Consumer Protection Mission
Advertising Practices Program
Credit Practices Program
Enforcement Program
Marketing Practices Program
Service Industry Practices Program
The goal of the Consumer Protection Mission is to maintain a well-functioning marketplace that allows consumers to make informed purchase choices. In today's increasingly complex marketplace, the Mission is developing new and creative strategies to ensure the free flow of current and understandable information to consumers.
Evolving technologies are radically changing the way consumers learn about, buy, and pay for goods and services. An array of new media has supplemented television and print advertising, once the standard for reaching consumers. The Internet, pay-per-call telephone services, and program-length television commercials ("infomercials") are among the new methods sellers are using to reach consumers. In addition, consumers are more sophisticated. Not too long ago, they were interested in only price and quality. Today they are concerned with the health implications of the food they buy, the environmental implications of packaging and other product attributes, the potential loss of personal privacy resulting from the use of online communication, and the astounding growth in telemarketing and other types of consumer fraud.
Mission Strategies
The Consumer Protection Mission uses three primary strategies to achieve its goal:
- Protecting consumers from fraud, deception, and unfair practices in three priority areas health, safety, and financial well-being;
- Identifying impacts on consumers of globalization and new technologies to build institutional expertise in these areas and to adapt consumer protection principles to correct practices that harm consumers and undermine these new markets; and
- Using creative approaches that are effective in protecting consumers and are not unduly burdensome for businesses.
The Mission implements these strategies through actions that involve both law enforcement and consumer education. Acting on the belief that the most effective consumer protection is education, the Mission is committed to alerting as many consumers as possible to fraud in the marketplace and educating consumers and businesses about their rights and responsibilities under Commission rules and regulations.
Overview of Activities
Fighting fraud is one of the Commission's highest priorities; consumers are bilked out of billions of dollars a year. In fraud cases, the Commission files actions in federal district court to bring an immediate halt to ongoing business activities and freeze defendants' assets. The Commission then pursues court orders that permanently ban the fraudulent activities and provide refunds to consumers. In addition to targeting fraud, the Commission's law enforcement efforts focus on stopping deceptive or unfair practices that cause significant risk to consumer health, safety, and economic well-being. The Commission often uses internal administrative litigation to pursue nonfraud cases involving novel or complex legal issues, many challenging advertising claims.
The Commission also puts a high priority on consumer education the first line of defense against fraud and deception. With each major enforcement initiative, the Commission launches an education campaign, using both traditional and new media to reach as many consumers as possible. In fiscal year 1996, the Commission distributed a record 4.1 million brochures. Almost all print materials are posted to the ConsumerLine section of the Commission's Web page (www.ftc.gov); over 140,000 publications were accessed online during the year. A unique initiative of the Commission is the Partnership for Consumer Education, a national coalition of 84 businesses, trade associations, consumer groups, and government agencies that have committed to educate the public about telemarketing fraud. From January 1996, when the partnership was launched, through September 1996, this group disseminated 90 million fraud prevention messages.
The Mission's activities are supplemented by close federal-state coordination. Joint resources are targeted to issues that have a direct impact on consumers. Staff attorneys working on individual cases and sweeps groups of related cases coordinate with their colleagues in federal, state, and local consumer protection offices. During the fiscal year, the Commission led its state and federal partners in a series of law enforcement sweeps. The Commission brought over 200 cases against fraudulent operators, stopping fraud that cost consumers $200 million four times the Commission's annual budget for Consumer Protection matters. And for every case the Commission brought, its state and federal partners brought two more.
The Consumer Protection Mission is advanced by five law enforcement programs Advertising Practices, Credit Practices, Enforcement, Marketing Practices, and Service Industry Practices; the Office of Consumer and Business Education; and the Commission's ten regional offices. Regional staff are responsible for a wide variety of significant consumer protection cases and are important contact points for state Attorneys General and other state and local consumer protection officials.
