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BOSTON PUBLIC LIBRARY 



3 9999 06317 363 5 







OFFICE OF NATIONAL RECOVERY ADMINISTRATION 
DIVISION OF REVIEW 



INFORMATION CONCERNING COMMODITIES 
A STUDY IN NRA AND RELATED EXPERIENCE IN CONTROL 

PART A. MISREPRESENTATION AND DECEPTION 



By 

Hunter P. Mulford 



WORK MATERIALS NO. 38 



Work Materials No. 38 falls into the following parts: 

Part A. Misrepresentation and Deception 
Part B. Standards and Labeling 
Appendices I, II and III 



Trade Practice Studies Section 
February, 1936 



OFFICE OF 1IATI01TAL RECOVERY ADMINISTRATION 
DIVISION 0? REVIEW 



IlJEORh'ATIOI! CONCERNING- COMMODITIES 
A STUDY IiT BRA AND RELATES EXPERIENCE III C01ITR0L 

PART A. MISREPRESENTATION AID DECEPTION 



37 
Hunter P. Mulford 



Trade Practice Studies Section 
February, 193G 



710 



FOREWORD 

This study on "Information Concerning Commodities — A Study in ITRA 
and Related Experience in Control" was prepared "by ;:r. Hunter P. Mulford, 
of the Trade Practice Studies Section, Mr. Corwin D. Edwards in charge. 

The study deals with two distinct types of control, (l) measures 
designed to prohibit the use of false and deceptive representations of 
various sorts in the marketing of commodities, and (2) positive require- 
ment'-; for the furnishing of accurate information through the development 
of uniform product standards and the use of informative labeling. These 
two types of control are in many respects closely related and interdependent. 
Various forms of misrepresentation flourish, and arc made difficult or im- 
possible to deal with, when there are no agreed standards or definitions of 
the products concerned against which inaccurate or false and fraudulent 
statements may be measured. Other forms of misrepresentation, resulting 
from failure to disclose significant facts concerning the commodity offered 
for sale, may be met only by specific requirements for the inclusion of 
such information in the labeling, marking, branding, or even advertising, 
of the products concerned. 

This close connection between the two principal forms of commodity 
information control has led to tl:eir treatment in a single study. However, 
due to differences in the nature of the fundamental problems involved, the 
subject has been divided for the purposes of presentation. Part A of the 
report deals with Misrepresentation and Deception, and Part E with Standards 
and Labeling. 

Since the code provisions prohibiting misrepresentation and deception 
were largely statements of existing law, the principal matters for study were 
the manner in which the codes were administered, and the results which were 
obtained through them. The study examines the code provisions concerning 
misrepresentation, outlines the typical itBA method of administration, and 
presents what evidence the central NRA records offer on the significance 
of these provisions to the industries adopting thorn. From the available, 
but not complete, compliance records, and a limited sample of first-hand Code 
Authority opinion, certain conclusions have been drawn concerning the extent 
of application of the provisions, their effectiveness in operation, the type 
of industry principally applying them in practice, and the chief obstacles 
to their successful functioning. For general comparative purposes various 
aspects of the work of the Federal Trade Commission in restraining mis- 
representative and deceptive practices ha/ve been given. 

Unlike misrepresentation and deception, standards and labeling are 
subjects on which there is no general- agreement of opinion. The records of 
code proposal and adoption were therefore of special importance as illustrating 
the controversial nature of the problems and the various attitudes existing 
within tie industries concerned. These records have proved equally illuminat- 
ing with respect to the difficulties involved in obtaining reconciliation of 
the various interests. As to the actual operation of the standards pro- 
visions, limitations placed upon field work and the difficulty of obtaining 
representative expressions of opinion or objective data resulted in only a 
small body of evidence being secured. However, a number of what arc believed 
to be justifiable conclusions have been c^ravm. 



9710 -i- 



Summaries of findings and conclusions with respect to each of the 
two parts of the report have been included at the beginning of the 
respective sections. Broadly speaking, although only a minority of 
the industries were seriously concerned with the problem of mis- 
representation, the code provisions, when actively administered, tended to 
produce beneficial results. On the other hand, efforts tc apply standards 
and labeling to the solution of industry problems on a mandatory basis 
were generally frustrated by conflicts of competitive groups within the 
industry, or by the apparent irreconcilability of industry and consumer 
interests, - inevitable difficulties which the tenure of IJRA existence 
was entirely too short to smooth away. 

The principal limitations of the report as a reflection of 1TEA 
experience have resulted from the great area to be covered, as repre- 
sented by the number of codes with pertinent provisions, and from the 
relatively slight opportunity given for the collection of first-hand 
data and opinion. For further development cf the subject extensive 
field work with former Code Authorities, trade associations, and in- 
dividual industry members, is of prime importance. Other suggested 
fields for further inquiry are indicated in the Appendix to the report. 

Preparation of the Standards and Labeling section of the report was 
carried out with the aid of Mr. H. A. Mereness. Various other in- 
dividuals contributed special industry summaries, as indicated in 
Appendix II. Special assistance in the development of material for the 
final report on Misrepresentation was given Tb'y Miff. E. S. Tobey. 

At the back of this report will be found a brief statement of the 
studies undertaken by the Division of Review. 



L. C. Marshall 
Director, Division of Heview 



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IITPORLiATIOl? CONCERKIUC COlMCDITIES 

A STUDY II; ..... A] D .. 1LAT D : XPERIEUCE III CONTROL 

Table of Cont ents 

Page 
Summary of Findings: Part A - Misrepresentation and Deception... 1 

INTRODUCTION 

The leaning of Commodity Information 4 

PART A - MISREPRESENTATION AID DECEPTION 

Chapter One ~ General Background 

I. Nature and Extent of Misrepresentative Practices 6 

II . Economic Consequences of Misrepresentation 7 

III .Development of Control 8 

Chapter Two - The Common Law Affecting Misrepresentation 

I. General Basis of the Common Law of Unfair Competition.. 10 

II. Development of the Law of Unfair Competition in the 

United States 10 

Chapter Three - The Federal Trade Commission 

I. Legal Basis of the Commission 

A. The Meaning of "Unfair Competition" 13 

B. Types of Misrepresentation Dealt with by the 

Commission 17 

C. Classification and Citations of Typical Cases. 18 

II. Federal Trade Commission Administration and Procedure 

A. Irf ormal Procedure 22 

B. Formal Procedure..... 22 

C . Judicial Enforcement and Review 23 

D . Stipulation Procedure 23 

E. Trade Practice Conference Procedure 24 

F. Other Considerations 26 

III. Record of Federal Trade Commission Activity 

A. General Legal Record. 27 

B. Cases Affecting Misrepresentation 27 

C . General Reasons for Dismissals 28 

D . The Corami ssion and the Courts 29 

E. Reasons for Reversals in Misrepresentation Cases 29 

F. Types of Industries Affected by Trade Commission 

Action 30 

G . General Summary 31 



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Chapter Four - NBA Experience in the Control of Misrepresentation Page 

I. General View of the Code Provisions 

A- Freauency of Misrepresentation Provisions in 

the Codes 33 

B. Form of the Code Provisions 34 

C. General Comparison with the Federal Trade Statute 3G 

D. Limitations in Practice of the NRA Provisions... 33 

II. ERA Administration of the Code Provisions 

A. The Code Authorities 39 

B. H.R.A. Compliance Agencies 39 

C. Some Comparisons with Federal Trade Organization. 40 

III. Results of Operations of the Misrepresentation Provisions 

A. General Sources of Information 41 

B. Operation of the Provisions in Selected Industries 

1 . Betail Trade 43 

2 . Coffee Industry 56 

3. Dog Food Industry. 60 

4. Plumbing Fixtures 63 

5. Canning Industry 65 

6 . Macaroni Industry 67 

7. Other Industry Summaries 69 

C. Data Developed by Code Authority Questionnaire 

1. Sizes and Types of Industries Reporting.. 70 

2. Nature of Information Requested 70 

3. General Analysis of the Returns 71 

4. Types of Misrepresentation Complained of. 72 

5. Effect of KftA in Checking the Practices 73 

6. Success of Code Authorities in Effecting 

Compliance 74 

7. Obstacles to functioning of Misrepresenta- 
tion Provisions 74 

8 . General Conculsions 75 

D. Field Work with Lpcal and Regional Code Authorities 

1. Retail Trade 77 

2 . Retai 1 Drug Trade 80 

3. Retail Food and Grocery Trade 81 

4. Crushed Stone, Sand and Gravel Industry.. 83 

5. Motor Vehicle Retailing 84 

6. Paper Distributing Trade 85 

7 . Set-up Paper Box Industry 85 

8. Retail Monument Industry 86 

9. Wholesale Confectionery Industry 86 

10. Farm Equipment Efg. Indtistry 87 

11. Household Goods Storage and Moving.... 87 

12. Graphic Arts (Commercial Relief Printing) 87 

13. Fnolesale Monumental Granite 87 

14. General Summary 87 



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-IV- 



E. Analysis of MA Compliance Cases Page 

1. Tabulations of State Compliance Records 91 

a. Relative Frequency of Misrepre- 

sentation Cases 91 

b. Distribution in Retail and ITcn- 

Retail Cedes 93 

c . Summary 94 

2. Further Analysis of Type and Disposition 

of Compliance Cases 96 

Chapter Five - Other Misrepresentation Control 

I. Federal Legislation 

A. The Food and. Drug Administration 101 

3. Other Regulatory Statutes 102 

II. State Statutes 103 

III .Private Agencies 105 



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-J.~ 

INFORMATION CONCERNING COMMODITIES 
A STUDY OF NRA A1ID RELATED EXPEDIENCE IN CONTROL 

FART A. MISREPRESENTATION A'TD DECEPTION 

SUMMARY OF FINDINGS 

The aim of this first section of study of Commodity Information has 
been to inquire into the effects of the use of prohibitory provisions 
written into NRA codes as a method of controlling misrepresentative and 
deceptive practices in commerce, and to make comparisons with the results 
attained by other methods aimed at the same end, notably those of the 
Federal Trade Commission. 

The forms of misrepresentation taken as within the scope of the study 
include inaccurate and misleading advertising; false and deceptive label- 
ing, marking and branding; deceptive packages and containers; misrepresen- 
tations concerning competitors or their products; and similar deceptive 
sales devices. 

Since such methods are already eccepted as basically unlawful, no 
question- of general policy as to their control arises, as is the case with 
certain other types of trade practices. The principal subjects for con- 
sideration relate to form of law and methods of administration and applica- 
tion,, 

Three different degrees in the development of a conception of legal 
control of misrepresentative competitive practices on a national scale 
have been noted: ' (l) the common law concept, viewing such practices in 
terms of invasion of private property right, and offering only the right 
of individual action for relief of individual injury; (2) the concept em- 
bodied in the Federal Trade Commission Act - "unfair methods of competi- 
tion" declared unlawful, but without statutory definition of the term, and 
their suppression made a function of public authority, with the public in- 
terest an express consideration; and (3) the concent exemplified in the 
code system created under the National Industrial Recovery Act - unfair 
methods of competition defined in terms of the individual industry's 
problems; and the industry, through its Code Authority, made a party with 
the government in the application of the Code requirements. 

Data concerning the operation of the Federal Trade Commission in the 
restraint of misrepresentative practices were drawn almost exclusively from 
the published records of that body. Analysis of these records shows that 
a great deal of valuable work in the field of misrepresentation control 
has been done by the commission. Through its formal restraining orders and 
its more flexible stipulation procedure, the Commission has acted effec- 
tively to compel the abandonment of questionable practices in advertising, 
labeling, marketing, branding,, and other merchandising methods in a large 
number of individual cases, urincipally affecting the consumer goods in- 
dustries. At the same time it has added materially to the number of 
specific misrepresentative practices recognized as unlawful, as compared 
with the previously existing precedents of the common law Through its 
Trade Practice Conferences it has encouraged fair dealing by approving rules 
which restate for individual industries the general prohibitions upon mis- 

9710 



-2r~ 



representations, and set up definitions of product standards "by which false 
representations may be measured, " 

Obstacles to the most effective functioning of the Commission as an 
instrumentality for controlling misrepresentations have been found in the 
dual statutory requirement placed upon it to show both public interest and 
actual or potential competitive injury as conditions precedent to its 
jurisdiction; in the extent of judicial review provided and the insistence 
of the courts upon their right of final interpretation as to "unfair methods 
of competition"; and in the delays incident to the methods provided for 
making fully operative the Commission's restraining orders, A certain dis- 
parity also appears between the size and relatively centralized nature of 
the Commission's administrative organization, and the nation-wide scope 
of the responsibility placed upon it. 

For information concerning the effect of the MA codes in dealing 
with misrepresentations there have been used the records of code making 
and code administration in Washington; and, in the degree available, com- 
pliance records collected from the State ERA offices throughout the country; 
data gathered from Code Authorities and trade associations by questionnaire 
and by field contact; and from consultation with industry members and 
former Deputies and their staffs who handled the various codes. 

More than four-fifths of all basic and supplemental codes approved 
contained prohibitions upon some form of misrepresentation, principally de- 
ceptive advertising, and false marking and branding. The provisions were 
for the most part broad in phrasing and were more comprehensive than the types 
deceptive acts already recognized as unfai r practice in Federal Trade 
Commission procedure. As to application of the provisions and their 
effects in actual operation, the evidence which has been obtained and em- 
bodied in this report points to the following conclusions: 

Despite the large proportion of codes containing the provisions, mis- 
representative practices constituted a serious competitive problem and the 
prohibitions upon them were sought to be actively enforced in only a minor- 
ity of the codes, the chief of these being the large retail trade codes. 

Where such practices constituted a serious industry problem, an 
active and capable Code Authority was usually able to apply the provisions 
for their elimination with a considerable degree of success, and with a 
minimum of assistance from MA enforcement agencies or from the courts. 

The support of some measure of authority was found essential, how- 
ever and a chief difficulty claimed to have been encountered by the Code 
Authorities in securing compliance with the misrepresentation provisions 
was the progressive loss of prestige by MA among their industry members, 
due to delays and uncertainties of enforcement, even in cases of flagrant 
violation. Especially they complained of the frequent acceptance of cer- 
tificates of compliance in such cases, in place of the penalties provided 
by the Act, 

Other obstacles encountered by the Code Authorities in administering 
the misrepresentation provisions included (1) the difficulty in practice of dr?: 
ihg a line between truth and falsity in advertising; (2) loose phrasing of 
the early code provisions; (3) difficulty of obtaining evidence of viola- 

9710 



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tion; and (4) lack of definite product standards to provide criteria for 
judging misrepresentations concerning them. 

In general, as compared with the Federal Trade Commission, the N.R.A. 
and its codes, as they were meant to operate, were more comprehensive in 
their declaration of the law of unfair competition affecting misrepresen- 
tation, were under fewer legal restrictions in its application, were more 
decentralized and direct in their potential machinery of enforcement, and 
possessed, in the Code Authority system, an informal medium for obtaining 
compliance only distantly approached by the voluntary cooperation afforded 
the Commission by some trade associations. 

Through its machinery for code amendment and interpretation , also, 
the N.R.A. provided a flexible and responsible medium for adapting the 
general law of misrepresentation to the immediate problems of individual 
industries, with the adequate protection of the interests of industry 
members apparently afforded, in cases of non-compliance, by the rights of 
hearing, protest and appeal, with ultimate court review. 

With respect to the Federal Trade Commission, various suggestions 
have been offered for reducing the legal restrictions upon its operation 
in the field of misrepresentations, and simplifying the procedure for 
obtaining enforcement of its orders. One of the most recent is that of 
the Commission itself, advanced in its 1935 annual report, and now sub- 
stantially embodied in the pending Wheeler- Eayburn bill. This suggested 
change would make "unfair or deceptive acts and practices in commerce" 
unlawful as well as "unfair methods of competition in commerce". Such a 
change, it is argued, would enlarge the Commission's scope in certain de- 
sirable directions, with the other terms of the Act and ultimate judicial 
review still standing to prevent rigid restrictions upon merchandising 
initiative. 

Furthermore, if means could be found to give to the Federal Trade 
Commission statutory authority to approve Trade Practice Conference 
Agreements, with power to enforce the rules approved, including those of 
the Croup II (*) type, much that was beneficial in the trade practice 
work of the N.R.A. codes might be continued. 



(*) Group II trade practices consist of those rules that have been 

accepted as expressions of the trade but not already recognized by 
cease-and-desist orders of the commission as unlawful. 

9710 



INFORMATION COifCS31TIlTG COMMODITIES: A STUDY OF NBA. 

T CONTROL 



INTRODUCTION 



I . THL ivlEANING OF COLl.KDLITY INFORMATION 



, The exchange of commodities constitutes essentially that 
which we term business. Exchange is the central economic fact. 
Behind it, however, and indispensable to it, lies another exchange - 
the exchange between seller and buyer of information concerning the 
commodities which are to be bought and sold. Without this primary 
interchange of information, which might be termed advertising in its 
widest sense, the very continutation of a complex industrial system 
such as our own is hardly -to be conceived. And the nature of the 
information which is so exchanged, its accuracy and completeness or 
lack of these, must affect in substantial ways the functioning of the 
system as it touches the' interests of all parties concerned. 

The means of exchange may be of many kinds - advertising copy in 
newspaper or periodical, representations on label or wrapper, verbal 
claims of sales representatives, the su gestion in a skilfully- 
selected trade name, the apparent bulk of package or container, or a 
dozen others. Whatever the methods, their total effect is largely to 
determine whether the public does or does not buy, and which of 
various competing articles it will choose. For the buyer the adequacy 
of the information he has received will go far to decide whether in 
his choice he actually obtains whit he intends and wants. For the 
seller, the jractices in supplying such information which prevail in 
his trace help to set the standards of competition which he must meet. 

Both parties therefore have, important interest involved" in the 
question of commodity information. The consumer is concerned with more 
and better knowledge of what he buys in order that he may obtain value 
for what he spends, and to be protected in his purchases from actual 
harm. The business mail in many cases, seeks, to be freed from the 
pressure of certain competitive practices, practices which he feels 
tend to shake mblic faith in the integrity of his entire industry, 
and to disturb its price structure through the debasing- of industry 
products and deceptions employed to conceal what is done. Other 
interests and aims occur and will be considered in their place, but 
these are basic and most frequently appear. 

The object of this study is to examine the nature of these interests 
and -the methods which are employed to satisfy them through improvement in 
the quality and increase in the quantity of the commodity information in 

9710 



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current use; in particular, to review the experience of ISA with 
respect to the subject; and to compare, so far as the facts seem to 
warrent, the effects of the 1J3A experiment Ln this field with the results 
obtained by other methods of control. 

The lines of approach to the problem which have been chiefly 
followed in r cent decaJ.es are two. One seeks to decrease the 
amount of misinformative information with which the purchaser is 
supplied; the other aims to increase the quantity of soundly informa- 
tive material provided. The first effort has taken the form of 
Federal and State statutes prohibiting, either specifically or by 
general intent, practices such as deceptive advertising, false 
marking and branding, and misrepresentation in whatever form. The 
second has been carried on largely through the cooperative efforts 
of industry organizations and government agencies. It involves the 
setting up of definite, uniform standards of quality, size, nomem- 
clature, performance, etc., for industry products, and promotion of 
the use of these standards in labelin , branding, packing and all forms 
of advertising. 

Although opposite in form, the one being negative in its 
control and the other positive, both of these methods are aimed pri- 
marily at the same immediate end, namely, the protection of legitimate 
consumer and industry interests through the promotion of adequate 
and dependable commodity information. Furthermore, there is a relation 
in practice between the two, since as experience of the Federal Trade 
Commission to be noted later shows, the existence of some recognized 
form of standards as to the composition or identity of goods is 
extremely helpful, if not indispensable, in controlling certain types 
of misrepresentative practices. In fact it uiay be said that a con- 
siderable portion of the work directed toward development of positive 
standards and their use in labelin., has lor its principal aim the 
drivin;. out of misrepresentations otherwise found impossible to 
reach. 

Because of this close connection between the two subjects of 
misrepresentation and standards they have be n comu, ned for treatment 
in this single study. On the other hand, owing to the different legal 
questions involved, and the varying problems as to adoption and 
application of the two types of control, the" have been treated in 
separate sections of this report, Part A dealing with Misrepresentation 
and Deception, and Part 3 with Standards and Labeling. 



