Opinion ID: 2192361
Heading Depth: 2
Heading Rank: 4

Heading: FTC Guidelines on Free

Text: In 1971, the FTC adopted a regulation interpretive of § 5 of the FTC Act. 36 Fed. Reg. 21,517 (1971). See 16 C.F.R. § 251.1 (1998), Guide Concerning Use of the Word `Free' and Similar Representations (Free Guidelines). In relevant part the regulation provides: When making `Free' or similar offers all the terms, conditions and obligations upon which receipt and retention of the `Free' item are contingent should be set forth clearly and conspicuously at the outset of the offer so as to leave no reasonable probability that the terms of the offer might be misunderstood. Stated differently, all of the terms, conditions and obligations should appear in close conjunction with the offer of `Free' merchandise or service. For example, disclosure of the terms of the offer set forth in a footnote of an advertisement to which reference is made by an asterisk or other symbol placed next to the offer, is not regarded as making disclosure at the outset. This interpretive rule reiterates the position taken by the FTC in 1953. See In re Walter J. Black, Inc. t/a Classics Club & Detective Book Club, 50 F.T.C. 225 (1953). [7] The FTC has stated that [w]hile the guide is interpretive of laws administered by the [FTC] and thus advisory in nature, proceedings, as appropriate, to enforce the requirements of law as explained in the guide may be brought.... 36 Fed.Reg. at 21,517 (emphasis added). See also 16 C.F.R. § 1.5 (1998) (Industry guides are administrative interpretations of laws administered by the [FTC] for the guidance of the public in conducting its affairs in conformity with legal requirements.). According to the general provisions of the Free Guidelines, they were promulgated to accord with the way in which the public understands the word free. The FTC noted that [b]ecause the purchasing public continually searches for the best buy, and regards the offer of `Free' merchandise or service to be a special bargain, all such offers must be made with extreme care so as to avoid any possibility that consumers will be misled or deceived. 16 C.F.R. § 251.1(a)(2) (emphasis added). As with the FTC Policy the Free Guidelines should be given due weight and consideration. See generally D. Pridgen, Consumer Protection and the Law § 11:21 (1986, 1998 Supp.) (Pridgen) (Most rational consumers presumably realize there is no such thing as a free lunch. Until the FTC is willing forthrightly to wipe the slate clean, however, marketers should attempt to follow the full disclosure ... rule for free offers, as state enforcement authorities may continue to incorporate the doctrine through references to FTC law in the state unfair and deceptive trade practices statutes.). The same commentator has suggested that [d]espite the history of rigorous enforcement, at the present time ... the [Free Guidelines are] rarely ever applied by the [FTC]. Pridgen § 11:31. Most commentators, however, continue to recognize the Free Guidelines as the FTC's statement on lawful use of the word free. National Consumer Law Center, Unfair and Deceptive Acts and Practices § 4.6.4 (4th ed.1997); T.T. Trai Le, Protecting Consumer Rights § 2.08 (1987); H. Alperin & R. Chase, Consumer Law § 77 (1986); G.E. Rosden, The Law of Advertising § 28.06[1] (1973, 1998 Supp.). In 1988, The Reader's Digest Association, Inc. (Reader's Digest) claimed that the language of the Free Guidelines was a remnant of pre-Cliffdale Associates law. In re Reader's Digest Ass'n, 1988 FTC LEXIS 7 (1988). The challenge was raised in a request that the FTC reopen and modify a 1963 consent order. Section 1 of that order prohibited Reader's Digest from [u]sing the word `free', `absolutely free', `paid in full gift' or any other word or words of similar import or meaning, to designate or describe articles of merchandise... in advertising or other offers to the public when all the conditions, obligations, or other prerequisites to the receipt and retention of the said free ... articles of merchandise are not clearly and conspicuously explained or set forth at the outset so as to leave no reasonable probability that the terms of the advertisements or offer might be misunderstood. In re Reader's Digest Ass'n, 63 F.T.C. 1653, 1660-61 (1963) (emphasis added). The FTC rejected Reader's Digest's position, concluding that the company had failed to demonstrate that changed conditions ... of law require deletion of the reasonable probability clause. In re Reader's Digest