criminal conduct is involved, the sellers tend to be fly-by-night operators
78The staff for the office of Federal-State Cooperation was doubled a few months
ago; it now consists of 2 lawyers and 2 secretaries.
who are not likely to be deterred by injunctive remedies; (b) local con-
sumer problems are best dealt with by state and local officials, and can-
not be dealt with effectively by a federal administrative agency in
Washington; and (c) the language of Section 5 making it applicable to
unfair or deceptive acts or practices "in commerce" rather than "affect-
ing commerce" creates a jurisdictional bar to the FTC dealing with most
localized consumer fraud practices.
It is interesting that no single reason attracts the support of a major-
ity of the present Commissioners. In any event, we suggest that these
problems and difficulties have been exaggerated and that none of these
reasons justifies the FTC's position that it should exclude itself from
playing an effective role in this important area.
(a) Inadequacy of FTC Remedies. While many of the most flagrant
consumer fraud schemes deserve to be prosecuted criminally, it by no
means follows that there is no role to be played by an enforcement agency
with solely civil sanctions. The President's Commission on Law Enforce-
ment and Administration of Justice noted that the line between criminal
and civil fraud often is unclear, and concluded that "the amount of civil
fraud probably far exceeds that of criminal fraud.'^^ Our interviews with
FTC staff personnel who had experience in the consumer fraud area,
and written submissions to our Commission by others active in the field,
support this conclusion. For example, the head of the criminal fraud
unit in the U. S. Attorney's office in New York advised us that he fre-
quently had been placed in the awkward position either of seeking an
indictment and criminal enforcement, or abandoning efforts to cope
with consumer fraud violations because his office has no civil remedy. His
view was that exclusively criminal sanctions were not adequate, and that
there were important areas in which an aggressive FTC program could
be effective. It was suggested that, at a minimum, FTC orders could
be entered against interstate sources of credit or supplies who often ap-
pear to be tied closely to local sales outlets.^o
(b) Preferred Enforcement by Local Agencies. In an ideal world, a
solution to consumer fraud problems might well be that U. S. Attorneys'
offices, using available criminal sanctions, would proceed against the
more flagrant consumer fraud schemes, and state and local government
units would cope effectively with civil fraud problems. We grant the
force of the argument that many consumer fraud schemes are local in
79President's Comm'n on Law Enforcement 127.
SOFor a similar view, see Home Improvement Fraud Hearings.
origin and effect and preferably should be dealt with by local enforce-
ment units rather than a Washington-based federal bureaucracy. Our
proposals for new FTC initiatives, described below, take these con-
siderations into account.
The fact is that resources now devoted to protection of consumers
against widespread fraud and deception are inadequate; some munici-
palities and states have no consumer protection program, and others
have consumer fraud programs in name only. As a result, the present
coordination and referral system often consists of the FTC referring
local complaints to state enforcement offices which have inadequate
legislative power and resources to do anything effective about the com-
plaint; meanwhile, state and local officials are urged to forward com-
plaints concerning "interstate" problems to the FTC, where problems
of delay, unwillingness to resort to formal proceedings, and the rela-
tively small allocation of resources to consumer protection activities
mean that little or nothing is done.
The FTC has some advantages in dealing with consumer fraud that
are not duplicated in any other sector of federal or local government.
Many defrauding sellers operate across state lines and cannot be dealt
with effectively by local law enforcement agencies. Also, the FTC has
an extraordinarily flexible statutory grant in Section 5 to deal with
unfair or deceptive acts or practices, broad investigatory powers under
Section 6, a large staff of lawyers and other professionals trained to
deal with economic problems, and rule-making and other administrative
enforcement devices which would allow the FTC to deal with a wide
range of consumer problems in a single proceeding. If existing powers
of the FTC are deficient in some respectâ€” for example, because of the
lack of power to enter a preliminary injunction against fraudulent
schemes or to assess sufficient damages to deter wrongdoersâ€” the FTC
can seek additional authority from Congress.