9710. 



PART A - LiISRkFRgSZ;:TATIOiT AiTD DECEPTION 
CHAPTER OITE 
'"IkERAL BACKGROUND 



I. NATURE AND EXTENT OF telSRSPRESENTATIVE PRACTICES 

The practices here considered include all types of misrepresen- 
tation, by whatever means employed, which have the intent or effect 
to mislead the rar chaser concerning the nature of the product itself, 
or the terms upon which it may be obtained. The latter point, as to 
terms, while not strictly an aspect of "commodity information" in 
the sense of providing knowledge of the product itself, nevertheless 
is so closely related to it in practice that the two are taken to- 
gether for the purposes of this study. 

Inaccurate or misleading advertising, and false or deceptive mark- 
ing, branding, labeling, packa ;ing, are the forms which misrepresen- 
tation as dealt with in this study most characteristically take. On 
the other hand, by the above definition of . the subject as restricted 
to the commodity itself or to immediate representations concerning it, 
there are seen to be excluded several types of deceptive practices 
which fi ure prominently in the codes and are seemingly matters of 
serious concern to various industries, but which relate only indirectly 
or not at ail to the products involved. Such practices include rebates 
and other concealed price concessions which are not misrepresentations 
to the buyer; false invoicing or other deception as to the facts of a 
transaction whose intent is rather to deceive competitors than the 
customer; commercial bribery, seen as primarily a problem of trespass 
or interference; and imitation of trade marks, viewed as a violation 
of property right. 

Even so restricted, the field is large. Taken only in terms of 
types, a considerable catalogue of ractices may be collected. It would 
include such matters as plain misstatements of facts concerning the 
quality, content, composition, or source of the article; extravagant 
claims or guarrantees as to its performance; assertions as to the nature 
of the seller's business, its affiliations, etc. designed to suggest 
special advantages in dealing ("factory- bo-you" where no factory is 
owned); descriptive trace names which are unrelated to the content of 
the product (Butterkrust and Kremekrust breads which are innocent of any 
connection with these ingredients); similar names based upon microscopic 
presence of the material indicated ("wool" jjoods having a kj content of 
v/ool) and so one, bounded apparently only by the limits of the merchan- 
dising imagination. (*) 



(*) See more extended list in discussion of Federal Trade Commission, 
Chapter S, p. 17 , below; also, Federal Trade Commission, Annual 
R' 't ort , (Fiscal year ended June 30, 1935) pp. 67-71. 



3710 



These are the types of practices with which the study is 
concerned. What the extent of their use may be it is impossible even 
to estimate in any concrete terms. Obviously figures are not obtainable 
to show what proportion of the country's total industrial output is 
characterized in its distribution by deceptive means. That it is 
sufficiently large to warrant and receive serious consideration seems 
evident. Eighty-four per cent ( 34 of a total of 754) of all cases 
involving unfair trade practices arising under Section 5 of the F.T.C. 
Act, (other, that is, than anti-trust) ordered ajainst by the Feaeral 
Trade Commission from 1915 to 193'.., as reported in Volumes 1-18 of its 
Decisions, involved some form of misrepresentation^*) 

Of 143 industries which prior to ERA. cooperated with the 
Commission developing Trade Practice Conferences, 102 incorporated 
provisions dealin ; with misrepresentations in their conference codes. (*) 
And when ITRA came along, the industries presenting "438 of 557 basic 
codes, and 175 of 200 sup demental codes, did the same.(*) If further 
-'roof were needed in support of what is a matter of common knowledge it 
might be found in the activities of trade associations, business organi- 
zations such as the Better Business Bureaus, women's clubs, Consumers' 
Research, etc., and in a mass of State legislation, municipal regulations 
and the like, dealing with the subject in various ways. 

II. SCOUOLilC C0I7SEQUENCES OR LIISREPRBSEiITATIOiJ 

The classical economist had no reason in their theory of free 
competition to recognize such iractices as deception and misrepresenta- 
tion. They habitually assumed a commodity which was standardized in 
every respect and one about which "ouyers had complete knowledge. Under 
their assumed conditions supply and demand determined ;orice at the 
sellers cost of uroduction; and reward for jrouuetion efforts varied 
directly with the efficiency of their effort and the abundance of their 
results. i>Io individual could visibly affect the market price by with- 
holding his sup <ly; and no individual buyer could affect the market 
price by witliholding his demand. With a standardized ;oroduct there was 
little jurpose in misrepresentation or little reason for advertising 
and other forms of sales uromotion. 



(*) Data drawn from Legal Research Report if-94, December, 31, 1934. 
"Pon-iT.R.A. Precedents Concerning Trade Practices. " Legal 
Division File. 

(**) Tabulation _ Tre _ oared by Commocity Information Unit, Trade practice 
Provisions in F-T.C. Trade Practice Conference Codes , drawn from 
Federal Trade Commission, Trade Practice Conferences , June 30, 1933, 
and other F-T.C. sources. 

(***) Records of Post Code Analysis Unit, Research & Plannin Division. 
(Misrepresentation File) 



710 



Under present-day conditions, however, where there is frequently 
an absence of commonly advertised standards, grades, and quality identi- 
fying labeling and descriptive terms, misrepresentation and deception 
may yield profitable results. Under these circumstances technically 
unskilled buyers, especially ultimate consumers, are left at the mercy 
of liaise rural ous sellers, a fact which militates not only against consumer 
interest but also against the honestly conducted enterprise. Such a 
situation is incompatible with "fair" competition which requires that 
there be some direct relation between the economical and abundant pro- 
duction of commodities of rood value and the rewards for such effots. 



<_.*- 



These are the fundamental grounds upon which those who rise to 
oppose raisrepresentative practices generally take their stand. The 
consumer or his spokesman bases his protest on the plain but sufficient 
contention that he is beiny, yyvrpec.. Thu 1 industry element which does not 
employ the practice which is a sore spot in their trade is aroused by 
the fact that those who do are getting the business and they are not. 
Simple interest is the primary test. This interest may be extended on 
the part of the industry members to include concern for the integrity and 
good-will of their entire trade (*) or fear for the continued effective- 
ness of a whole medium of sale, such as advertising. (*) But the interest 
remains, and unfair diversion of trade is the basic issue. IThere the 
unfair practices are employed by those having undue power, and the diver- 
sion is sufficient, questions of monopoly and destruction of competition 
may arise, and there is added the interest of those primarily concerned 
with public policy. 

Whatever the motivating interests, the business history of this 
century shows a variety of activities directed toward more effective con- 
trol of misrepresentation as a method of competition. 

III. DIVZLOPiJmT OP CONTROL 

The course of development of this control (which is also the course 
which the discussion of this re >ort will follow) may be briefly summarized 

here. 

Up and through the first decade cf the century, where relief from 
unfair competitive practices was sought it was to be looked for through 
the operation of the common law. This law provided (and still provides) 
only a ri lit of individual action for individual injury, and it imposed 
requirements in proof which made successful action difficult. Although 
the common law conception of unfair competition had made some progress 
in evolution in response to the changing demands of a rapidly developing 
industrial economy, this progress had be n slow, and the concept remained 
relatively narrow. Misrepresentation' as a competitive practice was in 
the eyes of the common law very largely a matter of "passing off" one's 

(*) Cf. Can. .in, Industry, Appendix II, Exhibit C, of this report. 

(**) "Less than jOb of present advertisements are profitably productive. 
The reason is lack of consumer confidence." Mr. P. A. C'Connell, 
former President, National Retail Dry Goods Association. (Trans- 
cript cf Kearin '. Retail C.nf.p^ 



-9u 

goods for a competitor's by some "colorable" imitative means. 

Such views were increasingly felt to be inadequate to meet the 
needs of a more complex economic order, and in 1914 the Federal Trade 
Commission Act was passed. Although this Act, as interpreted by the 
Courts, retained the basic common lav? conception of unfair competition, it 
did give recognition to the public interest in the question and empower- 
ed .the Government to act to irotect competitors and the public in general 
without the necessity to prove specific injury or fraudulent intent. 

During the years which followed the activity of the pederal Trade 
COi. mission was very largely concerned with the curbing of misrepresenta- 
tive practices in interstate commerce. In the same period there grew up 
a considerable body of trade association activity directed toward coopera- 
ting with the Commission to make these efforts effective. In the local 
field a , Teat deal of effective work along the same lines was done by the 
Better Business Bureaus and other groups. 

In 1933 came the National Industrial Recovery Act, which in turn 
sought to carry the conception of unfair competition and the means of 
its control still farther beyond the common law view than the Federal 
Trade Commission Act had done. 

This main line of uevelopment, represented by the common law, the 
PTC, and the IJRA, is the principal subject matter of this study, and each 
of these will be considered separately and more in detail in Chapters 
Two, Three and Pour which follow. 



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CHAPTER TWO 

THE COMMON LaW AFFEC1ING- MISREPRESENTATION 

I. GENERAL BASIS OF THE COMMON LAW OF UNFAIR COMPETITION 

Unfair competition at common law, as it concerns this study, 
consists essentially in "passing- off" one's goods as those of another, 
or by use of other false representations securing patronage which should 
be the competitors. By whatever means a particular trader's goods are 
identified, whether by a personal, geographical or descriptive name, a 
form of receptacle, a style or color of label, or by the appearance or 
configurat/ra*i of the goods themselves, if it is shown as a fact that any 
of these things perform the function of identification, duplication of 
the identifying element by a rival trader, under such circumstances as 
to render deception of purchasers a probable consequence, is looked up- 
on as unfair competition by the common law. 

The most recent restatement of this doctrine appears in the 
Schechter decision, declaring the National Industrial Recovery Act un- 
constitutional, in which Chief Justice Hughes had occasion to say: 

"Unfair competition, as known to the common lav;, is a 
limited concept. Primarily, and strictly, it relates 
to the palming off of one's goods as those of a rival 
trader. In recent years its scope has been extended. 
It has been held to apply to misappropriation as well 
as misrepresentation, to the selling of another's goods 
as one's own - the misappropriation of what equitably 
belongs to a competitor." (*) 

The modern common law of unfair competition originates out of 
the necessity for the protection of trade-marks and the development of 
legal precedents to meet this need. Actions in the unauthorized use of 
a mark by a rival trader were maintained in the English courts as early 
as the 17th century, though rarely. The early English cases also es- 
tablished another precedent which has largely held, at least in America, 
to the present time. This was an unwillingness to grant an injunction 
against an infringing trader unless fraudulent intent could be proved, 
or reasonably inferred. (**) 

II. DEVELOPMENT OF THE LAW OF UNFAIR COMPETITION IN THE UNITED STATES 

The first trade-mark infringement case to appear in the reports 
of a State court of the United States was in 1837, (***) but with the 
growth of mass production and the consequent increased importance of 
trade-mark, the courts built up a considerable body of protective law. 
The legal remedy against trade-mark infringement, however, was found in- 
sufficient to give protection against other developing devices for pas- 
sing off, and as a result the present law of unfair competition develop- 
ed., of which the law of trade-mark is but a part. McLean v. Fleming 
(*) Schechter v. U. S., 55 S.Ct. 037-850 (1935). 
(**) G. Blanchard v. Hill, 2 Atk. 484 (1743). 
(***) Thomson v. Winchester, 19 Peak - 214 (Mass. 1837). 

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may "be considered the first case in which the Supreme Court stated the 
doctrine: 

"Ilcr is it necessary, in order to give a right to an 
injunction, that a specific trade-nark should be in- 
fringed; but it is sufficient that there was an at- 
tempt on the part of the respondent to palm off his 
goods as the tJ oods of the complainant . n (*) 

McLean v. Fleming and other cases (**) also set up what the 
courts and text writers have taken as another fundamental principle - 
that there can be no action in unfair competition without actual or 
potential competitive injury. The plaintiff comes into the court to 
protect his property rights. The private right of action is given, not 
for any relief of the public which is deceived, although this may be an 
incidental effect, but bee-use by this deception there is invaded that 
which is an exclusive property right of the plaintiff. 

As far back as McLean v. Fleming, also, the Supreme Court 
ruled that a showing of fraudulent intent was necessary to obtain in- 
junctive relief against unfair competition. This requirement was again 
stated in the Elgin vTatch Coimany case, decided in 1900. (***) 

This attitude of the Supreme Court is contrary to the weight 
of oninion of the modern English cases, where honesty of purpose or ab- 
sence of intent to deceive is no defense. It is also hot shared by all 
American courts, the English rule being followed by the New York Court 
of Appeals, and the courts of California and Kansas. (****) 

While the required fraudulent intent may in any _.iven case be 
inferred from the circumstances, nevertheless so far as the Supreme 
Court decisions are concerned such intent is an essential condition for 
the granting of relief from unfair competition at common law, rather than 
the actual economic effect upon a competitor of what in itself may have 
been an innocent a.ct. 

The relief which is nrovided in cases of unfair competition 
may be obtaincu by action either at law or in equity. The former is em- 
ployed where damages are the main end. It is seldom used. The great 
majority of the ca.ses are brought in equity, and the relief obtainable 
is two-fold: an injunction to prevent injury through threatened acts of 

O) McLean V. Fleming, 96 U.S. 2.45. (1877). 

(**) Cf. Lawrence Mfg. Co. v. Tennessee Mfg. Co., 138 U.S. 537 
(***) Elgin National Watch Co. v. Illinois Watch Co., 179 U.S. 665(1900). 
(****)ln the case of Dodge Stationery Co. v. Dod e, 145 Calif. 380 (1904), 
the court held that it was quite unimportant whether the defendant used 
the name "Dodge" with fraudulent intent or not. If the necessary re- 
sult was deception, and the public was being confused, the fact that the 
defendant used the name with an honest intent will not aid it, and 
equity will exercise its injunctive powers to prevent a fraud upon the 
public, even though there may not have been technical fraud upon the 
plaintiff, due to the absence of fraudulent intent on the part of the 
defendant. 

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unfair competition, and an accounting of profits and for damages al- 
ready sustained if such can be -Droved. 

Briefly, then, the common law of unfair competition provides 
only a right of private action in protection of a private property 
right. Actual or potential competitive injury is the indispensable 
fact to be shown. Deception of the purchaser must also be shown, but 
only as evidence of such injury. The element of fraudulent intent is 
required. No right of public action for the protection of competitors 
as a group is allowed by the common law, and no public interest is 
recognized. Any protection of the purchaser from deceit is purely in- 
cidental to the main end. 

Expressed in other words: 

"Fostering competition directly by the provision of a 
few private remedies for -orivate wrongs, rather than 
preserving competition by positive measures administered 
by public authorities, was the burden of legal regula- 
tion of competitive practices under the common law." (*) 

It is the second of these two contrasted methods, that of 
"Preserving competition by positive measures administered by public 
authorities," with the public interest made a specific and essential 
consideration, which is embodied in the Act creating the Federal Trade 
Commission, the sco-oe and effect of which are to be considered in the 
next chapter. 



(*) National Industrial Conference Board, Public Regulation of 
Co mpetitive Practic es, Revised . (1939) p. 30. 



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CIIAPTER TERSE 
n I3: FEDERAL TFulDL COMMISSION 



I. LEGAL BASIS 07 THE COKiISSIOU 

The Federal Trp.de Commission Act "bee me lav; September 26, 
1914. Section 5 of the Act declared "That unfair methods of competi- 
tion in commerce are hereby declared unlawful," and authorized the 
Commission to take action where there is found to be a "using of any 
unfair method of competition in commerce , and if it shall appear to 
the Commission that a proceeding by it ** would be to the interest of 
the public." Orders of the Commission are made subject to review by 
the Circuit Court of Appeals, but "the findings of the Commission as to 
the facts, if supported by testimony, shall be conclusive." 



A. The Meaning of "Unfair Cormetition. 



ii 



No definition of "unfair competition" was included in the 
Act. There has always been question as to just where Congress proposed 
that discretion in deciding what constituted unfair competition should 
rest, many holding that this was of the very essence of the Commission's 
intended function. For practical purposes, however, the question was 
settled by the Supreme Court in the Gratz case: 

"The words 'unfair methods of competition 1 are not de- 
fined in the statute and their exact meaning is in dis- 
pute. It is for the courts and not the Commission ul- 
timately to determine, as a matter of law, what they 
include." (*) 

Further in this same case the Court indicated its general 
conception of the meaning of the phrase: 

"They (the words 'unfair competition') are clearly in- 
applicable to practices never heretofore regarded as 
opposed to good morals because characterized by decep- 
tion, bad faith, fraud or oppression, or as against 
public policy because of their dangerous tendency un- 
duly to hinder competition or create monopoly. }t 

This tendency of the courts to restrict the interpretation 
of the phrase to legal conceptions previously established has been looked 
upon by many as hampering a necessary broadening of its meaning in 
terms of social and economic criteria imposed by the evolution of our 
industrial system. It has had less of this effect with respect to mis- 
representative practices, however, since the court's definition plain- 
ly includes that idea; and further, because the courts have rejected 
any pleas that, since the standards of previously existing law are made 



(*) F.T.C. v. Warren, Jones and Gratz, 253 U.S. 421 (1920) 



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the test, the authority of the Act is restricted to specific practice s 
already ruled unlawful. 

"The commissioners ... are to exercise their common 
sense, as informed "by their knowledge of the general 
idea of unfair trade at common law, and stop all those 
trade practices which have a capacity or a tendency to 
injure competitors directly or through deception of 
purchasers, quite irrespective of whether the spec- 
ific practices in question have yet been denounced in 
common-law cases." (*) 

In addition to the -common-law criteria imposed by the courts, 
three conditions precedent to FTC jurisdiction are set by Section 5 of 
the Act and have been reaffirmed by the Supreme Court. First, the 
practices complained of must be unfair. Second, they must 'be methods 
of competition in commerce. Third, action by the Commission must be 
in the interest of the public. (**) And, of course, the competition 
must be in interstate commerce. 

Thus, while "the commissioners are not required to aver and 
prove that any competitor 1ms been damaged or that any purchaser has 
been deceived" (***) as would have been the case at common law, (****) 
they still have a double requirement to meet in that they must show that 
the act complained of has at least "a capacity or a tendency to injure 
competitors" and that there is a public interest involved. There is 
carried over in effect the common-law conception that unfair competi- 
tion is primarily concerned with the rights of competitors, and regards 
the deception of purchasers only as that constitutes an invasion of 
such rights. This has stood as a bar to the development of a concep- 
tion of misrepresentation or deception affecting the consuming public 
as being unfair competition per se, despite the increasing tendency of 
the Commission to maize this a principal test. 

A leading case in 'which the courts have i ejected public pro- 
tection as a sufficient grounds for Commission action is that of 
Raladam Co. v. F.T.C. (*****) 



(*) Sears, Roebuck &• Co. v. F.T.C, 258 Fed. 307 (1919) 

(**) Raladam Co. v. F.T.C, 4-2F (2d) 430 (1930); 51 S.Ct. 587 (1931 ) 

(***) Sears, Roebuck & Co. v. F.T.C. quoted above 

(****) jj or j_ s showing of fraud required. "It was not necessary for the 

commission to establish intent to deceive the -ourchasing public. For 

the test of unfair competition was whether the natural and probable 

result of the use by the petitioner of such words was deceptive to the 

ordinary purchaser and made him purchase that which he did not intend 

to buy." Indiana Quartered Oak Co. v. F.T.C, 26 Fed. (2d) 340 (1928) 

(*****) Cit. page 15, supra. 



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This case involved misrepresentations concerning the ef- 
ficacy of an obesity cure, which was also shown by testimony to be 
potentially harmful to the uninstructed user, nevertheless, the Com- 
mission's restraining ord<' j r was overruled by the Circuit Court of / 
Appeals, the Court saying: 

"The general law of unfairness uses the misleading 
of the ultimate purchaser as evidence, of the primary 
vital fact, injury to the lawful dealer; the Commission 
uses this ultimate presumed injury to the final user 
as itself the vital fact." 

