Randal Marlin
Page 50
ADVERTISIng
The Case Against government Controls
The case against government controls on advertising was usefully articulated in an
article, “Advertising and Ethics,” by Phillip Nelson, a professor of economics at the
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State University of New York.13 He argued against government sanctions for controlling advertising because he felt that government control would be wasteful, ineffect-
ive, and unnecessary in the light of possible alternatives. The arguments are far from
compelling, but they are worth critiquing inasmuch as they articulate ideas that have
some plausibility.
1. Government regulation has had a bad track record, in particular a record of counter-
productivity. For example, by control ing rents at a fixed level, accommodation prices
are kept lower and the stimulus to build new housing is lessened, thus making low-
cost accommodation more difficult to obtain. This may be so, but that is only one
area of government regulation. There are many others that show no obvious counter-
productivity, for example, motor vehicle licensing. The abandonment of a government
system of water supply testing emerged as a contributing factor in the outbreak in
Walkerton, Ontario of a deadly e.coli infection. So the argument against government
regulation of advertising, on the basis that government regulation in general is bad,
is not very strong.
2. Advertising generates social well-being. That is true of some advertising, perhaps
even of most advertising. However, it doesn’t address the question of how to deal with
advertising that misleads, insults, demeans, or is otherwise reprehensible.
3. There is a distinction between advertising of experience qualities (qualities that the
purchaser verifies on using the product) and advertising of search qualities (quali-
ties that can be determined prior to purchase, such as cost, size, shape, etc.). Nelson
points out that if there is any deception in the description of the search qualities,
people will not buy the product. In the case of experience qualities, the customer
might be fooled once but will not be in line for repeat purchases. Therefore, false
advertising will not pay for any company that wants to stay in business for long.
Since self-interest will dictate truthfulness in the advertising of experience qualities,
legislation should not be needed. If people are rational and act in their own interest,
there ought not to be any false or misleading advertising. This argument has some
merit, but, like the legendary bumblebee that ought not to be able to fly in the light
of aerodynamic principles, this kind of deceptive advertising of experience quali-
ties nevertheless occurs and with some frequency, as can be seen from convictions
obtained in Canada under the Competition Act.
4. Some forms of deception are harmless, because they trick people into doing what
they ought to do in their own interest anyway. Strangely, he views this kind of decep-
tion as a case of providing information because it leads people to act in the way they
would act if they were fully informed.
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5. If advertising were deceptive, people would not believe it; thus, in the long run, deception would not be in the interest of advertisers. That is true, but the observation
does not support the case against regulation. So long as the majority of advertisers are
truthful, there will be a tendency to believe advertisements. However, if this tendency
exists, it can be exploited by a few unscrupulous advertisers for their own benefit.
6. Because it is not possible to prevent all fraud, Nelson suggests putting up with exist-
ing abuses rather than trying to regulate them out of existence. There are costs to all
forms of legal enforcement, and there are diminishing returns the closer one moves
toward reducing crime to zero. That point is sound but limited in scope. From the
valid point that one cannot prevent all fraud, we cannot infer that it would be inadvis-
able to try to prevent some fraud.
7. Perhaps Nelson’s least impressive argument is one in defence of advertising prod-
ucts that are of no real intrinsic benefit to the customer on the grounds that “if I
don’t make/sell it, someone else will.” The form of that argument is identical to the
rationalization of any protection racket operator, contract killing organization, or
suchlike. Even if it is true that someone else will do it anyway, that does not serve as a
justification for my doing it.
In contrast to Nelson’s largely hypothetical treatment of deception as something
advertisers ought to eschew in their own interest, Burton Leiser looks at some actual
practices involving deception.14 While not attempting to provide a complete list, he
provides some interesting illustrative examples, among which are the following:
1. Offering for sale at a “reduced” price what was never offered for sale at the suppos-
edly “regular” price;
2. Offering “free” sets of encyclopedias, but asking for a small monthly service charge
for a 10-year research service;
3. Advertising “free” books or records to join a club, when they are not free but are
consideration in a binding contract to purchase a certain number of books or
records;
4. Small type to obscure limitations on, for example, insurance coverage; and
5. Misleading language, as when a health insurance policy advertises that it “will pay
your hospital bills,” but it does not include all hospital bills and maybe not all of
the bills themselves.15
Leiser makes a strong case for government intervention where products are adver-
tised in ways that mask health or safety risks to consumers, though he would prefer
advertisers to behave in ways that would make such intervention unnecessary.
