Slater, B. James, Jr.

English

Loyola University Chicago, School of Law: LAW eCommons

Loyola Consumer Law Review
Volume 5 | Issue 1 Article 7
1992
FTC Not Required to Rely on Extrinsic Evidence
to Determine Fraudulent Implied Claims in
Advertising
B. James Slater Jr.
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Recommended Citation
B. J. Slater Jr. FTC Not Required to Rely on Extrinsic Evidence to Determine Fraudulent Implied Claims in Advertising, 5 Loy. Consumer L.
Rev. 24 (1992).
Available at: http://lawecommons.luc.edu/lclr/vol5/iss1/7
test. The Court criticized the Third
Circuit for adopting a standard that
amounted to a mere potential for super-
vision rather than a stricter standard of
active supervision. The Court held that
a state must play a substantial role in
determining the specifics of the state
policy and not merely rubber stamp an
agreement among the private parties.
Moreover, because a negative option
regulatory program setting the prices
and the rates the private companies
proposed became effective unless ex-
pressly vetoed by the state, the Court
placed the burden of proof on the
companies to show that the states ad-
equately supervised the rate-setting pro-
cess.
In light of this strict standard, the
Court examined the programs estab-
lished in the two states that lacked
adequate supervision. Based on the
factual findings of the ALJ, the Court
noted that in both states, the rate-set-
ting programs lacked any supervision
whatsoever. Thus, the Court found
that the level of supervision for these
two states could not support a grant of
immunity.
Additionally, the Supreme Court
offered grounds to distinguish this rul-
ing in future applications. First, the
Court noted that the gravity of the
offense here was extreme: horizontal
price fixing is the most "pernicious"
antitrust offense. Second, the Court
pointed to the dominating role of the
private companies in the rate setting
process. Third, the Court cited the
clear lack of state supervision, not
merely a temporary lapse.
Dissent Fears Increased Litigation
The three dissenting justices noted
that the controversy concerning the
application of the state-action immu-
nity doctrine is far from finished. They
regarded the strict standard adopted by
the majority as ambiguous, untenable,
and as litigation-breeding. Also, the
dissenters stated that previous applica-
tions of the Midcal test examined
whether a state had the power to reject
or control the proposed uniform rates.
The dissent also stated that the strict
active supervision standard adopted by
the Court required close scrutiny into
whether the states played a substantial
role in the rate setting process. How-
ever, since the Court neither defined
this standard nor established any bench-
marks, the dissent reasoned that its
application would be arbitrary at best.
Furthermore, the dissent reasoned
that companies would now be less likely
to participate in negative option regu-
latory programs because the burden is
on them, under penalty of antitrust
treble damages, to prove that the states
substantially performed their duties. o:o
- Marc V. Richards
FTC Not Required to Rely
on Extrinsic Evidence to
Determine Fraudulent
Implied Claims in
Advertising
InKraft, Inc. v. Federal Trade Com-
mission, 970 F.2d 311 (7th Cir. 1992),
the Seventh Circuit Court of Appeals
held that a manufacturer violated the
Federal Trade Commission Act when it
misrepresented the content of its cheese
slices. Furthermore, the court stated
that its own reasoned analysis, rather
than extrinsic evidence, may be used in
determining the implied claims con-
tamined in the challenged advertisements.
Kraft Singles Advertisements
Fraudulent
In the early 1980's, Kraft, Inc.
("Kraft") began losing market share in
the sliced cheese market. The loss of
market share resulted from the intro-
duction of imitation cheese slices, which
were advertised as less expensive but
equally nutritious as Kraft's Singles, a
processed cheese slice. Kraftresponded
with an advertising campaign to in-
form consumers that Singles cost more
because they are made from five ounces
of milk rather than cheaper ingredi-
ents. The advertisements also focused
on the calcium content of Singles.
