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Business Ethics

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Business Ethics ­MGT610
VU
LESSON 39
The Federal Trade Commission (FTC) is the primary regulator of deceptive advertising in the
U.S. It was created by the FTC Act in 1914.
Section 5 of the Act gave the Commission the authority to regulate "unfair methods of
competition." The Act was later changed, by the Wheeler-Lea Amendment, to give the FTC
authority over both "unfair methods of competition" and "unfair or deceptive acts or practices."
It is through this latter power that the FTC regulates deceptive advertising.
Commissioners of the FTC act like judges, hearing cases when marketers are charged with
violating the FTC Act. The Commission also publishes advertising guidelines for marketers,
which are not law but merely advisory, and adopts trade regulation rules, which are law.
Basic Principles
According to its 1993 Policy Statement on Deception, the FTC considers a marketing effort to
be deceptive if: (1) there is a representation, omission, act or practice, that (2) is likely to
mislead consumers acting reasonably under the circumstances, and (3) that representation,
omission, or practice is "material." The term "material" refers to the fact that some deceptive
claims are trivial, and that the FTC will only regulate deceptions that are important to
consumers, i.e., those that affect consumers' "choice of, or conduct regarding, a product."
Evidence
To prove that an ad claim is, in fact, deceptive, the FTC is not generally concerned with what
the claim says, but what it conveys to consumers. If that conveyed message differs from the
reality of the product attribute being advertised, the claim is considered deceptive. This requires
the Commission to look at two types of evidence: (1) evidence concerning what message is
conveyed to consumers, and (2) evidence concerning the product attribute's true qualities.
The former requires looking into the heads of consumers. The FTC considers surveys the best
form of evidence to discover what message is conveyed by an ad, though sometimes the
Commission relies on other evidence. The question of how best to unearth the inner thoughts of
consumers has been an issue of significant research efforts and theoretical discussion. The
second form of evidence can require a variety of different methods of assessing a product's
attributes. If, for example, the claim refers to the fuel mileage of an automobile, laboratory
testing of the vehicle's fuel efficiency would normally be required. However, the FTC requires
that advertisers conduct such testing prior to making the ad claim. If a claim is made without
evidence in hand that the product will perform as advertised, the claim will be considered
deceptive. This is known as "substantiation," and the Commission's requirements are detailed in
the 1984 FTC Substantiation Policy..
Remedies
Most cases started by the FTC never require the Commission to make a final decision about the
deceptiveness of an advertiser's claim. Those cases end, instead, in a "consent order," whereby
the advertiser simply agrees to do what the FTC staff asks. No hearing is required.
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Business Ethics ­MGT610
VU
In those cases that do end in a final FTC decision, if the claim is found deceptive, the advertiser
will face one of three possible remedies: (1) a Cease and Desist Order, which requires the
advertiser to stop making the claim, (2) an Affirmative Disclosure Order, which forces the
advertiser to provide consumers with more information, or (3) Corrective Advertising, which is
a form of affirmative disclosure that is intended to correct lingering deception that results from
a long history of deceiving the consumer.
Puffery
Historically, claims that were "mere exaggerations" or "hyperbole" were considered to be
puffery, and therefore not deceptive. Terms like "the best" or "the greatest" were sales talk, and
the FTC would not regulate them. After all, everyone knows that "Wonder Bread" is not really
a wonder, and "The Greatest Show on Earth" is not what everyone considers the greatest.
Puffery, therefore, was a form of opinion statement, and considered un-regulable.
Some observers have expressed concern that the "puffery defense" was a loophole through
which many deceptive claims fell. The Commission has been criticized for allowing deceptive
claims to slip through under the guise of puffery.
On the other hand, the FTC has defined puffery as claims that (1) reasonable people do not
believe to be true product qualities, and (2) are incapable of being proved either true or false.
Consequently, if deception is the creation of a "false belief" about the product in the mind of a
consumer, claims that fall into the FTC definition of puffery cannot be deceptive. By definition,
such claims can be neither false nor can they create belief. This means that if deceptive claims
have slipped through regulation as puffs, it is because the FTC has failed to follow its own
definition. See our bibliography on puffery and puffery quotes.