Advertising Practices Program
The Advertising Practices Program promotes truthful, informational advertising, fair competition, and industry self-regulation. It issues guidelines to business on how to comply with Commission laws and policies in specific areas such as food and environmental marketing and advertising and how to advance national advertising policy. It brings law enforcement actions that focus on advertising claims with the potential for causing injury to consumers' health, safety, and economic well-being and the new advertising media and techniques spawned by the increasingly diverse, high-tech marketplace. It organizes public workshops and publishes reports that examine important and controversial consumer protection issues. It also administers federal laws requiring health warnings on tobacco products.
Health and safety claims claims that consumers often cannot judge for themselves are a primary focus of this Program. Consumer interest in health and nutrition is very high, and the market has responded by introducing "healthier" food product lines and nutritional supplements. The Program scrutinizes food advertisements for false and misleading low-calorie and low-fat claims. Marketers of dietary supplements advertise and promote their products heavily as scientific evidence becomes available regarding the potential health benefits of various nutrients. The Program monitors advertising for this product category, focusing on unsubstantiated health and efficacy claims for supplements claiming, for example, to speed weight loss and build muscle or to lower serum cholesterol.
The marketing of over-the-counter (OTC) drugs also has significant impact on consumers' health and safety. The Program challenges unsubstantiated claims of efficacy, superiority, and comparative safety in OTC drug advertising, including claims for analgesics, acne medications, and suntanning products. The increasing number of "switch" drugs, products previously available only by prescription but now allowed by the Food and Drug Administration (FDA) to be sold over-the-counter, also are of particular interest to the Commission since there can be significant economic benefit to consumers from these products.
In 1992, the Commission issued guidelines on environmental or "green" labeling and advertising claims. During fiscal year 1996, the Program conducted a formal review of the Guides, including holding a public workshop in which representatives from state and federal government, environmental groups, industry, and academia presented their views. Based on this review, the Commission determined that the Guides are effective in preventing deception and encouraging truthful claims. Also in this area, the Commission provides assistance to the U.S. Trade Representative on issues involving international environmental labeling regulations and programs conferring "eco-seals" to environmentally beneficial products.
New information technologies have had a significant impact on advertising. Infomercials, home shopping channels, catalogs, online shopping services, and other forms of nonretail, direct sales are a growing segment of the advertising market. The Program responded to this dramatic increase in advertising outlets through a media screening initiative, which works with advertising and media trade associations, such as the Cable Television Advertising Bureau, to educate the media on the importance of preventing fraudulent advertising by careful screening. As part of this initiative, and in conjunction with law enforcement actions, the Program is alerting media members that have carried advertising alleged to be deceptive by the Commission.
Expanded commercial use of the Internet is having a dramatic impact on consumers. The benefits of the free flow of information, both to consumers and industry, are great. The proliferation of readily available personal information, however, could jeopardize personal privacy and facilitate fraud and deception. In seeking to understand these and other issues, the Program, working with staff of the Credit Practices Program, convened a workshop in fiscal year 1996 to allow interested parties to express their views on privacy issues and online protections for consumer privacy. A subsequent report summarized the participants' diverse views and described private-sector efforts to address concerns about information privacy online.
Recognizing that children are a special audience, the Commission plays a leadership role in children's advertising and marketing issues. The Program focuses on deceptive and unfair advertising aimed at children in traditional media and on the Internet. For example, as part of the workshop and report examining consumer privacy in the online marketplace, the Program conducted a review of the information collected online from children. The Program also monitors tobacco and alcohol advertising to identify ads targeted to an underage audience, conducting law enforcement investigations where appropriate, and working with industry and health groups to encourage greater self-regulation in this area.
Credit Practices Program
The Credit Practices Program enforces several federal credit statutes that affect more than 113 million consumers who hold over 900 million credit cards and many millions more who obtain credit through loans. In this age of borrowing, credit bureaus play a critical role in the ease and speed with which individuals are able to get credit. With files on over 190 million Americans, the major credit bureaus have a responsibility to ensure the accuracy and privacy of this personal and sensitive information.
