Saturday, February 04, 2006

IN MY VIEW: Why FTC Consent Orders Do Represent Industrywide Policy

The dissenting opinion in the Price "light" cigarettes case in Illinois held that Philip Morris' marketing of "light" cigarettes was not specifically authorized by the Federal Trade Commission (FTC) and was therefore not subject to an exemption in the state's Consumer Fraud Act. This is in contrast to the majority opinion, which held that through a number of consent orders, the FTC did specifically authorize all tobacco companies to use descriptive terms such as "lights" or "lowered tar and nicotine" in marketing cigarettes.

In this post, I consider two issues. First, is the discrepancy in these two opinions a matter of a correct or errant interpretation of FTC action, or is it a matter of differing interpretation of the meaning of the state's Consumer Fraud Act? This question is important, because it has a direct implication for whether the United States Supreme Court has an interest in reviewing the decision.

Second, I consider the opinion itself and comment on the meaning and implication of FTC consent orders.

The Rest of the Story

In my view, the discrepancy in the opinions is primarily a matter of differing interpretation of the state's Consumer Fraud Act, rather than a matter of a correct versus an errant interpretation of FTC action. I feel that the dissenting opinion, written by Justice Freeman, relies heavily upon a differing construction of the relevant exemption clause in the state statute, and that this differing construction of state law is what ultimately yields a dissenting opinion, rather than simply an alternative view of the meaning of the FTC consent orders and other relevant FTC actions.

Justice Freeman himself, in summarizing his dissent, acknowledges that his dissent is predicated upon a differing interpretation of the state's Consumer Fraud Act and that it was the court's improper construction of that Act which led to his dissent: "The court's action today is predicated upon an erroneous and irresponsible interpretation of our Consumer Fraud Act, an act which I note is to be interpreted so as to give full protection of the citizens of this state against the fraudulent conduct of others. ... The court's construction of section 10b(1) serves not only to dilute needlessly the force of our state consumer protection legislation, but to limit unnecessarily our state's citizens' consumer protection in this area to a federal agency."

In fact, after presenting his somewhat different interpretation of what the FTC consent orders might mean, Justice Freeman then provides a detailed discussion of the rules of "statutory construction" that led him to arrive at a different conclusion than that in the majority opinion. In particular, Freeman relies heavily upon two rules of statutory construction: (1) that "the statute should be evaluated as a whole, with each provision construed in connection with every other section;" and (2) that "in determining the intent of the legislature, the court may properly consider not only the language of the statute, but also the reason and necessity for the law, the evils sought to be remedied, and the purpose to be achieved."

There are not really any factual errors that Justice Freeman suggests in the majority justices' interpretation of FTC action. What it ultimately comes down to, it appears, is a huge difference in the interpretation of the state's Consumer Fraud Act, rather than a gross difference in interpretation of federal action on the issue of cigarette descriptors.

For this reason, I believe that even if I strongly felt that the dissenting opinion was correct, there would probably not be any basis for Supreme Court review of this decision, since it primarily involves a question of the proper interpretation of a state statute.

Now to the question of whether FTC consent orders can be viewed as providing authorization for cigarette company behavior by virtue of their setting rules for industrywide policy.

First, it must be noted that Justice Freeman himself acknowledges the expert testimony that:
  • "the primary mission of the FTC is to enforce a variety of federal antitrust and consumer protection laws";
  • the FTC is "primarily a law enforcement agency;"
  • "the two primary tools the FTC employs to enforce consumer protection laws are trade regulation rules and enforcement procedures."
Thus, it seems undisputed that FTC does enforce the Federal Cigarette Labeling and Advertising Act (FCLAA), that this Act allows FTC to regulate cigarette marketing descriptors related to tar and nicotine levels, that FTC has taken action to regulate cigarette marketing descriptors, and that consent orders are in fact a primary tool by which FTC enforces the law.

Justice Freeman also acknowledges the expert testimony that:
  • "the 1971 consent order against American Brands, Inc., was 'an official act of the FTC';"
  • "the order provided 'industry guidance to [PMUSA] and others regarding the use of descriptors';"
  • "this guidance was found in the terms of the order against American Brands;"
  • "nonparties to a consent order, even an entire industry, learn from the order how far it can and cannot go;" and
  • "the 1971 consent order was exemplary of the FTC intending to provide industrywide guidance with respect to issues addressed in consent orders."
I think it is especially important to note that the 1971 consent order was highly specific in terms of the exact requirements that American Brands had to meet in order to use descriptors like "low-tar":

"The dispute between the FTC and American Brands was resolved in 1971, with the entry of a consent order that required American Brands to cease and desist from: Stating in advertising that any cigarette manufactured by it, or the smoke therefrom is low or lower in ‘tar’ by use of the words ‘low, ‘lower,’ or ‘reduced’ or like qualifying terms, unless the statement is accompanied by a clear and conspicuous disclosure of: 1. The ‘tar’ and nicotine content in milligrams of the smoke produced by the advertised cigarette; and 2. If the ‘tar’ content of the advertised brand is compared to that of another brand or brands of cigarette, (a) the ‘tar’ and nicotine content in milligrams of the smoke produced by that brand or those brands of cigarette, and (b) the ‘tar’ and nicotine content in milligrams of the lowest yield domestic cigarette.” American Brands, 79 F.T.C. at 225."

