FTC’s Early Consumer Protection Challenges Endure
Law360, New York (March 7, 2016, 9:19 AM ET) —
|Chris Jay Hoofnagle|
The 1914 creation of the Federal Trade Commission was a radical step to address tensions in the economy. Not only was it one of the first regulatory agencies in America, the FTC was also granted nearly comprehensive jurisdiction and a broad, undefined mandate to police competition. To understand the FTC, we have to situate ourselves in the tensions of turn-of-the-century American economy. The country was rapidly changing from an agricultural to an industrial economy. A growing disconnection between creators and buyer of products created new consumer protection problems. Industries with high barriers to entry and industries that enjoyed network effects could manipulate prices and bend others to their will. The individual could sense a threat to their livelihood and social condition, but not understand the broader implications of industrialization.
Today, these tensions are rekindled in our transition to a service and information economy. Like a century ago, new business models are changing the texture of our society. Companies are using their platforms to shape behavior and to mediate consumer experiences. Companies with no direct relationship with consumers — indeed ones that seem to be callous to individuals’ welfare — are causing new kinds of externalities.
In this new period of uncertainty and change, we still rely on a century-old institution for consumer protection. And despite the new context of the information economy, the debates about the FTC’s role and the challenges it faces largely remain the same.
Reasonable people disagreed about how to address monopoly and trust at the turn of the century. And so after the FTC Act was enacted, different groups declared that the law valorized their vision for competition law. As George C. Davis explained, “every group saw in the FTC the potential solution to its own special problems and complaints. Reformers envisioned a powerful harness upon business activity and a deterrent to misbehavior; businessmen saw a friendly and helpful liaison with an otherwise unsympathetic government; political economists rejoiced at the embodiment of their aspirations for efficiency and expertise in public administration.” But the many visions of the FTC resurfaced as conflicts in the early commission, as President Woodrow Wilson’s appointees to the new agency held different assumptions about the FTC’s role. And these conflicts continue today, largely in the same form, with pro-business forces desiring an advisory body and consumer advocates favoring more enforcement.
The Early Commission
President Wilson signed H.R. 15613, creating the FTC on Sept. 26, 1914. The FTC’s first meeting was held Tuesday, March 16, 1915 (perhaps to avoid Monday’s Ides of March). The FTC superseded the then 11-year-old Bureau of Corporations, and inherited much of its staff and its director, Joseph Davies, as the first chairman of the FTC.
The new agency’s powers included the ability to prevent “persons, partnerships, or corporations, except banks, and common carriers … from using unfair methods of competition in commerce.” This astonishingly broad power was tempered by limits on the agency’s enforcement tools. But Congress and the courts stripped away these limits over time, making the agency more and more powerful, and raising deeper questions about the due process issues implicated by the FTC Act.
At its inception, the FTC could issue cease-and-desist orders, but for these to be enforceable, the agency had to go to federal court to obtain an injunction against the business. Like the Bureau of Corporations, it could conduct investigations and publish reports. To this day, its power to issue civil penalties is constrained in part because of due process concern that the FTC could both define prohibited conduct and fine companies for it.
Several challenges confronted the early commission: The initial appointees failed to develop a coherent policy for the agency, and this shortcoming was aggravated by the onset of World War I and churn in membership of the Commission. The early commission struggled with the issue of whether it should merely be an advice-giving body for businesses. The courts weakened the agency by limiting it to the enforcement of wrongs already illegal under the common law. When the FTC investigated industries aggressively, factions would organize against it and cause “blowback,” that is, a counterattack on the agency by Congress. The FTC’s quasijudicial role invited criticism and fear of government abuse. And finally, the early commission lacked basic resources to function efficaciously. Despite all of these challenges, the commission accomplished a great deal of good work, and critiques of the agency frequently discount or simply ignore this work.
External factors of a hostile Congress and World War I made it difficult for the early commission to thrive. But it had internal problems as well. For the FTC to function properly, it needs a special kind of leader — one who conveys a sense of fair-minded balance.36 Throughout its history, however, weak appointments have plagued the FTC.
