Commission on Civil Disorders and the President's Commission on Law Enforcement and Administration of Justice was the impact which consumer fraud has on our economy and its impact as a causative factor in the unrest in our society. The National Commission on Civil Disorders' report indicated that consumer frustrations were among the 12 most deeply held grievances which fostered discontent and disorder. The Commission declared that, "there can be no higher priority for national action and no higher claim on the Nation's conscience" than the need to develop programs to change the system of failure and frustration that now dominates the ghetto and weakens our society.

The President's Commission on Law Enforcement and Administration of Justice pointed out that estimates of total fraud losses are difficult. Hovever, even the fragmented estimates listed by the Commission point up the magnitude of consumer fraud.

The Food and Drug Administration indicates that about $1 billion, as a conservative estimate, is spent annually on worthless or extravagantly misrepresented quack devices and drugs, foods, and cosmetics.

Several years ago, a survey by the Arthritis and Rheumatism Foundation disclosed that perhaps $300 million is spent annually on such worthless arthritis remedies as alfalfa tea, phony "radiation" treatments, and copper bracelets.

The National Better Business Bureau states that during the last 2 years its biggest single source of complaint deals with magazine subscription sales. Fraudulent and deceptive practices in home repairs and improvements are a close second, with television repair following close behind. Losses to these and other rackets may be in the billions

of dollars.

Estimates of consumer losses through frauds in the sale of new and used cars are less well documented, but it is apparent this constitutes a considerable expense to the public. Not only are these practices costly in dollars and cents, but in all too many instances they may be costly in terms of the lives and safety of the people defrauded. Bald tires which have been regrooved without the addition of any new rubber may blow out. The so-called new cars created by welding together undamaged halves of wrecked cars may come apart.

The public also bears sizable losses from fraudulent solicitations for charities, phony land promotion schemes, home study rackets, and numerous other schemes.

The report of the President's Commission on Law Enforcement and Administration of Justice concluded that particularly disturbing is the impact of fraud upon the poor or those who live on the margin of poverty. While no comprehensive data is available, what few studies there are indicate the disastrous impact this kind of fraud can often have. In one study of 500 households in four low-income housing projects, more than two of every five families reported being cheated or exploited by sellers or finance companies.

At the same time, consumers feel frustrated and alienated because they have nowhere to turn for effective redress. Generally quite small amounts are involved as far as any one individual consumer is concerned. The cost of private counsel is generally more than the amount involved. This is to say nothing of the time which the individual consumer must take from his job to initiate the case and to see it

through the often long-drawn-out legal process. For the poor, the elderly, and the unsophisticated, this is all compounded by their lack of knowledge of the course of action which is open to them, and their hesitancy to involve themselves with lawyers and the law. But the chief barrier is their lack of money to initiate such actions and carry them through to recover what they have lost. As a result, the consumer's frustration turns to hopelessness and a feeling that the law does not serve him fairly.

In short, gentlemen, consumer fraud is an insidious economic cancer which eats at the very vitals of our society. The fact that it continues to the extent it does erodes the respect of the individual, especially the poor, for law enforcement. It rots their faith in the equal application of the law to the white-collar fraud robber and to the family who cannot pay for shoddy merchandise they were tricked into buying by that self-same operator. It withers our moral fiber. It misdirects our economic resources. It saps the strength of our free enterprise system.

Crime is crime whether it be at the tip of a gun or at the tip of a pen and the tip of a tongue of a fraudulent sales operator. All reasonable forces for years have decried consumer fraud. It is long past time we turned orations into actions, lament into law, exhortation into fraud elimination.

I conclude my statement with a plea for speedy action on this legislation by this committee and the Congress. Through it, President Nixon has committed himself and his administration to break new ground to broaden consumer protection. We hope that Congress will move speedily in passing this bill which will give the consumers of America broad new protection from the perils of the marketplace. Thank you.

Senator Moss. Thank you very much, Mrs. Knauer. That is a very eloquent and fine statement. And as I tried to underline, we on this committee do believe that there is an urgency to move on in this field, and I assure you we will try to push ahead.

I think I would like to defer any questions I may have until we have heard from Mr. McLaren, and then we may direct questions to either or both of you.

