ABA Consumer Protection Conference, part 1

Welcome Address

James A. Wilson, Chair, ABA Section of Antitrust Law, Vorys Sater Seymour & Pease LLP, Columbus, OH

One section goal: outreach to the consumer protection section of the bar. This conference is quite timely; rarely do we get the President to plug our issues.

Opening Remarks

Rebecca Tushnet, Georgetown Law

Before introducing my respected Georgetown colleague—and now Director of the Bureau of Consumer Protection--David Vladeck, I wanted to say a few words about my aspirations for this conference.

My remarks come from my background, which has focused on the Lanham Act and competitor actions; looking at the excellent lineup of this conference, I have really been struck by the substantial differences in regulatory regimes. Courts applying the Lanham Act follow very different principles than the FTC or state attorneys general or the NAD, and consumer class actions add even more variation to the mix.

Specifically, consumer protection law at its foundation is about consumer reactions, and yet the law has a variety of approaches to actual consumer reactions, from ignoring them to presuming them to requiring specific evidence of them. Evidence of consumer perception is expensive and every survey has flaws that can easily be seized on by parties on the other side, but the alternatives have often been equally unsatisfactory—lawmaking by anecdote or by decisionmakers generalizing their own reactions to ad claims. Perhaps unsurprisingly, people tend to think that the reasonable consumer looks just like them.

The promise of today’s consumer protection law is to take a mature and balanced approach to the use of empirical evidence and rules of thumb. We know that most consumers are well aware that advertising exaggerates; but we also know that even smart consumers are not necessarily very good at evaluating specific claims, or understanding just how powerful persuasive advertising can be even when audiences say they aren’t persuaded. Consumers are subject to systematic, predictable cognitive limitations, and advertisers have learned to systematize and predict many of them.

Given the complexity of modern product claims, and the information overload to which we’re all exposed, sometimes disclosure is simply insufficient to protect consumers in the exercise of freedom of choice. The conference will explore specific instances of this problem in our panels on privacy—where it is quite obvious that consumers simply don’t understand and won’t understand the various uses of their information, no matter how much fine print you throw at them—and consumer financial protection—where we can see the roots of the current financial crisis in the inability of consumers even to understand how much their mortgages were going to cost them over time. Our panel on green marketing covers another aspect of the information problem: consumers can’t figure out or independently assess the science behind all the definitions of environmentally friendly terms in use now; they must rely on some consistent definition, whether established by government or by industry consensus, or they will just have to guess at the meaning, which is unlikely to lead to decisions that truly reflect their preferences.

More generally, many of our panels will discuss the intersection between legal theory or doctrine and the growing body of research that enables marketers and psychologists to understand consumer reactions. The FDA and the FTC are increasingly using consumer perception evidence to formulate general rules and even decide specific cases, fitting such evidence into the overall regulatory framework. By contrast, Lanham Act jurisprudence is much more rigid, using doctrinal categories of falsity and misleadingness to reject or require consumer evidence—and the stress of that rigidity, compared to the more flexible reality judges sense is out there, has led to doctrinal innovations like the concept of “falsity by necessary implication,” as well as increased reliance on judgments about puffery and materiality.

I hope we’ll explore these interactions between regulatory regimes and between doctrine and empirical evidence as we go through the conference.

And now I will get out of the way for David. I won’t take up your time listing even a fraction of his many accomplishments, but I will offer a personal note: David is one of the most consistently intellectually curious and engaged of my colleagues, always willing to listen and to learn. I consider his appointment a great benefit for the FTC in this time of great public concern over consumer protection issues.

David Vladeck, Director, Bureau of Consumer Protection, Federal Trade Commission

ABA Antitrust Section’s renewed focus on consumer protection is timely and welcome. His speech: “The FTC, Day 4,” since that’s how long he’s been there.

Vladeck began practicing law in this building (Georgetown Law) 33 years ago. 27 years at Public Citizen, working on commercial speech cases and some consumer protection work. Returned to Georgetown in 2002 to teach and run a litigation clinic, teaching civil procedure and administrative law. His experience with the FTC came from suing it a couple of times, successfully, with Public Citizen.