Ass'n, 111 F.T.C. 758, 760 (1989). The FTC said that it had used comparable language in other orders before and since the challenged 1963 order and that it continues to use language virtually identical to the reasonable probability clause in its Free [Guidelines]. The continued use of the language in the Free [Guidelines] reflects the [FTC's] confidence in the propriety of the language of the reasonable probability clause. Id. at 761. In re Encyclopaedia Britannica, Inc., 111 F.T.C. 1 (1988), and In re Grolier, Inc., 104 F.T.C. 639 (1984), were requests by those publishers that the FTC modify orders that, in relevant part, precluded the companies from advertising goods or services as free unless those offers complied with all of the terms of the [FTC's] `Guide Concerning Use of the Word Free and Similar Representations.'  The FTC retained those portions of the orders that required compliance with the Free Guidelines. 111 F.T.C. at 14; 104 F.T.C. at 643. Similarly, in 1994, the FTC barred the Beverly Hills Weight Loss Clinic from representing that any of its weight loss programs could be obtained for free, absent certain disclosures, including `[y]ou must pay for [list of products or services that participants must purchase at additional cost] to take advantage of this free offer.' In re Beverly Hills Weight Loss Clinics Int'l, Inc., 118 F.T.C. 213, 255 (1994). See also In re America Online, Inc., 5 Trade Reg. Rep. (CCH) ¶ 24,260 (Mar. 16, 1998) (failure to disclose the terms and conditions of a free offer constituted a deceptive practice). These requirements are remarkably similar to those of the Free Guidelines. [8] The FTC Free Guidelines were held to be incorporated into a New York statute in State ex rel. Abrams v. Stevens, 130 Misc.2d 790, 497 N.Y.S.2d 812 (N.Y.Sup.Ct.1985). N.Y. Exec. Law § 63 (McKinney 1985) authorized the Attorney General to bring an action for repeated fraudulent or illegal acts. New York courts had interpreted that clause to include authorizing actions for repeated violations of federal laws and regulations. Stevens, 497 N.Y.S.2d at 813. The court concluded that Stevens's conduct violated the Free Guidelines and, accordingly, § 63. The FTC's analysis of free merchandise and service advertising was applied under a state statute similar to the Maryland Act in Fineman v. Citicorp USA, Inc., 137 Ill. App.3d 1035, 92 Ill.Dec. 780, 485 N.E.2d 591 (1985). There a credit card issuer, as an incentive for cardholders immediately to accept an increase in the annual fee, offered those accepting the increase  `10 valuable extra services' ... including `free $100,000 common carrier travel insurance.' Fineman, 92 Ill.Dec. 780, 485 N.E.2d at 592. Like Maryland's Act, the Illinois statute at issue in Fineman provided that, `[i]n construing [the prohibition against deceptive trade practices] consideration shall be given to the interpretations of the [FTC] and the federal courts relating to Section 5(a) of the [FTC] Act.' Id. at 780, 485 N.E.2d at 593-94 (citing Ill.Rev.Stat. Ch. 121-1/2, ¶ 262 (1981)). The Fineman court adopted and quoted the disjunctive rules set forth in the precursor to the Free Guidelines. In re Walter J. Black, Inc., 50 F.T.C. 225. One of the alternate rules is: The use of the word `Free,' [is] an unfair or deceptive act or practice under the following circumstances: (1) When all of the conditions, obligations, or other prerequisites to the receipt and retention of the `free' article of merchandise are not clearly and conspicuously explained or set forth at the outset so as to leave no reasonable probability that the terms of the advertisement or offer might be misunderstood. Id. at 235-36 (cited at Fineman, 92 Ill.Dec. 780, 485 N.E.2d at 594). The court concluded that there was no violation because the card issuer had clearly stated in its notice that the insurance was available only to those cardholders who agreed to pay the higher fee. There was no reasonable probability that the offer would be misunderstood. Fineman, 92 Ill.Dec. 780, 485 N.E.2d at 594 (emphasis added). For much the same reasons as those underlying our holding concerning the standard for determining if a practice is deceptive, we hold that a claim under the Act that an advertisement is deceptive because of its use of the word free, or its equivalent, ordinarily should be decided by applying the same principles and rules that are applied by the FTC and the federal courts under § 5 of the FTC Act, including the principles and rules in the Free Guidelines.