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Letter of December 23, 2003 from Jerald A. Jacobs to Alden Francis Abbott, Assistant

Director for Policy and Evaluation, Bureau of Competition.

UNITED STATES OF AMERICA

FEDERAL TRADE COMMISSION

WASHINGTON, D.C. 20580

Bureau of Competition

Alden F. Abbott

Assistant Director for Policy and Evaluation

Direct Dial

(202) 326-2881

January 29, 2004

Mr. Jerald A. Jacobs

Shaw Pittman LLP

2300 N. Street, NW

Washington, DC 20037-1128

Dear Mr. Jacobs:

This letter responds to your request on behalf of the Electronic Retailing Association

(“ERA”) for a Bureau of Competition staff (“BC staff”) opinion letter regarding a proposed

program to review and, if appropriate, recommend discontinuation of DRTV (“direct response

television”) shows (e.g., infomercials) and advertising in other media that contain claims that

appear on their face to be unreasonable or incapable of substantiation.1 You have asked whether,

based on the facts submitted, BC staff would recommend that the Commission bring an

enforcement action challenging implementation of the program. On the basis of information that

you provided in your letter of December 23, 2003, BC staff have no present intention to

recommend a challenge to ERA’s implementation of the DRTV review program as proposed. 

This conclusion is entirely dependent on the accuracy of our understanding of pertinent facts

concerning the review program. Our understanding of those facts, in turn, is entirely dependent

on the information that you provided. Our present enforcement intentions might be different

should the DRTV review program not be as described in your letter and other materials.

ERA’s Proposed Program

We understand that ERA is the nation’s principal trade association representing the

electronic retailing/DRTV industry. ERA’s membership includes DRTV producers, media

buyers, product owners, consultants, and other industry firms.
Mr. Jerald A. Jacobs – Page 2

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We understand that NARC is a strategic alliance of the advertising industry and the

Council of Better Business Bureaus (“CBBB”), formed in 1971 by the Association of National

Advertisers, Inc., the American Association of Advertising Agencies, Inc., the American

Advertising Federation, Inc., and the CBBB to foster truth and accuracy in national advertising

through voluntary self-regulation.

We further understand that ERA proposes to establish a separate unit under the umbrella

of the National Advertising Review Council (“NARC”) to perform the review function.2

 We

also understand that the new unit will be funded by ERA, and operate under the rules and

procedures set forth in ERA’s proposal, but would otherwise be under NARC supervision and

independent of ERA. The new unit will initially be staffed by one attorney, experienced in

advertising law and ad substantiation, who will be selected by and work under the supervision of

NARC, although ERA may participate in the interviewing process and provide guidance on

selection standards and process.

We understand that the review program is intended to identify and effectuate

discontinuance of advertising that contains claims that appear to be untrue and lack any form of

credible substantiation. The single mission of the review program is to curtail false or deceptive

DRTV advertising for the benefit of consumers.

We further understand that reviews may be initiated by the new unit on its own initiative

or in response to referrals by any ERA member, consumer, or consumer advocacy group. 

Decisions on whether to review a referral will be based on the number of consumers affected, the

type of advertising claims involved – ERA proposes that the reviewing unit focus on advertising

campaigns that involve “high impact” on consumers, such as when health or safety issues are

involved – and how egregious the advertising claims appear to be.

We understand that the reviewing unit will notify the marketer whose advertising

campaign is under review, and may request product samples and additional information and/or

documentation from the marketer as needed. The review will be limited to the primary or core

efficacy or performance claims. The marketer will be required to provide the requested materials

within 15 calendar days, and, within those 15 days, may request a meeting with the reviewer,

which meeting shall be held within 15 calendar days of the request. The reviewing unit will

make a decision and notify the marketer within 15 calendar days after receipt of the final

submission from the marketer or within 15 calendar days of the meeting.