With this level of specificity of the details of requirements for using descriptors that relate to tar and nicotine content, I just have trouble accepting the argument that this action by FTC did not establish guidance and policy for the industry as a whole.

As I mentioned in a previous post, imagine that the FTC allowed American Brands to advertise cigarettes as low-tar according to the provisions outlined above, but later, did not allow Philip Morris to advertise cigarettes as low-tar at all. Even though the original consent order with American Brands could not be argued to hold the full force of law with regard to Philip Morris, it would be difficult to maintain that the FTC's actions were consistent with the law. This would seem to represent a clear example of unequal and inconsistent application of the law.

Thus, I do not find it unreasonable for Philip Morris to assume that the consent order with American Brands provided conditions for the use of the "low-tar" terminology that could be expected to apply to it as well as American Brands.

While it is true that as a matter of the force of law, the consent order did not bind FTC from dealing differently with other companies, as a practical matter, I think that it did bind FTC. Because a federal agency cannot willy nilly apply the law differently to different companies. The reason why the consent order only had the formal force of law with American Brands was simply that American Brands was the company about which a complaint had been filed, and which was therefore party to the consent order. It was not that somehow American Brands' actions were to be regulated differently than those of other companies because of some peculiarity about American Brands that did not apply to Philip Morris and other companies.

For this reason, I think Justice Freeman's argument that the consent order is not a trade regulation rule and that Philip Morris was not a party to the agreement does not hold weight in terms of establishing that Philip Morris was not authorized to take guidance from FTC's consent order on the requirements that Philip Morris had to follow to use tar and nicotine level descriptors in its marketing.

Justice Freeman also provided another concrete example of exactly why it is that consent agreements entered into by FTC do represent industrywide policy. He pointed out that:

"In 1970, the FTC proposed a formal trade regulation rule that would have required cigarette companies to disclose in their advertising FTC-measured tar and nicotine content of their cigarettes. ... However, the FTC dropped this proposed order after eight cigarette companies entered into a voluntary trade agreement."

It seems clear that FTC's interest was in promulgating a formal, industrywide policy on the disclosure of tar and nicotine yields. If that is the case, then does that mean that the FTC changed its mind, and decided that it no longer had an interest in an industrywide policy on tar and nicotine disclosure? Did those 8 cigarette companies convince FTC that the issue wasn't worthy of an industrywide policy?

I don't think so. I think FTC dropped the order because its mechanism of operation is that it prefers to enforce the law through trade agreements if it can do so without having to go through the formal trade regulation process. And in this case, since 8 companies agreed to comply, FTC apparently felt it was not necessary to go through a formal trade regulation process to achieve an industrywide policy on the disclosure issue.

Now is it the case that FTC could not now enforce the disclosure rules among the non-signatory companies because it did not represent an industrywide policy? I doubt it. I think if the FTC decided to, it could easily enforce the disclosure requirement and non-signatories would have no argument at all in claiming that they didn't sign the agreement so they don't need to disclose. The FTC could and would (if it had the interest in enforcing it) simply tell the companies: "Sorry - these are the rules that the industry has to follow").

The second major argument Freeman makes is that the consent order did not specifically mention the word "lights." But my reading of the consent order is that it is very broad with respect to the types of descriptors that it was regulating. After all, it addresses: "Stating in advertising that any cigarette manufactured by it, or the smoke therefrom is low or lower in ‘tar’ by use of the words ‘low, ‘lower,’ or ‘reduced’ or like qualifying terms."

Those "or like qualifying terms" would certainly seem to include the term "lights," which quite obviously is intended to relate to the tar/nicotine content of cigarettes.

Thus, I have trouble accepting the argument that FTC consent orders do not provide overall industry guidance and policy because it is, in fact, through consent orders that FTC enforces the law. FTC does not have to issue a trade regulation rule in order to set industry policy. In fact, enforcement agreements and orders are one of the primary mechanisms by which it enforces the law. And it seems illogical to argue that just because a company is not party to a particular consent order, that the company does not take general or even specific guidance from that order, particularly if the order is as specific as the 1971 consent order is in setting out the precise requirements for the use of tar/nicotine level descriptors.