At a bare minimum, it seems to us that the FTC has a responsibility
under its legislative mandate to engage in a sufficiently active program
of detection, enforcement and study of consumer fraud problems to re-
port to Congress on the exact nature and dimensions of the problem, the
economic conditions that permit these fraudulent schemes to flourish
(including, if it is so determined, inadequate competition), and the
needs, in terms of appropriations and new legislation, to cope effectively
with this important problem area.
(c) Alleged Jurisdictional Limitations. The reason most frequently
cited by Commissioners and FTC staff members for avoiding an active
program of detection and enforcement against ghetto and other local-
ized frauds is that the jurisdiction of the FTC under Section 5 of the
FTCA is inadequate to permit effective enforcement. Section 5 provides
for the issuance of a cease and desist order when firms have engaged in
an "unfair method of competition . . . [or] unfair or deceptive acts
or practices in commerce", and it has been argued that the "in com-
merce" language furnishes enforcement jurisdiction substantially nar-
rower than the "affecting commerce" language of the Sherman Act and
other regulatory statutes. ^i
The FTC's cautious approach in this area depends almost entirely on
deference to a single 1941 Supreme Court decision, FTC v. Bunte Broth-
ersP in which a 6-3 majority of the Court held that the FTC did not
have jurisdiction to enforce Section 5 against a localized fraud. Bunte
Brothers, a candy manufacturer, allegedly had been using an unfair sales
promotion to sell candy to children in Illinois. There were no interstate
aspects to Bunte Brothers' sales activities, but the FTC argued that its
fraudulent sales practices were "in commerce" because they adversely
affected the competitive success of interstate rivals selling into the Illi-
nois market. The Supreme Court majority rejected that contention.
We believe that the Commission has exaggerated the jurisdictional
problems that might arise if it pursued a more active program against
localized marketing frauds. In most consumer frauds of sufficient im-
portance to justify commitment of the FTC's enforcement resourcesâ€”
i.e., the kinds of cases we propose the FTC deal withâ€” we believe
evidence could be introduced to circumvent any problems generated by
the Bunte Brothers decision. For example, one line of evidence sufficient
to distinguish Bunte Brothers would be that the frauduent seller could
foresee that some customers coming into its establishment would cross
state lines.83 In that connection, it is noteworthy that de minimis prin-
ciples have been almost completely disregarded in interpretations of
comparable jurisdictional limitations.^* If the sales unit engaging in the
alleged fraud or deception is a subsidiary or division of a multi-state
seller, that also is likely to be sufficient to establish jurisdiction under
Section 5.^5 In addition, if the fraud relies in any way on systematic use
siSee Id. at 89-90 (testimony of Paul Rand Dixon) ; Address by James Nicholson
before the ABA Admin. Law Section, Phila., Aug. 5, 1968.
82312 U. S. 349 (1941).
83Standard Oil Co. v. FTC, 340 U. S. 231 (1951) ; Bankers Securities Corp. v. FTC,
297 F. 2d 403 (3rd Cir. 1961) .
84Safeway Stores, Inc. v. FTC, 366 F. 2d 795 (9th Cir. 1966) , cert, denied, 386 U. S.
932 (1967) ; Guziak v. FTC, 361 F. 2d 700, 703 (8th Cir. 1966) . cert, denied, 385 U. S.
1007 (1967) .