Commission was looking for an experienced litigator who could bring fresh eyes and a willingness to do test litigation. Last year, 850,000 Americans lost homes to foreclosure, this year 1 million. Mortgage rescue fraud is a huge problem. 40 million Americans below the poverty line; shouldn’t be preyed upon by credit repair firms. Millions of Americans out of work shouldn’t be preyed upon by misleading job opportunities.

The FTC has experience, knowledge, and compassion in the career staff. “Open door” policy in which lawyers can come in and talk about their cases—an institutional commitment to fairness. The sheer volume of work he’s seen is astounding—the cases are substantial and relevant. This is just the past seven weeks: proposed rule requiring health care providers to notify consumers when records have been breached; two major do-not-call cases involving over $3 million to settle with DirecTV and others; settled case with Kellogg’s where they claimed that Frosted Flakes improved the attentiveness of children by 20%; workshop on changes to the business opportunity rule; report on mobile commerce marketplace; $18 million judgment against Ponzi schemes; mortgage rescue foreclosure/data security and P2P filesharing congressional testimony; case under Equal Credit Opportunity Act involving disparate impact theory in mortgages offered to Hispanic borrowers; robo-call case against that terrible auto warranty company; and on and on.

Wants to maintain and step up the aggressive law enforcement, innovative consumer education, and rulemaking efforts. We’ll need a lot of cases on economic fraud. Too many people depend on us against mortgage rescue scams and debt consolidators; will remain a focus at least until the economy recovers.

Step back and take another look at our privacy framework—past approaches have not worked in the dynamic and changing marketplace. (1) notice and consent theory; (2) harm theory have been used to organize our thinking. Neither frame really works particularly well. Notice/consent: hard to know in advance what one is consenting to. Notices are unintelligible, and the secondary uses are unclear. Harm: doesn’t take into account interests we feel but can’t quantify. How will we rationalize and make more coherent our privacy work going forward? Will be soliciting views.

Hard look at advertising. Internet behavioral advertising, but also ads directed to vulnerable subpopulations: children, alcohol ads to teens.

There’s a lot of legislative activity coming: FTC reauthorization, president’s proposal. The FTC ought to be on equal footing with other consumer protection agencies. We ought to have the same tools: APA rulemaking that doesn’t tie us into knots for years; civil penalty authority; independent civil litigation authority that other agencies have and that we don’t.

John E. Villafranco, Kelley Drye & Warren, Washington, DC

ABA has put out a treatise on consumer protection law developments, the only book of its kind. You should buy it! (I also just found out that the ABA Antitrust Section has a bunch of oral history interviews, available at the ABA site. What a fascinating resource; I look forward to watching them.)

The FTC Chairs’ Perspective

Moderator: John E. Villafranco

40 years ago, the FTC was being heavily criticized by the legislature and the judiciary: Posner proposed grounding the commission, freezing its activities. “It’s scandalous to allow so dubious an enterprise to continue to wax in power.” Nixon appointed a commission to scrutinize the FTC; Pitofsky served on the commission, which was highly critical in its conclusions. Hard to believe from our perspective—how close was the FTC to being shut down?

Speakers:

Robert Pitofsky, Georgetown University Law Center, Washington, DC

The FTC earned the disapproval of Posner and others. It was called the little old lady of Pennsylvania Ave. It was preoccupied with trivia: textile labeling and not mergers. The staff was nothing like today’s staff. Famous quote by executive: he liked to hire people who’d been out of school for a while and hadn’t made much of a mark because those people stayed loyal to the agency.

Ralph Nader tore into the agency, then the ABA commission did the same. The FTC statute gave the agency enormous authority if it wanted to use it, but the agency was much more interested in bringing a number of tiny little cases each year. Widely regarded then as weakest regulatory agency in Washington; today it might be the strongest.

Timothy J. Muris, O’Melveny & Myers LLP, Washington, DC

Moving ahead 10 years: there was a brief shutdown in 1980. In the 1970s, Pitofsky had set up a largely sensible approach for consumer protection, but that was swamped partly by pushing from Congress and partly by a catastrophe, the 1972 S&H decision, when the FTC embarked on a mission to become a powerful legislature, resulting in lots of resistance and ultimately threats from Congress. Will history repeat itself? That’s a danger.

