Thus, we think the Consumer Protection Act initiates a major consumer protection program on a prudent and practical basis. But we also want to make provision for improving the act as we gain experience with it. This led us to provide for annual reports to Congress. This will require us annually to examine the questions of how effective the law is, and how it may be improved. And it will permit Congress to make its own annual review of these questions.

Let me now describe briefly why the problems I have referred to led us not to choose some of the other proposed methods of protecting consumers. One approach, proposed in S. 2924, is to overrule the recent Synder v. Harris decision. That case held that the individual claims could not be aggregated to meet the $10,000 jurisdictional amount required when Federal court jurisdiction is based on diversity of citizenship.

This approach, in our view, would do both too little and too much in the consumer protection area. It would open the Federal courts not merely to consumer actions, but also to class actions under a wide range of other State laws. On the other hand, it would not provide Federal court jurisdiction where there is no diversity of State citizenship between the plaintiff and the defendant. It would provide no new Federal rights for consumers. And it would provide no more Government enforcement.

Another suggested approach, embodied in S. 1980, is to open the Federal courts to class actions based on any Federal or State law for the benefit of consumers, without regard to the amount in controversy. This would require the Federal courts to administer class action litigation arising from an undefined and potentially very broad range of laws. Class actions could be based not only upon unfair trade practice laws, but also upon State public utility laws, State health and safety laws, usury laws, landlord-tenant laws, and the like.

While requiring Federal courts to assume much of the burden of State court litigation, it would not create any new, clearly defined consumer rights. Nor would it provide for public enforcement efforts, as does the administration bill.

Finally, some have suggested combining a Federal consumer right of action for violations of the Federal Trade Commission Act with provisions similar to those of S. 1980 for making Federal courts broadly available for State rights of action. This is the aproach taken in S. 3092. The practical considerations I have averted to persuade us that this is not the best way to proceed. In particular, I think, we cannot allow our impatience with the variability and frequent inadequacy of State legislation and State procedures to lead us into overloading our Federal court system. The administration proposal provides new rights and new machinery in the Federal courts. It seems to us that what is needed in addition is patient and persistent efforts to upgrade the State laws and the State procedures.

Those efforts are underway. Nineteen States have adopted consumer protection laws modeled on recommended uniform acts. The Federal Trade Commission and others are working to encourage more such laws, and to improve their administration in the States.

Both Mrs. Knauer's office and the new Consumer Protection Division will maintain liaison with State attorneys general and consumer protection offices, and will encourage the consumer protection programs of States and municipalities.

There is much improvement needed in this area. But we believe that in the long run State and local programs must play a central role in consumer protection. This role must include the use of State courts to vindicate consumer rights. Federal courts and Federal agencies cannot substitute for local and State action.

In sum, many responsible legislators and private citizens are now trying to respond to the need for better consumer protection, both here and abroad. Various approaches have been offered for exploration and consideration. We have examined suggestions embodied in bills submitted in Congress. We have consulted persons in private life familiar with consumer problems. We have had extensive discussions among different groups in the administration.

We believe the legislation we recommend here is sound. It takes account of the practical considerations involved. It is workable. It will give consumers very substantial public enforcement assistance and private remedies they have not had before. We believe it will improve the commerce of the United States. And it will provide a firm foundation for further development.

We urge your careful consideration of the Consumer Protection Act, and recommend that it be enacted.

Senator Moss. Thank you very much, Mr. McLaren, for that good statement. We are pleased to have it.

I have maybe a few questions that might help to clarify this a little-in my mind, anyway.

First, Mr. McLaren, where would the primary responsibility for dealing with the individual victimized consumer lie-with the FTC or with the Justice Department?

Mr. McLAREN. Well, jurisdiction would be coordinate and equal, Mr. Chairman; this is the pattern, as you know, of the Antitrust Division's jurisdiction, along with the FTC, under the Clayton Act.

The theory, I think, is that you have greater and lesser effectiveness in the agencies at different times. If one is not handling it, the other will. And also, I think, that it tends to give a little incentive to the agencies in competition with one another to make a good record. With good liaison, it seems to me it can be made to serve the public interest.

