A. Injunctions

ADDITIONAL ENFORCEMENT AUTHORITY

The Commission is unanimous in its support of this provision in Title I, granting it the power to seek preliminary injunctions aimed at bringing to an immediate halt unfair, fraudulent, or deceptive practices in violation of section 5 of the Federal Trade Commission Act.

It has been the experience of the Commission that the cease-and-desist order is inadequate in many situations. It has proved cumbersome and time-consuming. This additional enforcement tool will provide an effective weapon to the Commission and enable it to take efficient action to protect consumers in those matters where immediate action is warranted. The issuance of the injunction will have the salutary effect of expediting the adjudicative process by discouraging unnecessary procedural delays.

The Commission has long sought such injunctive authority for the substantial additional protection it affords the consumer.

B. Rulemaking

Although not covered by the provisions of H.R. 14931, the Commission believes that its power to issue substantive rules should be made more explicit. Any doubts about its rulemaking authority should be clarified and removed. Any possible ambiguity in its present rulemaking authority between its Labeling Acts and the Federal Trade Commission Act should be eliminated.

C. Assessment of Penalties and Damages

The Commission also believes that it needs stronger and more comprehensive tools to make the threat of a Commission proceeding a real deterrent to a lawbreaker. Specifically, the Commission should have authority to assess civil penalties for violations of existing cease-and-desist orders. The Commission should have the authority to assess civil penalties for existing violations of law at the conclusion of its adjudicative proceeding establishing that the law has been violated. Further, the Commission should be empowered to award damages where consumers have been injured by the acts or practices found by the Commission to be in violation of the law. Once the Commission's order has become final and application is made to it by any consumer for redress for injury sustained by reason of the violation of law found to exist by the Commission, the Commission should have the authority to decide the issues raised and if injury is found, to award damages subject to review by a court of appeals.

UNFAIR OR DECEPTIVE PRACTICES

Those unfair or deceptive acts or practices deemed unlawful by the Act are set forth in Title II. While each represents a practice unfair to consumers, the Commission is of the opinion that the listing is not sufficiently comprehensive. There are many practices unfair and deceptive to consumers which would not fit into the specified categories. Credit transactions are specifically excluded, and certain hard core frauds perpetrated on consumers are omitted. In addition, several categories are further limited by requiring proof that the deceptions were knowingly made, or made with knowledge of their falsity. The Commission is of the opinion that these limitations are unnecessarily strict and would effectively eliminate from the scope of the bill too many acts and practices which heretofore have been shown to be injurious to consumers.

SUITS BY THE ATTORNEY GENERAL

The Commission supports that section of the bill which would give the Attorney General authority to institute proceedings to restrain violations of the Act, as well as the provision allowing a court to grant at any time, such injunctive relief as it deems appropriate.

The Commission does suggest that consideration be given to the inclusion of a substantial civil penalty for violation of an injunction in addition to other such relief as the court may consider necessary to enforce its orders.

CONSUMER CAUSE OF ACTION

The Commission supports the consumer's cause of action and the provision for recovery of actual damages, costs, and reasonable attorneys' fees. Under the right of private action authorized by this bill, consumers will be able not only

to bring individual actions, but also to bring class suits under the procedures of Rule 23 of the Federal Rules of Civil Procedure.

Consumers are authorized to bring private actions where the Department of Justice or the Federal Trade Commission has successfully enjoined any unfair or deceptive practice enumerated in the bill. A final judgment or decree entered by the courts in any injunctive proceeding brought by the Department shall be prima facie evidence against the defendant in any private action or proceeding brought by any other person. Thus, the provisions of the bill offer considerable assistance to consumers in the filing and prosecution of consumer actions.

As is presently provided in the bill, Federal Trade Commission proceedings give rise to a private cause of action for damages, but such proceedings are not given prima facie effect in a subsequent consumer suit. This failure to give to Commission orders efficacy equal to that given to injunctions obtained by the Department of Justice deprives consumers of substantial benefits that could flow from Commission proceedings.

We believe that to give prima facie effect to Commission orders would substantially enlarge the protection which this bill affords consumers; it would make two government resources available to consumers to assist them in bringing class actions. Further, because of the substantial advantage which consumers would receive from proceedings by the Department, the Commission would be reluctant to use its powers without reference to the Department, which would have less inclusive coverage than the Federal Trade Commission. Thus, consumers would be injured by the denial to them of the substantial resources of the Commission.

The Commission does not believe that the prima facie effect of a final decree should depend on which governmental department happened to proceed in the first instance. Accordingly, the Commission proposes that the provision of H.R. 14931 be enlarged to provide that any final order, enjoining any unfair or deceptive practice enumerated in H.R. 14931, entered by the Federal Trade Commission on the facts after a full hearing, shall also constitute prima facie evidence in any subsequent consumer proceeding. This amendment to H.R. 14931 would accomplish two purposes: (1) it would render considerable assistance to consumers in instituting private actions seeking redress, and (2) it would place the Commission's enforcement authority under the bill on an equal basis with the Department.