In 1996, Congress passed comprehensive amendments to the Fair Credit Reporting Act (FCRA) that take effect in 1997. The amendments significantly expand coverage of the Act to those who furnish information to or obtain reports from consumer reporting agencies. The Program is responsible for educating consumers and businesses about the new rights and obligations established under this law. During the past year, the Program continued its enforcement of the current law, including litigation against one of the three major credit bureaus for its alleged violations of the FCRA by selling target marketing lists.
Credit identity fraud, where a criminal takes over a consumer's existing credit accounts or opens new credit accounts in the consumer's name, is a growing problem. The Program took the lead in this area by working with consumer and industry groups, including holding two workshops designed to promote consumer education and voluntary industry efforts at prevention and cure of this rapidly growing fraud.
Denial of credit access for reasons unrelated to creditworthiness continues to be a serious problem. The Equal Credit Opportunity Act, enforced by the Commission, requires lenders to judge individuals' creditworthiness by their financial condition and history, not by factors such as race, age, or national origin. The Program engages in enforcement activities designed to alert lenders subject to the Commission's jurisdiction that illegal lending discrimination is not tolerated.
The credit market breaks down when creditors fail to provide essential information or, worse, provide incorrect information. In its jurisdiction over millions of creditors, the Commission's role is to ensure that they provide accurate information, thereby allowing the marketplace to operate properly. The Truth-in-Lending and Consumer Leasing Acts require certain information about the total cost of the credit or lease to be placed in advertisements and given to consumers before transactions are consummated to allow for comparison shopping and fair competition among creditors. During fiscal year 1996, the Program, working with 23 state Attorneys General, concluded a major enforcement sweep of five major automobile manufacturers for their deceptive lease and credit advertisements. The proposed settlements, which became final in 1997, require the companies to provide clear, readable, and understandable cost information in their leases and, in two cases, credit advertisements. In addition, the Commission participated with the Federal Reserve Board, industry members, and consumer groups to develop consumer education on important leasing issues.
Default by a certain percentage of consumers is an inevitable consequence of granting credit. Creditors may take collection action in these cases or assign them to debt collectors. Under the Fair Debt Collection Practices Act, the Commission plays a critical role in clarifying proper collection tactics and prosecuting those who violate the law. The Program also makes it clear that creditors bear some responsibility for collectors' actions, when they are aware of the actions.
Finally, credit and other markets fail when merchants engage in unfair or deceptive trade practices. Given the importance of credit in individuals' lives, many of these illegal practices focus on credit issues. They include advance-fee loan fraud, phony gold cards, misuse of bank drafts, false advertising about secured credit cards, vacation scams, and credit repair.
The proliferation of readily available personal information on the Internet raises issues concerning personal privacy and possible fraud and deception. Working with the Advertising Practices Program, the Program convened a workshop to explore the full range of views about privacy in the online marketplace and the role of government in this rapidly evolving marketplace, and will continue to monitor developments in this fast-growing area. In addition, consumer deception on the Internet resulted in several law enforcement actions, many involving credit repair schemes.
Enforcement Program
The Enforcement Program enforces Commission orders that cover a wide variety of products, services, and consumer protection issues. It also administers and enforces more than a dozen statutes and rules, covering such diverse areas as care labels on clothes, energy labels on appliances, efficiency ratings for home insulation, buyers' guides on used cars, octane ratings, mail and telephone order sales, door-to-door sales, and the receipt of unordered merchandise. The Program works to improve compliance with orders and rules, seeking significant penalties when appropriate, and working cooperatively to ensure future compliance by companies that have acted in good faith and committed only technical or inadvertent violations.