ssHolland Furnace Co. v. FTC, 269 F. 2d 203 (7th Cir. 1959) , cert, denied, 361
U. S. 932 (1965) .
of interstate mails (for example, requesting information in connection
with credit reporting),^^ or if the seller advertises on TV, radio or any
interstate media,^^ that is a sufficient basis to challenge fraudulent and
deceptive statements included in the advertising, and also may provide
a basis for challenging any and all fraudulent and deceptive conduct by
the seller whether or not it is directly related to the advertising.^s
If the Bunte Brothers decision cannot be avoided, we suggest a di-
rect effort to test its continuing validity in the courts. We note that
some of the theories used by the lower courts to distinguish Bunte
Brothers since 1941â€” for example, finding interstate commerce where a
subsidiary of a multi-state seller engages in purely localized frauds-
are scarcely compatible with the theory underlying the decision that the
"in commerce" provision be interpreted solely by looking at the geogra-
phic area directly affected by the fraudulent scheme.89 Moreover, an ex-
pansionist reading of Section 5, whereby the "in commerce" provision
is interpreted to have a jurisdictional reach approaching or coexten-
sive with "affecting commerce" statutes, would be consistent with post-
1941 Supreme Court interpretations of similar statutory provisions in
several other regulatory areas.^**
2. Proposals for New Initiatives.
Our study of the FTC's existing programs has indicated a serious
misallocation of resources and a confusion of priorities. The only solu-
tion for this which can prevent similar distortions from occurring in the
future is for the FTC to set up its own apparatus to define and to keep
current a unified plan in the consumer area. Past eflForts to do this have
produced no effective results. The primary requisite for planning is ade-
86National Clearance Bureau v. FTC, 255 F. 2d 102 (3rd Cir. 1958) ; Rothschild
V. FTC, 200 F. 2d 39 (7th Cir. 1952) , cert, denied, 345 U. S. 941 (1953) .
^TSee Guziak v. FTC, 361 F. 2d 700 (8th Cir. 1966) , cert, denied. 395 U. S. 1007
(1967) ; Bankers Securities Corp. v. FTC, 297 F. 2d 403 (3rd Cir. 1961) ; Morton's Inc.
V. FTC, 286 F. 2d 158 (1st Cir. 1961) . See also. First Buckingham Community. Inc.,
3 CCH Trade Reg. Rep. ^ 18,357 (FTC 1968)* (FTC charged real estate brokers and
apartment owners with false advertising because of failure to disclose that they would
not sell or rent to Negroes; interstate commerce requirement based on advertising in
interstate media) .
88C/. Shreveport Macaroni Mfg. Co. v. FTC. 321 F. 2d 404 (5th Cir. 1963) ; cert,
denied, 375 U. S. 971 (1964) (jurisdiction over discriminatory advertising allowances,
based, inter alia, on advertisements in interstate media) .
89Note, Jurisdictional Fetter on the FTC, 76 Yale L. J. 1688, 1693 (1967) .
QOSee, e.g., Fair Labor Standards .\ct: WoUing v. Jacksonville Paper Co., 317
U. S. 564 (1943) ; Natural Gas Act: California v. Lo-Vaca Gathering Co.. 379 U. S.
366 (1965) ; Federal Power Act: FPC v. Southern California Edison Co., 376 U. S.
205 (1964) ; Fur Labeling Act: FTC v. Mandel Bros., 359 U. S. 385 (1959) ; Morton's
Inc. V. FTC, 286 F. 2d 158 (1st Cir. 1961) .
quate information about what consumer problems are, quantitatively and
qualitatively. This can be achieved through analysis and classification of
complaints received by the FTC, and by consultation and coordination
with all interested groups, e.g., organized consumer groups, OEO Com-
munity Action Law Offices, U. S. Attorney's offices. Better Business
Bureaus and the NAACP Legal Defense and Education Fund. Then the
FTC must deploy its resources so that national problems are handled at
a national level through the promulgation of regulations or through
landmark proceedings, while regional enforcement efforts are carried out
in a way which attains the maximum compliance per manhour of enforce-
Achievement of these requisites, we believe, requires new initiatives on
the part of the FTC. There are many routes to the goal. We will set
forth herein three suggestions as a guide to the type of initiative the prob-
First, a pilot project for a more intense study of retail marketing
abuses and their prevention, which could carry out on a larger scale and
a more sustained basis the embryonic effort of the District of Columbia
pilot project. This pilot project could compile the information needed
to classify and quantify consumer abuses, and demonstrate the most
effective enforcement techniques. Second, there are substantial areas
which have been largely neglected by the Federal Trade Commission, but
which a pilot project might explore with an eye to FTC action under
Section 5, or to federal legislation as necessary and appropriate. Finally,
the addition of sanctions for which new legislation probably would be
required could make the FTC a more effective enforcement agency across-
a. Pilot Project for Prevention and Study of Retail
We recommend that the FTC establish special task force offices in 8 or
10 major urban areas in the United States which preferably would be
independent of existing field offices. Each office would be staffed with an
average of about ten lawyers and other professional personnel, and sup-
porting clerical staff.^i and their assignment would be to carry forward a
9lAs noted previously, the pilot project in the District of Columbia, conducted to
some extent along lines proposed here, used an average of 5 attorneys plus supporting
staff. Since this proposed project incorporates additional responsibilities and activities,
we believe a larger staff is necessary. We chose ten as a convenient average; in cities
like New York, an effective project would need to be larger, while in other places less
than 10 might be adequate.
model program to detect, proceed against, and at the same time study,
classify, and report on problems of localized fraud against consumers.