Some members of the Commission would favor enlarging the rights given consumers to maintain private causes of action. They would specifically favor modifying the bill to permit consumers to bring actions for any unfair or deceptive act or practice declared unlawful by the bill without awaiting a previous proceeding by the Department of Commission. On this issue the Commission's position at this time is predicated upon its desire to determine first whether the broad expansion of consumer protection and remedies afforded by this bill, if strengthened in the respects now proposed by the Commission, would be adequate as a major first step in this area. If found inadequate by experience, the Commission believes that any necessary amendment could be proposed in light of such experience.

The Commission is also of the view that the bill could be improved if it were modified to permit the Attorney General to bring class actions on behalf of consumers under the provisions of this bill. The monies collected pursuant to a court decree could be paid into an appropriate fund for the benefit of consumers. Individual consumers who have been defrauded or deceived may apply to the fund in order to recoup their individual losses. The monies not distributed to the individual consumers could be used for programs of consumer protection and education. This procedure would not, however, replace the right to a private class action.

CIVIL INVESTIGATORY DEMANDS

The Attorney General is authorized to issue civil investigative demands for investigational purposes. However, confidential treatment is afforded by the bill to the material produced pursuant to civil investigative demands and accordingly, such material would not be available to the Federal Trade Commission. The Commission is of the opinion that if it and the Department are to have concurrent jurisdiction in this consumer protection area, the Department's investigative files should be available to the Commission under proper liaison arrangements, just as our investigative files are and have been available to the Department.

H.R. 14832

This bill would amend the Federal Trade Commission Act to provide that consumers who have been damaged by unfair or deceptive acts or practices may bring consumer class actions for redress of such damages.

Section 4 of the bill declares that an act in defraud of consumers which affects commerce is unlawful, and the district courts of the United States shall have original jurisdiction without regard to the amount in controversy to entertain civil class actions for redress. An "act in defraud of consumers" is defined

as:

(1) an unfair or deceptive act or practice which is unlawful within the meaning of section 5(a)(1) of the Federal Trade Commission Act; or

(2) an act which gives rise to a civil action by a consumer or consumers under State statutory or decisional law for the benefit of consumers. In any class action brought upon the basis that a deceptive act or practice which is unlawful within the meaning of section 5(a)(1) of the Federal Trade Commission Act has violated a consumer's rights, the court shall in construing the terms "unfair or deceptive," give great weight to the interpretation given such terms by the Federal Trade Commission and by the Federal courts in applying such Act. However, the court is not required to await administrative action by the Commission before applying Federal law to the case.

In any class action brought upon the basis of a violation of consumers' rights under any State law, the Federal court shall apply State statutory or decisional law relating to consumers' rights as Federal law, and where there is conflict between Federal law and State statutory or decisional law, Federal law governing the case shall be fashioned from State law not in conflict, and from Federal law. Whenever a class of consumers prevails in a class action brought under this bill, the court shall award reasonable attorneys' fees to attorneys representing the class. Such attorneys' fees shall not exced ten (10) per centum of the total judgment, unless failure to award a greater amount would be manifestly unjust to such counsel.

This proposed legislation, H.R. 14832, creates for consumers very broad classaction rights; rights which far exceed anything contemplated by the provisions of H.R. 14931. While the Commission is supporting certain enlarging of the rights given consumers under H.R. 14931 to bring class actions, it is not prepared to go as far in this respect as the class-action rights envisioned by H.R. 14832. Whether such an unlimited class-action remedy would impose undue burdens upon the already congested dockets of the Federal courts; whether such suits, which would not have the benefit of any prior screening of their merits by the Department of Justice or the Commission, could be used to harass legitimate businessmen; whether a class-action remedy, where consumers must proceed entirely on their own and without the assistance of government investigative and prosecutorial resources, and unaided by the benefit of a prior decree or order secured by the government establishing a violation of law, would in reality provide substantial benefits to consumers-all these are questions which the Commission considers to be pertinent to a determination by the Congress whether it should at this time create an unlimited class-action remedy for consumers. The Commission is of the belief that H.R. 14931, as strengthened by the Commission proposals stated above, should be considered as a major first step in this area. If found inadequate by experience, necessary amendments can be proposed in the light of such experience.

Thank you for the opportunity to appear here today to present the Commission's views on these important matters.

Senator Moss. We will begin our hearings this morning with Mrs. Virginia Knauer, the President's Special Assistant for Consumer Affairs, and Mr. Richard McLaren, Assistant Attorney General in charge of the Antitrust Division of the Justice Department.

If these two witnesses would come forward and be seated at the witness table, we will appreciate hearing from them.

I suppose Mrs. Knauer will lead off, but if you care to reverse that and go the other way around, it is perfectly all right. Is that Mr. Meade accompanying you?

