The Federal Trade Commission, launched in March 1915, was created in response to a groundswell of public concern that followed separate U.S. Supreme Court antitrust rulings against Standard Oil and American Tobacco in 1911.
The years straddling the turn of the 20th century were boom times for American big business. Money gushed, monopolistic companies grew huge and the rich prospered as never before. But there were also many losers — workers who couldn’t get ahead and small businesses unable to compete against the giants. Confronted with growing sense that capitalism was rigged, Congress passed laws to bridle the monopolies and thwart anti-competitive practices.
Two laws, the Sherman Antitrust and the Clayton Antitrust Acts, of 1890 and 1914 respectively, aimed directly at the problem, imposing restrictions on cartels and monopolies and regulating anti-competitive business practices. But Congress didn’t stop there.
Trust-busting was a major theme of the 1912 presidential election, and most political platforms that year favored the establishment of a trade commission. In 1914, Congress passed the Federal Trade Commission Act, creating an agency to enforce the new statutes and protect consumers from unfair business practices.
The FTC assumed the duties of its less powerful predecessor, the federal Bureau of Corporations. The act expanded the bureau’s authority to investigate and publish reports, giving the agency the power to bring administrative cases that challenged unfair competitive practices. In addition to enforcing antitrust provisions of the Sherman Act, the FTC uses Clayton Act powers to prohibit certain price discriminations, vertical business arrangements, interlocking directorships and stock acquisitions.
Over the decades, court decisions further defined the FTC’s legal authority, and Congress responded with legislation. While many issues centered on corporation competition and deceptive trade practices, other duties were added to the FTC roster. Changes including the Celler-Kefauver Act in the 1950s gave the FTC a role in approving corporate mergers. It also issued a rule on requiring health warnings on cigarette packaging in the early 1970s.
More recently, the FTC has taken on other duties, including enforcement of credit laws, including the Fair Credit Reporting Act and the Fair Debt Collection Practices Act. It also operates to prevent consumer fraud. The 1994 Telemarketing and Consumer Fraud Prevention Act, for instance, gave it the authority to create the National Do Not Call Registry — a step to control uninvited and fraudulent telemarketing.
The FTC is headed by five commissioners and split up into offices including the Bureau of Consumer Protection and the Bureau of Competition. Its 13 offices, which cover everything from policy planning to international affairs, act in concert with one another.
The FTC aims to:
- Protect Consumers – Prevent unfair and deceptive business practices, and ensure adequate consumer privacy.
- Maintain Competition – Prevent monopolizing actions that would reduce competition in the marketplace.
- Advance Performance – Consistently improve internally to make the FTC more efficient and effective.
Part of the FTC Act bans unfair business practices, those that cause substantial and unavoidable injury to the consumer.
In determining whether a practice is unfair, the FTC considers a set of criteria established in the Supreme Court’s 1972 Sperry and Hutchinson ruling. Although these criteria help the FTC make decisions, they allow discretion in enforcement.
The Sperry and Hutchison criteria are threefold:
- Unjustified Consumer Injury – The FTC considers unjustified consumer injury to be the most important criterion in determining the fairness of a practice. An unjustified consumer injury is one that meets these three points: the injury is substantial, it outweighs any benefits to the consumer, and it was reasonably unavoidable by the consumer.
- Violation of Public Policy – The FTC then considers current public policies, which can be laws or common laws. It considers whether the injury occurred as a result of a breach in public policy.
- Unethical Conduct – Finally, the FTC considers whether the practice or action was unethical — arguably the most open-ended criterion. Conduct is generally considered unethical if it is immoral, oppressive or unscrupulous, or if it violates general standards of business ethics.
The FTC can prevent a company from acting deceptively, which is another “no-no” under the FTC Act. These criteria are slightly more rigid. Although the criteria still leave room for interpretation, deceptive practices must fit all three benchmarks.
To determine whether an action or practice is deceptive, the FTC considers these three criteria:
- Misleading – A practice or representation on the part of the company must be likely to mislead a consumer.
- Consumer’s Perspective – The FTC considers how a typical and reasonable consumer would view a company’s actions or statements. The practice must be misleading to the average consumer rather than to a select few.
- Materiality – The deception must be one that is likely to influence a consumer’s choice. The deception must occur with regard to information that the consumer values and that is likely to affect consumption choices.
