,.

. BtmEAU OitCONSUMER PROTEcrION

FEDERAL TRADE COMMISSIONl;iA;;HI1'lGjC~J. J, c. :0530

COMMISSION-AUTHORIZED

November la, 1988

Helena HuangLegal Assistant, Consumer Protection DivisionDepartment of the Attorney General

·131 Tremont StreetBoston, MA 02111

'. Dear Ms. Huang:

This letter is submitted in response to an October 14 noticeand accompanying letter from your office inviting comments onproposed revisions to Massachusetts' Retail AdvertisingRegulations (the "Regulations"). The staff of the Bureau ofConsumer Protection of the Federal Trade Commission appreciatesthe opportunity to comment. 1

Our preliminary review of the Regulations suggest that theyreflect comrnendableefforts to provide-flexible guidance toadvertisers. Nonetheless the overall effect of several areas ofthe RegUlations may be to restrict unnecessarily some ..forms oftruthful advertising, particularly price advertising.' Ourcomment is limited to addressing three main areas of concern. 2

. 1 These Comments are the views of the staff of the Bureauof Consumer Protection of the Federal Trade Commission. They arenot necessarily the views of the Commission or of any individualCommissioner. Questions or comments concerning this document maybe addressed to C. Lee Peeler (202-326-3090), Associate Directorof the Division of Advertising Practices.

2 Our comment does not address several provisionscontained in the Regulations. For example, we have not-addressed provisions regarding the availability of advertisedproducts (§ 6.06), use of prize and gift promotions (§ 6.06) andadvertising of the availability of financing (§ 6.09). We wouldbe pleased to provide comments on these and other sections ifrequested.

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First, we are concerned that the proposed requirement thatadvertisers include in every advertisement every material factabout a particular product without regard to the specific factsand circumstances surrounding the advertisement is inconsistentwith the Federal Trada Commission Act and could chill the flow c:truthful advertising thus depriving consumers of valuableinformation. 3 Second, while many sections of the Regulationsappear to reflect an effort to minimize restrictions on truthfuladvertising, certain provisions nonetheless appear to have theunintended effect of prohibiting the dissemination of truthfulinformation, thus raising potential inconsistencies with both theFTC Act and the First Amendment. Similarly, while theRegulations indicate a substantial effort to provide flexibleguidance for pricing claims, the very detailed and prescriptivenature of the Regulations, together with their detailed recordretention policy, could act to chill truthful price advertising.Small merchants, who may have limited access to legal counsel toprepare and review their ads, may be most affected by suchregulatory requirements. Finally, the specificity of theseRegulations may have the practical effect of chilling thedissemination of advertising that is permitted in other statesand under federal law. 4

3 Massachusetts law provides that consumer protectionregulations "shall not be inconsistent with the rules·,regulations and decisions of the Federal Trade Commission and theFederal Courts interpreting the provisions of • • • (The FederalTrade Commission Act).tt Mass, Gen. Laws Ann. ch. 93A, § 2 (c)(West 1984).

4 Because we have not had the opportunity to review thebasis for the proposed rulemaking, we express no opinion on thequestions of Whether there is an adequate factual basis for theproposed rules. See,~, Katherine Gibbs School V. FTC, 612F.2a 658, 664 (2d eire 1979) (Commission failed to show arational connection between the fact found and the choice made) :statement of Basis and Purpose, Credit Practices TradeRegulation Rule, 49 Fed. Reg. 7740, 7742 (1984) (rulemakingrecord should contain evidence in support of the proposed rUle).The Statement of Basis and Purpose for the Credit Practices Rulealso concluded that U[b)efore promulgating a rule, rather thanbringing individual cases, the Commission believes the publicinterest requires answers to the following additional questions:(1) Is the act or practice prevalent?; (2) Does a significantharm exist?: (3) Will the proposed rule reduce that harm?; and(4) Will the benefits of the rule exceed its costs?lI. IS.

