sometimes threat to regulate is enough </li></ul></ul><ul><li>Federal Trade Commission (FTC) </li></ul><ul><li>State laws (“little FTC acts”) </li></ul>
  3. 3. Federal Trade Commission (FTC) <ul><li>FTC Act, 15 U.S.C. §41ff (1914). </li></ul><ul><ul><li>“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) </li></ul></ul><ul><ul><li>“Commerce” means “commerce that may lawfully be regulated by Congress, e.g. interstate, DC, airwaves, Internet </li></ul></ul>
  4. 4. FTC Action Against Deceptive and Unfair Business Practices <ul><li>What’s “Deceptive”? What’s “Unfair”? </li></ul><ul><li>Deceptive. Likely to: </li></ul><ul><ul><li>mislead consumers; and </li></ul></ul><ul><ul><li>affect consumers’ behavior or decisions about the product or service. </li></ul></ul><ul><li>Unfair. The injury it causes, or is likely to cause, is: </li></ul><ul><ul><li>substantial; </li></ul></ul><ul><ul><li>not outweighed by other benefits; and </li></ul></ul><ul><ul><li>not reasonably avoidable </li></ul></ul>
  5. 5. Advertising Practices Regulated by the FTC <ul><li>Deceptive pricing, 16 C.F.R. §233.1 </li></ul><ul><li>Use of the word “free”, 16 C.F.R. §251.1 </li></ul><ul><li>Product endorsements, 16 C.F.R. §255.0 </li></ul><ul><li>Advertising and marketing on the Internet </li></ul><ul><li>Internet prompt delivery rules, 16 C.F.R. §435.1 </li></ul><ul><ul><li>The “Mail Order/Telephone Order (MOTO) Rule” </li></ul></ul><ul><li>Pyramid schemes </li></ul><ul><li>See FTC advertising guidelines </li></ul><ul><li>See FTC DotCom Disclosures </li></ul><ul><li>Journal of Interactive Advertising </li></ul>
  6. 6. Sample FTC Cases <ul><li>Fraud </li></ul><ul><ul><li>FTC v. TLD Network Ltd. (N.D. Ill., filed Feb. 28, 2002) </li></ul></ul><ul><ul><li>Defendants used spam and appeals to patriotism to sell non-working domain names ending in .usa for $59 </li></ul></ul><ul><li>Pyramid schemes </li></ul><ul><ul><li>FTC v. Linda Jean Lightfoot (S.D. Ohio, filed March 29, 2002) </li></ul></ul><ul><ul><li>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. </li></ul></ul><ul><ul><li>$41 initial fee. Cash when you generate 3 levels of 10 members each = 1000 members @ $10 each = $10,000 </li></ul></ul><ul><ul><li>FTC wants to halt the scheme and freeze defendant’s assets </li></ul></ul>
  7. 7. Sample FTC Cases <ul><li>Fraud </li></ul><ul><ul><li>In the Matter of Palm, Inc. (FTC File No. 002-3332) </li></ul></ul><ul><ul><li>Palm deceptively claimed to offer PDAs with “built-in access to the Internet and email” </li></ul></ul><ul><ul><li>In fact this required a separate extra-cost modem, extra-cost software and an extra-cost subscription to Palm.net </li></ul></ul><ul><ul><li>Palm.net coverage is not available everywhere in the U.S. </li></ul></ul><ul><ul><li>Proposed settlement: Palm must </li></ul></ul><ul><ul><ul><li>Disclose hidden charges </li></ul></ul></ul><ul><ul><ul><li>Disclose that non-wireless PDAs can’t access Internet </li></ul></ul></ul><ul><ul><ul><li>Disclose that Palm.net does not operate everywhere </li></ul></ul></ul>
  8. 8. Telemarketing and Consumer Fraud and Abuse Prevention Act, 15 U.S.C. §6101 <ul><li>“ 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.” </li></ul><ul><li>Telemarketing Sales Rule, 16 C.F.R. §310 </li></ul><ul><ul><li>Disclosure of terms, limitations, restrictions, costs </li></ul></ul><ul><ul><li>Prohibits credit card laundering </li></ul></ul><ul><ul><li>Prohibits “abusive telemarketing acts” </li></ul></ul><ul><li>Telemarketing Sales Rule review </li></ul><ul><ul><li>Internet issues, cookies </li></ul></ul><ul><ul><li>Competition between Internet and telemarketing </li></ul></ul><ul><ul><li>Increased cross-border activity </li></ul></ul>
  9. 9. Comparative Advertising <ul><li>Permitted, even for famous marks ! </li></ul><ul><ul><li>Unknown mark may be juxtaposed with well-known one </li></ul></ul><ul><li>Requirements ( FTC ) </li></ul><ul><ul><li>Objective truth </li></ul></ul><ul><ul><ul><li>Product comparisons require advance experimental data (“ reasonable basis ”) </li></ul></ul></ul><ul><ul><ul><li>Demonstrations must show the product under normal use </li></ul></ul></ul><ul><ul><li>Subjective truth (not calculated to mislead or deceive) </li></ul></ul><ul><ul><li>No likelihood of confusion as to source </li></ul></ul>