President Wilson’s initial commission appointments, which he described as having “common sense,” were thought by others to be inept. This presents a puzzle: Why did Wilson support a strong commission but then appoint leadership incapable of realizing the potential of the agency? One of the founding commissioners, George Rublee, thought his colleagues agreeable but too cautious and unqualified for the job: “It really had no chance to do its job with that kind of membership. It was hopeless, really. I didn’t then quite know that it was hopeless, but I was discouraged.” Professor Marc Eric McClure suggested that an economic downturn caused Wilson to give the first chairman a charge to just consult with business and act in a conciliatory manner.
If the chairmanship were entrusted to Rublee, it might have had a very different early history. During his term, Rublee attempted to focus the commission on large matters instead of small frauds and to increase the economic sophistication of the agency by hiring the best economists, and he wanted to avoid advice-giving to business. These are the very strategies employed in the decades that have seen increased efficacy of the agency. Yet, Rublee failed to secure senate confirmation and only served for a short time.
The early commission suffered another blow in its leadership because of President Calvin Coolidge, who appointed William Ewart Humphrey, perhaps the agency’s most infamous leader. An outspoken proponent of big business, Humphrey, and a coalition of two other Republican appointees changed the agency’s rules, limiting the kinds of matters the agency could bring, making more proceedings informal, and reducing the publicity given to commission actions.
Starting under Humphrey, the commission entered into voluntary compliance agreements with companies. These agreements were informal, not legally enforceable, and, most importantly, not publicized. In periods where the commission leadership wishes it to be an information-providing agency, there is greater reliance on these informal mechanisms. Following these changes, companies and advertisers could engage in unfair practices, be caught, promise to change their practices, and escape the entire matter with no publicity whatsoever. When minority-party members of the FTC attempted to bring publicity to agency actions through dissenting opinions, Humphrey threatened them with criminal sanctions. The combination of changes brought on by Humphrey caused the agency’s constituencies to flip, with progressives becoming sharp critics of the FTC and the business community evincing support of it.
While well liked and loyal to friends, Humphrey’s personality made the commission less effective. As Thomas K. McCraw put it, “Despite Humphrey’s clowning, incompetence, and violent partisanship, President Hoover appointed him to a second six-year term.”
Later, as part of a strategy to clear the decks of federal agencies of officials who might oppose New Deal initiatives, President Franklin Delano Roosevelt attempted to remove Humphrey from office. Roosevelt lost the legal fight. The U.S. Supreme Court held that Humphrey could only have been removed for “inefficiency, neglect of duty, or malfeasance in office.”
Gerald C. Henderson’s 1924 study of the agency’s law and procedure — written even before Humphrey’s appointment — concludes by first discussing the importance of personality in commissioners. Henderson politely suggested that any body formed to be both prosecutor and judge faces the challenge of having its leadership perceived as fair-minded and impartial. Professor Milton Handler, who played a major role in drafting the 1938 amendments to the FTC Act and the U.S. Food and Drug Administration amendments, attributed the FTC’s poor reputation “in large measure to the disappointing exercise of the power of selection by our Presidents. The commissioners have failed to establish a tradition of fair dealing inspiring public confidence.”
Early (and Enduring) Challenges
The FTC as Advice-Giving Body
The early FTC had deep conflicts concerning giving advice to businesses about compliance with the antitrust laws, and this tension continues to exist in the modern commission. Throughout its history, some commission leaders have wanted the agency to be primarily an advice-giving body, as it was in its early years. The theme echoes back to the Bureau of Corporations, and is supported in particular by statements made by President Wilson before and after passage of the FTC Act.
Yet, there are many legal and policy problems with the FTC as advice-giving body. It obviously is concerned that advice it gives in one matter could estop an enforcement action in another. Then again, even if the FTC were to give advice, it would not foreclose action by the federal or state attorneys general. Furthermore, advice is not mentioned in the FTC Act, and Congress could simply have kept the Bureau of Corporations if it wanted an advice-giving function. The 1920 Republican Party Platform proposed that the FTC Act be amended to create an advice-giving role, but Congress never heeded this recommendation.
Policy considerations also militate against advice-giving. Advice creates hazard, as some commissioners leave the FTC before finishing their entire term to lucrative law firm partnerships that concentrate on lobbying the FTC or sometimes directly to companies that are frequent targets of FTC investigation.