The most common deceptive actions under the FTC Act include:
- False representations
- Misleading price claims
- Sales without adequate disclosure
- Bait-and-switch techniques
- Failure to honor warranties
Protecting Consumers: Additional Laws
The FTC Act works in conjunction with numerous laws related to consumer financial protection. Because of the act’s close connections with other laws, the FTC oversees and helps enforce laws related to the FTC Act.
Most notably, the FTC is responsible for enforcing the privacy provisions of these laws:
- The Fair Credit Reporting Act, part of the Consumer Credit Protection Act, regulates credit reports to ensure their fairness and accuracy.
- The Telemarketing and Consumer Fraud and Abuse Prevention Act prevents telemarketers from using fraudulent and invasive techniques.
- The Children’s Online Privacy Protection Act restricts the collection of personal information from young children.
- The Gramm-Leach-Bliley Act protects consumers’ rights to information about their financial accounts and records.
- The Identity Theft Assumption and Deterrence Act strengthens the FTC’s ability to prevent and react to identity theft.
The Federal Trade Commission has several bureaus underneath it that help maintain these laws.
Bureau of Consumer Protection
This bureau protects the consumers from unfair, deceptive or fraudulent trade practices. Attorneys enforce federal laws and FTC rules. The bureau also conducts investigations related to advertising and marketing, financial products, telemarketing, privacy and identity protection and other consumer issues. It also engages in rulemaking and consumer and business education.
Bureau of Competition
This bureau attempts to prevent anti-competitive mergers and business practices.
Bureau of Economics
This bureau helps the FTC evaluate the economic impact of its actions. Provides economic analysis of government regulation on competition and consumers, and critiques antitrust, consumer protection and regulatory plans.
The FTC investigates issues reported by individuals and businesses, reviews business pre-merger notification filings, and studies results from Congressional inquiries and media reports. It might look for false advertising claims or instances of fraud that involve a single business or entire industry. If the investigation uncovers unlawful conduct, the FTC can seek compliance through a consent order, or file an administrative complaint. Litigation is also possible.
Administrative complaints are heard in front of an independent administrative law judge, with the FTC serving as prosecutor. The FTC can also bring cases to the federal courts, which can impose fines, appoint receivers and monitors, and freeze business assets when deemed necessary. The FTC also promulgates and enforces trade rules, which regulate business practices.
Maintaining Competition: The Antitrust Law Triad
In addition to other duties, the FTC enforces the Sherman Antitrust and Clayton Acts. Each law addresses commercial excesses that were common early in the 20th Century and are recurrent trouble spots.
- The Sherman Antitrust Act – This outlaws agreements between competitors to fix prices. It also outlaws the monopolization of any portion of the market and the suppression of competitor goods. The act prohibits business arrangements that restrain interstate or international trade.
- The Clayton Act – This forbids business mergers that significantly restrict competition. Throughout the last century, the FTC has used the act to block mergers and breakup industry-dominating giants that pose threats to competition. In the Aluminum Co. of America (1945) case, the Supreme Court ruled the size and structure of a corporation alone were sufficient reasons for the FTC to take antitrust action.
In another famous case, the FTC prevailed in an antitrust suit against the phone-company giant AT&T in 1984. The Supreme Court ordered that the company be broken into seven regional operating units — known as Baby Bells — and restricted AT&T to selling long-distance service. Since then, some of the Baby Bells have merged again — moves allowed as technology (e.g. the invention of the Internet and cell phones) altered the telecommunication industry’s dynamics.
In 1999, the FTC took on Microsoft Corp., the world’s largest software manufacturer, asserting that the company’s attempt to include a Web browser in the computer operating system Windows would give it a monopoly in the personal computing arena. A federal court agreed with the FTC, ordering a breakup, but an appellate court overturned the ruling in 2001.
The FTC relies on Sherman Antitrust and Clayton Acts and a series of subsequent antitrust laws to protect society from businesses that abuse their standing. Among its missions is prevention of fraud and anti-competitive actions.
If a company violates either the Sherman Antitrust Act or the Clayton Act, it can be held liable under the more expansive Federal Trade Commission Act.
All the minor and specific stipulations of the Federal Trade Commission Act complement each other for the sake of the consumer. Together, they represent cohesive legislation aimed at keeping prices fair, protecting consumer privacy and prohibiting unfair business practices.