Although Kraft used five ounces of
milk to make each Single, roughly 30
percent of the calcium was lost in
processing. Additionally, the vast
majority of imitation slices sold in the
United States contained about 15 per-
cent of the U.S. daily recommended
allowance of calcium per ounce, approxi-
mately the same amount as in Singles.
The Federal Trade Commission
("FTC") complaint alleged that Kraft's
advertisements made two implied claims
that violated the Federal Trade Com-
mission Act ("the ACt"), which makes
it unlawful "to engage in unfair or
deceptive commercial practices or to
induce consumers to purchase certain
products through advertising that is
misleading in a material respect." The
FTC complaint charged that Kraft's
advertising campaign violated the Act
by materially misrepresenting the cal-
cium content and relative calcium ben-
efit of Singles by implying that a Single
contains the same amount of calcium as
five ounces of milk ("Milk Equiva-
lency Claim") and that Singles contain
more calcium than imitation slices
("Imitation Superiority Claim").
One of the two advertisements at
issue in this case featured a young girl
eating a Single as a narrator said
"... Imitation slices use hardly any
milk. But Kraft has five ounces per
slice. Five ounces. So her little bones
get calcium they need to grow..."
Later, in the same ad, milk was poured
into a glass until it reached a mark
denoted five ounces. In January 1986,
Kraft revised the script of the adver-
tisements from "Kraft has five ounces
per slice" to "Kraft is made from five
ounces per slice." In March 1987,
Kraft added the disclosure "one 3/4
ounce slice has 70 percent of the cal-
cium of five ounces of milk" as a
subscript on the television ad and as a
footnote in the print ad.
The second ad in controversy, em-
24 Loyola Consumer Law Reporter
Recent Cases I
phasized the milk and calcium content
of Singles. However, this ad did not
make an express comparison to imita-
tion slices as the previous ad had. Both
ads had a similar disclosures.
Trial Court and FTC Differ on
Implied Conveyance
The Administrative Law Judge
("ALJ") held that both advertisements
made the Milk Equivalency Claim.
The ALJ found the advertisements'
juxtaposition of references to milk and
calcium, as well as their failure to
mention the loss of calcium in process-
ing, implied that Singles contain the
same amount of calcium as five ounces
of milk. Furthermore, the court ruled
that the altered audio copy and disclo-
sure were confusing and inconspicuous
and therefore insufficient to dispel the
impression that Singles actually in-
clude five ounces of milk.
Additionally, the ALJ held that both
advertisements made a Superiority
Claim, leading reasonable consumers
to believe Singles contained more cal-
cium. Therefore, the court ordered
Kraft to cease and desist making from
these claims.
The FTC affirmed the ALJ holding
with some modifications. The FTC
found elements of both the Milk
Equivalency and Imitation Superiority
of Singles claims in the first advertise-
ments. Like the ALJ, the FTC based its
findings on its subjective impression of
the ad, but noted that extrinsic evidence
was consistent with its determination.
The FTC supported the finding of the
ALJ on the Milk Equivalency Claim in
the second ad. However, again without
relying on extrinsic evidence, the FTC
rejected the finding that a Superiority
Claim was made because the ad made
no express comparison to imitation
slices and had no visual images to
prompt a comparison.
Seventh Circuit Uses Substantial
Evidence Standard
The Seventh Circuit adopted the
traditional substantial evidence test as
the standard of review. Kraft argued
that the court should have applied a de
novo test because Kraft's first amend-
ment rights were implicated. How-
ever, the court rejected Kraft's appeal,
reasoning that FTC findings are well-
suited to a deferential review because
they may require resolution of exceed-
ingly complex and technical factual
issues.
Kraft's Arguments Rejected
Kraft based its appeal on four
grounds. In Kraft's first argument, it
contended that the FTC erred in not
requiring extrinsic evidence to deter-
mine what claims were conveyed by
the ad. Furthermore, Kraft asserted
that extrinsic evidence was required by
the Lanham Act to prove an implied
claim.