Nevertheless, on its fourth day of operation in March 1915, representatives of the coal industry appeared before the assembled commissioners to request an informal meeting. Following the coal industry, commission minutes document a parade of different industries briefing the agency, describing their plans for merger, and sometimes explicitly requesting immunity from prosecution. Rublee, reflecting upon the creation of the commission, said, “It appeared to be the common belief of business men that the chief function of the Commission was to give advice in regard to the legality under the Sherman Act of proposed combinations or contracts.” Rublee opposed such advice, noting the absence of statutory support for it, and the problem that the advice would not bind other government enforcement and policy efforts.
Challenges to Agency Power and the FTC as Common Law Enforcer
Companies were quick to challenge the FTC Act as unconstitutionally vague and as an improper delegation of power —arguments that resurfaced in modern challenges concerning the agency’s ability to police information security. In an early challenge to the FTC’s power, Sears Roebuck & Company argued that the term “unfair methods of competition” was too indefinite to be enforceable, and that absent a specific definition, it should only pertain to practices that were illegal under the common law on Sept. 26, 1914, the day the act passed.
But the Seventh Circuit rejected this argument, reasoning in part that other key provisions of the law are similarly vague and that Congress’ intent was clear. The appellate court held: “On the face of this statute the legislative intent is apparent. The commissioners are not required to aver and prove that any competitor has been damaged or that any purchaser has been deceived. The commissioners, representing the government as parens patriae, are to exercise their common sense, as informed by their knowledge of the general idea of unfair trade at common law, and stop all those trade practices that have a capacity or a tendency to injure competitors directly or through deception of purchasers, quite irrespective of whether the specific practices in question have yet been denounced in common-law cases.”
Despite this, the common law continued to haunt the agency. As Thomas Blaisdell explained in his 1932 analysis of the commission, the courts were much more likely to uphold agency orders when it used legal theories consistent with common law prohibitions. Faced with what appears to be an unbounded statutory mandate, courts found comfort in reverting to the common law strictures to interpret the agency’s powers. Today, critics who try to cabin the power of the commission argue that the FTC should only act when there are violations of common law elements. They argue that the FTC should only act where there is “harm” (usually implying economic damage) and to prove a specific intent to defraud, but neither is required by Section 5.
There are a number of reasons to reject appeals to cabin the FTC to common law strictures. For instance, if Congress intended the FTC to have a prophylactic function, how could it address new business models and technologies relying upon a body of law frozen in 1914? Why create an agency when other policy levers, such as funding private suits or the U.S. Department of Justice, could serve to enforce the common law?
On a higher level, appeals to the “common law” are a form of question begging. The common law does not speak with a single, coherent voice. How would the FTC address thin or conflicting common law precedent?
Turning to privacy, we will see that the common law in practice protects only a narrow range of business activities. If the FTC were to limit itself to common law causes of action, its most important privacy activities would cease.
The Blowback Problem
In 1919, the FTC completed an extensive investigation of the meatpacking industry. The six-volume tome caused the attorney general to file criminal suit against meatpackers. But the report also called for nationalization of some businesses. The sting of the report and the call for nationalization caused blowback — Sen. James Watson, R-Ind., accused FTC investigators of criminal anarchy and sedition. Eleven employees identified by Watson quickly departed from or were booted from the commission, despite being cleared by an agency investigation. Even the New York Times joined in, characterizing the FTC as carrying on the “propaganda of a class struggle,” and urging Congress to cure it of its “Bolshevist and propagandist tendencies.” Sen. Lawrence Sherman, R-Ill., speaking on the floor, named several FTC commissioners (Davies, Victor Murdock and William B. Colver) as do-nothing political climbers. At one point, commissioner Colver testified before Congress that agency employees had been victims of “frame up” arrests organized by the meatpackers!
The meatpackers were rewarded by gaining exemption from the FTC’s Section 5 jurisdiction, and placed under oversight of the friendlier U.S. Department of Agriculture. This is the first of several episodes where aggressive FTC action was met with congressional punishment. The infamous KidVid episode involved the commission’s proposals to regulate advertising to children on television. It too resulted in blowback, causing Congress to shut down the agency twice. Today, business lobbyists try to threaten the FTC with similar blowback if it oversteps on privacy.