In fiscal year 1996, the Program obtained nearly $4.7 million in civil penalties or disgorgement of ill-gotten gain to remedy violations of orders and rules. This amount includes the largest civil penalty to date in a consumer protection matter a major hearing aid manufacturer paid $2.7 million to settle allegations of false and unsubstantiated claims for hearing aids. Other cases resulting in substantial penalties or disgorgement involved false low-fat claims for frozen yogurt, unsubstantiated low-cholesterol claims for eggs, misrepresentation of the performance of a toy, and unsubstantiated engine treatment claims.
The Program coordinated a Telemarketing Sales Rule sweep of office and cleaning supply fraud operations that targeted small businesses and not-for-profit organizations, such as churches, monasteries, and schools. The sweep encompassed 17 cases, 5 filed by the Commission and 12 brought by the U.S. Postal Inspection Service or state and local officials. Most of the targeted operations closed, and some paid substantial sums in consumer redress.
The Program has responsibility for the Commission's ongoing review of its standard for claims that products are "Made in USA." A key event in this review was a 1996 workshop that brought together industry representatives, labor union officials, consumer groups, state officials, and others to discuss consumer perception of "Made in USA" claims and how the movement toward a global economy should affect the Commission's standard.
A major project during fiscal year 1996 focused national attention on the issue of checkout scanner accuracy. The Program worked closely with the National Institute of Standards and Technology and the National Conference on Weights and Measures to train state and local officials and industry members in the use of inspection procedures designed to increase scanner accuracy. Price checks conducted in 300 stores in seven states did not suggest that federal enforcement actions were required, but did suggest the need for consumer and business education to focus attention on the issue. Following extensive discussions with government and industry officials, the Program worked with the Consumer and Business Education Office to create and distribute educational materials.
The Program plays a leading role in carrying out the Commission's commitment to reviewing all of its rules and guides, repealing those that are outdated or no longer necessary, and streamlining those that are retained. In fiscal year 1996, the Commission rescinded eight rules and two industry guides and revised an additional six rules and two guides. Since the initiation of the Commission's regulatory reform program in 1992, the Commission has rescinded 27 rules and guides and revised another 19. This total represents more than 50 percent of the rules and guides in effect in 1993.
In response to the North American Free Trade Agreement, the Commission also is seeking to revise its rules to harmonize with those of U.S. trading partners. The Program is working closely with government and industry groups striving to achieve harmonization. In fiscal year 1996, the Commission sought public comment on proposals to allow use of icons in lieu of words on care labels and to revise other textile labeling requirements in ways that will facilitate trade within North America. The Commission also amended the Appliance Labeling Rule to reduce manufacturer burdens in complying with all North American energy labeling requirements.
Marketing Practices Program
The Marketing Practices Program works to stop fraud that consumers cannot readily detect and avoid on their own. The Program also targets economic harm caused by sellers who fail to provide consumers with the information necessary to prevent them from being deceived. Reflecting the variety, prevalence, and severity of consumer problems in the national economy, the Program focuses on deception and fraud in telemarketing and in the promotion and sale of business opportunities and franchises. To ensure that consumers have the information they need before paying for goods or services, the Program enforces the Franchise Rule (requiring franchisors to provide presale disclosure documents to prospective investors), the Pay-Per-Call Rule (requiring disclosure of cost and other material information to consumers who purchase information or entertainment through 900 numbers), the Funeral Rule (requiring disclosure of itemized cost and other information), and the Telemarketing Sales Rule (requiring material disclosures and prohibiting misrepresentations in telemarketing).
Economic fraud directed at consumers and small businesses is one of the most common consumer protection problems. The Program targets fraud that cannot be readily detected by most consumers or is aimed at vulnerable populations, like older consumers. Many perpetrators of this type of fraud use new technologies not yet understood by consumers or apply familiar technologies in new ways to confuse consumers, such as the Internet, new payment systems (such as 900 numbers and other innovative telecommunications services), credit cards, electronic fund transfers, and demand drafts (bank transactions that deduct money from a consumer's checking account without a written instrument bearing the consumer's signature).
