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Legal Review: FTC Act's Section 5 Apparently Applies Across the Board

1 May, 2008 By: Jeffrey D. Knowles, Venable LLP’s Advertising, Response Contributor Response

When you go to law school, the most important thing you have to learn is how to think like a lawyer.

Let's say a law clearly prohibits "A" and just as clearly doesn't prohibit "B." That means it's legal to do "B" — right?

Guess again. If you had mastered the art of thinking like a lawyer, you'd know the correct answer could be a resounding "No!"

Here's an example. Many years ago, the Federal Trade Commission (FTC) issued its "Mail Order Rule," which essentially provided that mail-order merchandise had to be shipped within 30 days (unless a specific delivery-time promise was made). If a product was out of stock and couldn't be delivered on time, the seller had to offer to refund the customer's money.

Gary D. Hailey
Gary D. Hailey

Some time after the rule was originally issued, toll-free telephone numbers were invented. But the FTC rule covered only merchandise ordered through the mail — it didn't say anything about merchandise ordered over the telephone.

Eventually, the FTC proposed an amendment to the rule that would cover telephone orders and close the apparent loophole. But the mills of bureaucracy grind exceedingly slow — and the FTC didn't want to wait until the rule was officially amended to take action against slow-to-deliver marketers who used toll-free numbers to take orders. But what else could they do? The rule clearly applied only to mail orders — didn't it?

The FTC enforces a number of specific regulations, such as the mail order rule, but brings most of its enforcement cases under Section 5 of the FTC Act, which prohibits "unfair or deceptive acts or practices." Talk about broad — Section 5 is about as broad a statute as any prosecutor could hope for.

The FTC took the position that while the delayed shipment of orders taken over the telephone didn't violate the mail order rule, it did violate Section 5 because it was "unfair" to consumers. That's a little like Congress passing a law saying that certain expenses are tax-deductible, and the IRS going after high-income individuals with a lot of legitimate deductions because they end up paying very little in taxes — and that's unfair. (Actually, that's exactly how the alternative minimum tax works, isn't it?)

Jeffrey D. Knowles
Jeffrey D. Knowles

Here's another example. Several years ago, Congress passed the Gramm-Leach-Bliley Act, which required financial institutions to ensure the safety and confidentiality of customers' financial information, including credit card account numbers. Federal agencies — including the FTC — were directed to issue specific rules implementing those requirements.

A number of the readers of this magazine work for companies that would be considered "financial institutions" under this law — that term includes banks, savings-and-loans, mortgage brokers and the like. But that doesn't mean that non-financial institutions are home free when it comes to complying with these standards.

Recently, the FTC issued an order against a student lender prohibiting future violations of the Gramm-Leach-Bliley rules. But only a few weeks before that, it issued essentially the same order against an online retailer that allegedly failed to take reasonable steps to protect credit card information stored on its computers. Of course, that order was based on alleged violations of Section 5 of the FTC Act.

In fact, there is only one significant difference between the two orders. The order against the financial institution requires a security audit by an independent expert every other year for the next 10 years. But the order against the online retailer requires those audits every other year for 20 years. That's right, the non-financial institution — which is not subject to the Gramm-Leach-Bliley statute and the specific rules issued pursuant to the statute — was held to a tougher standard.

Let's summarize today's lesson. If a new consumer-protection law clearly doesn't cover your business or your practices, you may still need to obey that law to avoid a challenge based on Section 5 of the FTC Act. If that result doesn't seem a little strange to you, congratulations — you're learning to think like a lawyer!

Gary D. Hailey and Jeffrey D. Knowles are partners at Washington, D.C.-based Venable. They specialize in advertising and marketing law and can be reached at (202) 344-4000.

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