Senator Moss. Thank you very much, Senator Tydings. We appreciate your testimony.

We have four Commissioners of the Federal Trade Commission. I do not know if you gentlemen want to come up one at a time or want to sit here all at the table and testify one after the other. I will proceed in any way you would like to.

STATEMENT OF HON. PHILIP ELMAN, COMMISSIONER, FEDERAL TRADE COMMISSION

Mr. ELMAN. Thank you, Senator. I am Philip Elman.

Senator Moss. Yes, Commissioner Elman, we are pleased to have you. We will have you go first.

I understand you each individually are giving your reactions, so I do not want to lump you together. I think you might have some differences. I hope you have taken different points of view.

Mr. ELMAN. Each of us has given the matter very considerable thought and study in the light of his own individual experience, and I think each of us has a separate statement, Senator.

Senator Moss. Thank you. You may proceed, Commissioner.

Mr. ELMAN. Mr. Chairman, Senator Pearson, I welcome this opportunity to restate and amplify the various legislative proposals I have made as a member of the Federal Trade Commission for achieving better protection of consumer interests.

We must start from the generally accepted premise that existing Government programs for dealing with marketing abuses do not adequately safeguard the public. As the President noted in his message to Congress on October 30, 1969, "many of the Government's efforts to help the consumer are still geared to the problems of past decades."

What we have now is a body of separate and discrete statutes, each reflecting an ad hoc response to a specific immediate problem, enacted at different times and in various circumstances. What we should have is a code of consumer protection, comprehensive and cohesive in scope and fully responsive to present needs.

Present law is replete with incongruities. Failure to disclose the country of origin on the label of an imported fur or textile product can result in criminal penalties (15 U.S.C. 69); but it is not a crime to violate the Automobile Safety Act, no matter how aggravated the offense or how much the public is endangered (15 U.S.C. 1391).

On the other hand, while violations of the Automobile Safety Act can be significantly deterred by imposition of substantial civil penalties, no civil penalties may be assessed (unless the defendant has previously been enjoined for past violations) under any of the labeling acts or the Flammable Fabrics Act-where, as I shall point out, such penalties in a relatively few cases could bring about a far greater degree of compliance than has been achieved by a multitude of consent orders.

While a new drug cannot be placed on the market without pretesting and advance approval of the Food and Drug Administration (21 U.S.C. 355), other products (for example, laundry detergents containing enzymes) may be freely marketed unless and until they are affirmatively found to be unsafe or unduly hazardous, even though the Government may believe a substantial and unresolved question exists as

to whether their use is dangerous to the health and safety of the public (15 U.S.C. 1261).

Some products (for example, cyclamates) are absolutely barred from the market if there is evidence that they induce cancer in animals (21 U.S.C. 348); while another product (cigarettes) which has been found to cause cancer in humans not only is freely sold, but Government agencies were forbidden to require that advertisements promoting its sale should also disclose the health dangers to the public. (15 U.S.C. 1331.)

A few products and services are subject to stringent regulation, including criminal sanctions and requirements for affirmative disclosure of information: Wool Products Labeling Act (15 U.S.C. 68); Fur Products Labeling Act (15 U.S.C. 69); Textile Fiber Products Identification Act (15 U.S.C. 70); Cigarette Labeling Act (15 U.S.C. 1331); Flammable Fabrics Act (15 U.S.C. 1193); Truth-in-Lending Act (15 U.S.C. 1601).

But, as to most products and services offered to the public, principal protection for the consumer is left to the Federal Trade Commission and its limited power to prohibit unfair and deceptive practices solely through issuance of orders to cease and desist having only a prospective effect. Unless and until an order based on past violations is issued, no penalties, criminal or civil, can be imposed for practices that violate the law, no matter how flagrant and harmful to the public. And even as to respondents under order, they are subject to civil penalties only if violations of the order are proved in a new, separate proceeding brought by the Attorney General in a Federal court.

Finally, while injured consumers are given a private right of action under a few statutes (for example, the Truth-in-Lending Act), no recovery of damages may be had under the FTC Act even when they result from unfair and deceptive practices which violate an outstanding

order to cease and desist.