For the same reason, I have trouble accepting the argument that the fact that the FTC did not ever issue a trade regulation on the issue of descriptors indicates that it never authorized cigarette companies to use these descriptor terms in their marketing. I think the consent order clearly implies a set of requirements that can reasonably be interpreted by the other cigarette companies as indicating FTC enforcement policy on this issue.

I think it's important to recognize that federal agency actions with regard to particular companies do, in fact, serve to set policy and rules for all companies. The converse seems illogical. Could a company being investigated by FTC for using the term "Lowest Tar" brand successfully convince FTC that there was nothing wrong with this action because FTC's consent order applied only to American Brands? I doubt anyone would argue that the use of the term "Lowest Tar" cigarette brand (without appropriate documentation) is lawful under the Federal Cigarette Labeling and Advertising Act, even though there is no trade regulation concerning this issue, even though the 1971 consent order applied only to American Brands, and even though the consent order did not specifically mention the term "lowest tar." I think it's safe to argue that federal law (as interpreted and enforced by the FTC) simply does not allow for the undocumented use of the term "Lowest Tar" brand, even in the absence of a trade regulation on the issue.

Finally, I have trouble accepting the argument that the failure of FTC to specifically mention the term "lights" means that the use of this term was not regulated. In fact, FTC specified that it was regulating the use of any term related to lower tar and nicotine content in cigarettes, and that it was specifically allowing the use of these terms as long as certain conditions were met; namely, that there be documentation of the fact that there were actually lower levels of tar and nicotine produced by the cigarette, presumably using the FTC method for determination of tar and nicotine.

Ultimately, the FTC is simply an enforcement arm for the Federal Cigarette Advertising and Labeling Act, and the central question is not really whether or not FTC has authorized the use of the term "lights" but whether the Federal Cigarette Advertising and Labeling Act authorizes the use of the term "lights."

Remember, the exemption in the Illinois statute is not for conduct "specifically authorized by a regulatory body," but for conduct "specifically authorized by laws administered by any regulatory body."

I think one of the rules of statutory construction is that you have to interpret the actual words used and the fact that alternative words or phrases were not used. Here, the statute does not exempt conduct specifically authorized by a regulatory body, but rather, conduct specifically authorized by the law, as administered by a regulatory body, and I think that distinction is important.

Because the question becomes not whether FTC has ever specifically authorized Philip Morris' marketing of "light" cigarettes (which I actually believe it has), but whether or not the FCLAA (as administered and enforced by FTC) currently authorizes the use of the term "lights."

If someone were to ask me whether the Federal Cigarette Advertising and Labeling Act, as administered by the FTC, allows a company to promote a new brand, with 20 mg tar under the FTC method, called "Lowest Tar on the Market Marlboro," I would argue that it does not. And one element of my argument would be precisely the fact that FTC issued a consent order in 1971 stating that American Brands could not throw out terms like low-tar without documentation.

In other words, I would use the FTC consent order as one piece of information in determining what is or is not permitted under FCLAA.

I find it difficult to accept the argument that the Federal Cigarette Labeling and Advertising Act, as administered by FTC, does not authorize the documented use of the term "lights." In fact, I think it not only authorizes it, but through its interpretation and administration by FTC, it spells out the specific conditions under which a company may use terms like "lights" or any other descriptor of the nicotine and tar levels within cigarettes.

Finally, I do think it's important to recognize that an action can be authorized in one of two ways. One way, which seems to be the only way acknowledged by the dissenting opinion, is for a federal agency to specifically state that the conduct in question, by the company in question, is permissible. The second way is for the regulatory agency not to state that the action in question, by the company in question, is not permissible.

For example, I'm not aware of any specific trade regulation by FTC that allows the use of a cowboy in cigarette advertising. But I have no doubt that Marlboro advertising, at least in terms of its use of a cowboy, is lawful under FCLAA. This is why I think the distinction in the exemption clause between conduct authorized by law versus conducted authorized by a regulatory body is important.

I would like to close by noting what I feel should be the broader lesson from this case. When federal agencies are given jurisdiction to enforce laws, it has a tremendous negative impact on the ability of local government to regulate the same conduct and on the ability of citizens to use state law to hold companies accountable for improper conduct that is federally regulated. I think one of the greatest mistakes we in tobacco control have made historically is under-appreciating the impact of federal preemption of local control, including its impact on litigation.

The proposed FDA tobacco legislation is the next arena where this is going to play itself out. And I'm afraid that in their zeal to claim victory over Big Tobacco, organizations like the Campaign for Tobacco-Free Kids are going to end up providing broad immunity to cigarette companies and greatly undermine the ability (as well as interest) of state and local governments to address the problem of tobacco use.

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