FEDERAL TRADE COMMISSION ACT (1914)
F EDERAL T RADE C OMMISSION A CT (1914)
Herbert Hovenkamp
T
he Federal Trade Commission Act (38 Stat. 717) was originally passed in
1914 with President Woodrow Wilson’s enthusiastic support. In its current form, the act states that “unfair methods of competition ... and unfair or
deceptive acts or practices in or affecting commerce, are hereby declared unlawful.” The statute created a new government
agency, the Federal Trade Commission (FTC), a five-member The statute created a new government agency,
board with broad authority to regulate unfair and deceptive
the Federal Trade Commission (FTC), a fivebusiness practices. No more than three of the FTC members
can be from the same political party, and they are appointed member board with broad authority to regulate
for overlapping seven-year terms. This was intended to limit unfair and deceptive business practices.
the amount of control that any particular president and his
political party have over the FTC.
SUPPORT FOR THE FTC AND OTHER COMMISSIONS
Many political groups supported the creation of the commission. First, Progressive Party members believed that the courts were too conservative about
condemning anticompetitive practices and tended to side with big business.
Further, court processes were cumbersome and took a long time. Often,
many years went by from the filing of a complaint until a final decision. By
contrast, an administrative agency was not obligated to follow strict rules of
evidence and did not have to use juries. The commissioners themselves could
listen to evidence and then issue “cease and desist” orders telling firms that
certain practices must be stopped. Even businesses largely supported the FTC
because of cumbersome court procedures and the inconsistent results of jury
trials in many different courts. Many businesses believed that a single commission could clarify and give them advance notice of the kinds of practices
that were unfair.
The Federal Trade Commission Act was part of a broadbased movement in the late nineteenth and early twentieth
centuries to use commissions rather than courts to regulate various forms of business conduct. Commissions were regarded
both as more streamlined in their decision-making process and
also as more specialized. However, early in its history the FTC
was hampered by a conservative Supreme Court that was highly suspicious of regulatory agencies and limited their power.
The Federal Trade Commission Act was part of
a broad-based movement in the late nineteenth
and early twentieth centuries to use commissions
rather than courts to regulate various forms of
business conduct.
Several commissions were set up as part of this movement:
• The Interstate Commerce Commission supervised railroads and other
public transportation and cargo carriers.
• The Securities Exchange Commission regulated corporate stocks and
bonds.
• The Civil Aeronautics Board regulated interstate air traffic.
• The Federal Power Commission (now called the Federal Energy Regulatory Commission) regulated the provision of electric power.
• The Food and Drug Administration regulated medicines, pharmaceuticals,
foods, and a few related products such as cosmetics.
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The FTC eventually was divided into two bureaus, or branches. The
Competition Bureau was intended to enforce that part of the law dealing with
“unfair methods of competition.” The Consumer Protection Bureau was
intended to enforce that part of the law condemning “unfair or deceptive acts
or practices.” Each bureau has broad power to define the business practices
that violate the statute. However, the power is not unlimited. If the commission decides to condemn a certain practice, it ordinarily issues a “cease and
desist” order, telling the company that it must stop that practice. The company can either agree or appeal the FTC’s order to a court. If the court agrees
with the FTC, it will “enforce” the order. If it disagrees it will “vacate” the
order and either let the company off entirely or else send the case back to the
FTC so that the FTC can consider other issues it may have overlooked.
COMPETITION
When the FTC’s Bureau of Competition is enforcing the law against “unfair
methods of competition,” its power overlaps extensively with the power of
the Department of Justice to enforce the antitrust laws. The FTC has the
power to enforce the Clayton Act directly, but its power over offenses covered by the Sherman Act is even broader. The Supreme Court held in FTC v.
Brown Shoe Co. (1966) that the phrase “unfair methods of competition”
includes everything that the Sherman Act includes plus some additional practices that might not violate the Sherman Act.
antitrust: laws protecting commerce and
trade from monopolistic restraints on
competition
One example of this broader power is part of the law of price fixing. The
Sherman Act, which prohibits contracts, combinations, and conspiracies “in
restraint of trade,” condemns price fixing by cartels (groups of businesses that
try to limit competition). But under the terms of the Sherman Act, this price
fixing must be done by agreement for the practice to be considered illegal.
Economists know, however, that there are some markets called “oligopolies”
in which firms can achieve cartel-like results without ever agreeing with each
other. For example, if there are four gasoline stations on a busy intersection,
each one of them can see what the other ones are charging for gas. If one
station puts up its price in the morning, each of the others can match the
price, acting entirely on its own. The four stations may effectively fix the
price at a higher level without ever formally agreeing with each other to do
anything. Although this would not be a Sherman Act violation, the FTC has
taken the position since the 1940s that it could be an “unfair method of competition” under the Federal Trade Commission Act (Triangle Conduit and
Cable Co. v. FTC [1948]). Since the early 1980s, however, the courts have cut
back the FTC’s power to condemn oligopoly pricing unless there is a fairly
explicit agreement among the parties.