Fraudulent sale of franchises and of business and employment opportunities, often with the aid of telecommunications technology and electronic fund transfers, has become an area of special concern. These schemes often victimize consumers who invest severance pay, retirement savings, or all their assets in business opportunities that seem likely to pay off and provide economic security. Recent estimates suggest that tens of thousands of investors lose as much as $500 million a year to franchise and business opportunity fraud.
In its continuing effort against this type of fraud, the Program launched "Project Buylines," a sweep against seven marketers of fraudulent business opportunities for 900-number lines. Investors are told all they have to do is advertise the pay-per-call programs recorded on the 900-number lines and take a portion of the revenues for themselves. This effort was a follow-up to the innovative and highly successful "Project Telesweep," which in fiscal year 1995 resulted in dozens of cases filed concurrently by the Commission, the Department of Justice, and state officials. Litigating the Telesweep cases to conclusion was also an important effort of franchise fraud and Franchise Rule enforcement in fiscal year 1996.
During the past year, a major effort of the Program was the design and coordination of federal-state enforcement of the Telemarketing Sales Rule (TSR), an important new tool in the battle against telemarketing fraud. The TSR became effective December 31, 1995, making illegal almost everything that fraudulent telemarketers do to separate consumers from their money. It also gives the 50 state Attorneys General the ability to go into federal district court and get injunctive orders that apply nationwide against fraudulent telemarketers. The enforcement effort included educating businesses and consumers about the new Rule; providing training on the Rule and federal court practice to the Commission's co-enforcers, the states; and designing, coordinating, and implementing a series of comprehensive enforcement sweeps, each of which focused on a particular type of telemarketing fraud or a particular practice outlawed by the TSR, such as credit repair scams, advance-fee loan scams, and deceptive prize-promotion scams. Close coordination with the states and other federal agencies with jurisdiction over telemarketing fraud was a key strategy in implementing the sweeps. This effort resulted in more than 100 TSR enforcement actions on the state and federal level, including 23 federal district court cases filed by the Commission and 7 filed by the U.S. Postal Inspection Service.
The Program also seeks to remedy consumer injury that occurs when sellers fail to provide important information to consumers. By enforcing the Funeral Rule, the Commission imposed sanctions on funeral providers who failed to give consumers information about choices and prices for all goods and services sold. A noteworthy development in Funeral Rule enforcement was the Commission's implementation, in conjunction with the National Funeral Directors' Association (NFDA), of an innovative industry training and certification program, the Funeral Rule Offenders Program (FROP), designed to bring identified noncomplying funeral homes into compliance without formal law enforcement action, thereby reducing the level of Commission resources needed to enforce the Rule.
FROP participants make a voluntary payment to the U.S. Treasury or the state in amounts lower than civil penalties might be assessed for the potential law violations identified and agree to enroll their personnel in NFDA's training program and submit to NFDA certification and business form review procedures. In fiscal year 1996, 26 funeral homes were offered FROP as an alternative to possible litigation. Twenty-three of the funeral homes accepted the offer and voluntarily entered FROP, making over $114,000 in voluntary payments and receiving training in complying with the Funeral Rule. The 26 homes that were offered FROP were identified through efforts of the Commission and five state Attorneys General in regional sweeps that involved test-shopping funeral homes in Colorado, Illinois, Massachusetts, Ohio, and Oklahoma.
Service Industry Practices Program
The Service Industry Practices Program addresses a variety of consumer frauds and market failures that impose substantial costs on consumers, including the fraudulent or misleading sale of non-traditional investments and health care and other services. The fraudulent telemarketing of investments and services causes billions of dollars of consumer injury every year. In the wake of recent law enforcement crackdowns on traditional prize-promotion and recovery room frauds, investment frauds have burgeoned. The Internet has become fertile ground for investment scams, and deregulation in the telecommunications industry continues to spawn numerous investment ventures designed to capitalize on purported new markets. False claims are made concerning the value and capabilities of the particular technologies being promoted, the profit to be derived, and the risk of investing.