These programs would be designed to protect consumers generally, but
emphasis would be on economic fraud and deception against particularly
vulnerable groupsâ€” the poor, the uneducated, and the elderly.
Project content would vary from city to city. For example, in a city
where state and local enforcement agencies are relatively active, and
OEO Community Action Law offices or the U. S. Attorney's Office is
energetically pressing legal actions against economic exploitation of con-
sumers, the FTC's program should emphasize coordination with existing
enforcement groups by referring complaints, operating as an information
clearing house, working on consumer education, etc. Where other
sources of enforcement against consumer exploitation are deficient, how-
ever, the FTC might experiment with a program that involves a greater
emphasis on formal enforcement activities.
The project described below would be designed to operate for three
years, after which a report would be submitted to Congress. If results
warranted, the program might be continued thereafter. The nature of
the program is outlined below.
(1) Detection. Information as to consumer abuse would be developed
through establishment of one or more "consumer complaint" offices in
each area, staffed by FTC personnel, which would make known through-
out the community the willingness of the FTC to investigate alleged
consumer frauds. Project members also would set up cooperative ar-
rangements with other public and private legal service organizations.
One reason for careful coordination is that formal investigation by the
FTC, conducted by subpoena, could confer immunity on the firm being
investigated under 15 U. S. C. A. Â§ 49. Before resorting to a formal in-
vestigation, it would be necessary for the FTC to be sure the matter
would not be more appropriately pursued by federal or state agencies with
criminal enforcement power.
In addition to local complaint offices, staff personnel would review
newspaper and magazine ads and local radio and TV scripts for false
advertising, study garnishment rolls and other court records to determine
whether sellers may be taking oppressive advantage of the judicial
process, and hold public hearings in the community to discuss economic
abuses. The results of such studies then might be summarized and cor-
related with trends emerging in the letters currently received by the FTC
from consumers complaining about fraud and deception.
(2) Enforcement Proceedings. Proceedings would be filed against
companies where there is cause to believe they have engaged in serious
consumer frauds in violation of Section 5. It is anticipated that many
cases would be settled through consent decree or voluntary compliance,
as is true with most FTC work. Where that is impossible or where a
violation is particularly flagrant, cease and desist orders should be sought.
Lawyers in the local office would be responsible for deciding whether to
file a formal complaint, issue subpoenas, enter into a consent settlement,
and, if necessary, try the case before hearing examiners assigned to sit
in each local area where a project is established. ^^ Since the staff of
FTC hearing examiners has little work to do at present, a commitment
of their time for this purpose would simply make use of resources cur-
rently being underutilized. Moreover, since most consumer fraud cases
(e.g. bait-and-switch, false advertising, phony warranties, etc.) are rela-
tively simple to try compared to the much more complicated cases that
arise under anti-monoply statutes, we expect that the young lawyers
assigned to these local offices would be competent to handle these
As we have previously noted, some consumer fraud situations are
almost entirely local in character (for example, a single unconscionable
contract between a seller and buyer) ; others can be dealt with effec-
tively on a national basis (for example, false advertising, including bait-
and-switch tactics, systematic abuse of holder in due course defenses,
door-to-door sales frauds, etc.). Where the abuse is entirely local, the
FTC office would be expected to establish liaison with and to refer the
matter to city or state authorities, or to a neighborhood law office. Where
clearly national, of sufficient impact, and within its planning priorities,
the FTC itself would act. Finally, in the vast intermediate area of ques-
tionable conduct, where there are both local and interstate aspects, the
field offices would be expected to deal with and dispose of those matters
unless there is reason to believe that existing state or private law enforce-
ment is adequate to handle them. As we have already indicated, we
doubt that the jurisdictional problem would be a bar to the FTC in
dealing with these mixed intrastate-interstate schemes.