Reviewing the present unsatisfactory situation, I stated in the Commission's Annual Report for 1968 (pp. 60-61) that:

The time has come for Congress to wrap up all the bits and pieces of existing and proposed consumer protection legislation into a single, comprehensive Consumer Bill of Rights. *** Implicit in the whole panoply of Congressional and Executive actions in this area has been a recognition of certain basic rights of consumers, and of the obligation of government to declare and secure those rights. Without having said so explicitly in legislation, Congress has junked the old concept of caveat emptor. In its stead has come gradual and increasing acceptance of the fundamental rights of a consumer buying products in today's markets: the right to receive a product which is safe, which will perform as represented, and is free from defects in materials or manufacture; the right to be sufficiently informed of the material characteristics of a product, so that he will have a basis for making a choice among competing products offered for sale: and the right to be free from unfair, unconscionable, or dishonest sales practices. A Consumer Bill of Rights would provide explicit statutory recognition of these rights, and affirm their application to all, not merely some, products. It would have the legal effect of making these rights derive from Act of Congress, and thus not depend on the action of sellers. In effect, all sellers of all products would be furnishing a statutory warranty to their customers that the product is safe, free from defects of manufacture or materials, and will perform as represented. The protections to the consumer afforded by such a statutory warranty could not be reduced by an "express warranty," such as is now commonly used by manufacturers of automobiles and household appliances, containing conditions and restrictions which have the practical effect of cutting down the consumer's rights.

The law should also make a new allocation of the responsibilities of government, Federal and State, in carrying out effective vindication of those rights.

I renew that general recommendation now. While many problems of consumer protection, such as product safety, warranties, and consumer credit, require particularized treatment, it is essential that Congress enact a comprehensive and coordinated consumer protection program arming both government and private citizens with the weapons to correct and redress, effectively and swiftly, not only fraud or willful misrepresentation but all dishonest or careless business practices which disregard the basic rights of consumers.

1. CONSUMER FRAUDS

The most glaring deficiency in existing consumer programs is with respect to the kind of hard-core frauds to which the Federal Trade Commission devotes so much of its resources and for which its present procedures and sanctions are plainly inadequate.

As I stated last year: high priority must be given to elimination of hard-core frauds and unconscionable ghetto market practices. The poor, the sick, and the elderly are always the prime targets of swindlers and cheats, whose "salesmen" go from door to door in the ghetto, peddling worthless or inferior merchandise at grossly exorbitant prices, and wheedling the buyer into signing a negotiable instrument which they then sell to a so-called holder in due course who takes it free of any defense the buyer has because of the fradulent aspects of the transaction. *** The parasites who exploit and prey upon the poor and the ignorant are not businessmen, even though they may be listed in the "yellow pages" or belong to the chamber of commerce. Not to mince words, they are crooks-and should be treated as such by the law.

I concur fully in the statement made here yesterday by Mrs. Virginia H. Knauer:

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 fradulent 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.

Many industries across the Nation are plagued by such white-collar fraud robbers. Where they are subject to Federal jurisdiction, as they frequently are, all of the law enforcement resources available to the Federal Government should be brought to bear. In its present form, the Federal Trade Commission is clearly inadequate for such purposes, essentially because it was designed to deal with another and different type of problem.

When the Federal Trade Commission was created in 1914, Congress and President Wilson were essentially concerned with the problem of monopoly, not with hard-core consumer frauds perpetrated by crooks and racketeers. It was believed then that a new administrative agency was needed to identify and define emerging trade practices which, although undertaken by businessmen in good faith, could, if unchecked, lead to full-blown restraints of trade. Because of the breadth and indefiniteness of the antitrust laws, Congress established the Commission as an agency to advise and guide legitimate businessmen honestly uncertain as to the practices in which they could lawfully engage. The Commission was therefore structured to deal with such problems mainly through informal techniques stressing conciliation and volun- ·

tary adjustment. After 55 years of operation, the institutional environment and processes of the Commission today reflect the same basic emphasis.

Valuable as these informal techniques may be in handling the kinds of antitrust problems for which the Commission was originally created, they are grossly inadequate for handling consumer frauds that involve fly-by-night operators to whom the Federal Trade Commission in Washington, and its voluntary compliance and cease-anddesist procedures, are distant, meaningless, and unthreatening. Such a swindler does not need to be told by a registered letter from a Washington agency that he is violating the law-he knows it, and his sole purpose is to continue his frauds as long as possible.

The cease-and-desist order, if and when it comes-and frequently it comes after many years-will merely order the respondent to sin no more, and if he does and should be caught, the result will merely be another proceeding. For such racketeers, this is virtually no sanction and thus no effective deterrent.