Prosecutor, Judge, Jury and Appellate Court
As originally conceived, the FTC was to have a quasijudicial role. The FTC would identify violations of the FTC Act, and bring adjudicative actions before an administrative law judge based upon its pleadings. The commission itself approves of and hears appeals of the administrative law judge’s determinations. Thus, when pursuing administrative proceedings, the agency has elements of an inquisitorial court: it is actively involved both in refereeing the dispute and in investigating it. Although commission decisions can be further appealed to the circuit courts, the agency itself is prosecutor, judge, jury and appellate court.
We will see that the FTC’s quasijudicial role attracts strong critique concerning separation of powers and due process. The 1955 Hoover Commission Report recommended transferring the FTC’s judicial functions to a centralized administrative court. One prolific critic, Commissioner Lowell Mason, known as the “Great Dissenter,” repeatedly sounded the alarm that FTC’s quasijudicial role and procedure foreshadowed a government tyranny. Mason even described a straw man he created to embody the growing lack of respect for business rights brought on by the New Deal and the growing administrative state: “X-53.” X-53 was the FTC staff person who would trample rights to satisfy the agency’s ends: “When you find yourself dealing with defendants as though they were people, your staff should see to it that decisions reached in such moments of weakness are channeled back to you for reconsideration.”
These concerns conflict somewhat with one purpose of the FTC Act — to provide remedies and proceedings quickly, and outside federal court. How to balance a quick remedy with procedural fairness has been a prime consideration of the agency. Agency leaders address it by adopting more court-like procedures, which add delay, and thus invite critique from Congress, which accuses the agency of being too slow.
The commission struggled at its inception, and reading the agency’s minutes, one sees that it spent substantial time on administrative tasks such as procuring furniture. Of course, anyone who has run an organization knows that such petty concerns can be frequent and that in government, unlike the private sector, decision-making is complicated by the lack of a CEO who can make such decisions by fiat. The early FTC had a budget of less than $200,000 — the equivalent of $4 million in today’s dollars. Its initial appropriation was so low that it sent a commissioner to the president to ask for old furniture from the White House. Resources continue to be an issue for the FTC — the entire agency today has a budget of over $300 million (smaller than the Consumer Financial Protection Bureau, and dwarfed by the Food and Drug Administration, with its $4 billion budget). Just under 60 employees are charged today with protecting privacy.
The Early Commission’s Waxing and Waning Powers
Throughout its history, the FTC’s power has been shaped by Congress and the courts, and the general trend has been to increase the agency’s power over time. At its inception, at least on paper, the agency’s powers seemed unbounded, and so courts looked to the common law and to the Sherman Act for guidance in interpreting Congress’ intent. This occurred in 1920, when the Supreme Court declared that the courts, not the commission, would determine the scope of unfair methods of competition. In the case, the FTC sued a company for tying the purchase of steel ties to jute bags. The Warren Jones & Gratz company was alleged to have only sold steel ties used for bundling cotton to jobbers who would also purchase jute bagging from the company. The court held:
This decision appeared to limit the FTC to policing practices that were already illegal at common law — not acts currently practiced in trade.
Just two years later, the court backpedaled. In FTC v. Beech-Nut Packing Co., the court found it within the FTC’s jurisdiction to pursue a matter against a company that did not appear to meet all the necessary elements of a Sherman Act claim. Rather than write an express contract that fixed prices, the company published suggested price lists, and simply would not distribute its product to sellers that undercut the suggested price. After quoting Gratz, the Court explained, if Beech- Nut’s activities were “against public policy because of ‘its dangerous tendency unduly to hinder competition or to create monopoly,’ it was within the power of the Commission to make an order forbidding its continuation.”