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A. P1sclosure of Material Facts

One of our primary concerns is with the prov1s10n in Section6.04 (2) that requires sellers to "clearly and conspicuouslydisclose in any advertisement any matarial fact. 1I The provisic::.defines the tern "material fact" and identifies sevenillustrative categories of material facts that ~ust bedisclosed.SIn addition to these seven specific disclosures, t~eRegulations also require disclosure of any fact that "has thetendency or capacity to influence reasonable buyers • . • to·purchase or not to purchase the product. 1t

Thus, as defined, the term u:material fact"·· could include analmost endless list of required disclosures. The disclosureobligations i~posed by the Regulations go well beyond thoserequired under FTC law. As noted in International Harvester~,6 the FTC Act does not impose such broad liability:

The number of facts that may be material toconsumers--and on which they may have priormisconceptions--is literally infinite.Consumers may wish to know about the life

S Although we did not have sufficient backgroundinformation on which to analyze each of the seven specificallyrequired disclosures, you may wish to consider whether each ofthese disclosures is necessary in all cases. If the disclosuresare not necessary to prevent deception, making them a requirementmay increase the costs of advertising (~, through higherprices for space ads or through the higher cost of ensuringcompliance with the regulation) with no significant benefit toconsumers who might otherwise be provided with this informationor who might find it immaterial.· For example, the Regulationsrequire a seller to disclose, in all instances, th~t a productadvertised for sale is "used." It is well settled in Commissioncase law that a seller has an obligation to disclose that an"apparently new product was actually used." InternationalHarvester Co., 104 F.T.C. 949, 10S8 (1984) (footnote omitted),appeal dismissed, No. 85-1111 (D.C. Cir. 1985). However,advertisements for products that are clearly used--such as adspromoting the sale of used cars and second hand furniture--maynot need such a disclosure. You may wish to consider whetherthis provision should be modified to require a disclosure that aproduct is used only when the failure to do so would misleadconsumers that the advertised product was new.

6 104 F.T.C.(D.C. Cir. 1985).865, 96S (1973).

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949 (1984), appeal dismissed, No. 85-1111~~ ITT Continental Baking Co., 83 r.T.C.

Helena HuangNovember 18, 1988

expectancy of clothes, or the sodium contentof canned beans, or the canner's policy ontrad~ with Chile. Since the' seller will haveno way of knowing in advance which disclosureis important to any particular consumer, hewill have to make complete disclosures toall. 'A television'ad would be completelyburied under such disclaimers, and even afull-page newspaper ad would hardly besufficient for the purpose. • •• Theresulting costs and burden on advertisingcommunication would very possibly represent anet harm for consumers. 7 .

,Commission actions dealing-with'deceptive omissions oftendeal with cases in which a seller fails to disclose qualifyinginformation necessary to prevent an affirmative statement fromcreating a misleading impression. Similarly, it can be deceptivefor a seller to remain silent under circumstances thatconstitute an implied but false representation. Such impliedrepresentations may take several forms. They may arise from thephysical appearance of the product, from the circu~stances of aspecific transaction, or from ordinary consumer expectations asto the irreducible minimum performance standards of a particularclass of good. S Finally, even absent an express or impliedrepresentation, the FTC Act requires further disclosures insituations in which the failure to do so is likely t~ causesubstantial consumer injury that is not outweighed by benefits toconsumers or competition and that could not be reasonably .avoided. 9 In applying each of these standards, the Commissionmust necessarily analyze the factual surroundings of the case,~, Whether express or implied representations have been madeor whether 'substantial consumer injury has occurred.

There are important policy as well as legal reasons forensuring that the Regulations are consistent with the FTC Act inthis area. Advertising can signal to consumers that attractivefeatures may be available and that consumers should inquirefurther for details. Numerous economic studies havedemonstrated that advertising for particular products or services

7 1.£. at 1059-60.

8 1£. at 1057-58.

9 ll. at 1060-61.

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tends to enhance competition and lower prices. 10 Advertising,however, is often not the most efficient or effective vehicle fordisclosing detailed and comprehensive characteristics of apotential transaction, and the failure to do so should notnecessarily render it illegal. Subjecting retailers to t~e typeof open-ended liability suggested by the Regulations could injureconsumers because advertisers may respond simply by restrictingthe amount of advertising in which they engage, which in turnwould reduce the amount of information they provide to consumers.

B. hdvertising Substantiation

Section 6.03. (1) of the Regulations states that "sellersmust be able to substantiate all claims or offers made before·such claims or offers are disseminated" (emphasis added). Thatsame section provides that sellers must maintain sufficientrecords to substantiate all representations made in itsadvertisements. section 6.14 (1) repeats the requirement that aseller "be able to substantiate all claims it makes in anadvertisement" (emphasis added). Section 6.14 (2) adds a generalrequirement that sellers maintain records substantiating theseclaims for a period of six months after dissemination. Under theRegulations, therefore, a seller must be able to substantiateboth objective and sUbjective Claims.