In particular, under this bill I would assume that the hardcore kind of violations would probably be prosecuted most frequently by the Justice Department. It would take them into court on such matters. On the other hand, the Federal Trade Commission would specialize in the development-of-the-law kind of case since they would have a broader enabling statute.

I might say incidentally, Mr. Chairman, that Commissioner Elman in his separate statement in the Federal Trade Commission's Annual Report of 1968, strongly supported this idea of placing enforcement authority in the Justice Department. I will not read it, but I will refer the committee to pages 56 and 57 of the FTC's 1968 report.

Senator Moss. Thank you. We are going to hear from Commissioner Elman sometime later, and we are glad to have that reference. We will, perhaps, discuss that with him a little bit at that time.

Mrs. Knauer might give her opinion on where an aggrieved consumer should turn first, then, the FTC or the Justice Department? Mrs. KNAUER. As the President conceives this three-pronged attack on consumer problems, I believe he feels that some of the complaints

will come to us directly, and I would refer them immediately to the new Consumer Protection Division and, of course, to the FTC, too.

We get, as you know, about 2,000 consumer communications a month now, Mr. Chairman. Many of these cite examples which, when investigated as you know, I have no investigative force of my own or power-but when investigated by the new Division of Consumer Protection, the Division could go right ahead and take action where they deemed action was appropriate.

Senator Moss. What would the three prongs be the local level, the FTC, and Justice?

Mrs. KNAUER. No, I was thinking in terms of the Consumer Representation Act which would set my office up as a statutory office within the White House, working as a nucleus, but working very closely with the FTC and with the new Division of Consumer Protection in the Department of Justice; but working as a coordinating team, as it were, to relay this information back and forth.

Senator Moss. You envision your office as being sort of a coordinating agency to make sure that it gets in the right place?

Mrs. KNAUER. Yes.

Senator Moss. Mr. McLaren, in the Nader report, it was stated that it takes about 2 years between the time the FTC begins investigation to the time that it issues a complaint. S. 3201 provides a preliminary injunction for only 60 days. In view of the usual investigatory period, will the FTC be able to make significant use of preliminary injunctions?

Mr. McLAREN. Well, I think that the Commission has been moving to streamline its procedures; however, I see the problem that you raise there. I think that when you go into court for a preliminary injunction, you frequently get a lot of your case into evidence. I would hope that the FTC might be able to complete action in 60 days. Perhaps they need 90 days.

I think that perhaps I would defer to the commissioners themselves, who have a lot more experience on that.

I know, however, that the FTC would be better able to serve the public interest with this temporary injunction authority.

Senator Moss. Mrs. Knauer, do you think that S. 3201 will offer full protection against fraud and deception for most individual consumers so that additional mechanisms for effectuating individual consumers' rights will not be needed?

Mrs. KNAUER. I feel it will be most effective. As Mr. McLaren has said, this bill offers broad new consumer protection. Based on my experience in Pennsylvania, I feel that the 11 areas that are described as illegal in this act constitute the major bulk of fraud. Certainly they did at the State level, and apparently they do, according to the FTC, at the national level.

But I do not think any of us feel we are frozen in on just 11 categories. Experience, as this law is in effect, might indicate that we would want to add two, three, or more categories. But I think that experience will be our best teacher in this matter.

Senator Moss. Mr. McLaren, you stated that these 11 categories cover about 85 percent of the FTC prosecutions. The FTC has come under some strong criticism recently in which it was alleged that the FTC does not attempt to set priorities for its prosecutions, that many

of its prosecutions are trivial because it relies on the mailbag to generate investigations. Do you have any assurance that the 11 categories cover the most important types of fraud presently practiced? Mr. McLAREN. I think that the experience that the FTC has had, together with the experience and the background of all the different agencies that have been consulted on this, including some of us who have had experience in private practice, shows that these 11 practices do cover the vast bulk of the most serious consumer frauds. These types of practices can be carefully spelled out and made the kind of thing that a businessman can be made responsible for in damages.

I think we have a delicate balance here. We are taking a new area of the law into the courts. I think that we have to be very careful of the burden we place on the courts because potentially every consumer and every transaction in the United States could form the basis of some kind of consumer action.

I think we need to proceed carefully. I think we definitely need to move forward. I think we have a fair basis for doing it.