The court rejected Kraft's first ar-
gument because the United States Su-
preme Court and other appellate courts
have found that the FTC may rely on its
own impressions to determine what
claims, express or implied, are made
reasonably clear from the face of the
ad. The Seventh Circuit cited two
reasons for rejecting Kraft's argument.
First, Kraft relied on the faulty premise
that implied claims are inescapably
subjective and unpredictable. The court
ruled that implied claims can range
from obvious to barely discemable and
that common sense and administrative
experience were adequate tools for the
FTC to make its findings. Kraft's
Lanham Act argument failed because
not all courts using the provisions of
the Lanham Act rely on extrinsic evi-
dence; however, courts that rely on
extrinsic evidence do so because they
are ill-equipped to detect deceptive
advertising. In this case, the court
ruled that the FTC was sufficiently
equipped to detect deceptive advertis-
ing.
In its second argument, Kraft as-
serted that the FTC's approach of rely-
ing on subjective judgment to deter-
mine that an ad was misleading ham-
pered nonmisleading, constitutionally
protected speech because advertisers
could not determine whether the FTC
would find an ad misleading. The
Seventh Circuit Court relied on the
United States Supreme Court holding
in Zauderer v. Office of Disciplinary
Counsel of Supreme Court of Ohio, 471
U.S. 626, 645 (1985), to deny this
claim. InZauderer, the Supreme Court
ruled that "no first amendment con-
cerns are raised when facially apparent
implied claims are found without re-
sort to extrinsic evidence." Because the
Court held that the FTC did not need to
examine extrinsic evidence, it did not
review the extrinsic evidence offered
by Kraft.
Kraft's third contention was that the
evidence did not support the FTC's
finding of the Milk Equivalency Claim
in the second ad. Kraft maintained that
only one of the four elements of the
first ad was present in the second ad.
Kraft also asserted that the literal truth
of the advertisements makes a ruling
that they are deceptive illogical.
The court supported the FTC be-
cause it found that the ad visually and
verbally linked milk and a slice of
Singles. Also, the court stated that not
all four elements needed to be present
for an implied claim; the presence of
one was enough. The court ruled that
even literally true advertisements may
be misleading. The issue in this case
was not that an average consumer would
believe that a Single contains five
ounces of milk, but that it contains the
calcium in five ounces of milk.
Kraft's last argument was that, even
if the Milk Equivalency and Imitation
Superiority claims were made, they
were not material to an average con-
sumer. A claim is material if it "in-
volves information that is important to
consumers and, hence, likely to affect
their choice of, or conduct regarding a
product." The court stated, however,
that the FTC can apply, within reason,
a presumption of materiality with three
types of claims: express claims; im-
plied claims where there is evidence the
seller intended to make the claim; and
claims that significantly involve health,
safety, or other areas with which rea-
sonable consumers would be concerned.
Volume 5 Number 1/Fall 1992 25
I Recent Cases
The court found Kraft's claims ma-
terial because Kraft surveys found 71
percent of respondents rated calcium
content to be an extremely or very
important factor in their decisions to
buy Singles. Furthermore, evidence
existed that Kraft designed the adver-
tisements with the intent to capitalize
on consumer concerns about calcium
deficiency.
Kraft further claimed that the cease
and desist order issued by the FTC was
overly broad and should have been
modified or set aside because it banned
constitutionally protected commercial
speech and was not rationally related to
Kraft's violation of the act. Kraft
asserted that the advertisements were
potentially misleading and, therefore,
the FTC should have chosen a less
restrictive method to sanction Kraft.
The court held the advertisements to be
actually, not potentially, misleading
and that the order was sufficiently nar-
row by banning only the advertise-
ments as currently designed and re-
quiring that future nutrient claims be
based on reliable scientific evidence.
Kraft finally argued that the scope
of the order was not reasonably related
to Kraft's violation because it included
in products that were not part of the
challenged advertisements. The court,
however, supported the broad order
because of the size and duration of the
ad campaign and the ready transfer-
ability of the violation in question to
other Kraft cheese products. There-
fore, the court found the FTC's order
justified despite Kraft's clean record in
the past.