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The Consumer Protection Movement, Misleading Advertising, and
Canada’s Competition Act
Public agitation for government regulation of industry in the interests of consumers
is nothing new. The outcry in the wake of Upton Sinclair’s classic revelation of the
horrors of Chicago’s meat-packing industry, The Jungle,16 led to government legislation imposing standards on the industry. In the late 1950s, Vance Packard raised the alarm
about the impact of advertising on our behaviour with The Hidden Persuaders,17 and in the mid-1960s Ralph Nader spearheaded the consumerist movement with his revelations, in Unsafe at Any Speed,18 about safety flaws in automobile design.19 The alleged attempt by General Motors to hire a detective to find material to discredit Nader20
led to the company paying a hefty out-of-court settlement to him after he launched
a lawsuit against it based on privacy rights. Nader used the funds to organize many
public interest groups including the Public Interest Research Groups to be found in
many universities throughout the United States and Canada.
The movement for consumer protection turned out to be very popular. Many
countries around the world have passed such laws in response to
public pressure. In
some cases, existing regulatory bodies were given added powers, as with the Federal
Trade Commission (FTC) in the United States. As explained on the FTC’s website,
it was created in 1914 for the purpose of preventing unfair methods of competition
in commerce as part of the battle to “bust the trusts.”21 The move from breaking up
monopolies and cartels to prohibiting misleading advertising has a logical basis.
Corporations willing to engage in misleading advertising have an unfair advantage
over those who for ethical reasons refrain from doing so. Fairness is therefore a major
reason for justifying measures to maintain truth in advertising, but there is also a pub-
lic concern for market efficiency. Where advertising is not truthful, consumers waste
time pursuing and purchasing goods that in the end turn out not to be what they
want, all because the goods were misrepresented. A third and compelling reason for
insisting on truth in advertising and proper labelling of goods is that the health and
safety of the public can be at risk if contents of drugs or foods are not properly iden-
tified or if false claims for strength, performance, and durability are made for such
things as tools or machinery.
In Canada, misleading advertising is prohibited under the Competition Act,
which has established a Competition Bureau that deals with misleading advertising
along with fair trading generally, including price-fixing, bid-rigging, phony “sales,”
“Made in Canada” claims, and much else. The same bureau enforces the administra-
tion of the Consumer Packaging and Labelling Act, the Textile Labelling Act, and the
Precious Metals Marking Act. When it issued enforcement guidelines for “Product
of Canada” and “Made in Canada” claims, it covered representations relating to all
three acts.22
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Penalties for misrepresentation of goods or services can be quite severe, and the situation in modern commerce has long gone beyond the rule of caveat emptor (let the buyer beware). In today’s world, the seller must be wary of making performance or other claims
for his or her goods without having adequate evidence to support these claims. The line
between so-called “puffery,” where advertisements make superlative claims for goods or
services in non-specific ways (“enjoy the best eating at Joe’s”), and cases of specific mis-
representation (“our additive will cut your fuel consumption by 10 per cent”) may not
always be easy to draw. That is one reason why administrative bodies with prosecutorial
powers have been set up to regulate misleading advertising. The criminal law may be
suitable for cases of outright fraud, as in the case of advertising and collecting payment
for goods or services one has no intention of delivering. But misleadingly worded sugges-
tions that a potential customer has already won a prize, to be awarded under a condition
of making a purchase, may need to be dealt with by less drastic measures, for example, by
some regulatory fine or forced discontinuance of the deception.
The criminal law has rightly been described as a rough engine, not suitable for the
fine-grained judgments that often have to be made in determining the degree either
to which a given advertisement is misleading or of the harm that is likely to result. As
a practical matter, the requirement of mens rea (a guilty state of mind in commission of an offence) may make successful prosecution unlikely because of the difficulty of
proving intention. By contrast, regulatory offences not involving criminal law can be
dispatched, and appropriate fines or other penalties applied, without having to prove
the existence of criminal intention or recklessness. This does not mean that violations
of the law, as interpreted by some administrative officials or tribunal, will automati-
cally be successfully prosecuted. Usually there is a provision for a defence of “due dili-
gence,” meaning that the person accused of misleading advertising may be acquitted if
he or she made appropriate efforts to verify the truth of the claims.