Would you proceed, then, Mr. McLaren?

Mr. McLAREN. Thank you, Mr. Chairman.

I appreciate the opportunity to testify before you about S. 3201, the Consumer Protection Act.

With me this morning are Mr. Bruce Wilson, my special assistant; and Mr. Jack Pearce, our Assistant Chief of the Public Counsel and Legislative Section of the Antitrust Division.

Senator Moss. You gentlemen are welcome.

Mr. McLAREN. The purpose of this bill is--and we believe its effect will be to afford consumers substantial additional protection against fraud and deception. It does this by expanding the jurisdiction and powers of the Federal Trade Commission; by making certain defined activities by sellers of goods and services violations of Federal law; by placing enforcement authority with respect to these new violations in the Department of Justice as well as the FTC; and by creating in consumers a Federal right of action to recover for damages suffered by reason of such violations.

As Mrs. Knauer has pointed out, the act would be administered by a new Division of Consumer Protection in the Department of Justice. This Division, which would also represent consumer interests before Federal regulatory agencies, would be headed up by an Assistant Attorney General and would be coequal with the Antitrust Division, the Tax Division, the Criminal Division, and so on. In size, I envision that this new Division would begin operation with a staff of 25 to 30 lawyers and economists, and would expand very quickly to at least twice that number. In addition, the Division's efforts would be supplemented by the 93 U.S. attorneys' offices throughout the country. Unfair practices would thus be attacked on both the national and local levels.

Turning now to the specific provisions of this bill-the Consumer Protection Act. It would expand the authority presently vested in the Federal Trade Commission in two different ways.

Under present law, the Federal Trade Commission has no power to enjoin fraudulent practices until its administrative hearings have been completed. The result is that delay and dilatory tactics are encouraged, the consumers must often wait for extended periods of time before the Commission can move to protect their interests.

Section 102 of this bill would remedy this by authorizing the Commission to seek injunctions from the Federal courts without completing its hearings, where it appears that emergency measures are needed in order properly to protect consumer interests. A defendant would, of course, have an opportunity to present his case to the court before an injunction was issued.

At present, the Commission's authority is limited in that it must. show that a seller is using an unfair or deceptive practice in interstate commerce before the Commission has power to act. The Commission's jurisdiction is, therefore, not as broad as that provided in many other Federal statutes which apply to activities "affecting" interstate commerce. Examples of such statutes are the Truth-in-Lending Act and the Sherman Act.

Many unfair and deceptive practices, though local in nature, are systematically utilized throughout the country. There is no doubt that such practices harm consumers; they also burden interstate commerce by diverting revenues from honest and conscientious businessmen to their dishonest or careless competitors.

Section 101 of the bill presently before you would close this loophole. It would amend the Federal Trade Commission Act to extend the Commission's authority under section 5 of that act to unfair practices affecting interstate commerce, as well as those taking place in inter

state commerce.

Before turning to the substantive law provisions of S. 3201, I would like to call your attention to the fact that, to a certain degree, we have followed the same general scheme as Congress adopted in the Clayton Act. That is, we set up certain substantive offenses; we allow for coordinate jurisdiction in the Federal Trade Commission and the Justice Department; and we create a private right to recover for damages resulting from the prohibited practices.

Section 201 of the act spells out the proscribed practices, which are 11 in number. These are practices which have substantial adverse effects on consumers. They are well known to be unfair and deceptive

practices under section 5 of the FTC Act, as developed by the Commission.

The Justice Department would be empowered to bring suit against such practices, and to obtain a preliminary injuction where it appears that the practices should be suspended pending adjudication (sec. 203). The Consumer Protection Division would be given investigative authority similar to that of the Antitrust Division under the Antitrust Civil Process Act. This would enable the Division to make speedy and accurate investigations (sec. 208).

Upon the entry by a court of a consent decree or a final decree after adjudication, or upon the entry by the FTC of a consent order or a cease and desist order against a violation of the Consumer Protection Act, injured consumers could bring their own suits to recover damages, to obtain rescission of contracts, or to obtain other equitable relief (sec. 204).