This "one free bite" approach to crooked operators whose fraudulent practices are in clear violation of law, and have done great harm to consumers, is futile and self-defeating. It is a simple matter for these people to go out of one business, and begin another that is equally dishonest, but not subject to the order.

A Commission order has little effect upon such operators; and those not under an order are unlikely to change their ways out of fear of being placed under such a toothless sanction.

Furthermore, the Commission is not equipped with the nationwide investigative staff, or the kinds of investigative expertise necessary to accumulate the evidence of hard-core frauds, much less locate the whereabouts of all the instigators of such practices.

As I stated earlier this year in a separate statement to the Commission's report on the proposed Deceptive Sales Act of 1969:

It is in this type of case (of hard-core fraud) that the administrative processes of the Federal Trade Commission are least necessary and least effective * In its very nature, the Commission functions best not as an investigative prosecutorial body but as a deliberate, more reflective, less dynamic body. Its organization and structure are simply not geared to the vigorous and expeditious discharge of prosecutorial duties.

What is needed, as I have long urged, is the creation in the Department of Justice of a fully staffed Consumer Protection Division, headed by an Assistant Attorney General, to investigate and prosecute these swindlers who prey upon the uneducated, the elderly, and the poor, and to bring to bear upon them every sanction and remedy available from the courts to "drive the huckster from the marketplace and afford a remedy for his victims."

The Department of Justice has the resources and physical facilities-93 U.S. attorney offices throughout the country, and the services of the Federal Bureau of Investigation-as well as the expertise and experience in criminal investigation and prosecution necessary to bring these fraudulent practices to justice.

At the same time, the courts-not the Federal Trade Commissionhave the facilities and expertise for trials which focus not upon complex and difficult technical and economic issues, but upon such traditional issues as knowledge, intent, scienter, and the identity of the

culprit. Of course, the Federal courts are hardly newcomers to this area. They have long handled fraud cases arising, for example, under the postal, securities, and food and drug laws. And the courts, not the Federal Trade Commission, have the authority to impose criminal penalties and grant preliminary injunctions—the kind of relief which so many of these cases demand.

The Department of Justice and the courts must have available a full panoply of remedies and sanctions to correct and deter these fraudulent practices. Above all, there should be criminal penalties where the consuming public is defrauded by practices which are essentially criminal in nature.

And I was frankly puzzled by the references yesterday so frequently to the criminal nature of these practices and yet the omission in S. 3201 of any criminal penalty. There is no reason why a Federal consumer protection law should not make the punishment fit the crime. The thief who burglarizes a home, and the door-to-door salesman who steals a family's savings and security by trickery and pretense, should both be treated as criminals.

On the civil side, the courts should also be able to enjoin such practices, temporarily pendente lite and permanently; to impose heavy civil penalties; to place the defendant's business in receivership; to deny him use of the mails to defraud; and to impose any other necessary sanctions.

In the same civil proceeding brought by the Department of Justice, the court, in my opinion, should be empowered-indeed required-to create a fund adequate to redress the damage claims of defrauded consumers. Especially where the poor, the elderly, and the uneducated are concerned, there is no reason to require them to hire a lawyer and to bring a separate lawsuit for recovery of private damages, especially when the case is brought in a court which is 3 to 4 years behind in its docket.

Where a violation of law has been established in a case brought by the Department of Justice, the court should proceed immediately to determine the extent of the damages to the public, and the amount due each member of the aggrieved class. Furthermore, injured consumers should be entitled to intervene in any civil proceeding brought by the Government to establish a violation of law.

As an additional step in this all-out war on consumer frauds, the Federal Government should make matching grants to the States for the establishment of, or strengthening of, existing State and local law enforcement agencies to prosecute and redress these frauds, since as we all know, so many of them occur in a purely intrastate context beyond Federal jurisdictions.

Senator PEARSON. Let me interrupt you, please, Commissioner. When you speak of creating an adequate fund in the courts. Are you talking about a Federal grant or a Federal appropriation from the public Treasury?

Mr. ELMAN. Not at all, sir, no. I am assuming that in the suit brought by the Government alleging the defendant has engaged in fraudulent practices which violate the law, the Government presents its case and the judge finds that the violation of law has been made, has been proved by the evidence my suggestion is that the judge immediately proceed to the issue of damages to the consumers, individually and as a class,

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