During the past year, the Program attacked these and other frauds with a strong enforcement effort that included several law enforcement sweeps, conducted with federal and state criminal authorities, and intensified consumer education campaigns.
In "Operation Roadblock," the Program partnered with 20 state securities regulators to bring 85 actions against sellers of "information superhighway" investments. This major crackdown was aimed at telemarketers who peddle fraudulent high-tech investments that cost consumers over $250 million. This effort garnered enormous attention from the media, which in turn alerted consumers to the perils of high-tech scams. Indeed, consumer warnings were on the front page of USA Today.
"Operation Career Sweep" targeted scam artists who falsely promised to obtain jobs for consumers in exchange for upfront fees of up to several hundred dollars each. Working with federal and state partners, the Program brought seven cases and obtained more than $1 million in refunds for thousands of consumers. A consumer education campaign to help job hunters avoid these schemes included brochures, consumer tip cards, and public service messages posted on the Internet.
The Program led "Project $cholar$cam," which focused on scams aimed at high school and college students seeking financial aid. The sweep, which stopped scams that cost some 100,000 consumers over $15 million, was combined with a massive education campaign in which the Commission and the education community distributed over 800,000 bookmarks, posters, and flyers, and posted warnings at popular Internet Web sites.
The Program joined forces with states and the FBI, bringing civil cases in support of "Operation Senior Sentinel," an enormous law enforcement effort that closed down sweepstakes, recovery rooms, and similar frauds that target older consumers. The Program and the FBI also conducted simultaneous actions against an allegedly fraudulent seller of "invention promotion" services, in which the Program obtained $1 million in redress for consumers.
"Project Jackpot," a federal-state effort targeting firms that fraudulently offer purportedly valuable prizes to consumers to induce them to purchase products, resulted in 56 enforcement actions against 79 defendants in 17 states. Consumer education materials were developed and released in combination with this major law enforcement effort.
As part of its effort to combat telemarketing fraud, the Commission maintains a Telemarketing Database developed with the National Association of Attorneys General (NAAG). This database captures information from the National Fraud Information Center (a project of the National Consumers' League), which receives about 8,000 inquiries a month from consumers who believe they may have been subjected to a deceptive telemarketing sales pitch. The NAAG-FTC Telemarketing Complaint System contains information from over 60,000 complaints and grows at the rate of over 11,000 new complaints each year. In fiscal year 1996, this system was used by over 100 law enforcement agencies, including the FBI, the U.S. Postal Inspection Service, the Department of Justice, and 44 state Attorneys General. The complaint system helps agencies determine enforcement priorities, allowing them to target particular types of fraud and/or specific geographic areas. It is instrumental in providing witnesses in cases that are part of the coordinated enforcement sweeps by federal, state, and local agencies.
The marketing of health care services is estimated at $1 trillion annually; as much as $100 billion may be attributable to fraud. Victims of health care fraud frequently lack information to evaluate deceptive advertisements and are often reluctant to challenge health care professionals because of this information gap. Deception in the marketing of these goods and services not only adversely affects consumers' pocketbooks, but also may endanger their health. Some consumers may be led to purchase goods and services that do not perform as advertised and delay treatments or procedures that may be far more effective. The Program targets false and unsubstantiated therapeutic and efficacy claims for health care goods and services, and works jointly with other federal, state, and local agencies to address deceptive claims. Education efforts are combined with law enforcement to assist consumers and provide guidance to marketers.
During the past year, the Program pursued numerous innovative remedies in the accomplishment of its mission. These included sending a joint Commission/FDA staff advisory to over 37,000 ophthalmologists regarding impermissible claims for laser eye surgery, working with the Department of Justice to repatriate $330,000 in funds from a defendant's Bahamian bank for redress to U.S. telemarketing victims, holding a health care conference in Dallas to promote joint federal-state enforcement against health frauds, and negotiating a settlement that provided 1,000 energy-efficient windows to state agencies in Oregon and Washington as consumer redress.