Louis Brandeis, who played an important role in forming the FTC and then rejected the opportunity to serve as commissioner, was later appointed to the Supreme Court. Writing for the court in the 1922 Winsted Hosiery Co. case, Brandeis upheld the agency’s authority to police false advertising in matters where competitive injury occurred. Winsted Hosiery was charged with attaching various versions of the word “wool” in its marketing of mostly cotton underwear. Tradesmen were well aware of this kind of deception, but, nevertheless, the court held that the public interest was served by suppressing it, both because the labels deceived the public, and because competitors might follow suit and falsely advertise their goods in order to compete with Winsted Hosiery. This was the first case where the court recognized that “Section 5 of the act makes the Commission’s findings conclusive as to the facts, if supported by evidence.” The FTC’s pursuit of false advertising was also the beginning of what we recognize today as the FTC’s consumer protection mission. In fact, the FTC’s first case involved technology and consumer protection — the use of chemical processes to treat cotton that was passed off as silk.
Less than 10 years after Winsted Hosiery, the court slightly narrowed the agency’s authority. In FTC v. Raladam Co., the agency alleged that the company’s advertisements for “Marmola,” a weight loss supplement made of laxatives and desiccated thyroid glands, were false. The Supreme Court ruled that the agency did not have the authority to interfere with the marketing of the “cure” on behalf of consumers alone. The FTC had not proven that the “advertisements substantially injured or tended thus to injure the business of any competitor or of competitors generally, whether legitimate or not.” This raises an obvious problem: if an entire industry is engaging in a fraudulent or dangerous practice, or otherwise lacks incentives to expose a fraud through counteradvertising, should the FTC be restrained from intervening?
The back-and-forth on the agency’s powers continued. In the 1934 case FTC v. R. F. Keppel & Bro. Inc., the agency sought to prevent a candy company from marketing its product to children with lottery-like inducements. In the scheme, the purchaser did not know the price of the candy until it was opened, whereupon the candy could be free (because it included a penny that the purchaser kept) or some higher specified price. The agency argued that this practice was against public policy, as it encouraged children to engage in a form of gambling. The candy company argued that the practice was not monopolistic; that any competitor could engage in like practices; and thus that competition had not been harmed. The court rejected this argument, noting that the FTC’s power to address unfair methods of competition was not limited to addressing practices illegal at common law, under the Sherman Act, or to behavior subject to previous litigation before the courts. The FTC had the power to define a new body of illegal acts independent of these established categories.
The Supreme Court further held that a practice could be unfair even if competitors were free to adopt it but chose not to do so. The court reasoned that “a trader may not, by pursuing a dishonest practice, force his competitors to choose between its adoption or the loss of their trade. A method of competition which casts upon one’s competitors the burden of the loss of business unless they will descend to a practice which they are under a powerful moral compulsion not to adopt, even though it is not criminal, was thought to involve the kind of unfairness at which the statute was aimed.”
The court specified that findings of the FTC should be given weight in determining whether a practice is an unfair method of competition. Finally, the court employed language similar to the Brandeis dissent in the Gratz decision — language that supported the congressional intent of creating an agency that could evaluate and correct new commercial practices as they evolve: “We hold that the Commission correctly concluded that the practice was an unfair method of competition within the meaning of the statute. It is unnecessary to attempt a comprehensive definition of the unfair methods which are banned, even if it were possible to do so … New or different practices must be considered as they arise in the light of the circumstances in which they are employed.”
Since Keppel, the courts have deferred to the commission’s determination of what is unlawful in both the competition and consumer protection areas.
Reviewing the history of the FTC’s early years shows that many issues surrounding regulation of trade are still contested. Just as the early FTC struggled with challenges to its authority and claims that it should only police practices illegal at common law, today commission critics insist that it only act when common law elements are satisfied. Just as the early FTC struggled with resources, today it is vested with policing a broad swath of commerce for not just privacy violations, but many other kinds of consumer protection issues.
In some ways, the modern FTC has transcended its early challenges. For instance, mediocre appointments plagued the Agency until the 1960s. The modern commission has well-qualified commissioners and expert staff. The FTC’s attributes – its expertise, its ability to provide certainty, its ability to be flexible, its ability to act to prevent problems, and its role as a forum for compromise – were forged by Congress to fight problems of trust and monopoly. These are remarkably well suited attributes for resolving modern privacy tussles.
—By Chris Jay Hoofnagle, Berkeley Law
Chris Hoofnagle is faculty director at the Berkeley Center for Law & Technology. This essay is adapted from his new book, “Federal Trade Commission Privacy Law and Policy” (Cambridge University Press 2016).