  10. 10. Regulatory Status of the Internet <ul><li>The Internet per se is unregulated </li></ul><ul><ul><li>Some laws apply to the Internet as well as other media </li></ul></ul><ul><li>Contrast: TV content is regulated by the FCC </li></ul><ul><ul><li>Tobacco and alcohol advertising is banned on TV </li></ul></ul><ul><ul><li>Tobacco and alcohol advertising are not banned on the Internet </li></ul></ul><ul><li>The FTC’s authority extends to “unfair or deceptive acts or practices,” not to dangerous or undesirable products </li></ul>
  11. 11. State Consumer Protection Acts <ul><li>States now enacting protective legislation dealing specifically with the Internet </li></ul><ul><li>California Business and Professions Code §§17530-17539.6 </li></ul><ul><ul><li>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.” </li></ul></ul><ul><ul><li>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. </li></ul></ul><ul><ul><li>“ surplus”, newspaper circulation, “prize”, “tear gas”, “steroids”, “energy conservation” </li></ul></ul>
  12. 12. California Prompt Delivery Rule <ul><li>California Business and Professions Code §17538 </li></ul><ul><li>“ 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: </li></ul><ul><ul><li>(1) Shipping, mailing, or providing the goods or services ordered </li></ul></ul><ul><ul><li>(2) Mailing a full refund </li></ul></ul><ul><ul><li>(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 …” </li></ul></ul><ul><li>Penalty: 6 months and $1000 </li></ul>
  13. 13. Legal Definition of the Internet <ul><li>“ ‘ 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.” </li></ul><ul><li>California Business and Professions Code §17538 </li></ul>
  14. 14. State Consumer Protection Acts <ul><li>Web site that accepts orders must comply with statutes of all 50 states or there are criminal penalties </li></ul><ul><li>Constitutional question: “impermissible interference with interstate commerce”? </li></ul>
  15. 15. Banner Ads <ul><li>User searches for “Estée Lauder.” Search engine displays a banner ad for “The Fragrance Counter” </li></ul><ul><li>Is it trademark infringement? False advertising? Deceptive trade practice? </li></ul><ul><li>Brand scanning services: BrandScanner </li></ul><ul><ul><li>Brand Awareness Service </li></ul></ul>
  16. 16. <ul><li>Idea: if an industry regulates itself effectively, the government will not interfere </li></ul><ul><li>BBB OnLine (Better Business Bureau) </li></ul><ul><li>International Chamber of Commerce (ICC) </li></ul><ul><ul><li>Guidelines on Advertising and Marketing on the Internet </li></ul></ul>Self-Policing
  17. 17. Advertising to Children <ul><li>Children are gullible; respond to small offers </li></ul><ul><li>Children are not responsible </li></ul><ul><li>They require a high degree of protection </li></ul><ul><li>Better Business Bureau </li></ul><ul><ul><li>Self-Regulatory Guidelines </li></ul></ul><ul><li>COPPA (Children’s Online Privacy Protection Act) </li></ul>
  18. 18. Unsolicited Email (SPAM) <ul><li>May be the subject of FTC TSR rulemaking </li></ul><ul><ul><li>FTC has no jurisdiction unless “unfair” or “deceptive. </li></ul></ul><ul><ul><li>FTC position: “unsubscribe” links that do not function are deceptive. FTC is using “current law” to stop spam </li></ul></ul><ul><li>Much pending federal legislation </li></ul><ul><li>California Bill 1629 (1998) </li></ul><ul><ul><li>Permits ISPs to sue senders of unsolicited email through ISP (if prohibited by ISP policy) </li></ul></ul><ul><ul><li>$50 for each e-mail up to a maximum of $25,000 per day </li></ul></ul><ul><li>California Bill 1676 (1998) </li></ul><ul><ul><li>Requires opt-out with free telephone number or email address </li></ul></ul><ul><ul><li>Ads must be identified in subject line </li></ul></ul><ul><li>Nevada similar </li></ul>
  19. 19. Unsolicited Email <ul><li>Washington State: Unsolicited Commercial Email Act (1998) </li></ul><ul><li>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 </li></ul><ul><li>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 </li></ul>
  20. 20. Q A &

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