The Supreme Court in turn upheld the Circuit Court of Ap- 
peals, reiterating the requirement that 

"The trade whose methods are assailed must have present or 
potential "rivals in trade whose business will be, or is 
likely to be lessened cr otherwise injured," 

and finding that the Commission had failed to present the necessary 
evidence of such injury, since all other members of the trade involved 
employed the same questionable tactics as the respondent. The Court 
could not bring itself to conceive that Congress had set up the Com- 
mission "for the purpose of preserving the business of one knave a- 
gainst another" - nor, apparently, for the purpose of protecting the 
public against both. 

It has been claimed that the Raladam case turned in reality 
upon the mere technical omission of the Commission to show competitive 
injury, and that it did not therefore constitute a check upon the 
liberalizing tendency of the Commission above referred to. As a mat- 
ter of fact the decision shows that the Supreme Court, at least, 
weighed the possibility of such injury in the circumstances carefully, 
and rejected it as insufficient. The case therefore amounts to a firm 
reiteration of the necessity of this element for jurisdiction under 
the terms of the Act as interpreted by the cou.'ts. 

On the other hand, in the Griffith Hughes case which came 
after Raladam and was somewhat similar to it, but which dia not turn 
upon the point in question, (since competitive injury was shown), the 
Circuit Court of Appeals in supporting the Commission used the follow- 
ing language in which the element of public protection is particularly 
stressed: 

"To strike down unfair methods of competition or unfair 
practices on the public is the duty imposed on the Com- 
mission by Congress. The object of the Act is to pre- 
vent public deception, and to preserve free competition. " (*) 



(*) E. Griffith Hu fa hes Inc. v. R.T.C. 65 F. (3d) 362 (1933) (An 
appeal to the Supreme Court in this case is now pending.) 



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In the Kcppel case, touching the practice of "break-and-take" 
in candy selling (a form of sale, especially of penny candies, invol- 
ving lottery or chance), the Supreme Court stated, 

"It is true that the statute does not authorize 
regulation which has no purpose other than of re- 
lieving merchants of troublesome competition, or of 
censoring the morals of business men." 

But the Court goes on to stress the social aspects of a competitive 
method which "is shown to exploit consumers, children, who are unable 
to protect themselves", "devices v/hich have met with condemnation 
throughout the community." (*) 

It may be that there is thus being evidenced a liberalizing 
tendency on the part of the courts which will help to give the Commis- 
sion's efforts along this line greater effect; nevertheless the word- 
ing of the statute as it stands does act as a bar in the way. 

The Commission's own sense of this is indicated by recommenda- 
tions for change in the Act which are put forth in its latest Annual 
Report. Section 5 of the Act is recommended to be amended as to its 
first two paragraphs, to read: 

Sec. 5. Unfair methods of competition in commerce and 
u nfair or deceptive acts -and practices in commerce are 
hereby declared unlawful. 

The Commission is hereby empowered and directed to prevent 
persons, partnerships or corporations, except banks, 
and common carriers subject to the acts to regulate com- 
merce, from using unfair methods of competition in com- 
merce and unfair or deceptive acts and practices in com- 
merce. (**) 

The Commission at the same time offers this explanation of 
the purposes of the proposed changes: 

"This recommen.ia.tion is made in order to give the Com- 
mission clear jurisdiction over a practice which is un- 
fair or deceptive to the public and is not necessarily 



(*) F.T.C. v. R. F. Keppel. ft Br. Inc. 291 U.S. 304 (1934) (The 

Commission was reversed in this case by the Circuit Court of 
Appeals, on grounds very similar to the Raladam decision, the 
Court finding that all competitors might, and many of them did, 
use the device complained of. The Supreme Court, in sustaining 
the Commission, would appear to have been materially influenced 
oy social considerations.) 

(**) Federal Trade Commission, Annual Report (1935), p. 15. 



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unfair to a competitor. There arc times when such 
a practice is so universal in an industry that the 
public is primarily injured rather than individual 
competitors. In such cases it is very difficult, 
if not impossible, to show injury to competitors, 
but the injury to : the public is manifest." 

A bill to emend the Federal Trade Commission Act, embodying 
the recommended language and certain procedural changes, was intro- 
duced by Representative Rayburn in the House of Representatives 
January 20, 1936, (*) and in the Senate oy Senator Fneeler. Should 
the bill become law, it would unquestionably enlarge the Commission's 
opportunities for action in certain situations. Probably only the 
test of court actions would determine whether it would materially add 
to the number of forms of misrepresentation with which the Commission 
is already able to deal, as enumerated in the following section of 
this chapter. 

To summarize, what the Federal Trade Commission Act primarily 
did from the legal view was to set up a public agency having the spec- 
ific function to prevent and restrain unfair competitive practices; 
to assert the public interest 'as' one, if not the first, consideration 
in such actions; and, so far a's' misrepresentations at least went, to 
provide a means for adding specific practices to the list of the un- 
lawful more rapidly than the ■cc-imaon 'law, cautiously following precedent, 
was able to do. Also, in due course, the Federal Trade Commission Act 
became one of the foundations upon which the IDA jurisdiction over un- 
fair trade practices was sought to be based. 

Among the causes which might be adduced for any failure on 
the part of the Commission to 'extend more fully its oontrol over un- 
fair competitive practices are, first, the restrictions upon its sphere 
of action set up in the Act itself, and second, the insistence of the 
courts upon their right to final definition of what unfair competition 
includes - not to mention the gigantic nature of the task itself. 

B. Types of Misrepresentation Dealt with by the 
Commission. Despite the various conditions imposed upon it, the 
Federal -Trade Commission, since its inception has been able to take 
action in many kinds df cases involving misrepresentation, and with a 
high degree of success. 'The practices condemned in orders to cease 
and desist (**) are printed in the annual reports of the Commission, 
and have been fully outlined and condensed in the following section. 



(*) H. R. 10385, 74th Congress, 3d Session. 

(**) Federal Trade Commission, Annual Report (1935) pp. 67-71. 

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C. Classification and Citation's of Typical Cases , 

For a more concrete presentation of the specific forms of mis- 
representation with which the Federal Trade Commission principally deals, 
there are given below a number of actual Commission cases, classified 
as to type, and with their case citations: (*) 

I. HISKCPIffiSZ^TATION. 



1. As to weight or quantity . 

(a) Fi ctitious weights. 

Selling soaked or "loaded" sponges by weight. 
Cease and desist orders issued in Complaints 
!Tos. 374, 375, etc. 

(b) False Packaging. 

Packing of butter in cartons of definite size 
and shape, but with contents less than stand- 
ard weight. F.T.C. v. Mountain Grove Cream- 
ery Co. 6 F.T.C, D. 426 (1923) 

2» C ompos i tio n, quality, condition or character of 

•produ cts. 

(a) C omposition. 

(1) Sale of goods chiefly made out of cotton 
as wool. F.T.C. v. Winsted Hosiery Co., 
258 U.S. 483 (1922) 

(2) Advertising a product composed of common 
salt with, its impurities as containing 
sixteen different chemical and vegetable 
ingredients 1 

Guarantee Veterinary Co. v. F.T.C. 
285 Fed. 853 (CCA. 2d, 1922) 
(Order affirmed). 

(3) Misbranding paint by terming it "Com- 
bination White Lead." 

touis Leavitt v. F.T.C, 16 F. (2d) 
1019 (CCA. 2d, 1926) (P^r curiam) 
(Order affirmed). 



(*) Condensed from "Anti-Trust Laws and Unfair Competition", Document 
of Division of Review, July 20, 1935, 

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(4) "Satinsilk" as a brand or label for cotton 
thread. 

Sea Island Thread Co. v. F.T.C., 22 P. 
(2d) LI19. (G.G. A. 2d, 1927) (Affirmed 
without opinion. ) 

. (5) Branding imitation leather products as 
Duralcather. M 

Masland Duraleather Co-, v. F.T.C, 34 F. 
(2d) 733 (CCA. 3d, 1929) (Order modified 
in an immaterial particular.) 

(6J : T sing term "Good Grape" in connection with an 
artificially colored and flavored preparation. 

Federal Trade Commission v. Good-Grape Co., 
45 F. (2d) 70 (CCA. 5th, 1930) (Order 
modified by permitting use of term on con- 
dition that artificial nature of prepara- 
tion be indicated. ) 

(b) As to qual it y or condition. 

(l) Lrbel bearing pictorial representation show- 
in mattresses with an uncovered end flaring 
to an exaggerated thickness. 

Ostermoore .& .Co. Inc., v. F.T.C 16 F. (2d) 
9S2 (CCA. 2d, 1927) (Order vacated on 
ground representation was simply fanciful, 
not deceptive, and merely constituted the 
time-honored practice of "puff inj' one 1 s 
wares. ) 

(?) Representation of "obesity cure" as "scienti- 
fic"; failure to state that the preparation 
could not be taken safely except under medi- 
cal advice. 

F.T.C v. Raladam Co. 283 U.S. 643 (l93l) 
(Order vacated, since jurisdiction of Com- 
mission is limited to unfair trade method 
which affect competition, and there was no 
evidence that respondent's advertisements 
injured competitors. ) 

(o) Selling rebuilt tires as new. 

F.T.C v. H.P. Jones, 1. F.T.C. D. 360 (1932). 



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(4) Advertising a weak chemical preparation as 
"ten times stronger as a germicide than un- 
diluted U.S. P. carbolic acid." 

F.T.C. v. G-inse Chemical Co., 4 F.T.C. D. 
155 (1931) 

(5) He-issue of old films as new releases. 

Fox Film Corp., v. F.T.C, 296 Fed. 353 (C.C. 
' A. 2d, 1924) (Or dor affirmed). 

3. Fal se claim to Endorsement or Use . 

( a ) Off icial endorsements and recommendations 

(l) False statement- that product was adopted or 
purchased "by the United States Government. 

Guarantee Vetinary Co. v. F.T.C, 285 Fed. 
353 (CCA. 2d, 192"). 

(b) Endor sement by "iriv:.te individuals. 

(l) Publishing testimonials of nationally known 

characters without disclosing that substantial 
payments are made. 

,....-, Hortham Warren Corp. v. F.T.C, 59 F^. (2d) 
196 (CCA. 2d, 1932) (Order vacated* on 
ground payment for truthful testimonials 
deceives ne one. ) 

4 . A s to Business St' tu s. 

( a ) Misrepresenting chat respondent is a manufacturer . 

(1) Trade or corporate name including word "Mills" 
where respondent does not rwn or operate a 
factory in which its products are made. 

Federal Trade Commission v. Pure Silk Hosiery 
Mills, Inc., 3 F. (3d) 155 (CCA. 7th, 1925). 

(2) By pictorial representations. 

Use of pictures of plants and factories on 
letter-heads and advertising', to indicate re- 
spondents own them - ordered discontinued in 
Complaints. Nos. 193, 491, 11©4, 1107, 172\ 

(b) Misrepresenting commercial rating (Stipulation #645) 



-20- 

( - ) ^ "-'.''■ . - •..--. . - distribution 

centers, '-'hen in fact it is untrue ( Stimulation 
Ho. 617.7). 

(d) Representing respondent '.-as not engaged in in 
a bus iness for profit . 

(l) Trade name "Anti- Tobacco League" implying 

non-profit organization, when in fact it was; - 
discontinued in Stipulation I T o. 0130. 



As to Origin of Product. 



(a) Labeling product made in the United States as 
"English Tub Soap". 

F.T.C. v. Bradley , 31 F. (2d) 569 (CCA. 2d, 
1929) (Order affirmed). 



As to Price Reductions. 



(a) False representation that usual sale price for 
product was $20, in sale ox two for $10. 

Chicago Portrait Co. v. F.T.C., 4 F (2d) 259 
CCA. 7th 1925), Cert. Den. 269 U.S. 5^6 (1925) 
(Order evacated. on ground there was no evidence 

that customers were deceived or competition 

injured, ) 

(b) False representation that "loose leaf extension 
service" for encyclopedia, was given free with purchase 
of books 

Consolidated Book Publishers, Inc. v. Federal 
Trade Commission 58 F. (2d) 942 (CCA. 7th, 1931) 
( Order af i i rmed) . 

(c) By means of combination sale s. 

Selling groceries at a fixed aggregate "price, placing 
theprice of the staple articles below retail price 
and charging excessive ■prices for the other articles. 
Ordered discontinued in Complaints ITos. 349, 352. 

(d) I-jsre -presenting that there was "no extra, cha rge for 
credit " whereas substantial discounts were given on 
goods sold for cash. ( Corn-plaints Nos. 765 and 766). 

(e) I.Ijsre'Presenting that repairs were free, when in fact 
the charge was made up by excessive postage and 
package charges. 

(f ) falsely advertising that the sale was below cost 

(Cor.; plaint IIos. 1TL). 



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([•) Representing that the rrice of the product would "be 
advanced (Stipulations I!o : s 521, 463). 

(h)' Represent in: that "products are offered at "special" 
or "introductory" prices. (Complaint IJo. 2010, 
Sti ul at ions 72 ' , J21, 483, 740, 607). 

( i ) Fictitious 1 trices . 

Larking enhanced prices on fountain pens, to mis- 
lead the purchaser as to the value of the product. 
(Complaints iJos. 561, 663-68, 670-673). 

7 . As to ..ecrici-ial or Curative Value of the Fro euct. 

( a ) 3y means of advertisin g. 

(1) That an electrical device wa.s beneficial for 
certain ailments and had the endorsement of 
physicians, when those facts were not true. 
(Complaints 16~ ; ;, 1703, 1679). 

(b) 3y mean s o f fal s e brand s. 

(1) Labeling soap as containing olive oil, pero;:ide, 
palm ail, witch -hazel, medicines or drugs 
(Complaint .IIo. 873). 

8. 1-jsre p rese ntations in_ th e Sale of. Corporate Securit ies 

(a) Misleading and deceptive statements in advertising, 
letters, naps, concerning the value of oil leases, 
properties, assets, and productivity. Ordered dis- . 
continued in Complaint" ilos. 795, 596, 336, 857. 

(b) Misleading announcements and reports in regard to 
nature and volume of business done. (Ordered dis- 
continued in Complaint ho. 273). 

An outline of the administrative machinery anc. methods of procedure 
by means of which these and other unfair practices are dealt with by the 
Commission is given in the section following. 



r\mi s\ 



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II. FEDERAL TRADE C01&II3SIGN ADUf&I STRATI 2 T AND PROCEDURE 

The serai -judicial nature of the Commission 1 s function in the re- 
straint of unfair methods of competition impose upon it rather elaborate 
procedural requirements, which may be only briefly noted here. 

A case before the Federal Trade Commission may originate in sev- 
eral ways. The most common is through complaint by a competitor or from 
public sources other than the Commission itself. The Commission, how- 
ever, may initiate an investigation. Once initiated, a case runs some 
part of the following course. (*) 

i 
A. Informal Procedure 

An "application for complaint" being received from any of the 
above sources, the Commission, through its Chief Examiner, considers 
first its jurisdictional elements, i.e., whether it involves interstate 
commerce and whether the facts presented are such that prosecution 
appears to be in the public interest. On the basis of this examination 
the application may be either dismissed or docketed for complaint. 
(Approximately two out of three of all cases are dismissed at this 
stage). (**) 

If docketed for complaint, the case is assigned to a Com- 
mission attorney to develop the facts by interviews with the respondent, 
with his competitors, or consumers if necessary, or from any other 
available so\irces. The record is then presented to the chief examiner, 
who will rec:mmend either (l) dismissal, (3) closing of the case by 
stipulation, or (3) issuance of formal complaint. All proceedings up 
to this point are confidential, the name of respondent being protected 
throughout the preliminary investigation. 

3. Formal Procedure . 

"Only after most careful scrutiny 11 does the Commission issue a 
formal complaint. The respondent is given opportunity to answer, and 
if the case is contested, hearings are held before a Commission trial 
examiner, who for the convenience of the parties may sit anywhere in the 
country. The Commission and the respondent are botn represented by 
their attorneys. After report to both sides by the trial examiner, 
briefs are filed by each, and the case is heard before the full Commis- 
sion. If the complaint is sustained, the Commission states its findings 
as to fact and its conclusion that the law has been violated, and 
issues an order requiring the respondent to cease and desist from the 
practice. If the complaint is dismissed or closed, an order to that 
effect is issued. These orders constitute the final functions of the 
Commission as far as its own procedure is concerned. 



(*) Abridged from Federal Trade Commission, Annual Report (1935) 
pp. ^3-46. 

(**) See figures presented in Sec. Ill of this Chapter, page 27 below. 



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C. Judicial Enforcement and Review . 

The Commission has no power to enforce its orders to cease and 
desist, or to assess penalties for failure to comply. For this it must 
appeal to the Federal courts. Likewise the respondent may appeal to 
the courts for review of the Commission' s actions. To obtain a decree 
of enforcement the Commission must prove violation, while for a penalty 
it must show respondent to be in contempt of the court' s decree. 

The Commission has sought the courts' aid in enforcement in 
only a relatively few cases (38 in all). (*) This may indicate that 
its procedure is effective without specific penalties, or it may re- 
flect the difficulties of the procedure. As to this the Commission it- 
self has said: 

"Punishment for a violation of the law can not be 
secured until the Commission has proved in its own pro- 
ceeding that the statute has been violated, has proven 
before the court that its order has been violated, and 
has proved that the offender is in contempt for a vio- 
lation of the decree of the court. The requirement to 
thrice prove a violation of a prohibitive statute be- 
fore punishment can be inflicted, and to prove it twice 
before an injunction can be secured, probably does not 
have a parallel in our statutes. "(**) 

In the recommendations contained in its 1935 Report the Com- 
mission includes certain changes in the Act designed to increase the 
simplicity and uniformity of its enforcement procedure. (***) These 
have likewise been incorporated in the Xieeler-Rayburn bill now pend- 
ing in Congress. 

D. Stipulation Procedure . 

A simplification of procedure which the Commission has it- 
self instituted is that of stipulation. This is an informal proceed- 
ing whereby a respondent may voluntarily enter into a stipulation of 
the facts complained of and agree to- cease and desist from the 
alleged unfair practice without issuance of formal order to do so. 
The stipulation is not a right but a privilege extended by the Commis- 
sion, and is used only where the offense is considered of a less seri- 
ous nature. In signing the stipulation respondent agrees that if he 
ever resumes the practice, the facts as stipulated may be used against 
him in the trial of a complaint which the Commission may issue. 

During the 9jr years in which the stipulation system has been 



(*) Federal Trade Commission, Annual Report (1935), p. 87, 
(**) F. T. C. Annual Report (1923) pp. 77-78. 
(***) y. T. C. Annual Report (1935) p. 15. 



9710 



r 24- 

employed (to June 30, 1935) a total of 2,257 stipulations have been 
approved by the Commission, as compared with a total of 1,446 cease and 
desist orders issued throughout the approximately 21 years of its entire 
history. Only 14 stipulations have ever been rescinded. ( *) As to the 
results of this form of procedure the Commission has said: 

"The Commission believes that its stipulation pro- 
cedure is protecting tne American consumer from numerous 
unfair methods of competition which, in the aggregate, 
are an important consideration, reaching, by reason of 
the simplicity ana economy of the procedure a very much 
larger number of abuses than the Commission could have 
reached through proceeding solely under the formal pro- 
cedure already outlined. " ( **) 

E. Trade Practice Conference Procedure . 

The trade practice conference is- a method developed by the Com- 
mission for fostering voluntary efforts by individual industries to 
correct their competitive abuses, and to formulate recognized standards 
of. commercial practice. Under it a trade group may develop a "code" of 
fair practice and submit it for the Commission 1 s approval and support 
in enforcement, so far as that may be legally allowable. Provisions of 
the trade practice conference codes are divided primarily into two 
classes. Group I rules are "affirmatively approved" by the Commission 
as expressions of existing law. These include declarations that vari- 
ous forms of misrepresentation, commercial bribery, price discrimination, 
etc. are unfair practices. The Group II rales are merely accented as 
"expressions of the trade", desirable but not as yet backed by any 
legal authority. Such rules include positive standards and packaging 
and labeling requirements, and other subjects of particular concern to 
the individual industries. Some 150 of these trade practice conference 
codes had been approved prior to the passage of the National Industrial 
Recovery Act.(***) 

The general resemblance of the conference codes to the trade 
practice portions of trie NRA codes is obvious. A principal difference - 
and chief weakness of the former - was that no legal power existed for 
enforcing the broader, Group II rules, (Rules accepted as expressions 
of the trade but not deemed unlawful by cease and desist orders) such 
as was intended to be conveyed by the terms of the NIHA. Furthermore, 
no official share in enforcement of the conference rules was allowable 
to the cooperating industries, as was the case with NRA through the 
Code Authority set-up. 