In addition to case-by-case enforcement, it would be expected that
other techniques characteristic of FTC procedureâ€” e.g., trade practice
guides and rules, advisory opinions, extensive voluntary compliance ar-
92This procedure would constitute an increase in authority delegated to staff over
and above the present situation, but is consistent with proposals we have made in
other sections of this report; see pp. 80 to 83 infra.
rangements, etc.â€” would be used, and also that existing guides in the
fraud and deceptive practice area would be modified and updated on the
basis of experience gained. Among other possibilities, the FTC might
consider whether means could be found to encourage informal settlements
of disputes between sellers and buyersâ€” for example, by establishment
of a community complaint board, appointment of a consumer ombudsman
or establishment of a low-cost arbitration system for refunds, financed by
sellers in the community.
While all of these investigations of novel doctrines of law or experi-
ments with new approaches could be undertaken by personnel at the
Washington office, we believe it is only by involvement at local levels
that reliable data can be obtained and realistic approaches designed
(3) Coordination with Local Education and Enforcement Units. In
the long run, we recognize the desirability of having local enforcement
agencies take over most of the task of coping with ghetto frauds and
other localized abuses of consumers. We believe a federal presence is
justified now, however, because consumer abuse is a serious problem
and because local authorities, by their own testimony, are not capable,
at present, of effectively coping with it. We note by the way that there
seems to be no serious problem of resistance to federal activity; almost
all state attorneys general seem to welcome federal law enforcement
efforts in the consumer fraud area.^^
A major emphasis of the program should be on cooperation with
and the training of local enforcement personnel in order that they may
ultimately assume responsibility in the local consumer abuse area. The
FTC should continue its efforts to support adoption by the states of
uniform state laws dealing with consumer frauds and deception, and
should conduct seminars with state legislators or administrators to make
available to the states relevant experience on the national level and in
other states.'-^^ The FTC also might try to stimulate local units to engage
"-yiHome Improvement Fraud Hearings 77.
O^There are a number of uniform laws presently available to the states, but none
has lieen widely enacted. Suggestions have emanated from the FTC, and from the
Committee of State Officials on Suggested State Legislation of the Council of State
Governments, and more will come from the National Commission on Product Safety.
Recent suggestions from the Council of State Governments include bills on unsolicited
merchandise (1969) , false advertising (1965) , retail installment financing (1963) , and
labeling of hazardous sulistances (1961) . More generalized major bills are the Uniform
Consumer Credit Code (L'CCC) , which covers both credit arrangements and sales, and
incorporates some of the suljstantive suggestions made to the FTC above; the Uniform
Deceptive Trade Practices Act which provides only a broad injunctive remedy but
more extensively in consumer protection education programs, through
publication of written materials, TV programs, open meetings, and so
forth. An obvious but important project would be simply to advise
consumers of their rights under local court procedures. Faculties and
students at local law schools, some of which are already engaged in
clinical programs designed to study consumer fraud problems, also might
be invited to become involved in a local consumer protection project.
(4) Reports and Studies. A major purpose of the proposed program
would be to enlarge our knowledge of the types and extent of exploita-
tion of consumers and of the most effective methods for combatting
such exploitation. Essential to the acquisition of the requisite body of
empirical data is the collection and analysis of economic and statistical
information by professionals. The problems in the field of consumer
protection are to a large extent economic and intelligent solutions re-
quire the full utilization of economic skills and insights. A substantial
capability for economic data gathering and analysis therefore should be
included in the pilot program.
One important by-product of the study function of the project
should be comprehensive reports to Congress that illuminate the prob-
lems in these areas. Such reports would also address the question of
the extent to which local enforcement agencies are adequately staffed
and financed to protect the consumer interest. In that connection,
criteria to determine adequacy of present enforcement efforts should be
published, after consultation by the FTC with representatives of local
agencies. Finally, the FTC should also consider whether and to what
extent federal funding, through the model cities program or otherwise,
ought to be made available to state and local consumer protection
none in damages; and two sets of FTC recommendations. The first is the Unfair Trade
Practices and Consumer Protection Law which inchides treble damage actions, con-