Review Standards

We understand that the review will consist of:

• Determination/identification of claims;
Mr. Jerald A. Jacobs – Page 3

• Determination whether substantiation for claims appears reasonable on its face,

e.g.,

i) Does the substantiation address the claims being made?

ii) If applicable, does the substantiation meet general standards of competent

and reliable scientific evidence?

We understand that the review is intended to be limited, with the goal of identifying

“outliers” – egregious primary or core advertising claims that on their face appear unreasonable

or incapable of substantiation. The reviewing unit will recommend whether the primary or core

claims that were reviewed should be continued. The reviewing unit is not expected to (but may)

make recommendations regarding how claims should be modified or qualified. The proposed

program does not include provisions for appeal of the reviewing unit’s decisions.

Enforcement

We understand that failure to comply with the reviewing unit’s recommendation to

discontinue a claim will result in a referral to the FTC or other appropriate agency and expulsion

from membership in ERA. Failure to comply with a request for information or other materials

also may result in referral to the FTC or other agency. Decisions of the reviewing unit will be

made public through publication in NARC reports. Review decisions and referrals to the FTC or

another agency will also be announced in NARC press releases. Conclusions of the reviewing

unit will be qualified – e.g., “based on preliminary evaluation, it appears that certain advertising

claims may not be adequately substantiated.”

Finally, we understand that ERA contemplates that publication of the reviewing unit’s

decisions and actions will benefit ERA members and suppliers such as fulfillment companies,

telemarketing companies, and media services by providing information that will assist them in

making independent decisions regarding whether to provide goods or services to a noncompliant company.

Analysis of the ERA Proposed DRTV Review Program

We begin with the observation that the antitrust laws do not forbid legitimate selfregulation that benefits consumers. As the Commission has stated, “[s]uch self-regulatory

activity serves legitimate purposes, and in most cases can be expected to benefit, rather than to

injure, competition and consumer welfare.” American Academy of Ophthalmology, 101 F.T.C

1018 (1983) (advisory opinion); see also American Medical Association, 117 F.T.C. 1091 (1994)

(advisory opinion); American Medical Association, 94 F.T.C. 701, 1029 (1979), aff'd as

modified, 638 F.2d 443 (2d Cir. 1980), aff'd by an equally divided Court, 455 U.S. 676 (1982)

(“AMA”). On the other hand, conduct that unreasonably restricts competition is inconsistent

with the antitrust laws.
Mr. Jerald A. Jacobs – Page 4

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There is one significant difference between the ERA’s proposed program and

standardization programs. An industry group might voluntarily adopt standard specifications to

ensure that its members offer particularly high quality products or products that appeal to

specific consumer preferences (like a preference for “organic” food). Many consumers may

prefer non-standard offerings (perhaps at lower prices), however, and it is therefore necessary to

consider whether the standardization program will foreclose competition from non-compliant

sellers and thus reduce output and consumer welfare. Because the ERA’s program does not

establish product standards but seeks only to exclude egregiously false claims, it is not necessary

to be concerned about an adverse effect on competitive opportunities for products that are

deceptively promoted.

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The actions of groups or associations such as ERA comprised of entities with horizontal

business relationships (i.e., competitors) are deemed, under the antitrust laws, to be concerted

action.

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E.g., Allied Tube, 486 U.S. at 501; Accrediting Commission on Career Schools

and Colleges of Technology, 119 F.T.C. 977 (1995) (advisory opinion; Commission declined to

approve a proposed accreditation standard that would define acceptable tuition levels, reasoning

We also note at the outset that ERA’s DRTV review program is in many respects similar

to a standard-setting and standard-compliance program, and that precedents dealing with these

kinds of programs are therefore helpful in the analysis of the ERA’s proposed program.3

Specifically, under the review process, recommendations regarding whether ERA members

should continue or discontinue an advertiser’s commercial will depend on whether the

commercial satisfies a standard of reasonableness (capacity to be substantiated) with respect to

the claims made in the commercial. The reasonableness standard, in turn, is solely determined

by ERA through NARC. ERA, through NARC, is thus, in this respect, both a standard-setting

body and an evaluator of compliance with the adopted standard.