(*) Ibid. p. 51. 

(**) Ibid. p. 50. 

(***) p or detailed discussion of the Trade Practice Conference system 
see: Federal Trade Commission, Trade Practice Conferences , 
June 30, 1933; National Industrial Conference Board, Public 
Regulation of Competitive Pra c tices , pp. 224-241; Geo .3. C-alloway, 
Industrial Control in the U. S. Before NRA NRA Training 
Section, ?eb. 1935, pp. 14-18 . 



As to misrepresentations, tue great majority of the tride prac- 
tice conference codes contained one or more provision concerning them. 
These were more or less uniform and for the most part couched in rather 
general terms, (which in several instances, with minor changes, became 
the basis for the customary type of KRk code provisions dealing with 
the same subject). The following are one or two typical provisions: 

"The making or causing or permitting to be made 
or published any false, untrue, or deceptive statement 
by way of advertisement or otherwise concerning the grade, 
quality, quantity, substance, character, nature, origin, 
size, or preparation of any product of the industry having 
the tendency and capacity to mislead or deceive purchasers 
or prospective purchasers and the tendency to injuriously 
affect the business of competitors, is an unfair trade 
practice. "(*) 

"The false marking or branding of products of the 
industry, with the effect of misleading or deceiving 
purchasers with respect to the quantity, quality, grade, 
or substance of the goods purchased, and the tendency to 
injuriously affect the business of competitors, is an un- 
fair trade practice. " (**) 

In some instances the phrase concerning competitors was omitted, 
though this of course did not affect the obligation of the Commission 
under the FTC Act to show competitive injury. A few of the Group I 
rules deal with specific misrepresentative practices. On the other 
hand, a large number of the trade practice conference codes contain in 
their Group II rules statements of qualitative and quantitative 
standards for industry products, designed to aid in the stamping out 
of misrepresentative practices, concerning them. Although, as previous- 
ly stated, these rules have no effect of law, they tend to emphasize 
the necessity of positive definitions of standards for that purpose. 
With respect to t.iis p.iase of the work the National Industrial Confer- 
ence Board has said: 

"The clearest and most substantial advantage from 
the trade practice conference procedure is in the defini- 
tion of wnat amounts to misrepresentation or misbranding 
of goods in various lines of trade. . . They (trade evils of 
this type) thrive on the absence of clearly defined and 
universally recognized trade standards. . . Only the 
highest commendation can be given the efforts of the Com- 
mission to assist various industries in establishing fixed 
standards of quality or grade for their products. " (***) 



(*) Rale 1, Group I, Bituminous Coal Operators of the Southwest. 

(**) Rule 3, Group I, Cut Tack, Mail and Staple Industry. 

(***) National Industrial Conference Board, Public Regulation of Compe- 
titive Practices, (1929)., pp. 237-238. 

'9710 



-26- 

This essential tie "between the establishment of specific commod- 
ity standards and the adequate restraint of misrepresentations concern- 
ing them will find further illustration later, in the discussion of N3A 
experience. Here it may be also noted that the Commission itself, in 
certain of its cases concerning misrepresentatiai of commodities (as 
white lead paint, fur or wool garments, etc.), has found it necessary 
to adopt standard definitions of the products in order to provide nec- 
essary criteria for showing deception Concerning them. 

F. Other Considerations . 

Perhaps the most striking consideration about the Commission 1 s 
procedure in general is the very heavy administrative burden which the 
Commission's semi-judicial character is seen to place upon it in the 
discharge of its function. While the development of stipulation pro- 
cedure has doubtless helped materially in this respect, the various 
necessities of investigation, hearing and review which are inherent 
in the Commission's regular processes would appear to be a drag upon 
full effectiveness of operation, especially with the existing limita- 
tion s upon available staff. 

Another point concerning the Commission's organization, and 
one which is in marked contrast with the later NUA organizations, is 
its centralisation. Though its activity is national in scope, outside 
of Washington the Commission now maintains regular field offices in 
4 cities - New York, Chicago, San Francisco and Seattle. Besides 
clerical help these offices are staffed by 20 examiners each in 
New York and Chicago, and 3 to 5 each in San Francisco and Seattle. 
As noted above, trial examiners may hold hearings in various parts of 
the country, but all final hearings on formal cases are before the 
Commission itself. For t.ie performance of all its functions, including 
those of conducting general investigations, the Commission has at this 
time a staff of about 600. 

A summary of some of the results of the Commission's operation 
under this set-up, in the field of unfair competition, is given in the 
section following. 



£710 



J2?- ■ 

T ^I. F3C03E OF FIDF7.AL T7JGZ COii: JS3IOII ACTIVITY. 

A> ' General Lega l Record . 

The offici 1 record of the activity of the Commission with 
res >ect to unfair competitive Drrctices, as shorn by its published cum- 
ulative sum : rii s cov Tin, the entire eriod from the creation of the 
Commission to June 30, 1935, . ives a total of 34,757 inquiries instituted 
during the period, of which 17,465 were dismissed and closed after pre- 
liminary inve tigation. (*) Am licationc for complaints docketed 
numbered 3,6 !6. Of these 3,059 were subsequently dismissed •" for lack of 
merit." Formal com al ints were issuea in 2,434 of the esses docketed, 
of vhich 1,446 resulted in orders to cease and desist. Cases settled by 
stipulation totaled an additional 5,257. Some 634 amplications for 
complaint "-ere ending at the close of the year. (**) 

From this it is seen that the Commission was successful in 
effect in,; some form of restraining action, either by cease-and-desist 
order or by stipulation, in 3,703 instances'- that is, in a.mprox- 
imately 16 percent of all the cases "presented to it vhich were definitely 
disposed of during the period. At the same time., appro:dmately 21,300 
cases were dismissed without issuance of complaint, the great majority 
after a first invest.i5a.ti0n. 

3 . Cases Af fee t ing .'. sr e presentation . 

ihat the rela.i ive success of the Commission may have been in 
dealing - r, ith those dealing with misrepresentation and deception, the 
particular types of ca„ses in 7/hich this study is interested, it has not 
been possible to determine. Je know, as previously noted, (***), that 
somewhat more than one-h If of all the cease-and-desist orders issued 
(and 94 percent of those ris n.r out of Section j of the Federal Tra.de 
Commission Act alone - that is, other than rnti-trust cases) concerned 
this general subject; Of the stipulations, it is reported that not less 
than 95 Percent - sre in the sane category. (****) 

(*) "Tables Summarizin; Fork of the L 1 Division and Court Pro- 
ceedings, 1915-35", Federal Trade Commission, Animal Report 



(1935), pp. 



o 



pQ 



(**) Aote: The. Commission's tabular summaries are rather com- 

plicated, due in part to changes in the status of some cases 
at different stages in the proceedings. For detailed explan- 
ation and reconcilic tion of figures with respect to the Com- 
mission's legal operations se? the text of the summaries, as 
cited in note above. 

(***) See note, page 5, Chapter O.,-, supra. 

(****) Aisleading representations of the "general" class, tilus the 

special false and misleading advertising type of cases (D a ta 
irom Offic= of Chief Trial Examiner, Federal Trade Commission, 
II v emb er 11, 1 9 ■' 5 . 



9710 



-28* 

But we have no way of knowing -hat proportion of the more 
than 21,000 dismissed cases had to do with the same subject. The 
records of these cases, as a group, are held confidential. "Tithout 
some classification of these cases "by subject-natter there is no way 
of determining whether the number of instances of successful restraining 
iction taken in misrepresentation cases alone was greater or less, in 
relation to the entire number of cases of this same type, than the 
16 percent av°ra:;e for affirmative action in cases of all types, given 
above. 

C. General Reasons for Dismi ssals. 

Without a knowledge of the reasons for dismissal, also, of 
all or a representative sample of these .31,000 cases, it is not feasible 
to attempt any appraisal of the grounds for this large proportion of 
dropped cases or the policy involved in their handling, or to obtain 
light on the administrative difficulties and practical problems in- 
volved in the nature of the cases the. ..selves. The more frequently en- 
countered causes for disposal of the cases without restraining action 
prob,ably are those listed by the Commission itself in a. recent Annual 
Report : 

"The Commission disposed of 1,597 cases (during the 
year) for the reason that they were found to be private contro- 
versies lacking public interest, that the practices complained of 
had been discontinued, that the firms or persons complained 
against had gone out of business, or for lack of jurisdiction, 
etc." (*) 

In its tabular summaries referred to above the Commission 
offers the following similar explanatory note to its classification 
of cases "Closed, for other reasons" - 

"This classification includes such reasons as death, 
business or practices discontinued, private controversy, con- 
trolling court decisions, etc." (**) 

The classification of applications for complaints "dismissed 
for lack of merit" is offered without further explanation, as is the 
larger group of preliminary inquiries reported merely as "Closed after 
investigation" . 

llo data have been found to indicate the causes, specifically, 
for dismissals of the misrepresentation and deception group of cases, 
or whether these causes differ materially from the general reasons given 
above. A n analysis to shed light upon this joint, as well as upon the 
extent of dismissal of this type of case, might well prove of value in 
any consideration of the whole problem of w.blic dealing with deceptive 
practices. 

(*) ■ Federal Trade Commission, Annual Report (1934) p. 4 

(**) Federal Trade Commission, Annual P.eport (1935), p. 8?, note. 



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-29- 

D. The Commission' and the Courts . 

As to the Commission's record with the courts, of the 1,446 
cease-and-desist orders issued in the period dealt with in the cumulative 
summaries ouotecl above, the vast majority '.ere accented as "binding by 
the respondents without recourse to judicial review. (Only 1,000 of the 
orders were contested in pnj degree before the Commission itself, 409 
being issued by consent, and 37 by default). I n 151 cases, appeals 
were taken by the respondents to the lower courts, and in 33 cases the 
Commission petitioned the lover courts for enforcement of its decrees. 

In 37 of the 151 appealed cases the Commission's ruling was 
either reversed or modified; in 46 instances the Commission was sus- 
tained; 15 petitions were withdrawn, and 3 are pending. It is pointed 
out, however, that in several instances where the Commission was re- 
versed, a number of cases in the sane industry and turning on the same 
point were briefed, tried and decided as one case, but given each an 
individual docket number. If cases a.ctually tried, and not docket 
numbers, were counter*, it is said, the total of uecisions adverse to 
the Commission would be 56, i: t-tead of '7. (*) In \JC cases annealed by 
the Commission or others to the Supreme Court, the Commission has been 
upheld 24 times, and reversed 13 tines; 3 petitions were withdrawn; and 
in 17 cases certiorari was denied. Cut of 33- cases in which the 
Commission applied to the courts for enforcement of its orde/s, it 
was supported in 24 cases and reversed in 4; 3 petitions being withdrawn 
and 2 oending. 

Statistically at least this is a creditable record. Some 
criticism of the Commission has inclined to attribute the relative in- 
freauency of its judicial reverses to its conservatism, its disinclina- 
tion to try conclusions in newer, more doubtful fields of jurisdiction. 
7/hatever the justification of such a charge in some areas of competitive 
practice, it does not appear to apply with respect to misrepresentations. 
Here the Commission has shown consistent activity, and has inclined to 
entend its restraint to the limits of judicial approval, and sometimes 
a little beyond, as its reversals in these cases show. 

-^ • Reasons for Reve rsals in kis r -^-p resentation Causes . 

An examination of the cases involving misrepresentation in which 
the Commission has suffered reversal at the hands of the courts reveals 
such cases to have turned orincinally uoon these points: (l) whether the 
practice cor.rolained of wa.s really nisre-oresentative or deceptive in 
nature, or constituted merely trade "puffing" (**); (3) whether the 
public was in fact deceiver 1 , or liable to be deceived by the uractice, 
and competitive injury suffered in conse-mence (***); and (3) whether, 

(*) Federal Trade Commission, Annual keport (1935), ilote to T a ble 5, 

•0. 35. 
(**) Ostemoor & Co., I n c. , v. F.T.C. 16 F (2d) 962 CCA. 2d, 1927. 
(***) Berkey ft Gay Furniture Co-, v. F.T.C. , 42 F (3d) 427; Chicago 

Portrait Co- 4 F (2d) 259 (CCA. 7th 1925). 



9710 



-30- 



in spite of admitted deception of or possible injury to the oublic, 
there existed any competitor liable to suffer from the practice. (*) 
In certain ernes, also, the Commission 1 s orders '-'ere modified to permit 
the respondent to continue the practice complained of, but vith modifi- 
cations designed to remove the likelihood of misleading. (**) 

P. Type s of I n dustr ies Affected by Trp.de Commission Action. 

r 

To obtain some idea of the types of industries which, in 
practice, have been most freouently affected by action taken by the 
Federal Trade Commission with respect to raisre Presentation, a check of 
cases contained in the Commission's official reports was made. (***) 
B th the type of commodity dealt in by the respondent, and the form of 
his business - whether manufacturing, wholesale, retail, etc. - were 
noted, where it was felt that these joints were sufficiently indicated 
by the data. given in the reports. 

A total of 555 cease-and-desist orders covering misrepresenta- 
tion cases were so tabulated, with the results shown below: 



Product 

Faint, Varnish, Shellac, etc. 

Foods (G P neral 

Cutlery, Silverware, Uovelties , 

etc. 
Furniture and Rags 
Schools & Institutes of Health 
Building Material - Glass, 

Hoofing, etc. 
Publishers & Printers 
Cotton Textiles C-, Lace 
Chemicals, Stain Remover, 

Disinfectant, Soar> 
Fountain Pens H Pencils 
Cigars 
Electrical Appliances (Health, 

B e aut y , Household ) 
C a ndy 

Merchandise (General ) 
Lumber 

Oil, Gas, & Ga.s Revivers 
Business Equipment (Typewriters, 

che c ! ■:- wr iters, etc.) 
Jewelry "• Eyeglasses 
3eeds 
Spongers 
Shirts 



no. oi 
Cases 
30 
41 
36 



36 
32 

21 

20 
18 

if: 

18 

12 

11 
11 

10 

10 



8 
7 
7 
7 



Product 

Hosiery 

Outerwear 

Underwear 

Toilet Articles C iI tions 

for Beauty & Health 
Bedsprings, Mattresses, etc. 
Auto Accessories, Batteries, 

etc. 
Tires and Rubber 
Rope 

Medicinal Products and Drugs 
Coffee 

Leather & Imitation Leather 
Shoes 
Fats , 

Machinery- Oil Pumps, etc. 
Music - Pianos, 
Coal 

Sporting Goods 
Photographs 
lotion Pictures 
Fur Coats 



Ho. of 
Cases 
28 
27 
27 
26 



Phonograohs 



(*) 



(*** \ 



F.T.C. , v. Hal ad am CO. 283 U.S. 643 (1 C F1). 

F.T.C. , v. Morrissey; 47 • F. (2d) 101 (C.C.'A. 7th, II 

II. Flueg'elman fi Co., v. F.T.C, 37 F (2d) 50 (CCA. 

1C30). 
Vols. 1-18, June 30, 1915-193 . 



?i); 

, 2d. 



5 
5 
5 
5 
4 
4 

4 
4 
3 
3 
3 
3 
1 
1 
1 



9710 



-31- 



Form of Business No. of C^ses 

Manufacturer 294 

Wholesaler CO 

Hetp.iler .' 72 

Kail order and other correspondence 

selling ; 64 

Broker, Importer, Agent, etc. ... 35 

Sor.ie questions as to exact classification arose in the prep- 
aration of the above, but the results clearly indicate the 
principal conclusion to "be drawn, namely that the great majority 
of Trade Commission actions as to misrepresentation are in con- 
nection with consumer goods industries. Also, a very considerable 
ironortion of the cases deal with elements of the distributive 
system in direct contact with the ultimate consumer, despite the 
fact that the greet bulk of retail trade lies outside the juris- 
diction of the Commission through limitations of the interstate 
commerce clause. 

G. Cpneral Summary 

In general as to the work of the Commission, there is no 
doubt that a large share of its attention and activity has been 
directed toward the stamping out of mi ^representative and deceptive 
practices, and that in a numerous body of cases it has acted 
effectively to that end. Whether, over a period of some 20 years, 
a total of perhaps 3,500 restraining actions (stimulations and 
cease-and-desist orders combined) effected in this field represents 
a reasonably sufficient policing of this problem in the sphere of 
nation,-;! commerce might at first glance arouse a nuestion. 

"whatever inadequacy there may be felt to be must be attri- 
buted in large measure to the various limitations placed upon the 
Commission's work, by the interstate commerce clause, by the other 
legal conditions specifically imposed by its organic Act, by the 
interpretations of the courts, and by the extent of the task itself 
in relation to the physical facilities provided for handling it. 
The Commission itself, by the recommendations for amendments to its 
Act which have been previously mentioned, has indicated its own 
sense of the need for an increase in its scope of activity through 
relaxation of some of these restrictive conditions. 

Furthermore, the extent of the influence of the Commission 
in discouraging deceptive practices and encouraging a more whole- 
some tone in advertising and other marketing methods is not to be 
measured by number of orders issued alone. Such orders deal with 
individual cases, but they also serve in a measure to set precedents 
which have widespread restraining effect umon others in the same 
lines of trade employing, or who might be inclined to employ, 
similar tactics. Through these orders also, and in the informal 
stipulations entered into, a considerable body of decisions as to 
the nature of misrepresentation has flowed from the Commission which 
have never been carried to the courts, and which have contributed 

9710 



-32- 

materiplly to an enlarging law merchant in this country. 

The "omaission has particula 1 ■ sought to keep abreast of 
the development of practice in the • rertising field by its 
Special Boar:- of Investigation functioning in the newspa :>er, 
-periodical and rs Lio fields. (*) Thf-ne efforts are claimed to have 
met with very considerable success, really, through its Trade 
Practice Conference work the Commission has assisted in cooperation 
with the individual trades in emphasizing the restriction of decep- 
tive practices, and has given as istance, to the extent of its 
powers, in the formulation of >ositive trade standards looking to 
this result. Altogether, it seems probable that with respect to 
this type of unfair competition, fully as iuch as any other falling 
within 1 its sphere, the Commission has fulfilled the aims and expec- 
tations with which it was established. 



The nature end work of the Federal Trade Commission have been 
dealt with at considerable length in this chapter because in 
certain respects it was the forerunner of the trade practice work 
embodied in the IRA code;,. As the first agency set up for coping 
with misrepresent- i ive practices in commerce on a national scale, 
also, it furnishes, the chief available basis for comparison with 
the work in this field achieved under the HRA codes, which is to 
be considered in the chapter following. 



(*) Federal Trade Commission, Annual Report (1935) , pp. 101-104, 



S710 



-33- 
CHAPT ER FOUR 

N»R.A. EXPERIENCE III THE CO'TROL OF MISREPRESENT ATI ON 



1. GENERAL VIET; OF THE CODE PROVISIONS 

The National Industrial Recovery Act "became law on June 16, 1933. 
Section 3 (b), of Title I of the Act provided: 

"After the President shall have approved any such code, the pro- 
visions of such code shall be the standards of fair competition 
for such trade or industry or subdivision thereof. Any violation 
of such standards in any transaction in or affecting interstate 
or foreign' commerce shall be deemed an unfair 'method of com- 
petition in commerce within the meaning of the Federal Trade 
Commission Act, as amended; 11 .. 

This was in effect the next step beyond the Federal Trade 
Commission Act. The codes were to supply the specific definitions of 
the practices constituting "unfair methods of " competition" which had 
been omitted from that Act. Fiirthermore , by use of the phrasing "in 
or affecting interstate or foreign commerce" it was "oroposed to avoid 
the limitations involve! in a strict interpretation of the interstate 
commerce clause of the Constitution to which the Federal Trade Com- 
mission was subject. 