Concurrence Advocates Guidelines
forAdvertisers
The concuring judges, while agree-
ing with the opinion of the court, ex-
pressed concern that the FTC proce-
dure allowed it to avoid extrinsic evi-
dence merely by concluding that a
deceptive, implied claim was facially
apparent. Because consumers were the
ultimate beneficiaries of the FTC's
actions, the FTC should consider con-
sumer surveys to make objective deter-
minations about potential violations of
the FTC Act.
The concurrence also argued that
the current FTC procedure threatened
to chill nonmisleading, protected speech.
They stated that the flow of informa-
tion from producer to consumer was
jeopardized by allowing FTC commis-
sioners to make subjective interpreta-
tions of whether an ad, while literally
true, implied a false message. As a
result, not only would advertisers be
unable to predict whether the FTC will
find a particular ad misleading, surveys
taken to prove that ad is not misleading
might be disregarded by the FTC.
Instead, the concurrence suggested
that the FTC develop a consumer meth-
odology which advertisers may use to
determine whether their advertisements
contain implied, deceptive claims. .+
- B. James Slater, Jr.
Tampering with Satellite
TV Decoders to Steal
Scrambled Shows Violates
Federal Wiretap Law
In United States v. Lande, 968 F.2d
907 (9th Cir. 1992), the United States
Court of Appeals for the Ninth Circuit
held that modification of satellite
descrambler units to receive scrambled
subscription television programming
without payment of a subscription fee
violated the Electronic Communica-
tion Privacy Act of 1986 ("the Wiretap
Law"), 18 U.S.C. §§ 2510-2521.
All For One, One For All
Jack Lande ("Lande") modified com-
mercially available satellite descrambler
units to receive scrambled subscription
programming without paying a sub-
scription fee. Lande changed the
descramblers by placing a clone of a
paid subscriber's computer chip with a
new chip in the nonsubscribing
descrambler. This difference allowed
the people with Lande's units to re-
ceive all satellite stations, notjust those
of the cloned subscriber, for free. This
method of duplication is called the
"Three Musketeers" technique due to
its "all-for-one and one-for-all" nature
of modification.
Lande's modification practice was
discovered, and he was charged with
violating three separate provisions of
the Wiretap Law. Lande moved to
dismiss the charges, arguing that Con-
gress did not intend the Wiretap Law to
apply to satellite television piracy. The
district court of Montana, however,
denied the motion.
Lande then pleaded guilty to violat-
ing three sections of the Wiretap Law:
§ 2511(1)(a), which prohibits inten-
tional interception of "any wire, oral or
electronic communications;" § 2512
(1)(a), which covers commercial deal-
ings in devices whose design renders
them primarily useful for surreptitiously
intercepting such communications; and
§ 2512(1)(b), which prohibits the manu-
facture, assembly, possession, or sale
of such devices. Lande was sentenced
to thirty-five months in prison.
Lande's guilty pleas, however, gave
him the right to appeal the denial of his
motion to dismiss to the United States
Court of Appeals for the Ninth Circuit.
On appeal, Lande claimed that Con-
gress did not intend to apply the Wire-
tap Law to satellite television piracy;
and therefore, his motion to dismiss the
charges should be granted.
The Court of Appeals, however,
affirmed the denial of Lande's motion
to dismiss. It reasoned that the plain
language of the Wiretap Law applied to
the interception of satellite television
signals and that contrary legislative
intent was ambiguous at best.
What Did Congress Say?
The Court of Appeals for the Ninth
Circuit first considered the language of
the Wiretap Act to determine whether
Lande's acts were included within the
statute. The court of appeals found that
26 Loyola Consumer Law Reporter
I Recent Cases I


FTC Not Required to Rely on Extrinsic Evidence to Determine Fraudulent Implied Claims in Advertising

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FTC Not Required to Rely on Extrinsic Evidence to Determine Fraudulent Implied Claims in Advertising

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