These provisions are similar to the Commission's well­established legal requirement that advertisers and ad agencieshave a reasonable basis tor advertising claims before they aremade. They differ, however, in one important respect. The FTCadvertising substantiation doctrine is directed to objective,verifiable claims about the item or service advertised.Consumers are likely to interpret advertisements making such

10 See. e,a" Cleveland Regional Office and Bureau ofEconomics of the Federal Trade Commission, Improving ConsumerAccess to Legal Services: The Case for Removing Restrictions onTruthful Advertising, Federal Trade Commission staff Report(1984); Benham, The Effect of Advertisina on the Price of

.Eyeglasses, 15 J. of L. and Econ. 337 (1972); Cady, An Estimateof the P~ice Effects of Restrictions on Drug Price AdYertising,14 Econ. Inquiry 493 (1976): Kwoka, Advertising and the Price andQuality of optometric Services, 74 Am •.Econ. Rev. 211 (1984); andSchroeter et al., Advertising and competition in Routine LecralService Markets: An Empirical Investigation, 36 The J. of Indus.EC0Z:. 49 (1987).

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claims as representing, either expressly or impliedly, thatsupport exists for the advertised characteristic. Theserepresentations of substantiation are material to consumers. 11

Th9 FTC advertising sUbstantiation dcctrine also reccg~izes

that not all claims imply to consumers that the advertiser hassubstantiation for them. For example, consumers are not likelyto interpret subjective advertising or "pufferyll claims to bebacked by substantiation. To the extent that the Regulationswould require advertisers to have substantiation for all claimsother than objective verifiable claims~ it would be inconsistentwith existing Commission standards. In addition, section 6.14(2) compounds the burden by specifically requiring that recordsbe created and retained to sUbstantiate these. claims.

C. Price Advertising Provisions·

Sections 6.05 and 6.14 specify in detail the types of pricecomparisons permissible and the records that must be maintainecin order to substantiate those comparisons. These provisionsappear to be designed to force all price advertising into certainpreset categories. As such, they may have the unintended effectof increasing the cost of price advertising which in turn wouldreduce the amount of this important information that is availableto consumers.

To illustrate, section 6.05 (11) (a) (3) provides that, whenproducts are advertised as available at a range of savings, theseller must clearly and conspicuously disclose "(a]ll materialfacts about the lowest priced or highest discounted productoffered (such as size, material, grade or model)." Given thebr.oad definition of the term "material fact" and the relatively

11 Substantiation Policv statement, 104 F.T.C. 839 (1984)(emphasis added) (adopted by the Commission in Thompson Medical

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inflexible definition of "clearly and conspicuouslylt, theRegulations may reduce a seller's incentive to offer broad basedsavings to consumers. 12

Si:nilarly, section 6.05 (3) (a) (2) statss that a sellarmay compare its former price with its current price if its formerprice is equal to or below the price at which the seller offeredthe product for sale for at least 30 of the 45 days prior todissemination of the advertisement. Notwithstanding, section6.14 (3) (a) provides that a seller must maintain records of allsales of the advertised product and all offers to sell theproduct which occurred during the 12 month period prior todissemination of the advertisement. such requirements maydiscourage sellers from offering and advertising reduced prices.

Further, section 6.05 (6) (b) prohibits a manufacturer orfranchisor from making a "list price" or similar comparisonunless the list price "is the price-charged for the advertisedproduct by a reasonable number of sellers in the trade area inwhich the advertisement is disseminated" (emphasis added). Inorder to make "list price" comparison under this provision,therefore, a national manufacturer would have to investigate indetail the prevailing prices in each trade area in which theadvertisement is disseminated. Recognizing the potentially

12 The following hypothetical may illustrate our concern.Under this provision, a seller who offers a range of savings (20­30% off) on particular brands of shoes must identify the modelsof shoes offered at a 30% saving, what the shoes are made of, andwhat size shoas are being offered. Having disclosed the size ofthe shoes offered for sale, the provisions governing theavailability of advertised products (§ 6.06) may apply to theseller which WOUld, in turn, require additional disclosures.While such requirements may provide a great deal of informatio~

to consumers, the increased costs of compliance may be Ultimatelyreflected in higher prices. These costs, and their potentialimpact on small businesses, may be unnecessary if unfairness ordeception does not occur in the absence of the requireddisclosures.