A. F requency of Mi srepresent ation Provisions in th e Codes 

Prohibitions unon misrepresentations were among the most fre- 
quently-appearing of all trade practice provisions in the codes. 
Slightly more than four in five of the total number of codes, both 
basic and supplemental , which were ultimately approved included in 
their schedule of unfair practices one or more methods of misrepre- 
sentation or deception. Specifically, the principal types of pro- 
visions so included were: (*) 

Prohibition of misrepresentation 
in general (widely inclusive 
provision) 356 codes and supplements 

Misrepresentation of products . . 148 " " " 

Misrepresentation of prices ... 74 " " " 

Misrepresentation of, or deceptive 

credit terms - . . 22 " " " 



(*) From "Trade Practice Provisions in Codes of F air Conmetition" , 
Daniel Gerig and Beatrice Strasburger, Division of Review 5> I'TRA, 
December 20, 1935. Table I. 



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-34- 
Frequency of Misrepresentation Provisions in the Codes (Continued) 



Misrepresentation of services, form 

of business, affiliations, etc. 35 Codes and supplement c 



Inaccurate advertising 494 



ii n it 



Deceptive labeling, branding, mark- 
ing or packing 416 ' " " " 

Deceptive "selling methods". ... 57 " " " 

Deceptive offers, orders, agree- 
ments, etc 425 



ii ii ii 



Misrepresentation of competitors 

or their products ("defamation"). .529 " " " 

Inaccurate or persistent under- 
selling claims 19 " " " 

False measures 19 " " " 

Lotteries 67 " " " 

B. Form of the Code Provisions . 

numerous variations in the form of these provisions are found, 
particularly in the earlier codes. (*) Later they tended to become 
more standardized in form and legalistic in phrasing. In many in- 
stances the langLiage followed closely, if not verbatim, the text of 
the similar provisions appearing in the voluntary trade practice conference 
codes of the Federal Trade Commission. 

The forms in which several of the frequently appearing provisions 
were included in the 1TEA "model code" are as follows: (**) 

Misrepresentation (General) 
Inaccurate Advertising 

"iTo member of the trade/industry shall publish adverti- 
sing (whether printed, radio, display or of any other nature), 
which is misleading or inaccurate in any material particular, 
nor shall any member in any way misrepresent any goods, (in- 
cluding, but without limitation, its use, trade-mark, grade, 
quality, quantity, origin, size, substance, character, 
nature, finsih, material, content or preparation) or credit 
terms, values, policies, services, or the nature or form of 

(*) See text accompanying the .tabulation of trade practice provisions, 

(op.cit. supra, for discussion of the method of tabulation followed, 
variations i" thp fn^m of the "provisions , overlaps, etc. 

(**) liRA Office Manual, PP. 1800-1831.1. 



9710 



• 35- 



Misrepresentation (General) (Continued) 
Inaccu ra te Advertis ing 



the business conducted." 

Deceptive Marking, Branding or Packing 

"No member of the trade/ industry shall brand or mark or 
pack any goods in any manner which tends to deceive or mis- 
lead purchasers with respect to the brand, grade, quality, 
quantity, origin, size,' substance, character, nature, finish, 
material 'content or preparation of such goods." 

Defamation of Competitors 

"Ho member of tne trade/industry shall defame a com- 
petitor by falsely imputing to him dishonorable conduct, in- 
ability to perform contract, or questionable credit stand- 
ing, or by other false representation, or by falsely dis- 
paraging the grade or quality of his. goods." 

The code provisions dealing with misrepresentation were generally 
broad in their phrasing, and added little if anything specific were 
more comprehensive than the types of practices which had already been 
recognized as unfair competitive methods in Federal Trade Commission 
procedure. For the most part also they provided little in the way of 
criteria for determining just what might be considered misrepresentative 
or deceptive in any given case with respect to any of the points 
enumerated in the provisions. 

In some instances there was simply a flat prohibition: "Mis- 
branding, mislabeling, and false, deceptive, and misleading advertis- 
ing are prohibited by this code." (*) "Misrepresentation or mis- 
branding of mercnandise is an unfair practice.... ITo person shall 
enter into any false or misleading advertisings" (*** A more usual 
form added the qualification "with the intent or effect of deceiving 
the purchaser". (***) 

The model provision as to marking and. branding given above 
employed the form "which tends to mislead or deceive purchasers" , 
doing away with any requirement of proof of i tent or actual deception! 
as matters of fact. For misrepresentations in advertising the qualifi- 
cation "in any material particular" was : Used- ivr the "'-m^del' clause, and 
in numerous codes, apparently to avoid drawing the rein on the mer- 
chandising imagination too tight. In many other instances however it 
is simply stated, "Ho member shall use advertising methods which have 
capacity cir tendency' to deceive or mislead the customer or prospective 



(*) Paint anc V a rnish Code ," Part ' 3 , Art. XII. Codes of Fair Com- 



petition ,_ Vo 1 . II. p . 178. 



T**7 Unde rwear and" All ied Produc ts' Code . Art. VI'. 4, ibid." Vol.1 .p. 323, 
f***)Retail Solid" Fuel. Art. VI. 2, ibid, Vol." VI. n.433. 



•#■'- .. t 



9710 ' * 



-36- 

Defamat,ion of Competitors (Continued) 

customer, n or the equivalent. 

As previously stated, practically no attempt was made in the 
code provisions themselves to provide definite criteria to guide the 
administrative authorities in deciding just where the line between 
truth and deception in advertising runs., or what are the permissible 
boundaries of "trade puffing". This apparently was left to their 
discretion in the particular circumstances, with the shadow of the 
courts in the background for passing of final judgment. There is 
little evidence, also, of effort on the "art of the Code Authorities 
to set up any general standards of guidance for themselves in these 
matters.. Apparently they dealt with such questions in piecemeal 
fashion, and more or less by rule of thumb, as the individual cases 
arose. 

i 
Such a system was flexible and perhaps well adapted to deal 

with the specialized problems of the individual industries. Had the 

NRA continued in effect long enough for a body of precedent to be 

built up through the actions of the different Code Authorities, no 

doubt more specific rules could have been drawn. .At least there would 

have evolved lists cf the particular practices barred in the several 

industries, similar to that of practices condemned by orders to cease 

and desist already quoted from the Federal Trade Commission. 

In one code, that for general Retail Trade, a series of inter- 
pretations were in fact adopted defining and .clarifying the meaning of 
the advertising provisions with respect to certain merchandising 
practices of the industry. (*) And an effort was made by a special 
Advertising Committee set up by the Coffee Code Authority to formulate 
a code of advertising ethics for use in deciding as to borderline 
cases, this Code Authority apparently having beon particularly alive 
to the complexities of the subject. (**) 

As far as the physical qualities and characteristics of the 
commodities themselves were concerned, certain criteria for deter- 
mining misrepresentation were provided in those codes which set up 
come form of product standards er labeling requirements. These are 
dealt with in detail in Part II of this report, 

C. General Comparison with the Federal Trade Statute . 

What was essentially significant about the codes as a whole, 
from a comparative legal point of view, was that they carrd«d their 
own definitions of what constituted unfair competition, as a natter 
of law; this was not left lor a court to decide. The acts were for 
the most part branded as unfair in themselves, thus freeing the code 
law_ from the hampering double requirement to show both competitive 
injury and public interest, as in the case of the Federal Trade Com- 
mission Act, (although as a matter of practice the-se points were 
usually plead for the purpose of strengthening the cases presented by 



(*") See pages -5«-53, bel»w 
,**) See pages 57, 58* fcolow 

9710 



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C-e neral Comparison with, the Federal Trade Statute (Continued) 

NBA fT litigation). What was essential to he shown was tha.t the code 
had "been legally adopted and contained the provision in question 
(evidenced usually "by affidavit), and that violation of the provision 
had tai:en place. 

Furthermore, the NBA law was also, theoretically at least and to 
some degree in effect, free of the necessity to show that the act com- 
plained of was directly in interstate commerce, by grace of the "in or 
affecting" clause already referred to, (*) 

Finally, violations of the standards of unfair competition em- 
bodied i • the codes were made misdemeanours by the NBA Act and (again, 
theoretically at least) immediately subject to criminal prosecution 
and penalty, as contrasted with the restraining procedure of the 
Federal Trade Commission Act with its penalties only upon action in 
contempt where violations of the restraining orders of the Commission 
and the courts had occurred. (**) 



(*) That is, the Code Authorities were able to obtain a ronsiderable 
amount of compliance, as in the retail code, without the inter- 
state commerce issue being raised. On the other hand, "...every 
time that we filed a suit for enforcement of a code provision, 
the defendant presented first a denial of the constitutionality 
of the NIBA as a whole; second, the allegation that the delegation 
of authority to the Administrator had exceeded the powers of 
Congress; and third, that the business involved was not interstate 
commerce and Congress had nothing to do with it." Wm. H. Davis, 
former Compliance Director, Bulletin of Crushed Stone, Sand & 
Grave l Code Authori ty, Fob. 20 ,1935. 

(**) The points noted in the preceding three paragraphs apply only to 

legal proceedings undertaken by or on behalf of 1TBA itself in con- 
junction with the District or State Attorneys and the Department 
of Justice. A rather complicated dual system of legal enforcement 
was in fact sot up, involving criminal prosecutions as aDove on 
the one hand, and action by the Federal Trade Commission on the 
other. By the terms of NIBA, violations of the codes became un- . 
fair methods of competition "within the meaning of the Federal ^ 
Trade Commission Act", thereby giving the Commission jurisdiction; 
but that jurisdiction was in turn still restricted to the terms of 
the F.T.C. Act itself, as in ordinary cases of unfair competition. 
Further, the President by Executive Order, gave a right of appeal 
to the Federal Trade Commission from the action of any Federal 
agency, except the Department of Justice, in cases of alleged code 
violations involving promotion of monopoly or discrimination 
against small enterprises; but the order also instructed the 
Coi.imission to turn over to the Department of Justice all such 
appeals where the practices complained "f were found to be not 
contrary to section 5 of the F.T.C. Act, or sections 2,3, or 7 of 
the Cl ayton Act. (Executive Order o_f .January__20_. 1934) __ _ _ 



9710 



D. Limitations in Practice of the IIBA Provisions . 

The somewhat larger legal scope for enforcement allowed by the 
Recovery Act had its limitations. Many cases were settled by the sign- 
ing of a certificate of compliance by the offender, which amounted to 
a promise to obey the code in the future, unaccompanied by any present 
penalty and/or increased hazard of future penalty in case of continued 
violation**. 

As long as public opinion demanded display of the Blue "la'gle , 
violators were very anxious to have the insignia restored to them and 
this condition aided administration agencies in the adjustment of the 
code violations without the necessity of resorting to the usual court 
procedure. However, the Administration was hampered in its efforts to 
obtain compliance and/ or enforcement by the very nature of the com- 
plaints themselves; because of the incompleteness of the preparation 
of the cases, the insufficiency of the supporting evidence and the 
bias which frequently accompanied the data submitted by the Code 
Authorities when demanding action. 

Greater experience and proficiency on the part of the Code Ad- 
ministering bodies in discharging their own responsibilities as well 
as complete cooperation from the complainants and the prosecuting 
officials would doubtless be required in order to make a system of 
code administration function with a high degree of efficiency. 

The general nature of the machinery of administration which was 
employed to give effect to the code provisions is outlined in the 
succeeding pages. 



(*) Compare FTC stipulation procedure, page 23i below 



-39- 

II. ESi jffiKIfllSTRAJtltlH OF THE CODE PR OVISIO AT S 

The ERA machinery for obtaining compliance with the Code require- 
ments and restraining violation of the Code law t ook its most charac- 
teristic pattern from the conception of cooperative control "fcy industry 
and government which was basic in the National Industrial Recovery Act. 

A. The Code Authorities 

On the industry side were the Code Authorities, often with local 
and regional Sub-Authorities of various s orts, composed of industry mem- 
bers supposedly representative of all competing groups, and with public 
representation through an Administration member. These Authorities, by 
the terms of their codes, received various powers for their administra- 
tion, subject in most instances to NBA approval in their actual perform- 
ance . 

For the more adequate dealing with trade practice questions, Trade 
Practice .Complaints Committees were set up in conjunction w ith.lthe 
Code Authorities of most of the codes, the personnel and methods of 
procedure of these being required to be passed upon by the central ERA 
organisation. These Committees were authorized to receive and investi- 
gate complaints of violations of the code's trade practice provisions, 
or initiate such action of their own; and to endeavor by education, 
persuasion, arbitration, etc., to obtain compliance f rom t he violator 
without recourse to NBA or the institution of legal proceedings . Where 
no such committees were set, up the corresponding functions were common- 
ly performed by the Code Authorities themselves. 

Such a mechanism, closely in contact with industry conditions and 
familiar with industry problems, was expected to prove a responsive 
and effective means for dealing with these. When properly ooerated it 
did, in fact, orovide a flexible, informal, useful and often s-oeedy 
mea,ns of making the codes effective. (*) 

3. ERA Compliance Agencies. 

Cases where compliance could not be obtained by the Code Authori* 
ties were referable to the ERA compliance machinery, the first stages 
of which comprised the State and Regional Compliance offices, and the 
Regional Compliance Councils. Here, also, effort would be made to 
settle the controversies by adjustment rather than through court pro- 
ceedings; neither the Code Authorities nor the ERA Compliance agencies 
having the right to subpoena witnesses (as could the Federal Trade 
Commission), or to issue legal processes of any kind. 

Cases which still remained obdurate might be referred t o the Com- 



(*) For discussion of the organization and functioning of the Code 
Authorities see Administrative Studies, ERA, Division of Review. 



9710 



-40- 

pl-iance Division in Washington, and finally to the Litigation Division 
to fee prepared for prosecution. 

Legal enforcement provided "by the NRA Act was of 'two kinds , first 
by means of criminal proceedings instituted through the various Dis- 
trict Attorneys' offices, and second, through the Federal Trade Com- 
mission, in cases subject to the Commission's jurisdiction under its 
own Act . 

Though generally, power to assess penalties was only granted 
Code administration agencies by liquidated damage provisions, which had 
been a greed upon bv members of industry, the compliance division pen- 
alised many recalcitrants by removal of the Blue Eagle. The penalty 
thus achieved was of course the most severe "hen consumers and t he 
public in general shunned those who had been penalized by the removal 
of the insignia. When such action did not bring the required result 
it became necessary in many sections to bring the offenders before the 
several District Courts in the respective areas. The point to be noted, 
is, that the Act itself permitted v iolators to be brought before the 
courts at once and charged with t he offense, incase the compliance 
agencies could not cope with the situation. 

C . Some Comparisons With Federal Trade Organization . 

The foregoing outline indicates some points both of comparison and 

of contrast between the NRA administrative set-up and that of a body 
such as the Federal Trade Commission. 

Compared to the rather closely c entralized organization of the 
Commission the NRA was widely decentralized, both on a geographical 
and on an industry basis. NRA Compliance Offices were operative in , 
every state for the purpose of cooperating with the code authorities, 
State and local agencies, and the public itself in seeing that the 
codes were properly put into effect. In its Code Authority organiza- 
tion the URjL possessed a medium of direct administrative contact with 
the . individual coded industries only remotely approached by the link eai 
between the Trade Commission and those organized' industries which had 
presented Trade Practice Conference codes. 

On t he other hand, the entirely official character of the Fed- 
eral Trade Commission enables it to retain an objective position with 
respect to industry interests which the Code Authority set-ups under 
HRA were not often able to attain. 

In their method of operation the Code Authorities themselves bore 
some degree of resemblance to the Commission. They could, in their 
own particular fields, receive or initiate complaints of unfair prac- 
tices, make investigations' concerning them, collect evidence, decide 
the issues, and call upon those found to be in violation of the code 
to desist from their practices. Like the Commission, they could dis- 
miss cases found to be "without merit", or close others upon informal 
agreement to abandon the practice complained of; but lite it again 
they had no power to enforce their orders by imposition of any direct 
penalties. Unlike the Commission they could not apply to the courts 



-41- 

in their own names for enforcement of their orc.ers, out -'ere required 
to seek this through the regular channels of the NRA» 

As an administrative agency the NM had the operation of hundreds 
of diverse trade practice laws, with varying jurisdictions, to oversee, 
as compared with the two basic charters of the Federal Trade Commission 
in this field. The NRA moreover, under its original concept, possessed 
the authority and, responsibility, in conjunction with industry, to de- 
termine the specific constituents of its own trade law, a po'-'er denied 
to the Federal Trade Commission in its Trade Practice procedure. 

So long as its legal basis stood, also, thelTRA. had in its machin- 
ery for amendment and interpretation a flexible medium for altering 
and adjusting code law to meet the experienced needs of industry and 
changing circumstances, as contrasted with the established and rela- 
tively inflexible legal precedents under which the Commission was 
largely compelled to operate. 

The next section of this chapter will set forth some of the re- 
sults in the field of misrepresentation achieved under this system, 
as the ITPA' s own records of operation, and the comments of various 
Code Authorities and other industry groups, reveal them. 

III. RESULTS OP OPERATION OE THE MISREPRESENTATION PROVISIONS 

A. General Sources of Information 

For the information necessary to ca.st light upon the Question of 
how the code provisions concerning misrepresentation operated in ac- 
tual practice the following sources of information were used: the 
records of code adoption and administration in the NRA files in Wash- 
ington; the compliance and enforcement records both in that city and 
as collected from the State anc 1 Regional Compliance Offices throughout 
the country; questionnaires directed to officers of the former Code 
Authorities; field contact, through the State offices, with representa- 
tives of the former Local and Regional Code Authorities of codes 
which "ere organized uoon that basis; and some direct contact with in- 
dividual industries. 

In comparison with the very large number of codes which contained 
one or more forms of misrepresentation provision, a relatively small 
amount of significant information concerning either their genesis or 
operation was found in the NPA file records. In all but a handful of 
cases - the most notable of which was the general Retail Trade Code - 
the provisions were, so far as the transcripts of code hearings re- 
veal, adopted almost wholly vrithout discussion or controversy, as de- 
sirable general objectives or the expression of existing law. Little 
more concerning them is found, in the file records of code administra- 
tion. 

For data as to operation of the provisions as revealed by the 
compliance records, the Washington compliance files for more than 400 
individual codes, including those covering the 60 largest codified 
industries, were searched. Only 61 of these codes showed any misrep- 



9710 



-42- 

* 

resentc.tion cases whatever ref erie d f or action, and in nearly half of 
then not tore than :wo or three cases each. 

Composite compliance figures concerning; trade practice violations 
for 1113 representative industries, gathered f rom the State Compliance 
Offices throughout the country, show a total of 23,611 cases concerning 
all types of trade practice provisions, of which only 1,619, orless 
thai 1 . 7 per cent, represented all types of misrepresentation violations 
of interest in this report. Moreover, four— fifths of the total numoer 
of misrepresentation cases were contributed "by 9 retail codes. 3?orty«» 
six of the entire 115 codes reported showed no misrepresentation cases, 
and 42 others showed five or less such violations each. (*) 

T'70 reneral conclusions might be drawn from the foregoing faops, 
either, first, that in the great majority of industries, the retail 
trades excepted, misrepresentations constituted no problem, or at 
least not one actively so\ight to be controlled; or, second, that the 
Code Authorities of these industries had been largely able to deal 
'With their misrepresentations problems by means of their code pro~ 
visions without calling upon 1TRA for compliance or enforcement aid. 

In the following sections there will be considered, in order, 
(l), the data concerning misrepresentation for a group of industries 
largely representative of those with a story appearing in the NRA 
files; (2) results obtained from a questionnaire largely circulated 
among former Code Authorities; (3) data obtained by field contact with 
Local Code Authorities in a selected group of industries; and (4) fur~ 
ther analysis of the data presented by the compliance and enforcement 
records. 



(*) Detailed figures are presented on pp. 92, 93, below 



-43- 



Is. Operation of the Provisions in Selected Industries 

In the pages following there is presented the story of the opera- 
tion of the misrepresentation provisions in a group of selected indus- 
tries. The industries included are for the most part those in which 
control of misrepresentation in some form was a recognized industry 
problem, usually making its appearance in the very beginning of the code 
making, and continuing as a matter of concern in the administration 
phase. Taken together they arc illustrative of most of the circumstances 
connected with the misrepresentation problem which the NBA experience 
served to emphasize. 

