Buy First, Think Second, Sue Third

by S.M. Oliva, Mises.org
Aug. 24, 2010

“Too many ‘free’ offers come with strings attached,” warned David Vladeck recently. Who is David Vladeck? Why, he’s the person in charge of protecting you from unscrupulous businesses. Vladeck is director of the Federal Trade Commission’s Bureau of Consumer Protection, and his warning came in a press release last week about acai berry supplements -- aka “colon cleansers” -- which Vladeck and his minions have declared a scam.

Vladeck announced the FTC obtained a court order forcing a group of acai berry supplement marketers to cease operations. The court also froze the assets of the marketing companies and their individual owners. Incidentally, there was no opportunity for the defendants to be heard by the court. The FTC proceeded ex parte, arguing that if the defendants received any due process -- such as notice they were being sued -- they might take advantage of the situation and “dissipate” their assets to prevent the FTC from seizing them. Let this be a lesson to you: The FTC can seize all of your assets whenever it wants, and you are not entitled to any semblance of due process.

Turning to the substance of the case, the FTC made three basic allegations: the “colon cleansers” do not work; the marketers’ “free trial” program came with too many “strings attached,” as Vladeck alluded to; and the marketers falsely claimed their products were endorsed by celebrities, specifically daytime talk-show hostesses Oprah Winfrey and Rachael Ray.

The third claim seems pretty cut-and-dry. The FTC presented advertisements that prominently featured Winfrey and Ray endorsing specific acai berry supplements. Yet, according to an affidavit signed by Ray, she has “never used or approved” the product in question and was never “associated with ... any acai berry product, company or online solicitation of such products.” Winfrey filed a similar affidavit through the chief financial officer of her production company. (Apparently, it never occurred to either hostess, or the FTC, that they could simply use their own media presence to publicly refute the phony endorsements; it would certainly be more effective and less costly than FTC litigation.)

The first claim is the garden variety FTC argument that all speech is illegal unless it is substantiated by “scientific” evidence, with the FTC serving as the sole arbiters of that evidence. Basically, the acai berry marketers claimed their products facilitated rapid weight loss and helped reduce the risk of colon cancer. The FTC claimed the defendants “do not possess and rely upon a reasonable basis” to substantiate their claims, although it’s unclear how the Commission knew what information the defendants possessed or did not possess. The Commission’s brief in support of its “ex parte” injunction cites a single “cancer expert” -- who was likely paid for his opinion -- who merely asserts there was no scientific basis for the marketers’ claims.

Now, I don’t doubt the acai berry marketers’ claims are suspicious and possibly false. The term “colon cleanser” calls to mind the late, great Phil Hartman and his “advertisement” for “Colon Blow.” But the FTC shut down a company and seized its assets, without a court hearing, and it did so largely based on conclusory statements about “scientific” truth. That is far more troubling than a company peddling phantom weight-los remedies.

The FTC’s second allegation -- misleading consumers about “free trials” -- also shows a lack of self-awareness by regulators. The FTC’s complaint details numerous consumer complaints about the various conditions attached to the marketers’ “free” trial. Even taking the accusations at face value, the unasked question is how much responsibility the customer has for learning about these offers before handing over their credit-card numbers to a company they’ve never dealt with before. The FTC says the customer has zero responsibility. The FTC assumes that “customers cannot reasonably avoid” the risks of dealing with certain companies. But obviously, the consumers could have avoided the “free” trial altogether by not dealing with the marketers in the first place. And consumers could have done a minimal amount of due diligence to learn whether the marketers were trustworthy.

The FTC noted the Better Business Bureau received numerous complaints against the acai berry marketers. Indeed, I looked up one of the named defendants at the BBB’s website and immediately learned it had an “F” rating from the private agency. Any potential customer could have easily taken five seconds to look this information up before deciding to deal with the company. Heck, run a web search for any dubious-sounding product or company and you’ll discover a wealth of information, including complaints from previously dissatisfied customers.

The only reason any customer walks into a transaction blind is because she chooses to. That was confirmed by the FTC’s own witnesses. The Commission offered affidavits from two customers who said they were deceived by the “free” trial offers. One customer said that after she requested the trial product -- and agreed to a credit-card charge for a shipping fee -- “I was concerned I did not have enough information” about the product or the company that sold it. So after she gave the company her credit card information, she “conducted an Internet search,” where she discovered numerous customer complaints against the company. A second customer told the FTC that a week after ordering the free trial and providing her debit card information, “I did not try the pills because my husband was concerned that we did not have enough information” about the product or the company.

None of this disproves the FTC’s allegations that fraud occurred. If we take the Kinsella definition of fraud -- acquiring title to another’s property without consent -- the Commission presents a viable argument. The FTC’s complaint alleges that the marketers charged customers, without authorization, for purchases beyond the “free” trial and added numerous supplemental charges to the trial product that were not disclosed. If true, that would constitute fraud.

But this also doesn’t prove the FTC should have a role in policing fraud. Let’s consider another potential victim here: the banks and other credit card issuers. Assuming the FTC’s charges are true, the payment processors are just as much victims as the customers, perhaps more so. Fraudulent charges impose substantial costs on the banks, and it is unquestionably in their self-interest to police and eliminate such transactions. Ultimately, these private firms are in the best position to deal with these types of cases, not a group of government lawyers in Washington.

The problem with relying on the banks, from the government’s standpoint, is that if policing fraud was left totally in private hands, the banks might actually assess some measure of liability on the customer who rushes into a purchase without thinking. Absent government intervention, some banks would choose to say, “We’ll protect you against fraud, but not against stupid purchases where you didn't do your homework first.” Other banks might choose to cancel any charge the customer complains about, no questions asked. In other words, there would be a market for “consumer protection.”

In contrast, the FTC provides a one-size-fits-all regulatory scheme. Remember, even though the FTC presented two specific customers who claim to be the victims of fraud, the complaint assumes that every customer was defrauded. The Commission did not conduct specific inquiries into each and every customer’s situation. Some customers probably knew exactly what they were getting into. Some customers were probably satisfied with the product. That doesn’t matter. In order for the FTC’s regulatory scheme to function, all customers must be reduced to the lowest common denominator of the most gullible individuals.

As a postscript, when I relayed this story last week to Jeffrey Tucker, he immediately seized upon David Vladeck’s “Too many ‘free’ offers come with strings attached” statement and noted that there were “a few examples” of such “free” lunches from the government -- Social Security, national defense, healthcare, “stimulus,” etc. Just about every government program promises wonderful benefits “with no mention of cost,” Tucker said.

I would add that it is the government’s constant promise of easy solutions that gives credence to alleged scams like the “colon cleanser.” The people who think you can lose a ton of weight by taking a pill you order off the Internet tend to be the people who think voting for a certain politician will bring about fundamental “change” in healthcare, warfare, etc. The average political campaign contains far more false and misleading statements then any private advertising campaign, yet there’s no FTC official holding candidates accountable. Instead, the FTC simultaneously reinforces the contradictory ideas that customers should continue to spend blindly while warning them about the dangers of unscrupulous sellers.