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Helena HuangNovember lB, 19B8

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burdensome nature of such a requirement, FTC guidelines take adifferent approach. 13 As drafted, this Regulation maydiscourage sellers trom using this type of price comparison.

Finally, section 6.05 (16) provides that "[t]he use in anadvertisement ot a price comparison not otherwise allowableunder these regulations is an unfair or deceptive act even if theadvertisement also contains disclaimers or explanatory language"(emphasis added). This section compounds the problem created bythe other provisions by prohibiting price comparisons notspecifically provided for in the Regulations even if they aretrue by virtueo! using explanatory language in theadvertisement. Such broad prohibitions of truthful speech thatis not otherwise deceptive or misleading may not withstandconstituti9nal scrutiny under the First Amendment. 14 In

13 FTC guidelines state that

a manufacturer . . . who does business on alarge regional or national scale cannot berequired to police or investigate in detailthe prevailing prices of his articlesthroughout so large a trade area. IIf headvertises . ." . a list or preticketed pricein good faith • • • Which does notappreciably exceed the highest price at Whichsubstantial sales are made in his trade area,he will not be chargeable with having engagedin a deceptive practice.

16 C.F.R. § 233.3 (g) (1988) (emphasis added). See also 16C.F.R. § 233.3 (h) (1988) (giving an example of when amanufacturer's conduct would not constitute a deceptivepractice).

14 See, e.g., South Ogden cvs store, Inc. v. Ambact, 493F. ~ upp. 374 (S •D. N • Y. 1980).

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addition, the citizens of Massachusetts will not be better servedif this Regulation chills the dissemination of truthfulnondeceptive price advertisements. 15

So~z co~~~ntators o~ advertising law hav~ argued that rigidenforcement of even the FTC's more ,general and flexibleguidelines may at times impair competition while generatinglittle or no consumer benerits. 16 , In light of the much greaterspecificity of the Regulations, we believe a careful review oftheir potential impact on vigorous price competition shouldprecede their adoption. If there is an opportunity for furthercomment, we will attempt to provide a more detailed comparisonbetween the Regulations and the provisions of the FTC Act andwill address in greater depth the Regulations' likely impact onconSUmers.

D. Impact on Interstate Advertising

A final question raised by the Regulations is their impacton interstate advertising. In addition to defining unfair ordeceptive advertising practices, the RegUlations containremedial provisions specifying such matters as the size of the

15 See Zauderer v. Office of Disciplinary Counsel, 471 U.S.626 (1985) (attorney advertising). In Zauderer, the'SupremeCourt wrote:

Were we to accept the State's argument in this case, wewould have littl~ basis for preventing the governmentfrom suppressing other forms of truthful andnondeceptive advertising simply to spare itself thetrouble of distinguishing such advertising from falseor deceptive advertising. The First Amendmentprotections afforded commercial speech would meanlittle indeed if such argument were allowed to prevail.Our recent decisions involving commercial speech havebeen grounded in the faith that the free flow ofcommercial information is valuable enough to justifyimposing on would be regUlators the costs ofdistinguishing the truthful from the false, the helpfUlfrom the misleading, and the harmless from the harmful.

~. at 646.

16 See, e.g., Pitofsky, Beyond Nader: Consumer Protectionand the Regulation of Advertising, 90 Harv. L. Rev. 661, 687-689(1977).

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print that must be used for disclosures in print advertising17and wording of disclosures to be contained in catalogs. 18Because it may be costly for a firm to tailor its nationaladvertising on the basis of distinct state requirements, theprovisions ultimataly adopted in Massachusetts may have thepractical effect of chilling the dissemination of adver~ising

that is permitted in other states and under federal law. Webelieve that you may wish to examine carefully these likelyeffects of the Regulations before adopting them.

E. Conely'sion

The staff of the Bureau of Consumer Protection share theconcern of the Massachusetts Attorney General that advertising betruthful and substantiated. We hope that you will find thesecomments helpful. We would be pleased to provide you with a moredetailed analysis of the provisions of the proposed Regulationsif requested.

Sincerely,

~~~-~#william c. MacLe6d"'-~'~Director

17

18

See Section 6.01 (2).

See Section 6.05 (10) (a) (1).

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