The data presented for these cades was obtained very largely from 
the various NBA file records in Washington, supplemented by conference 
with former Deputy Administrators in charge of the codes, and to a 
limited extent by correspondence and personal contact with Code Author- 
ity and industry representatives. The codes follow: 

1. Retail Trade (Code Ho. 60) 

This is probably the largest and most important code in which the 
question of misrepresentation, including particularly the definition of 
false or misleading advertising, was a matter of major concern. Pr«m 
the inception *f the code the subject aroused a controversy, first with 
respect to "underselling claims", and later as t» "free deals", which 
came to be only second in importance t» that which surged about the 
"loss leader" question. 

The general retail trade code, covering a wide variety of 
commodities, including retail drugs, was presented to NRA for appreval 
by 10 sponsoring national retail trade associations on July 29, 1933. 
The code was designed to cover a combined business comprising approxi- 
mately 300,000 establishments, employing 1,070,000 workers, and having 
net sales aggregating some $8,600,000,000. (*) 

a. The Proposed Code Provisions. 

The code as originally proposed contained the following pro- 
visions touching upon deceptive advertising and other mis representative 
practices: 

(a) "No member of the retail trade shall use advertising, 
(whether printed, radio, display or of any other nature) which 
is inaccurate and/or in any way misrepresents merchandise, 
; (including its use, trade-mark, grade, quality, quantity, substance, 
character, nature, origin, size, material content or preparation) , 
or credit terms values, policies, or services, nor shall any mem- 
ber ef the trade use advertising or selling methods which tend to 



(*) Estimates of Research and Planning Division, 1TEA, for 1933. 



9710 



-44- 

deceive or mislead the consumer, including '"bait 1 offers of mer- 
chandise. " 

(b) "The term ; 'Bait offer of mercliandiso ' as used herein 
means the practice whereby a member of the trade through an 
appeal by price, brand, description, or ether means, attracts 
prospective customers' into his store and then through inad'cqiiatc 
or disparaging sales presentation or through the quantity avail- 
able, or through other means places obstacles in the way of the 
purchase of the advertised merchandise and forces upon the pros- 
pective customer's attention other merchandise upon which a great- 
er profit is to bu realized." 

(c) "Ho member of the retail trade shall use advertising 
which refers directly or by"' implication to any competitors or 
their merchandise, prices, values, credit terms, policies or 
services." 

And the following: "The usb of, participation in, publishing 
or broadcasting of, any statement or representation that lays 
claim to a policy or continuing practice of generally undersell- 
ing competitors, is an unfair and uneconomic practice." (*) 

A public hearing was hold August 24-26, 1933, at which a great 
deal of time was "given to discussion of the trade practice provisions 
to be adopted. Of 203 speakers who presented their views the record 
indicates that only clno seriously opposed the advertising provisions. (**) 
This was Mr. Percy S. Strauss. 'President of the R. H. Lacy Company, New 
York, who presented his company's views in opposition to the "under- 
selling" clause given above. 

b. The Underselling Claim Problem. 

According to the testimony offered the sales policy of the 
3. H. Macy Company has been developed and widely advertised over a 
period of years. All mercliandise is sold' for cash and it is the 
company's claim that they are,, because of cash sales, able to soil for 
six per cent less than their competitors. They have consistently 
followed this policy and claim to be always ready to sell six per cent 
below any competitive price. It was further developed at the hearings 
that the Macy Company owns the Bamberger Store, Newark, IT. J., and two 
or three other stores which do not operate on a cash basis. It has been 
the contention of the R. H. Macy Co., that because of their intimate 
knowledge of sales c«st under the two systems they were able to judge 
and know the exact advantage which they were able to offer the consumer. 

The general opposition of the trade to the advertising of such 
a general policy may bo summed up in the terms of "a brief subsequently 
submitted by the National Retail Dry Goods Association, which held 
that: 



(*) Text of original draft of code submitted. Code Record files. 
(**) See Transcript of Public Hearing, August 24, 1933, Vols. 1-12. 



S710 



-45- 



(1) "The claim to undersell all competitors never has been 

and cannot he sustained." 

(2) It is therefore inherently rr.isrepresentative to the 
public. 

(3) ~Such claims "break down public confidence in adver- 
tising, arc detrimental to sound "business, and are 
unfair and uneconomic." 

(4) "The loss-limitation provision of the Code establishes 

a fixed point beyond which no merchant can go in an 
effort to undersell his competitor, and therefore he 
should not be able to claim his ability to do so."(*) 

In defense of his firm's position 'Mr. Strauss cited the conclu- 
sions reached by the Federal Trade Commission in its investigation of 
the operations of their business. He stated: 

"S e vcral years ago interested parties filed application 
with the Federal Trade Commission to prohibit the advertis- 
ing by Macy of its cash policy statement. The commission 
made a thorough and exhaustive examination which occupied 
over two years. Macy produced its records. The Commission 
also examined records of Macy competitors. The Commission 
found neither unfair competition nor false and misleading 
advertising in connection with Macy'a cash policy statement 
and concluded its investigation by denying the application. 

"We oppose any attempt to prevent any merchant from 
presenting to the public in any form of appropriate words 
his economically justifiable claim that generally lower 
cost operation, whether by reason of cash sales exclusively 
or otherwise, permits economies which are passed on to his 
customers. 

"The only restriction upon such sales would be their 
truthfulness. 

"That economics resulting from cash sales exclusively 
are possible and exist cannot fairly be denied." (**) 

The Consumers' Advisory Board supported the Macy contention, in 
the general interests of truth of statement. 

"The Board also opposed the provision that, 'No retailer 
shall use advertising which lays claim to a policy or continu- 
ing practice of generally underselling competitors'. This 
provision may make it an offense to tell the truth, and that 
resembles the ancient and nyw discredited doctrine that 'the 
greater the truth the greater the libel'." (***) 



(*) Brief presented by T. 3. Moeeer, Vice President, national Retail 

Bry Goods Association, July 27, 1934. Deputy Files. 
(**) Transcript of Hearings, page 593. 
(***) Volume A-l, Memorandum to A. D. Whiteside, B c puty Administrator, 

September 29, 1933. 
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-46- 



The difficulty apparently lay in the fact that while the Macy 
example admittedly might have given rise to much improper advertising 
of a similar nature by other industry members, there was no way to 
prove that an underselling policy could not "be truthfully claimed 
and honestly carried into effect. 

C. The Code Provisions as An-oroved . 

Nevertheless, the Code as finally agreed upon by the sponsors 
did not recognize the I.fecy position, and the trade practices were 
forwarded to the Administration for approval with the underselling clause 
in its original form. The code was approved October 21, 1933, to be- 
come effective October 30. 

The Code thus approved was not in several respects the code which 
had originally been presented by the sponsoring trade groups, nor was it 
precisely as finally agreed upon by them; and there was considerable 
outcry in the industry. Article IX, 1-c, as actually approved read: 
"No 'retailor shall use advertising which inaccurately lays claim to a 
policy or continuing practice of generally underselling competitors." 
The "bait" advertising clause had disappeared, and in place was a 
provision simply against "switching". (Art. IX, 1, e) The clauses 
concerning inaccxirate advertising and disparagement of competitor had 
been qualified by the addition of the phrase "in any material particu- 
lar." The text of the entire misrepresentation provision as approved 
is as follows: 

"Section 1. Advertising and selling methods. — (a) No 
retailer shall use advertising, whether printed, radio, 
or display or of any ether nature, which is inaccurate 
in any material particular or misrepresents merchandise 
(including its use, trade-mark, grade, quality, quantity, 
size, origin, material, content, preparation, or curative 
or therapeutic effect) or credit terms, values, policies, 
or services; and no retailer shall use advertising and/or 
selling methods which tend to deceive or mislead the cus- 
tomer. 

(b) No retailer shall use advertising which refers 
inaccurately in any material particular to any competitor 
or his merchandise, prices, values, credit terms, policies, 
or services. 

(c) Ho retailer shall use advertising which inaccurately 
lays claim to a policy or continuing practice of generally 
underselling competitors. 

(d) No retailer shall secretly give anything of value 
to the employee or agent of a customer for the purpose of 
influencing a sale, or in furtherance of a sale render a 
bill np statement of account to the employee, agent or 
customer which is inaccurate in any material particular. 

(e) No retailer shall place obstacles in the way of 
the purchase of a product which a consumer orders by brand 
name by urging upon the consumer a substitute product in a 
manner which disparages the 'product ordered." (Article IX) 

9710 



-47- 



Therc were other changes in the code, the net results of which 
were to cause the industry at large to feel that it had "been "let 
down", and to create a mental reservation which later tended to 
weaken the support which the code obtained. (*) 

When the Darrow report appeared these changes were further 
castigated. The clauses, it was claimed, had "been "unwarrantably 
amended". The changes were characterized as 

"startling and most disquieting. The elimation of reference 
to 'bait offers', or 'loss leaders' largely cancels the pur- • 
pose of the paragraph. The addition of the phrase 'in any 
material particular' virtually wrenches from the paragraph 
any degree of effectiveness. The change that allows 'accurate' 
reference to competitors completes the same emasculation of 
the reform of this evil ... It is a matter of public con- 
cern to know how and "oy whom the coles thus prepared for 
public protection and the welfare of the industry are in 
this stealthy manner ruined. : ' (**) 

In July 1934, the national Retail Dry Goods Association sought 
to reepen the question of general underselling claims, and in a brief, 
whose substance has been previously quoted, (***) urged deletion of the 
word "inaccurately". Ho action was taken upon this. 

With respect to the whole subject, Mr. ?.. IT. ITeustadt, Managing 
Director of the National Retail Code Authority, stated that while the 
"Macy policy" problem was a sore spot in parts of the Northeast, it did 
not present great difficulties elsewhere. While other department 
stores did attempt the same tactics, they were not so careful nor so 
thorough-going as the original, and the Local Code Authorities were 
able to curb the improper advertising. Many stores were glad to stop a 
practice which they found they could ill afford. (****) 

d. Proposed Amendments. 

A public hearing was held on May 4, 1934, for the purpose of 
considering various proposed amendments to the Retail Code, several 
touching upon misrepresentation. 



(*) Opinion of Mr. Richard IT. Neustadt, Managing Director, National 
Retail Code Authority, expressed in conversation, November 5,1935. 

(**) Report of the National Board of Review, May 10, 1934, p. 23. 

This Board, under the chairmanshro of Mr. Clarence Darrow, was 
set up by the President to receive testimony and report concern- 
ing certain controversial aspects of NRA operation, particularly 
with reference to their effect upon the smaller units of industry. 

(***) Page 63 supra. 

(****) Opinion expressed in conversation with representative of Commod- 
ity Information Unit, November 5, 1935. 



9710 



-48- 

The question of ""bait" offers, which had been dealt with in the 
code as originally proposed, ".as again considered out it was concluded 
that the loss-limitation provision would sufficiently icstrict the 
practice. (*) 

An amendment concerning the advertising of Installment- Payment 
Plans was considered, the proposed text reading - 

"Advertisements offering merchandise for sale in install- 
ment payment plans shall clearly and unequivocally indicate all 
terms and charges which must be complied with in order to ob- 
tain the merchandise so advertised." 

This amendment was favored by the National Retail Code Authority 
and the Consumers 1 Advisory Board. Expert testimony, however, developed 
the fact that the problems of installment selling were so intricate that 
a simple statement in an advertisement would not suffice adequately to 
explain the sales terras. The question was referred for further study. (**) 



e. The "Free Deal" Problem 



On the question of free goods advertising Mr. Peterson, Chairman 
of the National Retail Code Authority said: 

"We wish to inform you that there have probably been more 
complaints filed with local and with the National Retail Code 
Authority on unfair practices involving the use of the word 
'Free' or its synonyms than any other class of trade prac- 
tice." (***) 

Accordingly the following amendment was proposed: 

"No retailer shall use the word 'free' or any word or 
words similar import with reference to any article or service, 
when the delivery of such article or the performance of such 
service is contingent upon the purchase of another article 
or service." 

The amendment was held for further changes, and finally was sent 
to the Advisory Council for a policy ruling. The Council in a memoran- 
dum signed by Willard Thorpe, January IV, 1935, (****) discussed the 
various concepts of "free deals" and recommended that the proposed 



(*) Transcript of Public Hearings, . May 4, 1934, "Proposed Amendments". 

"(**) Transcript of Hearing, p. 9. 

(***) Transcript of Hearing, p. 60. 

(****) Memorandum, Advisory Council, Deputy File, Folder "Free Amcndmont". 



9710 



-49- 



amendment "bo disapproved as fundamentally in conflict with Office 
Memorandum No. 316. 

Office Memorandum ITo. 316 provides in part: 

3. "Although there should "be no general prohibition against 
the use of premiums or 'free deals', the use of premiums or 
'free deals' in the following way may "be prohibited: 

(e) "The use of premiums or 'free deals' in ways which 
involve misrepresentation, or fraud, or deception in any form. 
It should be noted that the use of the word 'free', 'gift', 
'gratuity' or language of similar import in connection with 
premiums or 'free deals' cannot be declared deceptive in and 
of itself. It will be proper, however, to prohibit the use of 
this or any other language with. intent to deceive, or in such 
a way that it does in fact mislead or deceive customers in some 
material particular." 

The Industry would not accept the provision in any.other form to 
cover the use of the word "free". Division Administrator Carr suggested 
that evidence of widespread abuse of the word "free" in advertising be 
collected to support the recommendation for a change: in NRA policy on 
the point. 

Meanwhile, on March 15, 1935, Mr. Edwin L. D a vis of the Federal • 
Tirade Commission presented the Commission's attitude on the subject of 
"froo" deal advertising. 

"The Commission, through the medium of orders to cease 
and desist and stipulations, has forbidden, in connection 
with theJSLtcrstate sale of various commodities, representations 
to the effect that such commodities are free, unless they are 
sent to the prospective customers without requiring the payment 
of any money, the rendering of any service, or the purchase of 
any merchandise. Its action is predicated upon facts which 
disclosed that the so-called 'free' goods or services were not 
free at all, but that their price was included in the purchase 
price of the combination offer; in other words, that there was, 
in fact, a misrepresentation. 

"It lias been the experience of the Commission that there 
have been comparatively few instances of bona fide 'free' goods 
or services. By your amendment, the use of the word 'free' is 
prohibited when used in connection with the delivery of an article 
or the rendering of a service, even though, if the article be 
purchased or the service rendered, no additional charge is made.- 
Hence, it is not necessary to establish, as a violation of the 
Code (as proposed to be amended), that the cost of the alleged 
'free' article or service is a part of the purchase price of the 
article concerned. The Commission and the Courts, as far as I 
am aware, have not passed upon this precise question." (*) 

(*) Letter to Assistant Deputy H. C. Rogers, March 15, 1935. Deputy file, 

Folder "Free Amendment". 
9710 ' 



-50- 

Additional evidence in the shape of various "free" advertisements 
was submitted to the Deputy's office "by the National Code 'Authority, 
which tended to "bear out the Commission's statement that few such offers 
were really "free". No final action on the subject was taken, however. 

A side light on the possible results to be derived from the in- 
clusion of this amendment in the Code, is shown in a statement of the 
Secretary of the Code Authority, that when he attempted to collect 
"free advertisements" as evidence he had difficulty in finding them. 
This he attributed to the fact that members of the industry, being 
aware of the proposed amendment and believing it was soon to be approv- 
ed by the NPA, had stopped the insertion of the "free" types of adver- 
tisement. 

There was approved on August 23, 1934, Amendment 3 to the Code, 
which provided in part: 

Art. IX, Sec. 1, (f) "Ho retailer shall sell or offer 
' for sale any merchandise upon a condition which involves a 
lottery, gamble, or element of chance, similar to what is 
commonly known as a 'Suit Club Plan', provided, however, that 
this sub-section shall not apply to non-profit organizations 
not definitely constituted to carry on retail trade." 

The objection to these t>racticos was in considerable part the 
misrepresentations which appear to be inseparable, in practice, from 
them; in particular the use of fraud in the conduct of drawings and 
awards. 

f. Interpretations of Misrepresentation Provisions. 

While no great success; was had with obtaining approval of amend- 
ments extending the scope of the false advertising provisions, a number 
of interpretations of these provisions were issued by the Administration 
which set up definite criteria for determining the fact of misrepresenta- 
tion in various situations, and which amounted so far as this code was 
concerned to marked extensions of the law of the subject. Because of 
their significance in this respect, as well as their intrinsic interest, 
the essential rulings of these interpretations are given below. All 
relate to A r t. IX, S G c. 1 or ,2. (*) 

Administrative Order No. 60-18D, March 6, 1934: 

"Clearance Merchandise" 

"If the merchandise is segregated from all other merchandise, 
and clearly identified with signs as clearance merchandise, it 
need not be individually marked. Clearance Merchandise may be 
. intermingled with other merchandise but if so intermingled, each 
piece must be individually marked and clearly identified as 



(*) See text of provision, p. 46 supra. 



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-51- 

clearance merchandise." 

Administrative Order Uo. 60-18G, March 6, 1934: 

"Re tailers as Wholesalers or manufacturers 11 

"A retailer shall not represent himself as other than a 
retailer or represent his establishment as other than a retail 
establishment; provided, however, that this interpretation 
shall not prevent a retailer performing another separately 
economic process, from presenting himself as a retailer and/or 
his establishment as a retail establishment in combination 
with such steps, if, indeed, such is the case; for example 
'Retailer and Wholesaler', 'Retailer and Llanuf ac ture r ' . " 

Administrative Order No. 60-59, April 20, 1934: 

" Pi s cont inuance-o f-bus ines s Sale " 

"It shall be considered as false, inaccurate and misleading 
advertising, and a violation of the Code for any retailer to 
advertise a sale as a closing out sale, a going out of business 
sale, a bankrupt and/or receiver's sale or any sale of a like 
nature, without disclosing, if such be the fact, that additional 
merchandise, except such as may be in transit, on order, or 
under firm contract, is added to the stock of merchandise on 
hand at the beginning of said sale." 



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-52- 

Administrative Order ITo. 60-65, April 26, 1934: 

"Factory to You" 

"No retailer shall use a statement in advertising such as 
'Factory to You', 'Direct to You', 'Buy from the Wholesaler', 
or similar phrases or statements, unless such phrar.es or state- 
ments refer to all the merchandise illustrated and/or advertised 
and/or otherwise offered for sale in connection v, ith such phrase 
or statement, or unless the merchandise sold, illustrated and/or 
advertised, is clearly segregated in fche advertisement or state- 
ment in such a manner to show clearly just what merchandise is 
intended for sale under the conditions specified therein. 

Administrative Order Fo. 60-66, May 29, 1934: 

"ITo Down Payment" 

"It shall he considered an unfair trade practice for any 
retailer subject to the provisions of this Code, in any ad- 
vertisement and/or other form or forms of selling publicity, 
to use the phrase 'no down payment', and/or other phrases of 
similar or like meaning, .unless each item in the entire stock 
or class of merchandise offered for sale, to which the said 
advertisement and/ or publicity is directed, may "be purchased 
without any form of initial payment whatsoever, in every case, 
whether such payment be termed a "deposit 1 , a 'down payment', 
an 'interest charge', a 'cost of delivery' arrangement, an 
'advance on the first payment* , an arrangement whereby the 
purchaser is obliged to open an account and pay a fee or charge 
for such service, or any other form of initial payment on or 
before the date of delivery. 

"Whenever the retailer desires to limit the above terms 
to any specific article or articles of the entire stock of 
merchandise for sale, this limitation must be set forth in a 
manner to clep.rly segregate and identify the items of merchan- 
dise so advertised." 

Administrative Order No. 60-68, April 26, 1934: 

"Bankrupt Sale" 

"It shall be inaccurate and misleading advertising and 
a violation of the Retail Code for any retailer to use such 
statements as 'save one-half, or 'one-fourth off, or 'bank- 
rupt sale', or 'fire sale', or 'removal sale', unless such 
statements apply to all merchandise in the advertisement or 
section of the advertisement in which said statements are made." 



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-Do- 

Administrative Order Ho. 60-113, June 25, 1934: 

"Deferred payment Plan" 

"It shall be an unfair trade practice under Article IX, 
Section 1 (a) of the Code, for a retailer to ao/vertise or offer 
for sale any merchandise with a statement or representation 
that the merchandise may he purchased on any deferred-payment 
plan, of whatever nature, without charge for such deferred pay- 
ment, interest, services, privilege, or other comparable desig- 
nation, rhen, in fact, discounts from quoted or marked prices 
are given on identical goods sold for cash or when differentials 
between prices for cash and prices for installment are quoted, 
marked or wade available for identical merchandise, at any time 
during the period in which such merchandise is on sale or offered 
for sale." 

