Unfair Trade Practices under Section 5 of the Federal Trade Commission Act—A Statistical Evaluation

• Published date: 01 September 1977
• Date: 01 September 1977
• DOI: 10.1177/0003603X7702200307
• Author: W. Bruce Erickson
• Subject Matter: Article

UNFAIR

TRADE

PRACTICES

UNDER

SECTION

5 OF

THE

FEDERAL

TRADE

COMMISSION

ACT-

A

STA

nSTICAL

EVALUATION

by

W.

BRUCE

ERICKSON-

Section 5 of the Federal Trade Commission Act as

amended reads in

part:

"Unfair methods of competition in

commerce, and unfair or deceptive acts or practices in com-

merce,

are

hereby declared illegal." 1Section 5 as revised is

intended to protect businesses and consumers from unfair

trade praetiees.' Despite the prominence of Section 5, how-

ever, data-based literature on unfair

trade

practices is excep-

tionally scarce, perhaps because of the extraordinary

difficul-

ties involved in collecting accurate information on this sub-

ject.a

This paper empirically describes unfair trade practices as

defined under the Federal Trade Commission Act in terms

of their relationship

to:

(1) the competitive process; (2)

consumer welfare; (3) existing levels of concentration in the

industries where the trade practices

are

found; and (4) the

economic importance of the industries in which the practices

are

found.

Part

1 briefly examines the assumptions under-

lying the data and analyses to follow.

Part

2presents basic

empirical data on individual trade practices and statistical

analyses of the data presented.

Part

3 considers the public

policy implications of the information analyzed in

Part

2.

1.

FTC

ENFORCEMENT

ACTIVITIES,

1945-67

The Federal Trade Commission relies on three basic

enforcement proeedures-e-eease and desist orders, consent

orders, and stipulations.' The cease and desist order involves

- Professor, College of Business Administration, University of

Minnesota, Minneapolis, Minn.

643

644

THE

ANTITRUST

BULLETIN

issuance of a formal complaint by the

FTC

staff and aformal

order by an administrative law officer, the Commission itself,

or (if an

order

is appealed) by a federal court. A cease and

desist order has the full force of law. A consent

order

repre-

sents awritten, legally binding agreement between the Com-

mission and a business respondent, and the consent order is

legally enforceable by the

FTC.

The stipulation typically

takes the form of an affidavit signed by a business respon-

dent and has no legal effect. Violation of a stipulation can

result in issuance of a formal complaint by the

FTC

and an

ultimate cease and desist order. Where stipulations

are

in-

volved, however, there is little evidence

that

the

FTC

sys-

tematically evaluates respondent compliance.

From

1945-67

the

FTC

was involved in

6,186

enforcement

procedures

that

are

available to the public," Of this total,

986 represent cease and desist orders,

2,281

are

consent or-

ders, and

2,919

represent stipulations. A given enforcement

procedure, however, may include one or more alleged

unfair

trade

practices

(for

example, requiring arespondent simul-

taneously to cease false advertising

and

to discontinue an

unfair

lottery scheme). Because of the multiple

unfair

trade

practices alleged in some enforcement procedures, the 6,186

procedures analyzed in this

paper

produce 9,119 alleged un-

fair

trade

practices. Appendix Table 1describes the 9,119

trade

practices involved in

FTC

enforcement procedures

under

Section 5during the period 1945-67 divided into 29

trade

practice categories, which in

turn

reflect consolidation

of 63 classes of

unfair

trade

practices used

at

various times

by the

FTC.

(Brief

definitions of each

trade

practice cate-

gory, which range from product misrepresentation to Flam-

mable Fabrics Act noncompliance,

are

given in Appendix

Table 4.)

Conceptually,

trade

practices could be examined by direct

observation

and

their

effects

traced

on a case-by-case basis.

Realization of this objective

for

most or all of American

industry

is, however, a

major

undertaking; moreover, the

presence of observers examining

unfair

trade

practices-