If a court has adjudicated that the defendant has committed an unlawful practice under the act, the judgment will be prima facie evidence of the violation in the consumers' suit.

Under the Federal Rules of Civil Procedure, consumers will be able to bring suit as a group when the unlawful practice has damaged a substantial number of them, and when the other requirements for a class action are met. Since this is a statute regulating commerce, they need not meet any requirement for jurisdictional amount to bring suit. (See 28 U.S.C. sec. 1337.)

The right to bring a class action in Federal court would provide consumers with a powerful new legal tool. Litigation usually costs more than an individual consumer can expect to recover. He presently has little choice but to take his loss.

But if a group of consumers can share the costs of litigation, they may be able to recover most of their money damages. And if a seller must make good to all those he has harmed by a violation, he will have considerably more incentive to abide by the law. The unethical seller can no longer rest secure in the knowledge that few if any consumers can sue him and that public authorities can only, after much effort, issue an injunction.

The bill provides for court control over attorneys' fees. This insures that funds paid to consumers by defendants are not diminished by excessive counsel fees (sec. 204).

Finally, the bill provides for an annual review of the effectiveness of the act by the Attorney General and a report to Congress. This provides a procedure for improving the legislation as we gain experience with it, and as the law of unfair and deceptive practices develops further (sec. 209).

The approach we recommend in this bill differs somewhat from proposals in other bills. Some, for example, would provide a wide range of class suits in Federal courts. Let me explain to you why we think the approach of S. 3201 is better balanced and more effective than other approaches, and why we recommend it to you.

A major new consumer remedy in the Federal courts must meet a number of requirements. The remedy must be effective for consumers. It must be fair to manufacturers and merchants. And it must be manageable by the Federal courts. To meet these requirements we must deal with some very practical problems.

We concluded that both public and private enforcement are needed to make the law effective. Private enforcement against consumer frauds has much to offer. But it is apt to lack effectiveness in some cases, and to generate needless litigation in others.

Where the defendant has little in assets, or damages are hard to prove, neither private lawyers nor aggrieved consumers may find it worth their while to pursue a legal action. This is so even though cler frauds may have been committed, and the seller should be brought before a court. In such a case, public enforcement is needed. The Consumer Protection Division, supplementing the efforts of the Federal Trade Commission, can provide that enforcement.

For the bill to be fair to suppliers and manageable by the Federal courts, some specificity in the acts and practices subject to suit is required. And, we believe, selection of suits by the Government is justified for this purpose.

The very broad language of the Federal Trade Commission Actdeclaring unlawful "unfair or deceptive acts or practices"-is appropriate for administration by a specialized administrative agency. The FTC gives case by case definition to this standard in evolving the law governing trade practices.

But a law for direct redress by large classes of consumers entails different considerations. Large class actions in Federal courts can generate very substantial liabilities for defendants, and very substantial fees for plaintiffs' attorneys. Care must be taken that the inducement to organize suits for large groups does not lead to harassing actions, or "strike suits". A broad and vague law, we feel, would allow undue scope for such suits.

In addition, large class actions impose very substantial administrative burdens upon the courts. Under Federal rule 23, the court must determine if a class action is warranted, who are proper class members, how they shall be protected at the trial, how they shall participate in the recovery, and so on. Large numbers of such suits, on unclear grounds, could add materially to the already considerable burden which present class actions now placed on the courts.

Finally, if suppliers are to be subject to new and potentially substantial liabilities, it is imperative that they be given clear notice of what their obligations are.

We believe that the specification of the 11 types of proscribed practices, and the provisions for Government selection of cases, meet these problems. The list of practices provides wide coverage-some 85 percent of the types prosecuted by FTC, as we have been informed.

But at the same time, it provides suppliers of goods and services clear and fair notice of their liabilities. The provisions for prosecution by the Justice Department-as well as the expansion of the FTC's enforcement authority-give the consumer the skilled legal services of the Government in detecting and establishing violations, while providing for a public selection of cases which are both sound and significant to consumers.

And, as stated before, since it is highly likely that the worst offenders will be substantially "judgment proof," so that private actions would not often be self-liquidating, we believe that this doublebarreled Government enforcement provides the most promising prospect of successful consumer relief.