Administrative Order ITo. 60-557, February 5, 1935: 

"Budget Spies" 

"It shall be a violation of Article IX, Section 1 (a) for 
a retailer, in connection - ith any offer of sale on a deferred, 
'budget' or installment payment plan, whether in advertising 
natter or direct to the consumer or otherwise to quote or to 
fix a price or solicit deferred, 'budget' or installment payments 
of r.ny hind without at the time definitely, if such is the case, 
that additional financing or other charges will be made or im- 
posed. " 

g. Informal Interpretations. 

Besides these general interpretations issued by the Administra- 
tion there were several informal interpretations made by the Deputies to 
cover specific cases. In response to a request from the United Drug 
Corroany for a ruling on a contemplated. "Factory to You" sale the Deputy 
Administrator stated .that the advertising of "Jactory to You" in the pro- 
posed sale would not be considered misleading provided the goods covered 
by the advertising was actually made by the United Drug Company or its 
totally owned subsidiaries. (*) 

Although no formal interpretation was issued with regard to the 
controverted question of use of the word "free", a complaint of the Local 
Code Authority of Ehoxville, Tennessee against the Lane Drug Store of that 
city, gave rise to an informal interpretation on the point as follows: 

(*) Letter of A.S. Donaldson to Z. T. Clark, Vice President, United 
Drug Company, parch 16, 1935. Code History. 



-54- 

"The use of the word 'free 1 or a word or ror&s of similar ^r 
identical meaning in an advertisement of premiums, which are 
in fact gifts contingent upon the purchase of other merchandise, 
shall not he in itself construed as ina.ccurate or misleading to 
the consumer, so long as the advertisement clearly and plainly 
states that the gift of the premium is contingent upon the pur- 
chase of other merchandise, and so long as the advertisement is 
not inaccurate in its description of the premium, the merchandise, 
or .the price thereof." (*) 

An unofficial "interpretation" or definition adopted at the 
original hearing on the code provided: 

"Reference to the value of an article shall mean that such merchan- 
dise cannot be purchased elsewhere in the normal course of business, 
at a price less than the value quoted." (**) 

h. Compliance Results. 

The procuring of compliance with the provisions of the Retail 
Code was in the hands of a large number of Local Retail Trade and Retail 
Drug Authorities in all parts of the country. It appears that in general 
they performed their tas 1 ': with a very slight reliance uoon either the en- 
forcement machinery of NRA, or the national Code Authorities. A compila- 
tion of figures totaling complaints for the first year of operation of 
the Retail Trade Code, prepared by the National Code Authority from data 
of the 278 Local Code Authorities that made reports, show 17,600 trade 
pra.ctice complaints, of which 12,129 were adjusted by the Locals, 4,621 
were dismissed as without basis, 644 were referred to the National Re- 
tail Code Authority, and 115 were referred to NRA. (***) 

A similar report on Retail Drug Compliance, dated April 10, 
1935, but not showing the period covered, gives 14,095 less limitation 
complaints received and 12,637 adjusted by the Local Code Authorities; 
1,605 "other trade practice complaints" received, and 1,449 adjusted. 

(*) Letter of Assistant Deputy har 1 -: Terrell, to R. B. Creech, 
Secretary, Retail Drug Code Authority, Knoxville, Tenn. , 
July 23, 1934. Deputy Files, "Code Authority-General No. 1". 

(**) Transcript of Hearings, August 24, 1933, Vol. 1, p. 85. 

(***) Code Administration Study, Research and Planning Division. 

(****) Deputy Files. "Compliance". 



-55- 

This would seen to indicate that in the handling of general 
trade practice violations the Local Code Authorities achieved a consi- 
derable degree of success, and there appears to be no reason to suppose 
that the advertising provisions did not fare at least as well as the 
rest. 

Further indication that the Local Retail Trade Authorities ' 
rere in fact able to make the code provisions effective in suppressing 
misrepresentations is found in the results of field contacts made with 
Local Code Authorities all over the country, to be presented, later in 
this re-oort. (*) 

On the other hand, that compliance in general declined during 
the later code period, due in part to the spread of cynicism over the 
code as approved and in part to the difficulties of obtaining NRA 
administrative action in enforcement, is the opinion of the Managing 
Director of the National Retail Code Authority. (**) 

i. Sffect of the provisions. 

As to the general results achieved by the limitations placed 
upon misleading advertising and other misrepresentations by the code the 
following expressions of opinion, from the NRA and the Code Authority 
points of view, may be offered. 

Deputy Administrator A. S. Donaldson, reporting on the results 
of the retail codes, gives this summary of the situation: 

"It may be said that the entire 'truthful advertising' 
features of the Retail Code are primarily in the interest 
of the consumer. Prior to the adoption of the Code, 
in an atmosphere of cut-throat competition, the most out- 
landish claims were made oy stores to lure the consumer 
into the store at any cost. 'Sensational Sales', 'Greatest 
Value of all Times', 'Free Goods', 'S10 Values for $2.95!, 
and all such advertising claims bewildered rnd misled the 
consumer. The advertising provisions of the Code definitely 
placed a brake on such advertising and even more stringent 
rules have been applied by amendment and interpretation of the 
Code since its inception. Thousands of untruthful advertising 
complaints have been settled satisfactorily to the great gain 
of the consumer, as well as to honest merchants. The use of 
the 'Loss Leader' , which was no better than a bait to draw 
customers into the store, has been greatly reduced by the 'Loss 
Limitation' provision of the Retail Code. It appears in each 
case that Trade Practice provisions- of the Retail Code which 
have protected the consumer are the same as those which have 
protected the honest advertiser. 

(*) See pages 77-3'T , below, ~~~ 

(**) Xr. R. IT. ITeustadt, in conversation, ITov. 5, 1935. 



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-56- 

"The national Better Business Bureau lias nade the state- 
ment that retail advertising is at" the present tine on a 
much higher plane and natural 1 .:/ had automatically reduced 
the number of cases where the consumer is subject to "being 
misled, than "before the adoption of the Code." (*) 

Mr. reus tad t stated (**) it to "be his opinion .that if the intcrsta 
question could "be settled the industry would "be practically unanimous 
in desiring, a code; that the former code with only minor changes rould 
"be acceptable; and that the tre.de practice provisions covering advertis- 
ing would "be especially desired, as a great deal of benefit had' resulted 
from these provisions. 

There is no evidence at hand as to trends in advertising prac- 
tices in the retail trades since the lapse of the code. 

j . Summary • 

This code experience' is of particular interest because of the 
size and importance of the industry, and the significance of the problems 
of misrepresentation both to the 200, 00C industry members and to the va,st 
mass of the purchasing public. The industry grappled with specific forms 
of deceptive practice in formulating its code and employed amendments and 
interpretations as mediums for expanding and 'clarifying the conception of 
code law concerning them. Practices connected with questionable price 
competition appear to have been of principal concern. Active efforts seem 
to have been made by the majority of the Local Code Authorities to enforce 
the misrepresentation provisions, and, so long as the prestige of KRA held, 
apparently with a considerable degree of success. Little demand was made 
upon ERA by the Local Authorities for help in effecting compliance, and 
little complaint was heard that in applying these 'provisions discrimina- 
tory tactics were employed. It is believed that both the trade and the 
public were benefited, and that this aspect of the operation of the code 
offers an illustration of the possibilities of the basic NBA conception 
of a code' authority system as a medium for effectuating cooperative in- 
dustrial control 

2. Coffee Industry - (Code ?T o. 265) 

This Code, sponsored by the Assbciated Coffee Industries of 
America, was submitted August 18, 1933 and approved on February 6, 1934. 
The Code Authority. '-as a Coffee Industries Committee composed of 9 mem- 
bers generally elected, the Managing Agent of the Code Authority being 
the Secretary of the trade association* A Trade Practice Complaints 
Committee was approved on- January 9, 19S5, but was practically identical 
in composition with the Code Authority. 

(*) "Economic Importance and Effectiveness of Retail Codes", 
June, 1935. p. 5. • 

(**) Ir. Conference, llovember 5, 1935. 



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-57- 

a. Provisions Concerning Misrepresentation 

The Code as approved contained general provisions prohibiting 
misrepresentation, false advertising, and defoliation of competitors. 
(Article VI, 1, 2). No protests of these provisions are recorded in the 
Transcript of Code Hearings, although subsequently a recomnendation was 
made that the practice of "dating" coffee be prohibited as r.is representa- 
tive. (*) ITo action was taken upon this. 

A special "orovision ained. to prevent misrepresentations through 
failure to label products to show the content of ingredients other than 
coffee was adopted, largely at the suggestion of the Consumers' Ad.visory 
Board, and Consumers Counsel of AAA. (Article VI, 3.) One protest was 
recorded against this, claiming that it struck at those providing a cheap 
but satisfactory beverage for the poor man. (**) 

Despite this meagre record- concerning adoption, the organized 
industry appears to have been much interested in the provisions, and the 
Code Authority active in making them effective. Because of this interest, 
and "because the problems raised by these (advertising) complaints were 
complicated and. required extended, discussion and study by men experienced 
in the methods and. problems of advertising", (***) a special Advertising 
Sub-Committee of the Code Authority, composed of three members, ras formed, 
apparently earl]- in 1935, to give particular attention to this subject. 

b. Compliance Results 

Compliance records show only three cases of advertising 
violations reported, to ERA and only one of these referred for action. 
The reason is indicated by the following; 

"Eo cases (sic) on advertising were referred, to the ERA 
for action, and the cases were either satisfactorily adjusted 
or continued in the hope of adjustment without reference to 
ERA. . . Having had extensive experience with the impossibility 
of securing ERA cooperation for actual enforcement, re limited 
our efforts to securing compliance." (****) 

The nature of the violations dealt with is indicated, by another 
extract: 

"Complaints centered mainly on alleged false disparagement 
of competitors products (Eote: chiefly by manufacturers of coffee 
substitutes, apparently), and misrepresentations concerning the 
nature or handling of a product. A leading example is the advertis- 
ing of coffee as a 'Blend with Uocha and Java' when these coffees 
are only a small percentage of the total." (*****) 

(*) Letter to Deputy Administrator from rosa'ra Hills, Saint Louis, 
To., February 5, 1934, Deputy's Files'. 

(**) Letter of TJm. Schotten Coffee Co., August 27, 1933, Deputy's Files. 

(***) Letter from J. Rosenthal, Asst, Secretary, Associated. Coffee In- 
dustries of America, October IS, 1935. Commodity Information Unit 
File. : 

(****) Trade Association letter of October 18, 1935, referred to above. 

(*****) Idem. 



-58- 

The case referred for HRA action concerned claims of Chase & 
Sanborn by radio that all its "dated" coffee was sold on a system where- 
byrnio pound remains on our grocer's shelf for -:ore than ten days". Evi- 
dence showed that in various rural communities the date stamped covered 
a thirty day rather than a ten day period. The care was closed "by 
Standard Brands signing a certificate of compliance and agreeing to date 
its coffee only in accordance with its advertising, although the Deputy 
Administrator considered this a case of trade puffing rather than sub- 
stantial misrepresentation. (*) 

Compliance Report Ho. 368, September 1, 1934 - April 4, 1935, 
shows out of a total of ?5 trade practice complaints, 11 concerned with 
misrepresentations by false labelir^;, principally failure to show the 
required data concerning adulterants. Seven of these cases were closed 
by the signing of certificates of compliance. One was referred to the 
Federal Trade Commission and dismissed by it as not involving inter- 
state commerce. (**) There is no record of the disposition of the 
other three. 

c. Effectiveness of the Provisions, 

As to the general effectiveness of the provisions and the 
work of the Code Authority in administering them, Mr. 17. F. Uilliamson, 
Managing Agent of the Code Authority, stated; 

"Commenting on the administrative problems involved under 
the fair trade practice section of the Code, during the life 
. of the Code the Coffee Industries Committee worked consistently 
to bring about an improvement in the advertising practices with- 
in the industry . . . The work of the Committee resulted in a 
material improvement in conditions, especially in securing 
modification: of .advertising cony used by coffee substitutes and 
by some of the larger advertisers of nac^age coffees ... In 
the main . companies answering complaints against them under 
these sections of the code exhibited an honest and sincere de- 
sire to cooperate with the "Commit tee in the elimination of 
objectionable advertising." (***) 

d. Criteria for Determining Misrepresentation 

One difficulty encountered was with respect to criteria, for 
judging as to the fact of misrepresentation. Mr. Williamson wrote on 
this point: 

"The Committee encountered some difficulty in drawing an 
exact line between advertising that might be considered as 
legitimate trade puffing, and advertising which clearly fell 
under the provisions of the Code." (****) 

("*) Deputy's Files, Compliance Folder. 

(**) Complaint in re: New England Tea and Coffee Co., Docket 

Ho. 2299, February 19, 1935. 
(***) Letter to Assistant Deputy C. T. Estes, June 6, 1935. 

Deputy's Files. 
(****) Letter quoted above. 

9710 



The Advertising Committee tool: steps to have formulated by the industry 
"a specific Code of Advertising Ethics as a standard and guide with which 
to handle all such border-line cases", but with what success is not known. 

Problems presented by difficulties in obtaining adequate coopera- 
tion in matter of compliance from ilRA. have been suggested in an earlier 
quotation from the industry. More specifically, on this point Mr. William- 
son stated: 

"The most embarrassing phase in the Cab Authority's efforts 
to obtain compliance lias developed as a result of the Administration 
permitting a violator who through his violation lias gotten a large 
amount of business, to avoid conviction through acceptance of his 
certificate of compliance and promise of obedience in the future. 
Ey that time the damage has already been done. . . .The industry 
felt that the trade practice provisions could have been more ' 
effectively enforced if KRA had prosecuted violations . . ." (*) 

Other difficulties reported encountered included "lack of a 
clear-cut decision as to the Committee's authority over coffees manufac- 
tured and sold exclusively intrastate" and "lack of uniformity in en- 
forcement procedure as between various Regional Officers of the NBA."(**) 

"If the Code authority had actually had the authority it was pre- 
sumed to have had under the code it would have been possible to eliminate 
entirely (certain practices) . . and the administrative problem would 
have been relatively simple." (***) 

The pre-code history of the industry shows effort to cope with the 
problem of misrepresentative practices both by a voluntary Cede of Ethics 
and by cooperation with the Federal Trade Commission. There is no record 
as to post-code tendencies in the matter of advertising or labeling 
practices. 

e . Summary 

In this instance we have a very complete expression of Code'. Authority 
attitude and experience with respect to misrepresentations from which the 
following points appear: Special interest was taken in the subject through 
formation of an Advertising Committee of the Code Authority. The difficulty 
of drawing a line between deceptive and legitimate advertising was recognized 
and efforts were made to formulate basic principles for guidance. 



(*) Quoted in Memorandum from Hobert M Beattie, Administration Member 
on Coffee Code Authority, tc C. I Dunning, Deputy Administrator, 
March 21, 1955, see also memorandum from Code Authority to 
C. T. Estes, June 6, 1955. 

(**) Letter to C. T. Estes, quoted above. 

(***)Same. 



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-60- 

The complia.-ice efforts of the Committee resulted in "material improve- 
ment" in advertising conditions in the industry. In the main, re- 
spondents to compliance cooperated willingly in the elimination of ' 
objectionable copy. Difficulty in administering the provisions result- 
ed largely from failure of N3A enforcement, specifically from the 
practice of closing complaints with certificate of compliance and no 
penalty, after the offender had reared the profit of his act. No 
quality standards ^ere set up in this industry, "but the reauirement 
of labeling to show ingredients furnished a factual "basis for a mumber 
of complaints as to this type of misrepresentation. 

3. Do- Food Industry - (Code Ho. 450) 

This Code presents another instance of an industry in which mis- 
representations by means of advertising or labeling appear to hs.ve 
been considered of primary importance, and to have received active at-s 
tention from the Code Authority to secure compliance, with considerable 
success . 

The industry, which has developed largely s ince 1920, has enjoyed 
very rapid growth, industry statistics for 1933 as estimated by the 
Code Authority, ( *) showing number of concerns 170, number of employees 
2,500, dollar value of products $32,000,000, of which ^20,000,000 was 
represented "oi r canned dog food. As to the industry's narked expansion, 
and the effect of this on competitive practices, the Code Authority 
stated; 

"The Canned Dog Food Industry, as a comparatively new 
industry, has developed into a large national business. Because 
of its youth and amazing success the industry has become involved 
in practices as to composition, labeling and advertising which 
make necessary new corrections to protect the purchasing public 
and assure fair competition." (**) 

Nothing more specific is shown as to the reasons for the develop- 
ment of the practices referred to. Apparently, however, the industry 
because of its youth had attracted little outside regulation, and the 
rapid influx of concerns interested in the profits promised by rapid 
expansion had made difficult any orderly development'., of standards of 
practice by the industry itself. 

Prior to the Code only one court decision existed with respect 
to the industry under the Ture Food & Drug Act. In this case, (***) 
judgment of condemnation and forfeiture was entered against the de- 
fendant, the roods being labeled "Tuns, for pets, not intended for 
human consumption", and having been found to be composed of decomposed 
animal substances, 

(*) In conference with ?.. S. Scott, Assistant Deputy in chars® of Code, 
(**) Code Authority Bulletin l T o. 57, October 23, 1934. 
(***)U. S. v. 620 case of canned tuna (California Sea Food Co.) Dis- 
trict Court, Western District of Washington, 1931. 



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-61- 



The court held that the same standards applied as those prescribed under 
the act for food for human use. Prior to the Code, also, no complaint 
or stipulation had ever teen issued "by the Federal Trade Commission in 
a dog food case . 

The Code was originally submitted to the AAA in September 1933, 
by the jtfational Dog Pood Manufacturers Association. It was transfer ed 
to NBA in January 1334, and approved May 31, 1934. The Code as adopted 
contained provisions prohibiting four types of misrepresentative prac- 
tice - inaccurate advertising, false labeling, disparagement of compet- 
itors, and deceptive containers. ( *) 

The transcript of hearing records no controversies with respect to the 
adoption of t he provisions, and there is no evidence of subseauent com- 
plaints, ITo Trs.de Practice Complaints Committee was ever approved, and 
there were no amendments, exemptions, stays or interpretations pertinent 
to t his study. 

The Code Authority, however, filed with the N?A what appears to be 
a complete record of the individual complaints of violations of the 
misrepresentation provisons which were handled by the Authority itself, 
jogether with the action taken with respect to them. (**) This record 
shows a total of 29 cases; 10 dealing with misleading advertising, 4 
with false labeling, and 15 with disparagement of competitors' products. 
The complaints in these cases were initiated in some cases by competi- 
tors and in some causes by the Code Authority itself. Numerous forms 
of deception are complained of, the principal ones involving (1) mis- 
statements of fact, as "from choise cuts of meat" ; (2) extravagant 
claims requiring scientific proof - "complete food for dogs", "balanced 
diet" , "proved biological value", etc.; and (3) indirect reflections on 
the nature or value of ingredients used by competitors. (***) 

(*) Dog Food Code, Article IX, 12-15. Codes of Fair Competition, 

Vol. XI, pp 106-107. 
(**) Report of Code Violations, Folder of Charles Wesley Dunn, 

Secretary, in Deputy's Files. 
(***) Details of the individual cases are included in the report noted 

above . 



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-63- 



All the reported cases dealing with advertising and dispar- 
agement were settled by respondents agreeing to discontinue the ob- 
jectionable practices when notified to do so by the Code Authority. 
As to its success in this respect the Code Authority stated: 

"As to labels and advertisement representations which 
are patently false and deceptive, it suffices to say 
that we have vigorously acted against each as it has 
come to our attention. And, to date, the industry has 
satisfactorily responded to our corrective action along 
the aforesaid lines. I do not recall a single instance 
of defiance in this respect. And the manufacturers to 
whom we have written have voluntarily acquiesced upon ' 
the basis that the requested corrective action is in- 
herently right and should be taken." (*) 

In appraising this statement it should be noted that it is 
addressed to industry members as part of a general statement evidently 
designed to encourage compliance, and so may contain an element of op- 
timism. Nevertheless, taken in connection with the factual record of 
enforcement given above, it has weight in indicating a successful com- 
pliance performance. 