As a general principle, industry adoption of private standards and voluntary compliance

with those standards often, if not typically, promote competition by enhancing price and quality

rivalry and by increasing consumer confidence in product quality and thereby increase demand,

and facilitate entry of new sellers. It is inherent in a standards system, however, that some

products may fail to satisfy the standards, and therefore may tend to be excluded from the

marketplace.This effect is not inherently anticompetitive, but an unreasonable restraint on

competition may arise under some circumstances. For this reason, the actions of standard-setting

bodies are subject to scrutiny under the antitrust laws.4

 See, e.g., Allied Tube & Conduit Corp. v.

Indian Head, Inc., 486 U.S. 492, 500 (1988); American Soc’y of Mechanical Eng’rs, Inc. v.

Hydrolevel Corp., 456 U.S. 556, 572-73 (1982).

Competitive concerns can arise, for example, when competitors abuse or distort the use

of standards for the purpose of restricting competition, thus imposing harm on the market and

consumers while not providing the procompetitive benefits that can flow from compliance with

industry standards.5

 In addition, the adoption of an industry standard may, in effect, be an
Mr. Jerald A. Jacobs – Page 5

that this would in effect be an agreement among members of the accrediting body to charge no

more than the standard would permit).

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Id.

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E.g., American Soc’y of Sanitary Eng’rs, 106 F.T.C. 324 (1985) (consent order).

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Specifically, BC staff’s analysis would follow the framework set out in the Federal

Trade Commission/Department of Justice Guidelines for Collaborations Among Competitors,

available at http://www.ftc.gov/os/2000/04/ftcdojguidelines.pdf.

agreement not to sell non-compliant products.6 Competitive concerns may arise when the

standard is not reasonably necessary to attain procompetitive objectives.7

ERA’s adoption of the proposed review program would be an agreement among

competitors to restrict a certain kind of DRTV advertising, i.e., advertising that does not meet

ERA/NARC substantiation standards. As such, it raises two potential antitrust concerns. First,

the program could be characterized simply as a non-competition agreement, i.e., an agreement

among ERA members, by means of enforcement of a standard, not to compete for the business of

particular advertisers. Second, the expulsion from ERA of a member that refuses to comply with

the review program requirements could be characterized as a group boycott. 

BC staff would analyze both of these issues under the “rule of reason” test rather than the

per se test.8 Under a rule of reason test, BC staff weighs the potential for competitive harm

arising from an agreement among competitors against any procompetitive or efficiency benefits

produced by the agreement. If BC staff concludes that the procompetive benefits more than

offset the likely competitive harm, BC staff will not pursue an enforcement action. Given the

facts as we understand them in this instance, it is unlikely that BC staff would conclude that

potential anticompetitive effects arising from the implementation of ERA’s DRTV review

program would outweigh procompetitive benefits. We find therefore that ERA’s DRTV review

program does not merit a staff recommendation to the Commission for enforcement action at this

time. We reach this conclusion for a number of reasons.

First, truthful, non-deceptive advertising promotes competition by providing consumers

with important information about product prices, quality, and availability, among other factors

that consumers consider in their purchasing decisions. See, e.g., Virginia State Board of

Pharmacy v. Virginia Citizens Consumer Council, Inc., 425 U.S. 748, 765 (1976). Agreements

on standards among competitors that restrict truthful, nondeceptive advertising, therefore, have

the potential to restrict competition and harm consumers. See, e.g., American Medical

Association, 94 F.T.C. at 1005. Such agreements harm consumers by raising the cost of finding

the combination of price, service, and quality that best fits their needs and by reducing the

incentive for firms to compete (by preventing them from informing consumers of their prices,

services, or quality). Id. By contrast, false or deceptive advertising does not produce the same

benefits for consumers as truthful advertising, and, therefore, agreements among competitors on
Mr. Jerald A. Jacobs – Page 6

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Evidence to the contrary would cause serious antitrust concerns.

standards that are aimed at restricting deceptive advertising present less antitrust concern;

indeed, restricting deceptive advertising may help avoid anticompetitive effects. Calif. Dental

Assn. v. FTC, 526 U.S. 756, 773 n.9 (1999) (“That false or misleading advertising has an

anticompetitive effect, as that term is customarily used, has been long established.”) ERA’s

review program appears to fall into this second class of restrictions.