STATEMENTS OF HON. VIRGINIA H. KNAUER, SPECIAL ASSISTANT TO THE PRESIDENT FOR CONSUMER AFFAIRS, AND HON. RICHARD W. McLAREN, ASSISTANT ATTORNEY GENERAL IN CHARGE OF THE ANTITRUST DIVISION, DEPARTMENT OF JUSTICE; ACCOMPANIED BY ROBERT L. MEADE, DIRECTOR OF LEGISLATIVE AFFAIRS; MRS. BETTY BAY, ASSOCIATE DIRECTOR OF LEGISLATIVE AFFAIRS; BRUCE WILSON, SPECIAL ASSISTANT TO MR. MCLAREN; AND JACK PEARCE, ASSISTANT CHIEF OF THE PUBLIC COUNSEL AND LEGISLATIVE SECTION, ANTITRUST DIVISION, DEPARTMENT OF JUSTICE

Mrs. KNAUER. Mr. Robert Meade is Director of our Legislative Division in my office; and he is accompanied, too, by Mrs. Betty Bay, who is his Associate Director.

Senator Moss. Thank you very much. We are pleased to have you. Mrs. KNAUER. Mr. Chairman, I am pleased to appear before a committee whose record of assistance to the consumer makes so evident our common interest. I am also pleased to have this opportunity to urge your support for S. 3201, the administration's Consumer Protection Act of 1969.

President Nixon personally urged this legislation in his October consumer message to the Congress as part of a far-reaching general program to protect the consumers' interests. Another key part of that package was the Consumer Representation Act which is also now before the Congress. That act proposes establishing my office by statute as well as giving it greater responsibility to serve consumers. In addition, the Consumer Representation Act proposes establishment of a new Division of Consumer Protection in the Department of Justice to act as a consumer advocate before Federal regulatory agencies in judicial proceedings and in government councils.

The bill before this committee today is another vital part of the President's comprehensive consumer protection program. It assigns to the Division of Consumer Protection in the Department of Justice, which is proposed in the Consumer Representation Act, major consumer responsibilities for increased consumer protection from fraud and deception. We recognize, of course, that you, Mr. Chairman, and others on this committee have proposed legislation relating to some of the problems to which this act is directed. But this proposal goes significantly further. We believe it to be landmark legislation in every

sense of the word for all American consumers.

Since this law is to be enforced by the Justice Department, Mr. Richard McLaren, Assistant Attorney General, will deal with it thoroughly. I will devote my comments largely to the scope of the problems consumers face which make passage of this bill so imperative, and to explaining why its provisions are so important.

Much consumer fraud and deception is at a local level. This is why the expansion of the Federal Trade Commission's authority to deal with practices which "affect" commerce, as opposed to those that are merely "in" commerce is needed and should be enacted.

Consumers have all too often been required to wait for extended periods of time for Government protection from fraud and deception. You do not need me to remind you, gentlemen, of the years of litiga

tion in the Holland Furnace case. We understand that the time between the opening of an investigation by FTC and the obtaining of a final order has been approximately 1 year. But 2, 3, and more years are not uncommon. This is why it is important to enable the FTC to obtain preliminary injunctions in appropriate cases, as this bill would make possible.

But, with due respect to the FTC, unaided it cannot police the entire American economy. The enforcement strength of the Justice Department and the private bar can multiply consumer protection. This is why title II of this bill is so important. This part of the bill establishes a major new Federal consumer protection law, with provisions for Department of Justice enforcement and suits by consumers to recover damages. As Mr. McLaren will explain in detail, the act prohibits 11 specified types of consumer fraud and deception, including the most common forms of deception. My experience in Pennsylvania certainly bears out that these 11 practices constitute the vast bulk of fraud and deception. For example, the act outlaws on a nationwide basis bait and switch advertising and deceptive pricing which are the two most common deceptive practices in use today.

Upon the termination of a successful Government action against any of these practices, whether by the Justice Department or by the Federal Trade Commission in one of its proceedings, any consumer, including classes of consumers, as defined in rule 23 of the Federal Rules of Civil Procedure, may bring a private action for money damages or for other relief. Reasonable attorneys' fees may also be collected by successful private consumers.

As in antitrust actions by the Justice Department, a final judgment or a decree in the action brought by the Justice Department may be used as prima facia evidence against the particular defendant in a subsequent action brought by consumers.

For years, consumers who were victimized by unfair or deceptive acts or practices have been left without any practical private remedy or means of redress. For the first time, this act will create on a national basis a Federal cause of action for the use of unfair or deceptive practices and will allow the Federal courts and the Federal procedure to be utilized. Nothing whatsoever is cut back by this act, but a whole new consumer protection remedy is added.

The consumer protection afforded by this bill is greatly needed. Consumers in all income levels are among the victims of unfair and deceptive practices, including those of us who may consider ourselves sophisticated in the marketplace. But the victims are most often the poor, the elderly, and those who have had little opportunity for formal education.

For them, it is a vicious circle. They are the ones who can least afford the loss, are least likely to know the legal procedures for recovery and are least able to pay the cost of litigation if they knew the procedure. And their troubles may not end with the fact that they have been deceived as to what they were purchasing or have been out the cost of shoddy merchandise for which they may have to continue paying long after it has fallen apart. Their wages may be garnished. And, as a result, they may lose their jobs.

Violence and crime are major concerns of the American people at this hour in our history. Threaded through the reports of the National

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