Villafranco: Hearing in 1969 revealed deep cracks in commission solidarity. One commissioner said reauthorization would simply buy more unimportant cases, more incompetent personnel, etc. Another cited a deteriorating relationship between commissioners and staff. What went wrong?

Pitofsky: Some of it was personal, other parts ideological. No comparison to today, especially with respect to a shared sense of mission.

Villafranco: 1989, special ABA committee with a number of recommendations. Considered the FTC a less dangerous forum for testing legal theories than the federal courts because of its Part III authority—ALJs are talented, but only a handful of consumer protection cases under Part III in recent years. Should that even exist any more?

Muris: That quote was directed to “the other bureau,” but a variety of reasons have led the FTC to move to federal court, probably the single most important thing that’s happened at the FTC. National advertising has not led to many Part III cases—why not? National ads: between the Lanham Act and the self-regulatory system, the FTC doesn’t have the role that it once did. Self-regulation has been a success. There’s a big part III problem in the merger area but that’s a topic for another panel.

Pitofsky: he wouldn’t do away with Part III, though it can be cumbersome and expensive. Effort underway to make it streamlined and ensure ALJ quality. Certain kinds of cases, usually antitrust, best handled in Part III, but reform is probably the best solution.

Villafranco: in 1989, the ABA noted the lack of advisory opinions. Should we see more?

Pitofsky: Do lawyers ask for advisory opinions from the FTC? Do they want to call attention to problems that way? They have to be triggered by requests.

Muris: The advice-giving function is extremely important; one of the hallmarks of modern FTC is in giving advice. Things like the substantiation statement.

Pitofsky: Congress created the agency with the idea that it would give advice to businesses. While he can’t recall individual companies coming in looking for advice, hearings and rulemaking were designed for general problems. Increasingly the FTC has recalled its 1914 roots and doing more of that kind of work.

Villafranco: Turning to consumer perception, Kennedy in Edenfield v. Fane said: the general rule is that the speaker and the audience, not the government, assess the value of information. How does that work at the FTC?

Pitofsky: Substantiation is still important. Should the FTC pay more attention to claims made to vulnerable audiences? The FTC has a special obligation to the sick, kids, the poor. Currently, this relates to predatory lending. If the claims made are outlandish, the FTC needs to act.

Muris: There’s plenty of blame to go around for what happened to the economy. Clearly, the regulated industries and the unregulated ones performed poorly, as did government regulators/agencies, Fannie Mae/Freddie Mac; fundamental misperception of risk. He fears an overreaction. A lot of the expansion of wealth in the US and globally was due to the market, not the government; the FTC should be market-reinforcing. He wants to counsel against overreaction.

Villafranco: Ok, so how do we protect the reasonable consumer acting reasonably now that the US is more linguistically, economically, culturally diverse, even if we exclude vulnerable populations?

Pitofsky: Hard question. The business of the FTC deciding what the reasonable person is entitled to is a bit arbitrary. What a reasonable person thinks generally is not well known; it’s probably varied from decade to decade. There was a time when the FTC was very tough about claims that seemed to take advantage.

Muris: The FTC doesn’t try to define reasonability in all cases. He fought the reasonableness wars of the early 1980s, with the deception statement. Is regulating advertising practical? The FTC went overboard in protecting fools, and in areas like deceptive pricing, turning advertising cases anticompetitive. There was even sentiment against comparative advertising as inherently deceptive; and a big move was to encourage the TV networks to allow such ads. Surveys have to be context-specific. Five commissioners don’t inherently know things about the meaning of an ad.

Villafranco: here’s an example: proposed revisions to the endorsement guides. Are the guides paternalistic? Are we taking endorsement/testimonial disclosures too far? How does that fit in with the reasonable person standard?

Muris: Pitofsky wrote the original testimonial guides. There’s an inherent problem: certain products don’t work and testimonials can’t make them work. That’s separate from how consumers interpret testimonials for products that do work. Muris thinks consumers discount more than other people believe. We do have a move towards paternalism now, but he thinks “soft paternalism” of the Cass Sunstein variety is a pretty good idea. Elizabeth Warren’s “hard paternalism” suggests certain products are too dangerous for consumers to deal with; he likes that a lot less.