Second, both the agreement to adopt a standard and the standard itself are not product or

advertiser-specific. Because ERA represents a wide spectrum of marketers that use DRTV

advertising, the agreement would relate to a class of advertising rather than specific products. 

That fact would attenuate any adverse consumer impact. 

Third, ERA’s proposed program appears to have a significant pro-consumer rationale by

restricting advertising that is deemed to be facially unreasonable or incapable of substantiation. 

According to ERA, the overriding purpose of the proposed program is to curtail false or

deceptive DRTV advertising, rather than to restrict competition. The restriction of such

advertising likely would increase consumer confidence in DRTV and make the overall market

more efficient. See Calif. Dental Assn. v. FTC, 526 U.S. at 771-772 (restrictions designed for the

purpose of avoiding false or deceptive advertising might plausibly have a net procompetitive

effect).

Fourth, the review program will be administered under the umbrella of NARC and not

directly by ERA. Although, because of ERA funding and participation in staff interviewing, the

reviewing unit cannot be characterized as fully independent of ERA, there is nonetheless some

degree of separation between the reviewing unit and ERA respecting the actual screening and

decision-making process. This separation tends to lessen the possibility that the program could

be manipulated by horizontal competitors for the purpose of restraining competition for their

products.9

 Furthermore, NARC will control the rules and procedures used by the reviewing unit

after formation.

Fifth, while the expulsion of a member for non-compliance with program requirements

could be characterized as a horizontal boycott, there will not be an effect on competition in the

marketing of the expelled member’s product unless two or more members actually compete in

the marketing of that product or reasonable substitutes. Further, even if there is extant

competition with respect to the marketing of that particular product, expulsion of a noncompliant member may not be unreasonably exclusionary. In general, expulsion from a trade

group characteristically is not likely to result in predominantly anticompetitive effects. See

Northwest Wholesale Stationers, Inc. v. Pacific Stationery & Printing Co., 472 U.S. 284, 286

(1985). According to ERA, membership does not have significant competitive ramifications. 

Although loss of membership results in the loss of ERA’s trade association services, those

services are not essential to competition or competitors.
Mr. Jerald A. Jacobs – Page 7

Finally, we understand that ERA plans to encourage members not to deal with marketers

that refuse to comply with the reviewing unit’s procedures and decisions. BC staff would not

recommend enforcement action by virtue of ERA simply encouraging members not to deal with

non-compliant marketers, so long as the actions of the members remain voluntary. By contrast, a

requirement that members refrain from dealing with such marketers could be viewed as a boycott

or an agreement not to compete for that marketer’s business, and therefore may be subjected to

heightened BC staff scrutiny.

Conclusion

For all the reasons stated above, we believe that, on balance, the likely benefits of ERA’s

proposed review program more than offset the potential for competitive harm. On this basis, BC

staff have no present intention to recommend a challenge to ERA’s proposed DRTV review

program.

This letter sets out the views of the staff of the Bureau of Competition, as authorized by

Rule 1.1(b) of the Commission's Rules of Practice, 16 C.F.R. § 1.1(b). Under Commission Rule

1.3(c), 16 C.F.R. § 1.3(c), the Commission is not bound by this staff opinion and reserves the

right to rescind it at a later time. In addition, this Office retains the right to reconsider the

questions involved and, with notice to the requesting party, to rescind or revoke the opinion if

implementation of the proposed program results in substantial anticompetiutive effects, if the

program is used for improper purposes, if facts change significantly, or if it would be in the

public interest to do so.

Sincerely yours,

Alden F. Abbott

Assistant Director

 for Policy & Evaluation