Federal Trade Commission v. Standard Education Society
1937 U.S. LEXIS 536, 302 U.S. 112, 58 S.Ct. 113 (1937)
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Rule of Law:
Deceptive representations in advertising, including offers of 'free' goods that are conditioned on a bundled purchase, constitute unfair methods of competition under the Federal Trade Commission Act, regardless of whether a sophisticated person would be deceived, as the law protects the unwary and trusting consumer.
Facts:
- Standard Education Society and Standard Encyclopedia Corporation (Respondents) sold encyclopedias and a ten-year loose-leaf extension service to the public through subscription salesmen.
- Salesmen represented to prospective customers that they were 'specially selected' to receive a set of encyclopedias as a 'gift' or for 'free'.
- Salesmen further represented that the customer was only paying for the extension service at a price of $69.50.
- In reality, $69.50 was the regular, standard price for the combined package of the encyclopedia and the extension service; the books were not free.
- Respondents also advertised a list of 'Contributors and Reviewers' that included individuals who had not contributed to or reviewed the publications.
- The companies utilized fictitious testimonials and used altered or garbled versions of authorized testimonials.
- Individuals H. M. Stanford, W. H. Ward, and A. J. Greener were the managers and sole stockholders/incorporators who controlled both corporations.
Procedural Posture:
- The Federal Trade Commission (FTC) filed a complaint against the Standard Education Society, the Standard Encyclopedia Corporation, and three of their controlling officers.
- After extensive hearings, the FTC found that the companies engaged in unfair and deceptive sales practices and issued a 'cease and desist' order.
- The companies (Respondents) appealed the FTC's order to the U.S. Circuit Court of Appeals for the Second Circuit.
- The Circuit Court of Appeals affirmed some parts of the order but reversed the key provisions that prohibited the companies from representing their books as 'free'.
- The Federal Trade Commission (Petitioner) was granted a writ of certiorari by the U.S. Supreme Court to review the decision of the Circuit Court of Appeals.
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Issue:
Does a sales practice of representing an encyclopedia as 'free' when its cost is bundled into the standard price of an accompanying service constitute a false, deceptive, and misleading practice under the Federal Trade Commission Act?
Opinions:
Majority - Mr. Justice Black
Yes. A sales practice of representing an encyclopedia as 'free' when its cost is bundled into the standard price of an accompanying service is a false, deceptive, and misleading practice under the Federal Trade Commission Act. The appellate court erred in reasoning that such a statement was a 'trivial nicety' because a sophisticated person would not be misled. The fact that a false statement may be obviously false to those who are trained and experienced does not change its character or its power to deceive others who are less experienced. Laws are made to protect the trusting as well as the suspicious, and the rule of caveat emptor should not be relied upon to reward fraud. The Commission's factual findings, which showed that this sales plan successfully deceived consumers, were supported by substantial evidence and should not have been overturned. Furthermore, the Commission was justified in including the individual corporate officers in its cease and desist order, as they controlled the corporations and could otherwise evade the order's intent.
Analysis:
This case significantly strengthened the Federal Trade Commission's power to regulate deceptive advertising by establishing a protective standard for consumers. It rejected the 'reasonable person' standard in this context, focusing instead on whether a practice has the capacity to deceive the 'unwary' or 'trusting' consumer. The decision also solidified the principle of judicial deference to the factual findings of administrative agencies like the FTC when those findings are supported by evidence. Finally, it affirmed that corporate officers can be held personally accountable for their company's illegal practices, preventing them from using the corporate form as a shield against regulatory orders.
