FTC Act’s Section 5
Across the Board
When you go to law school, the most
important thing you have to learn is
how to think like a lawyer.
Let’s say a law clearly prohibits
“A” and just as clearly doesn’t prohibit “B.” That
means it’s legal to do “B” — right?
Guess again. If you had mastered the art of thinking
like a lawyer, you’d know the correct answer could be a
Here’s an example. Many years ago, the Federal
Trade Commission (FTC) issued its “Mail Order Rule,”
which essentially provided that mail-order merchandise had to be shipped within 30 days (unless a specific
delivery-time promise was made). If a product was out
of stock and couldn’t be delivered on time, the seller
had to offer to refund the customer’s money.
Some time after the rule was originally issued, toll-free telephone numbers were invented. But the FTC
rule covered only merchandise ordered through the
mail — it didn’t say anything about merchandise ordered over the telephone.
Eventually, the FTC proposed an amendment to
the rule that would cover telephone orders and close
the apparent loophole. But the mills of bureaucracy
grind exceedingly slow — and the FTC didn’t want
to wait until the rule was officially amended to take
action against slow-to-deliver marketers who used
toll-free numbers to take orders. But what else could
they do? The rule clearly applied only to mail orders
— didn’t it?
The FTC enforces a number of specific regulations, such as the mail order rule, but brings most of its
enforcement cases under Section 5 of the FTC Act,
which prohibits “unfair or deceptive acts or practices.”
Talk about broad — Section 5 is about as broad a statute as any prosecutor could hope for.
The FTC took the position
that while the delayed shipment
of orders taken over the telephone didn’t violate the mail
order rule, it did violate Section
5 because it was “unfair” to
consumers. That’s a little like
Congress passing a law saying that certain expenses are
tax-deductible, and the IRS going after high-income
individuals with a lot of legitimate deductions because
they end up paying very little in taxes — and that’s
unfair. (Actually, that’s exactly how the alternative
minimum tax works, isn’t it?)
Here’s another example. Several years ago, Congress passed the Gramm-Leach-Bliley Act, which
required financial institutions to ensure the safety and
confidentiality of customers’ financial information, including credit card account numbers. Federal agencies
— including the FTC — were directed to issue specific
rules implementing those requirements.
A number of the readers of this magazine work for
companies that would be considered “financial institutions” under this law — that term includes banks, sav-ings-and-loans, mortgage brokers and the like. But that
doesn’t mean that non-financial institutions are home
free when it comes to complying with these standards.
Recently, the FTC issued an order against a student
lender prohibiting future violations of the Gramm-Leach-Bliley rules. But only a few weeks before that,
it issued essentially the same order against an online
retailer that allegedly failed to take reasonable steps to
protect credit card information stored on its computers.
Of course, that order was based on alleged violations of
Section 5 of the FTC Act.
In fact, there is only one significant difference between the two orders. The order against the financial
institution requires a security audit by an independent expert every other year for the next 10 years. But
the order against the online retailer requires those
audits every other year for 20 years. That’s right, the
non-financial institution — which is not subject to
the Gramm-Leach-Bliley statute and the specific rules
issued pursuant to the statute — was held to a tougher
Let’s summarize today’s lesson. If a new consumer-protection law clearly doesn’t cover your business or
your practices, you may still need to obey that law to
avoid a challenge based on Section 5 of the FTC Act.
If that result doesn’t seem a little strange to you, congratulations — you’re learning to think like a lawyer! ■