We must not on the one hand leave the consumer short; on the other hand, we must be fair to businessmen who will be responsible in damages and will have to defend themselves in court.

We think that we have achieved a good balance here in this bill, and we would like to see it go.

Senator Moss. Let me pose just one or two examples to see whether they are included in the definitions of the 11 categories.

Could chain referrals be stopped? And by what category? This is where consumers are led to believe they will not need to pay for certain merchandise despite signing a contract for it if they supply names of friends who will also buy the merchandise. But the merchandise is not so easily sold to others, or else the company does not keep track of the names submitted by the consumer. That is one of them.

Perhaps the other category that I might suggest would be the "free" gimmick. "This lovely X-cubic foot freezer is yours absolutely free if you subscribe to a food freezer plan." The freezer is free, but the food is so overpriced that it covers the cost of the freezer with a nice profit to boot.

Are either of those covered?

Mr. McLAREN. Well, I think that chain referrals would be covered by No. 5 on the list: representing that the consumer will obtain any rights, privileges, or remedies, knowing that the consumer will not.

I think this may also cover your second example, although No. 8 provides for holding the seller to his statements of fact concerning the reason for, existence of, or amounts of price reductions, or savings in comparison to prices of competitors or his own price, when he knows that this is false.

Senator Moss. Under No. 5, where you say "representing the consumer will obtain any rights, privileges, or remedies," is that a legal right or privilege, or just any suggestion of some benefit coming to him?

Mr. McLAREN. Well, I think that this covers representations that might go along with what, for example, a given lot would carry with it, a real estate lot. If it did not carry those privileges, yes, No. 5 would cover that.

It would also cover representations with respect to perhaps warranty rights that are not included.

Senator Moss. Well, switching to the freezer case again, I suppose it is true that the freezer is free; but the cost of the food is so overinflated in price-do you think No. 8 gets at that?

Mr. McLAREN. Mrs. Knauer suggests that No. 7 also probably gets at it because they pass off the meat as being grade A, and it is somewhere down the line, substantially less in quality than it would other

wise be.

Of course, in each case, we are not trying to trap the seller. We have the qualification in here that these statements are knowingly made and that they are false and the seller knows that they are false.

Senator Moss. Of course, I think you testified that it was going to take some buildup, perhaps, of case law in these categories. There are several questions that I raise as to where they might fit in.

I have another one on the substandard correspondence and vocational schools that lead one to believe he will acquire a valuable skill, but whose graduates find themselves unqualified for a job when they finish the course. Where is that covered?

Mr. McLAREN. There again I think No. 5 would probably cover it, Senator; and probably No. 11, because these correspondent schools frequently represent that they have some kind of a tieup or sponsorship with a job-providing authority that they really do not.

Mrs. KNAUER. Mr. Chairman, may I point out that No. 6 would strike right at the heart of what I consider a very vicious practice that was evident to me in Philadelphia and in Pennsylvania's inner cities, where goods that are sold are repossessed, then they are repainted, resprayed and sold as new to unsuspecting, less sophisticated people for the full purchase price when they are not new. They are secondhand. Item 6 would strike at what I consider a source of great dissatisfaction in our inner cities among our poorer and low-income people.

Senator Moss. No. 5 would seem to be kind of a general category, category, like No. 5 under the FTC Act. It is broad in its wording and perhaps would cover a great many of these frauds that we are confronted with.

Mr. McLAREN. Mr. Chairman, I wonder if it would be helpful if we would furnish you examples that would fit under these different categories by reference to decided cases?

Senator Moss. It would be very helpful. We would include them in the transcript of the record of the hearing, and it would be helpful to the committee to have it.1

Senator Moss. I might agree that specific rules are essential to provide manufacturers with notice of unfair and deceptive trade practices, but should not the FTC have express authority to set trade regulation rules to define other prohibited acts? And should not the consumer be able to sue as a class if these rules are violated?

Mr. McLAREN. I think that is something that needs to be developed gradually. It may very well be true that that should be the way in due course.

We think that these 11 points now on the list cover this situation as of the present time. We certainly do not have a completely closed mind on it, but we have made a careful analysis of the defined practices

1 See letter on p. 27.