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18 Antitrust 18 (2003-2004)
The Way They Do the Things They Do: Materiality and Method in FTC Advertising Regulation

handle is hein.journals/antitruma18 and id is 204 raw text is: COVER STORIES THE WAY THEY DO THE THINGS THEY DO: Materiality and Method in FTC Advertising Regulation BY RICHARD S. HIGGINS AND FRED S, MeCHESNEY HK FTC REGULATES advertising as either decep- Regulatlnol Ai tive or unsubstantiated, Both FederalTrad modes of analysis, however, laim -, I begin and end with the same two issues: what message the ad actual- ly conlmnicates to its audience, and whether that message was material to its Will audience. Legal analysis for possible deception .,. or lack of substantiation is straighrfor- 'wi, - ward; Commission statements con- cerning deception and substantiation set forth the substantive elements of a / T I 1 MIN violation. However, these statements Ma say nothing about the methodology by which FTC lawyers and economists resolve the crucial issues in any adver- tising proceeding. We suggest in this article that, methodologically, the FTC staff should focus first on issues of materiality, a necessary condition for liability, We explain our reasoning by referring to a recent proceeding in which we were involved concern- ing advertising for Wonder Bread, taking issue with several points about that case raised in a Reply by Gerard Butters.' The Basics of Advertising Regulation Advertising is stbject to common-law rules concerning fraud. In addition, various federal statutes apply to advertising, notably the Lanham Act.' State government regulation, espe- cially covering professions, has generated much First Richard S. Higgins Is Director, LECG, Washington DC, and was the Deputy Director for Consumer Protection In the Federal Trade Commission's Bureau of Economics from 1982-1986. Fred S. McChosney teaches at Northwestern University, where he Is the Class of 1967 James B. Haddad Professor of Law and Professor, Department o Management & Straiegy, Kellogg School of Management. Dr. MeChesney was Associate Director for Policy and Evaluation In the Federal Trade Commission's Bureau of Consumer Protection from 1981-1983. The assistance of Marta Luis Santa Maria Is acknowledged with gratitude. This article draws on the authors' experience both within the FTC and as particlpanls In subse. quent contested proceedings at the agency. Amendment (commercial speech) case rtlsIng bythe law' But probably the most important ommlaison restraint on advertisers arises tinder Section 5 of the Federal Trade Coin- mission Act, outlawing unfair and deceprive acts and practices. The flow chart (left) illustrates the steps in the FTC's regulatory process. The FTC must first determine what fclaims an advertising message is mak- ing. For example, what exactly were the Joe Camel ads saying? An ad's actnual content is often controversial, in part because ads are designed to be eye- or - ear-catching rather than just colorless - coinmun icarions of information.' It is important to distinguish between advertising messages that are explicit and those which are not, and who makes the claims. It is unlikely that a national advertiser of a well-established consumer brand will make an explicitly false claim. Wcll-esiablished national advertisers depend on repeat purchases and fivorable rec- ommendations from existing consumers to potential new users of their products. The seller's economic self-interest is a consumer's best guarantee of veracity when an explicit drdm is made. A bigger problem, however, is the risk that a message not making explicit claims will nonetheless be misinterpreted by the consumer audience. The national advertiser hardly wants misunderstandings, either; the results are, again, disappoint- ed consumers. And so adverrisers and their ad agencies spend considerable time and money determining what message consumers take away from ads. Regardless of what advertis- ers think they are saying, though, regulators ultimately deter- mine for themselves how consumers interpret an atdvertise- ment. (How regulators make that determination is discu~ssed below.) With the actual content of the message determined, the FTC can proceed in two ways; an advertiser may be liable under either or both. First, a message may be deceptive, Deception Is the traditional mode of FTC advertising regu- lation. The FTC today analyzes deception along the lines of 1 6 • A N TI T P U 7

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