The FTC also enforces the Clayton Act provision against anticompetitive
mergers. In general, when the FTC enforces the merger laws the standards
are the same as when the Justice Department enforces the
Clayton Act. As a result, we have one set of merger standards
for most firms. In general, the merger laws come into play
In general, the merger laws come into play when when a merger either creates a monopoly or makes it more
likely that the firms will engage in price-fixing or oligopoly
a merger either creates a monopoly or makes it
behavior. If a market contains several dozen firms of roughly
more likely that the firms will engage in price- the same size, then price fixing is unlikely. The concern for
possible price fixing gets stronger as the number of firms in
fixing or oligopoly behavior.
the market falls below seven or eight. This is because price-
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fixing agreements tend to work better when the number of participants in the
agreement is fairly small.
CONSUMER PROTECTION
The Bureau of Consumer Protection in the FTC is concerned with deceptive
practices. One division of this Bureau is concerned with false and misleading advertising. Another is concerned with misleading credit practices by
lenders. The FTC has also established rules regarding how car dealers must
report features such as the miles that a used car has been driven or its gasoline mileage. Increasingly the FTC has become involved in enforcement
against fraudulent practices by telemarketers as well as practices by sellers
over the Internet, including complaints about spam, or unsolicited e-mails.
In this 1934 cartoon, monopolies block the “highway of competition,” creating a barrier to small business. The Federal Trade
Commission has fallen by the wayside—it is criticized here as “an idle threat.” (© MICHAEL J. SANDERS/USAF/GETTY IMAGES)
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FEDERAL UNEMPLOYMENT TA X ACT (1939)
The FTC also has always paid very close attention to health claims, particularly for products that are said to be “miracle” drugs or to cause dramatic
weight loss.
Do Not Call
In 2003 the Federal Trade Commission
(FTC) instituted a National Do Not Call
Registry that allowed citizens to register their phone numbers in order to
cut down on the number of telemarketing calls they received. Political
organizations, charities, and telephone surveyors were still allowed to
call. Organizations with whom the citizen had an established business relationship were allowed to call for up to
eighteen months after the most recent
transaction. The FTC was scheduled to
begin enforcing the Do Not Call Registry on October 1, 2003.
EFFECTIVENESS
The FTC has made many hundreds of rules governing many aspects of business behavior. Some of the rules are very complicated, but others are quite
simple. Here are two examples, the first concerning advertising and the second concerning product warranties:
Advertising must tell the truth and not mislead consumers. A claim can
be misleading if relevant information is left out or if the claim implies something that’s not true. For example, a lease advertisement for an automobile
that promotes “$0 Down” may be misleading if significant and undisclosed
charges are due at lease signing.
If your ad uses phrases like “satisfaction guaranteed” or “money-back
guarantee,” you must be willing to give full refunds for any reason. You also
must tell the consumer the terms of the offer.
These rules, simple and straightforward, have protected the average consumer from unfair business practices for decades. Although the FTC is a large
government agency, it encourages consumers to file complaints when they
believe they have been the victim of a false or misleading claim. The FTC
actively maintains a web site for this purpose.
See also: CLAYTON ACT; SHERMAN ANTITRUST ACT.
BIBLIOGRAPHY
Chamberlain, John. The Enterprising Americans: A Business History of the United
States. New York: Harper and Row, 1974.
Faulkner, Harold U. American Economic History. New York: Harper, 1960.
Hovenkamp, Herbert. Federal Antitrust Policy: The Law of Competition and Its Practice, 2d ed. St. Paul, MN: West Group, 1999.
Sklar, Martin J. The Corporate Reconstruction of American Capitalism, 1890–1916.
Cambridge, U.K.: Cambridge University Press, 1988.
INTERNET RESOURCE
Federal Trade Commission. <http://www.ftc.gov>.
F EDERAL U NEMPLOYMENT TAX A CT (1939)
Ellen P. Aprill
T
he Federal Unemployment Tax Act (FUTA) (P.L. 76-379) emerged from
the country’s experience during the Great Depression. By 1932, 25 percent
of the workers in the United States were unemployed. In his presidential
message of June 8, 1934, President Franklin D. Roosevelt declared that the
American people wanted “some safeguard against misfortunes which cannot
Great Depression: the longest and most
severe economic depression in American
history (1929–1939); its effects were felt
throughout the world
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