Pitofsky: He hasn’t looked at the revised guidelines, but he doesn’t duck from the charge of paternalism. The FTC ought to be paternalistic. People should not be left to the mercies of the free market for credit fraud or loans. Without displacing the market, the government should keep an eye on it. Where the audience is more susceptible than average, the FTC ought to step in.

Villafranco: What’s your proudest accomplishment as chair?

Pitofsky: Change in quality of staff.

Villafranco: 13b authority—expansive, and FTC seems to have a complete winning record bringing ex parte cases; have you worried about cases brought under this statutory head?

Muris: it was an experiment; worrisome at the beginning when we went to get ex parte asset freezes and other things that have become standard. But we picked cases carefully and went incrementally. He doesn’t fear overreaching in this area because these guys tend to be really bad actors. It’s a different story on the antitrust side.

He comes out of the law and economics movement. From his perspective, basic job of FTC is: enforce rules of the game in situations where small claims court and class actions don’t work.

Villafranco: any misconceptions outside lawyers have?

Pitofsky: That the staff is out of control.

Muris: that antitrust lawyers can do consumer protection.

Villafranco: what about FTC staff?

Muris: FTC staff deal with a lot of bad actors, people who’ve screwed up, and there’s a tendency to generalize and assume everyone is a bad actor. This is especially a problem for rulemaking: if you make business opportunity rules they cover fraud—the target—but also apply to Mary Kay. There is a tendency for everyone to generalize from what they see, and if you see mostly bad actors, your rulemaking can be distorted.

Pitofsky: Some of the rules/guides are a bit on the vague side. There are people who get into trouble not from intent but from honest mistakes. This interacts with the problem Muris mentioned.

Villafranco: you’ve sat through countless presentations by respondents trying to head off sanctions. Anything memorable?

Pitofsky: one thing that always impresses him is when people come in and don’t hide weaknesses in their position, but provide their best answers for what the staff is eventually going to ask about anyway.

Muris: as a decisionmaker, when a party insists on fighting an obviously specious point, it casts doubt on other points. A businessperson who knows his/her stuff can be very effective, as long as s/he also understands the context.

Pitofsky: The most impressive individual: Andy Grove of Intel, in an antitrust case. Unlike the usual 17 lawyers with one businessman, where the lawyers do most of the talking, Grove ran the meeting and the lawyers just listened. When you get a CEO who knows the business and can explain their side of the argument, that can work.

Muris: but you sued him anyway.

Pitofsky: well, he was wrong.

Muris: The worst presentation: Roger Smith, GM/Toyota joint venture; too many jokes. Muris came in mildly supportive of the deal and got quite suspicious in the middle.

Villafranco: Mad Men has brought back discussion of great past ad campaigns. Marbles in the soup/shaving sandpaper—we know those cases. Are today’s cases going to last like that?

Pitofsky: What is the ad campaign that sticks in my mind? Listerine kills colds and flu—led to a very important remedy. But he was most struck by a split-screen ad on behalf of a roach killing product: one half of the screen, the competitor’s product was sprayed on the roaches, who thrived. On the other side, the advertiser’s product was sprayed on the roaches, who keeled over and died immediately. Upon investigation, the FTC found that the advertiser had left the effective ingredient of the competitor’s product out of the first side—spraying the roaches with water, essentially. The FTC went as far as it could for remedy.

Muris: The FTC will always bring some national advertising cases, but will always be a secondary player in that field. When an ad claims a bucket of KFC is health food, that gets his attention. At some point, the First Amendment issues will be in play in a national advertising case, but he hasn’t seen that yet.

Villafranco: relationship between competition and consumer protection law?

Muris: BCP is one of the wonders of the world; it’s extremely cohesive, with longer tenure v. Competition. BCP rarely hires people out of school; spectacular at finding people out of prosecutorial backgrounds etc. Find people, often women, who want a more sensible lifestyle with their families. The two are complements, like bacon and eggs: bacon and eggs come from very different places, and the fact that you consume them together doesn’t mean that the production or anything else about them is necessarily the same.

Pitofsky: He thinks the differences are less pronounced now than 30/40 years ago. At an early stage, women were more likely to choose consumer protection over antitrust. Another striking difference: the role of economics, though even that difference isn’t what it was. The Bureau of Economics has more to say about antitrust than consumer protection. The briefs and opinions show more economic sophistication for a merger than for false advertising, but the gap is steadily narrowing.