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice. Shoshana Zuboff, Big other: surveillance capitalism and the prospects of an information civilization, 30 Journal of Information Technology 75-8 (2015).  George C. Davis, The Federal Trade Commission: Promise and Practice in Regulating Business, 1900–1929 (1969) (Ph.D. dissertation, University of Illinois).  63rd Cong. 2nd Sess. Chap. 311, Public Law No. 63–203, 38 Stat. 717.  NELSON B. GASKILL, THE REGULATION OF COMPETITION: A STUDY OF FUTILITY AS EXEMPLIFIED BY THE FEDERAL TRADE COMMISSION AND NATIONAL INDUSTRIAL RECOVERY ACT WITH PROPOSALS FOR ITS REMEDY (1936).  An early commissioner discusses some FTC successes in Huston Thompson, Highlights in the Evolution of the Federal Trade Commission, 8 Geo. Wash. L. Rev. 257 (1939). A summary of 110 general investigations completed by the FTC is published in Investigations by the Federal Trade Commission 1915–1939, 8 Geo. Wash. L. Rev. 708 (1939).  Marc Eric McClure, EARNEST ENDEAVORS: THE LIFE AND PUBLIC WORK OF GEORGE RUBLEE 112 (2003) (McClure characterizes three of the five initial commissioners as inept).  THOMAS K. MCCRAW, PROPHETS OF REGULATION 151–152 (Belknap Press 1984).  Humphrey’s Executor v. US., 295 US 602 (1935)(Humphrey died before the case resolved.).  GERALD C. HENDERSON, THE FEDERAL TRADE COMMISSION: A STUDY IN ADMINISTRATIVE LAW AND
PROCEDURE 327–328 (1924).  Milton Handler, Introduction: The Fiftieth Anniversary of the Federal Trade Commission, 64(3) COLUM. L. REV. 385, 387 (1964).  Sears, Roebuck & Co. v. FTC, 258 F. 307, 311 (7th Cir. 1919).  LOWELL MASON, THE LANGUAGE OF DISSENT (1959). In this book, the author also articulated Mason’s
Law: “that bureaucracy will arrogate to itself all power available under a statute in spite of the limitations against tyranny in the Constitution. This it will do, quietly and unobtrusively, through decisions at the lowest rung of the quasi-judicial ladder where the issue seldom meets the eye of the public.”  FTC v. Gratz, 253 US 421 (1920).  FTC v. Beech-Nut Packing Co., 257 US 441 (1922).  FTC v. Winsted Hosiery Co., 258 US 483 (1922).  In the Matter of Raladam Co., 12 F.T.C. 363 (1929).  283 US 643 (1931).  291 US 304 (1934).  “Congress advisedly left the concept [of unfair methods of competition] flexible to be defined with particularity by the myriad of cases from the field of business. It is also clear that the Federal Trade Commission Act was designed to supplement and bolster the Sherman Act and the Clayton Act to stop in their incipiency acts and practices which, when full blown, would violate those Acts as well as to condemn as ‘unfair method of competition’ existing violations of them.” FTC v. Motion Picture Adver. Serv. Co., 344 US 392 (1953)(internal citations omitted).  “Congress amended the Act in 1938 to extend the Commission’s jurisdiction to include ‘unfair or
deceptive acts or practices in commerce’—a significant amendment showing Congress’ concern for consumers as well as for competitors … This statutory scheme necessarily gives the Commission an influential role in interpreting § 5 and in applying it to the facts of particular cases arising out of unprecedented situations. Moreover, as an administrative agency which deals continually with cases in the area, the Commission is often in a better position than are courts to determine when a practice is ‘deceptive’ within the meaning of the Act. This Court has frequently stated that the Commission’s judgment is to be given great weight by reviewing courts. This admonition is especially true with respect to allegedly deceptive advertising since the finding of a § 5 violation in this field rests so heavily on inference and pragmatic judgment. Nevertheless, while informed judicial determination is depen- dent upon enlightenment gained from administrative experience, in the last analysis the words ‘deceptive practices’ set forth a legal standard and they must get their final meaning from judicial construction.” FTC v. Colgate-Palmolive Co., 380 US 374 (1965)(internal citations omitted).