Section 5 of the FTC Act

Citation

Section 5 of the Federal Trade Commission Act (FTC Act), Ch. 311, §5, 38 Stat. 719, codified at 15 U.S.C. §45(a).

Overview

Section 5 prohibits entities from engaging in unfair or deceptive acts or practices in interstate commerce. It states, in pertinent part:

“

(1) Unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce, are hereby declared unlawful. (2) The Commission is hereby empowered and directed to prevent persons, partnerships, or corporations, [except certain specified financial and industrial sectors] from using unfair methods of competition in or affecting commerce and unfair or deceptive acts or practices in or affecting commerce.

”

Deceptive acts or practices

An act or practice is deceptive if it involves a representation, omission, or practice that is likely to mislead consumers acting reasonably under the circumstances, and the representation, omission, or practice is material.

The FTC Policy Statement on Deception states that the Commission analyzes deceptive business practices under the following rubric:

1. There must be a representation, omission or practice that is likely to mislead the consumer. This includes the "use of bait and switch techniques."
2. The practice is examined from the perspective of a reasonable person in the circumstances. If the practice "is directed primarily to a particular group," such as Internet users, "the Commission examines reasonableness from the perspective of that group."
3. The representation, omission or practice must be a material one, i.e., it is likely to affect the consumer's conduct or decision regarding the produce or service.

Thus, an advertisement is deceptive if it includes material information that is false or that is likely to mislead a consumer acting reasonably under the circumstances. Likewise, an advertisement is deceptive if it omits material information, and that omission is likely to mislead a consumer acting reasonably under the circumstances. Requiring accurate disclosure of material terms allows consumers to compare similar services offered by one or multiple providers and weigh the different terms being offered in making decisions about what services to purchase.

The FTC has taken action against websites for violating their own privacy policies as a deceptive trade practice.

The Commission has used its Section 5 powers to pursue deception claims against online companies for a variety of Internet-related claims unrelated to a violation of published privacy policies. These include claims against:

1. spyware and adware distributors that surreptitiously downloaded software onto unsuspecting users’ computers,
2. those who made materially deceptive representations in marketing a spyware removal product,
3. those who made fraudulent claims in selling prescription drugs online,
4. a credit reporting company that failed to verify the identity of persons to whom it was disclosing confidential consumer information and failed to monitor unauthorized activities,
5. a reverse auction site that used improper promotional activities to solicit users of a competitive auction site, and
6. unauthorized charges in connection with “phishing.”

Unfair acts or practices

An act or practice is unfair, also in violation of the FTC Act, if it causes injury to consumers that: (1) is substantial; (2) is not outweighed by countervailing benefits to consumers and competition; and (3) consumers themselves could not reasonably have avoided.

The Act authorizes the Commission to seek injunctive and other equitable relief, including redress, for violations of the Act, and provides a basis for government enforcement of certain fair information practices (e.g., failure to comply with stated information practices may constitute a deceptive practice or information practices may be inherently deceptive or unfair). However, the Commission has noted that, as a general matter, it lacks authority to require firms to adopt information practice policies.

The Commission has used its unfairness jurisdiction in a broad array of cases. For example, the Commission has taken the position that cramming unauthorized charges for information services onto consumers’ telephone bills is an unfair practice. In the data security context, the Commission has challenged the failure to implement reasonable safeguards to protect the privacy of consumer information, where the failure causes substantial injury without offsetting benefits, as an unfair practice.

The Commission also has taken the position that a unilateral change of contract may be an unfair practice.

Rules and guides

The FTC issues rules pursuant to Section 5 of the FTC Act when it has reason to believe that certain unfair or deceptive acts or practices are prevalent in an industry. The Commission may seek civil penalties from any person or company that violates a rule "with actual knowledge or knowledge fairly implied on the basis of objective circumstances that such act is unfair or deceptive and is prohibited by such rule." The Commission also may seek redress for consumers. In addition, the Commission promulgates rules pursuant to specific statutes, which are designed to further particular policy goals. The remedies available to enforce these rules vary.

Guides are "administrative interpretations of the laws administered by the Commission." Although the guides do not have the force and effect of law, the Commission may bring an enforcement action if a person or company fails to comply with a guide and engages in an unfair or deceptive practice in violation of the FTC Act.