Villafranco: how should the economy affect priorities?

Pitofsky: Mortgage fraud. Hearings wouldn’t be a bad idea; legislative action wouldn’t be a bad idea. Predatory lending cases were brought years ago and won; could put more resources into that.

Muris: There are an enormous number of scams taking advantage of tough times; the FTC needs to focus on that. The bigger danger is external forces that could push the commission away from the basic mission.

He thinks C&Ds are better for dealing with national advertisers—in the security/privacy area, C&Ds allowed them to approach advertisers and get substantial progress; civil penalties would have engendered more resistance, and economists have shown that such penalties hurt a nationally traded company’s stock prices.

He’s a fan of rulemaking. But the FTC is now being encouraged by Congress to make new rules, and Congress is suggesting how the rules should be made—that’s a dangerous trend. It might fundamentally change the agency, and damage it in the following way: you can only take on so many fights at once. If you’re trying to change the rules for a dozen major industries, congressional oversight will inevitably cause you significant problems.

Pitofsky: he’s never been a fan of rulemaking. It sweeps up people in inappropriate regulations when they haven’t been behaving badly. It’s also a question of resources. Fight one case = fight one entity. Make rules, and every member of the bar shows up. Bringing cases against the worst actors, and imposing a tough remedy, creates proper incentives. Main difference from 40 years ago: nature of remedies, not nature of rules. Telling people to stop making claims doesn’t deter; making them pay for corrective advertising does.

Villafranco: Advice for Vladeck?

Pitofsky: do nothing before talking to every senior staff member about what they’re doing, why, and what they intend to get out of it.

Muris: Agreed. Talk to predecessors as well?

Q: what’s the role of the FTC with respect to state AGs?

Pitofsky: over the past 40 years, the relationship has been improving—often bring cases with AGs.

Q: Broad definition of unfairness in S&H—was that really a disaster for the FTC? What’s the future role of unfairness?

Muris: Pitofsky in 1980 letter helped repudiate that broad definition, aided by Congress. The broad definition of unfairness led to overreaching, which led naturally to cutbacks by the legislature.

Pitofsky: he just doesn’t know what unfairness means in the abstract. There may be cases of nondeceptiveness that should be acted on, but he’s uncomfortable with breadth.

Q: Are there examples of 13b cases you think that went too far?

Pitofsky: No. We didn’t do much with it.

Muris: Exactly—they created a template, producing the cases quickly and working with the states to get rid of fraudsters—sweeps of particular industries, bringing more than one case at a time.

Q: What about decisions not to bring cases?

Muris: there were discussions early on about using 13b against businesses that were more substantial, practices that were more problematic, but not much serious attention to that. 13b has stayed limited because of the severe ex parte remedies: aimed at a particular kind of bad actor—why, institutionally, haven’t people pushed the envelope when that tends to happen with legal powers? He’s not sure.

Q: Monetary relief: is the FTC looking too much to ability to pay and not the merits of the case?

Pitofsky: he doesn’t think the FTC decided to squeeze the parties who could pay. The most important part of enforcement is the remedy, not the rule itself. The remedy has to be something that tells other people it won’t pay to engage in a particular kind of transaction.

Muris: There is an inherent tension between bringing a multitude of cases and getting maximum relief out of one individual case. 13b diminishes the role of commissioners as commissioners—these aren’t Part III cases, and sometimes you could push harder on a settlement but that would slow the process down and make it harder to go to the next case. He’s generally in favor of steps to increase the amount of civil penalties, and the ease of getting them, in particular cases, but settlement pressures will always be in play.

Q: Regulatory failures at the FTC in the financial crisis?

Muris: it would be nice if the FTC could have stopped this, but probably not. He had an antitrust investigation of Fannie that didn’t go anywhere, despite its market power; there was no role for the antitrust laws. Doing something about Fannie could have helped, but there was a lot of other stuff along the way. AIG was a market failure, not a government failure. No-doc loans: that’s a problem in the market and a problem in the regulators. The fundamental underpricing of risk in the economy was the problem; he’s dubious of regulating risk, but in theory he understands why people want a new regulator. He fears interfering with the tremendous reduction of poverty in the world by overregulating.