For reasons partly in line with those already mentioned, the acts enforced by the
Competition Bureau go beyond requiring non-deceptive information in that they make
it mandatory in certain cases to disclose aspects of the nature and contents of the goods
offered for sale. It may not be obvious to a buyer whether, say, a sweater is acrylic or made of wool. Forcing disclosure of the content assists the potential buyer in making a choice.
The main rationale here would seem to be market efficiency, but there is also a semblance
of fraud when inferior materials are used in products made to look like more expensive
versions, though no specific claims are made to that effect. Requiring proper labelling
reduces the likelihood of such deception.
All of these legal initiatives have a positive side, but there are also costs. There is
the cost of the bureaucracy needed to administer the program, and there are other
costs including that of penalties to those who run afoul of the regulations. Rather
than just sit and wait to prosecute violations, the Competition Bureau tries to inform
potential violators about the risks they run if they do not learn about and conform
to the regulations. It will review proposed market strategies to resolve issues where
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doubts as to legality might arise. In recent years, it has issued pamphlets, guidelines, and other information bulletins to advise how it is likely to interpret and act on provisions of the Competition Act. The guidelines cover such things as deception about
winning a prize, telemarketing, representations made over the Internet, price claims,
promotional contests, etc.23
The FTC has carried out investigative work in the United States beginning in
1928 when private utility officials described under oath their methods for influenc-
ing newspaper editors and publishers, schools, and universities.24 These propaganda
activities, so described by Jack Levin, were well-documented, but the growth of the
PR industry along with so many paid lobbyists suggests that government initiatives
supporting a fair and free flow of information to the people and specifically to the
US Congress on matters affecting corporate and public interests may need to be
supplemented.
Legal controls over advertising are not solely the prerogative of the FTC or, in
Canada, the Competition Bureau. Many US states have their own statutes. For example,
the California Department of Consumer Affairs lists 18 different categories of law-
governed activities under “Advertising,” starting with “Bait and Switch,” and 14 under
“Misrepresentation,” starting with “Affiliation or Association.” In Canada, there are stat-
utes such as the Food and Drug Act and the Tobacco Act that also place restrictions on
advertising. And provinces have also enacted consumer protection laws. On both sides
of the border, a body set up to regulate broadcasting also plays a role. This is the Federal
Communications Commission (FCC) in the United States and the Canadian Radio
Television and Telecommunications Commission (CRTC) in Ca
nada. These bodies are
tasked among other things with the job of ensuring diversity in news and entertainment
available to the public through broadcasting satellite and cable.
Specific kinds of prohibited marketing deceptions are spelled out in the Canadian
Competition Act, recently amended in 2009. There are also general provisions. A
recent example shows that penalties can be quite steep. The Competition Bureau
announced on June 28, 2011 that Bell Canada had agreed to pay a penalty of $10 mil-
lion for making misleading advertising claims.25
The following are excerpts and paraphrases from some of the updated provisions
of the Competition Act26 and are not meant to be a complete exposition of the law.
s.52(1) No person shal , for the purpose of promoting, directly or indirectly, the supply or use of a product or for the purpose of promoting, directly or indirectly, any
business interest, by any means whatever, knowingly or recklessly make a representa-
tion to the public that is false or misleading in a material respect.
The general language of “any business interest” allows for prosecution of misrepresen-
tations concerning services or other benefits.
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s.52(1.1): For greater certainty, in establishing that subsection (1) was contravened, it is not necessary to prove that
(a) any person was deceived or misled;
(b) any member of the public to whom the representation was made was within
Canada; or
(c) the representation was made in a place to which the public had access.
This provision allows for prosecution of misleading advertising without waiting for
someone to be victimized. The last clause indicates that such things as misleading tele-
phone or e-mail solicitations may be included among the prohibitions. Another subsec-
tion declares that the law applies not only to those who make representations but also to
those who permit representations to be made.
The act appears to take into account the possibility of misleading people by imag-
ery or suggestion rather than by literal statement in the following provision:
s.52(4) In a prosecution for a contravention of this section, the general impression conveyed by a representation as well as its literal meaning shall be taken into account