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Table of Contents:
  1. INTRODUCTION:Business Issues
  2. INTRODUCTION (CONTD.)
  3. THEORY OF ETHICAL RELATIVISM
  4. MORAL DEVELOPMENTS AND MORAL REASONING
  5. MORAL REASONING:Arguments For and Against Business Ethics
  6. MORAL RESPONSIBILITY AND BLAME
  7. UTILITARIANISM:Utilitarianism: Weighing Social Costs and Benefits
  8. UTILITARIANISM (CONTD.):rule utilitarianism, Rights and Duties
  9. UNIVERSALIZABILITY & REVERSIBILITY:Justice and Fairness
  10. EGALITARIANS’ VIEW
  11. JOHN RAWLS' THEORY OF JUSTICE:The Ethics of Care
  12. THE ETHICS OF CARE:Integrating Utility, Rights, Justice, and Caring
  13. THE ETHICS OF CARE (CONTD.):Morality in International Contexts
  14. MORALITY IN INTERNATIONAL CONTEXTS:Free Markets and Rights: John Locke
  15. FREE MARKET & PLANNED ECONOMY:FREE TRADE THEORIES
  16. LAW OF NATURE:Theory of Absolute Advantage, Comparative Advantage
  17. FREE MARKETS AND UTILITY: ADAM SMITH:Free Trade and Utility: David Ricardo
  18. RICARDO & GLOBALIZATION:Ricardo’s Assumptions, Conclusion
  19. FREE MARKET ECONOMY:Mixed Economy, Bottom Line for Business
  20. COMPETITION AND THE MARKET:Perfect Competition
  21. PERFECT COMPETITION
  22. MONOPOLY COMPETITION:Oligopolistic Competition
  23. OLIGOPOLISTIC COMPETITION:Crowded and Mature Market
  24. OLIGOPOLIES AND PUBLIC POLICY:Ethic & Environment, Ozone depletion
  25. WORLDWATCH FIGURES:Population Year, Agriculture, Food and Land Use
  26. FORESTS AND BIODIVERSITY:The Ethics of Pollution Control
  27. THE ETHICS OF POLLUTION CONTROL:Toxic Chemicals in Teflon
  28. THE ETHICS OF POLLUTION CONTROL
  29. THE ETHICS OF POLLUTION CONTROL:Recommendations to Managers
  30. COST AND BENEFITS:Basis of social audit, Objectives of social audit
  31. COST AND BENEFITS:The Ethics of Conserving Depletable Resources
  32. COST AND BENEFITS:The Club of Rome
  33. THE ETHICS OF CONSUMER PRODUCTION AND MARKETING:DSA Comments
  34. THE ETHICS OF CONSUMER PRODUCTION AND MARKETING:Should Consumers Bear More Responsibility?
  35. THE CONTRACT VIEW OF BUSINESS' DUTIES TO CONSUMERS
  36. THE CONTRACT VIEW OF BUSINESS' DUTIES TO CONSUMERS:The Due Care Theory
  37. THE SOCIAL COSTS VIEW OF THE MANUFACTURER’S DUTIES
  38. ADVERTISING ETHICS:The Benefits of Advertising, The harm done by advertising
  39. ADVERTISING ETHICS:Basic Principles, Evidence, Remedies, Puffery
  40. ADVERTISING IN TODAY’S SOCIETY:Psychological tricks
  41. ADVERTISING IN TODAY’S SOCIETY:Criticism of Galbraith's Work
  42. ADVERTISING IN TODAY’S SOCIETY:Medal of Freedom
  43. ADVERTISING IN TODAY’S SOCIETY:GENERAL RULES, Substantiation
  44. ADVERTISING IN TODAY’S SOCIETY:Consumer Privacy, Accuracy
  45. THE ETHICS OF JOB DISCRIMINATION:Job Discrimination: Its Nature