It is also to be noted that the code contained enabling oro- 
visions (**) calling for development and adoption of positive standards 
for industry products, and labeling regulations based- upon these. 
Serious efforts were made to carry this provision into effect, and con- 
siderable progress was achieved £**) , although -no standards were ac- 
tually adopted before lapse of the codes. It was evident*, however, 
that the industry felt the necessity of definite product and labeling 
standards in order to cope adequately with the varied misrepresenta- 
tions, both in advertising and labeling, which. seem to have been preva- 
lent in this industry. 

Two cases of misrepresentation in labeling and advertising 
were referred to the Federal Trade Commission. These involved un- 
supported assertions of "U. 5. Government Inspection", and inaccurate 
claims as to the nature and proportion of the meat ingredients con- 
tained. One case was settled by stipulation and agreement to cease 
and desist. (****) 



(*) Code Authority Bulletin No. 57, quoted above. 

(**) Dog Food Code, Article VII, Codes of Fair Competition. V.IX 
p. 104. 

(***) See under Dog Food Industry, Part II of this report, Standards 
and Labeling. 

(****) Vaughan Packing Company, Inc., Stipulation No. 1333, 
April 4, 1933. 



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In the other the respondent is repeated. us having quite recently 
agreed to accept a consent decree to cease and desist subject to the 
Commission' s approval. (*) 

One false labeling; action was referred to the State of 
Kentucky for prosecution as being primarily a violation of the State 
la?/ requiring a marking of percentage of fat, fibre and protein on 
the label of the product. (**) 

No information is available as to the course of .events with 
respect to misrepresentation practices since the Code, although, the 
National Dog Food Manufacturers Association reported earlier in the 
year that "The Federal Trade Commission is now broadly investigating 
the labeling and advertising of dog food." (***) 

4. Plumbing Fixtures Industry - (Code No. 204) 

Misrepresentation of products became a problem in this in- 
dustry during the building boom which followed the World War. The 
demand for increased production caused manufacturing standards to be 
lowered, and large ouantities of second grade or "cull" ware were 
marketed, much o'f it in the guise of first grade material. When build- 
ing slackened, the competition of this cull ware became a serious mat- 
ter to sellers of regular grades. The matter was further complicated 
by development of direct-to-you and mail-order methods of plumbing fix- 
ture distribution, which threatened the traditional manufacturer- whole- 
saler-master plumber channels, and which furnished a particularly ready 
outlet for cull types of material. (****) 

The industry's concern over this situation was based upon (1) 
the effect of such misrepresentation on the competitive price situation 
within the industry itself, and (2) the injur?- to the consumer through 
deception and possible delivery of unsanitary wares. The first con- 
sideration seems to have been much the more important. 

a. Pre-Code Efforts at Regulation 

Attempts were made ^oy the industry to remedy the condition, 
and to eliminate the confusion resulting from general unstandardized 
nomenclature and grading of industry products, by cooperation with the 
National Bureau of Standards. A series of Commercial Standards were 
approved, most of which provided for grade marking and labeling, as a 
means of eliminating uneconomical and fraudulent selling practices. 

(*) Old Trusty Dog Food Company, Docket No. 2537, formal complaint 
dated August 21, 1935. 

(**) Continental Packing Company, Covington, Kentucky. Case referred 
April 30, 1935. There is no record of the outcome of this case. 

(***) Bulletin No. R3. 

(****) The material presented here is summarized from a detailed and 

documented treatment of the subject of standards in this industry, 
Appendix 2, Exhibit A, of this report, q.v. 

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These efforts were greatly limited in effectiveness by the 
fact that the standard requirements did not have the force of law, out. 
depended upon voluntary acceptance by the industry. Indirect evasion 
of the labeling requirements was also achieved by placing the labels in 
illegible locations, and by removal or obliteration of grade marks. 

b, Regulation in the Code 

When HRA came, the industry in its code sought drastic meas- 
ures to deal with the problem, by prohibiting entirely the sale of 
"cull" grades within the continental United States. (*) Sponsors of 
the provision asserted its necessity on the grounds that labeling alone 
was inadequate to control the misrepresentative practices. Considerable 
testimony was given, however, claiming that a more immediate aim of the 
provision was to eliminate the competition of the lower grade products, 
and their producers, entirely. 

The provision was. opposed in various ouarters, including the 
Research and Planning Division of IT3A, and the Consumers' Advisory 
Board, on grounds that it constituted unlawful restraint of trade, that 
it was discriminatory between competing groups in the industry, and 
that it deprived the consumer, under guise of protecting him, of the 
right to purchase a grade of goods for which there was a legitimate mar- 
ket in the lower-price field. The provision was,, nevertheless, approved. 

c. Failure of the Provision 

The Code Authority found itself unable from the first to ob- 
tain satisfactory compliance with the provision. As a matter of fact 
its ostensible aim of controlling misrepresentation appears to have been 
largely ignored; and the issue developed into a contest between industry 
interests. Producers rasing older types of equipment, which turned out 
a larger proportion .of culls, campaigned actively against the restric- 
tion and refused to be bound by it. By a series of steps which need 
not be detailed here (Cf. Appendix 2, Sxhib. A) the provision became 
practically inoperative, and was finally officially staged. 

d. Alternative Effort At Control. 

Following the break-down of the prohibition upon sale of 
seconds, or culls, an effort was made by the Vitreous China Division 
of the- industry to revise its Commercial Standard CS 20 to provide for 
the marking of culls with a non-removable label placed in a position 
to be readily legible after, installation, and to embody this provision 
as a mandator-- requirement in the code. A Committee was appointed, and 
a draft of the proposed provision was presented to HRA for approval. 
The codes were terminated before action could be taken. 

e, Sumi lary 

The experience of the Plumbing Fixtures Industry with its 

a Ate n E?A s A? cjon.trp.l, P l ?-p}''f-P T . e . s . e }\^ a .W\ e . . 1 ?. r . a . c . JG A. c . e - s . A-k-kJi s A 3 T. a A e ^. .^ e . -A Mt - 

(*) Plumbing Fixtures Code, Article VIII, -, Codes of Pair Competition, 

Volume V, p. 129. 

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ficulty of making such control effective by merely voluntary label- 
ing rules, even when definite product standards nave "been developed. 
It also indicates the tendency of industry interests to take ascendency 
over consumer interests, and the possibility, where mandatory controls 
are invoiced, that a movement to curb a generally unfair practice may 
mer^e into an attempt to promote a special competitive interest. It 
is to be regretted that the method of mandatory ..grade. IjabejLing,, without 
other marketing restriction, was not used by this industry sufficiently 
early in its code history to provide a comparative test of results, 

5. Canning Industry - (Code No. 445) 

a, Pre-Code Situation as to Misrepresentation 

A condition of general confusion, and a certain amount of 
actual misrepresentation, as to the Quality and grade of the products 
sold by this industry had existed for some time prior to the 1IHA code 
periou. The effect of this had been an increasing dissatisfaction on 
the part of the consuming public, which, together with growing competi- 
tion from fresh fruits and vegetables, had come to constitute a threat 
to the industry's markets. 

The unsatisfactory situation probably resulted less from de- 
liberate intent to mislead the public through inexact labeling and ad- 
vertising than from the lack of definite commodity standards and label- 
ing requirements, by which the public could be guided in its buying. 
Under the McHary-Mapes amendment to the Food and Drug Act the Depart- 
ment of Agriculture was empowered to prescribe minimum quality stand- 
ards for canned goods, and require that grades below this be labeled 
n 3alow U. S. Standard-Go odFood - Hot High Grade". For goods above these 
minimum standards, however, there were no requirements as to marking for 
grade. Each producer might designate and label his product according 
to his own "standards". At the same time, severe price competition in 
the industry had supplied a strong incentive to the general lowering of 
quality of industry products. (*) 

b. Consumer and Industry Attitudes 

The resulting situation, from the consumer point of view, 
may be summarized as follows from testimony offered by consumer rep- 
resentatives at public hearings on the Canning Code:- 

Consumers have no guide in buying canned goods in general 
since T>rice is no sure indication of the quality which will be re- 
ceived. At least SO percent of the canned merchandise on display is 
totally unmarked as to grade. There is often a wide variation of 
quality found in a single brand. Quality f brands does not remain 
uniform from season to season. Many can labels contain extravagant and 
misleading brand names which the quality of the contents fails to jus- 
tify. Tests have indicated that widely or nationally advertised canned 
goods are not necessarily superior to the products not so advertised. 
The tests have also shown that buyers of goods in the lower price range 

(*T Dor full discussion of standards and labeling in this code see 

appendix II, Exhibit C, tf this renort. 
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frequently, receive either first, second or third grade merchandise, 
and that the same holds true for even the highest price ranges. (*) 

The industry in turn was genuinely concerned to meet the 
rising tide of consumer criticism, but, as the code experience demon- 
strated, it wished to do so in a manner quite satisfactory to itself. 

c. Experience under the Code. 

Owing to inability of the industry and the ISA to agree upon 
a standards program prior to adoption of the code, no provision deal- 
ing with the subject was incorporated in the code as approved. The 
following general provision as to misrepresentation v/as incorporated: 

"Section 9 - False Label or Advertisement or Container - 
IJo member of the industry (a) shall sell a product of 
the industry falsely or deceptively labeled or marked; 
or (b) falsely or deceptively advertise a product; or 
(c) use a deceptive container or give short weight or 
measure or count." (Article VII I ) (**) 

In view of the unreconciled controversy on standards mentioned above, 
the terms of this provision were evidently a little indefinite for 
practical effect. 

However, in his Executive Order approving the Canning Code(***) 
the President required the industry to designate a committee to co- 
operate with iI?A in the formulation of standards and labeling require- 
ments. This cooperative effort resolved itself into a contest between 
iPA and consumer advocacy of a system of simple A, 3, C, D or equivalent 
grade labeling, and the insistence of the industry upon a more elabo- 
rate and lengthy method of "descriptive" labeling, which the consumer 
group held would be little more enlightening to the purchaser than the 
methods already in use* (****) As in the pre-code period, no agreement 
between the views was obtained, and the code lapsed, through the 
Schechter decision, with the controversy still largely unresolved. 
There is no available evidence of any particular effort made by the 
Code Authority to make effective the broad prohibitions' upon misrepre- 
sentation contained in Article VII, Section 9, of the code quoted above. 

d. Summary 

The experience of this code is chiefly illustrative of two 
points: (l) the difficulty of dealing with borderline misrepresenta- 
tions with respect to the physical quality or characteristics of con- 
sumer goods without specific quality standards or product definitions; 
and (2) the ineffectiveness of "cooperation" between ISA and industry 
to achieve amelioration of the situation in the interest of the con- 
sumer except upon terms satisfactory to the industry, irrespective of 
other opinion as to the suitability of those terms. 

(*) See "Testimony on Standards for Consumer Goods at Canning Indus- 
try Hearings, Feb. 8-9, 1934", Consumers' Advisory Board, Index 
#1767. 
(**) Canning Industry, No. 446, Codes of Pair Competition, V. XI , p. 43. 
(***) Codes of fair Competition, Vol. XI, |p. 25. 
(****) See Appendix II, Exhibit C, for aetails of this controversy,' 



-67- 

fi. Macaroni Industry - (Code No." 23^ 

This industry, also, prior to the code had suffered from de- 
structive price-cutting effectuated largely through adulteration and 
debasing of industry products, and from various misrepresentative prac- 
tices in labeling, paclraging ana advertising. Here, however, a very 
comprehensive group of standards provisions and labeling rules were in- 
corporated into the code as approved. 

The principal practices which had been complained of included 
use of inferior flours, principally soya, bean flour, for higher grade 
ingredients normally used; use of artificial coloring matter to simulate 
egg content; wrapping in yellow coverings for the same purpose; inaccu- 
rate labeling of packages as to content and weight. 

a. Code Provisions Concerning Misrepresentation 

The code provisions forbade the use of artificial coloring or 
deceptive wrappings; set a minimum egg content for noodles; required 
labeling to show the content of various ingredients of all products by 
weight; and imposed a substandard labeling requirement upon products 
failing to meet a minimum cash test. (*) The provisions had received the 
auproval of a committee from the Food and Drug Administration. 

The macaroni industry is distributed over the entire country, 
though centering largely in metropolitan districts. Individual units 
vary from numbers of small family establishments catering to local trade 
only, to large up-to-date factories having a substantial output and com- 
peting through channels of inter-state commerce. According to figures 
submitted in connection with the 1934 code buaget, the industry was com- 
posed of 383 concerns employing 5,498 employees exclusive of executives 
and salaried employees. 

The industry in general seems to have approved, or least not 
contested, the code provisions. Complaints of violation were frequent, 
however, due in part at least to the numbers of small, local concerns 
engaged in the industry. The Code Authority appears to have been active 
in its effort to secure compliance. The records compiled from reports 
of the State Compliance offices show an unusual number of violations of 
this type of provision referred to ISA for action. 

b. Compliance ?.ecord 

Cases concerned with mislabeling and misbranding so reported 
total 50, and false advertising cases 9; as compared with 34 complaints 
of failure to file prices, and 46 of failure to adhere to prices so 
filed. Of the 50 misbranding cases, 25 resulted in findings of viola- 
tions and were adjusted; in 19 no violation was found, 1 case was 
dropped, and 5 were pending when the code lapsed. Adjustments were 
made in 7 of the advertising cases, and 2 were dropped. 

The specific types of violation principally complained of 

(*) Macaroni Code, No, 234, Codes of Fair Competition, Vol. V pp. 532, 33. 
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were (l) not disclosing on the label the farinaceous contents of the 
product, (2) labeling products as being made from pure seninola when 
in truth the product was made of an inferior flour, generally soya 
bean flour colored with artificial coloring to imitate the true semi- 
inola product, and (3) though less frequently, inaccurate marking of 
net weight, or not showing weight at all. 

'^here is no complete record available at this time of the 
method of disposition of the misbranding, false advertising cases 
which were adjusted. In two instances, however, the records of the 
Compliance Division in Washington show that the cases were closed upon 
respondents agreeing to relabel their products. The Code Authority 
Chairman, Mr. G. G. Hoslcins, is reported to have been much concerned 
at the settling of one case in such fashion without fine or punishment, 
feeling that "one example of punishment would deter other members from 
similar violations." (*) 

c. Effects of the Code Provisions 

As to the general effect of the provisions, Mr. Hoslcins 
stated (**) that during the early life of the code the rules concern- 
ing false advertising, misbranding, standards of identity and quality, 
and labeling requirements, performed an excellent function for a lim- 
ited period, raising the standards of ingredients, temporarily doing 
away with artificial coloring, and going far to prevent palming off 
upon the consumer inferior products advertised as composed of the best 
ingredients. 

Later however, according to Mr, Hoskins, during the , summer 
and fall of 1934, artificially colored soya bean flour came to be ex- 
tensively used to simulate "fine grade seminola. The Code Authority 
attempted to correct this under the code without success, and finally 
enlisted the aid of the Pood and Drug Administration-, which made a 
number of seizures of the soya flour. 

In general it appears, from the same source, that the indus- 
try felt that the code fell short of its objectives largely because of 
failure on the part of ERA to back up the provisions forcefully and 
promptly. What seemed to the industry the dilatory tactics of the Li- 
tigation Division, and failure to assess penalties tended, it is claimed, 
to undermine confidence and discouraged the industry, which "came to the 
conclusion that no real effort was being made to effect compliance with 
the trade practice reouirements, " 



(*) Code Administration Study, Macaroni Industry, pp. 50-51. 
(**) In conversation with Assistant Deputy Administrator Scott, 
Macaroni Code. 



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Since the lapse of the code, it is further reported, there has been 
complete abandonment by the industry of the standards and labeling 
regulations which the code sought to /rat into effect. 

d . Summary 

This industry furnishes another instance of a situation where 
positive product standards and labeling requirements were felt to be nec- 
essary in order to curb misrepresentative ppractices injurious to both 
the industry and the consumer. The code enabled such provisions to be 
put into operation, apparently with a considerable degree of success so 
long as the authority of ISA gave the code requirements force. Later, 
failure of the -provisions became general; due, again - in the view of the 
Code Authority - to the weslmess of 1I?A coimliance and enforcement . 

7. Other Industry Svjnmaries 

In addition to the individual industries dealt with in the preceding 
pages, the code experiences of nine other industries, primarily from the 
standpoint of their standards and labeling provisions, are presented in 
Appendix II, following PART II - STANDARDS AID LABELIHG, of this report. 
In each of these some indications of the collateral effect of these 
provisions upon different forms of misrepresentation will be found. 
These additional industry exhibits include; Mayonnaise, Wood Cased Lead 
Pencil, Hosiery, Preserve and Maraschino Cherry, Fertilizer, Agricultural 
Insecticide, Paint & Varnish, and Cleaning & Dyeing. 

In the pages now immediately following are stu.;marized the general 
situation as to misrepresentation, and the effects of the code provisions, 
in a representative group of industries, as reported by the Code 
Authorities which administ:red them. 



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C. Data Developed by Code Authority Questionnaire . 

Owing to the limited scope of the opportunity for field work which 
was finally allowed the trade practice studies, an attempt was made to 
elicit necessary information as to code operation "by means of a question- 
naire. A combined form, dealing with "bot^ open price filing and mis- 
representative practices, was sent out to the former Code Authority 
secretarics of 330 industries. There are available for this analysis a 
total of 49 replies, in questionnaire or letter form, which are 
sufficiently definite, either positively or negatively, to be included 
he re . 

1. Sizes and Types of Industries Replying. 

Twenty-four of the 49 industries which replied included in their 
responses an answer to a general question as to estimated industry out- 
put in 1934. The aggregate reported production of these 24 amounts to 
approximately $243,000,000. Of this total, however, $75,000,000 was 
accounted for by a single industry (Scientific Instrument). Of the 
remaining 23, 2 reported $15,000,000 each, 8 reported from $10,000,000 
to $15,000,000, and 10 reduced less than $5,000,000 each during the year. 

It thus appears that the industry sample represented by the question- 
naire returns is composed largely of industries in the smaller size groups. 

Probably not more than 13 of the 49 industries may be definitely 
included under the head of consumers' goods industries. The remaining 36, 
while perhaps preponderantly classifiable under heavy machinery and 
equipment, or building materials and operations, nevertheless cover a very 
wide range of products. Two or three distribution codes appear, but no 
retail trade is included among these. 

As to selection of the industries to be covered by the questionnaire, 
this was done upon the basis of interest to the open price filing study, 
misrepresentation provisions of one kind or another being so generally 
distributed through the codes that it was felt special choice might be 
waived. The result is that the returns constitute, from the standpoint of 
misrepresentation, a genuine random sample of the entire body of codes. 

2. llature of Information Requested 

The misrepresentation section of the questionnaire consisted of tlae 
following questions: 

"Indicate which of the following kinds of misrepresentation 
(deceptive advertising, false marking or branding, deceptive 
packaging) or others were a serious problem in this Industry 
before the NRA code. Also indicate whether such mis- 
representative practices were still of a serious nature during 
. the code and after the code. 

"Please explain briefly the nature of the above practices which 
were or are a serious problem to this Industry during any of 
the above periods, 

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"Did the provisions in your code prohibiting misrepresentations 
serve materially to lessen the prevalence of practices of the kind 
which you have indi ca ted( a"bo ve ) ? 

"Was the Code Authority able - to obtain compliance with such 
provisions without recourse to NRA enforcement? 

"What were the chief obstacles encountered to effective 
functioning «f the code provisions concerning misrepresentations of the 
kind you have indicated?" 

Tlie questions' propounded were deliberately restricted to the above 
scope because of the necessarily extended nature of the open price 
filing queries, and from a desire to avoid overstraining the responsive- 
ness of those to whom they were directed. 

3. General Analysis of the Returns 

In 20 of the responses, or 40 per cent of the entire 49 received, 
no information whatever is given with respect to the subject-matter of 
this study. 

In 1J5 instances it is definitely stated that misrepresentations do 
not constitute a serious problem of the reporting industry. 

In 12 cases misrepresentation is shown to be an industry problem. In 
11 of these the operation of the code is credited with having served in 
some degree to lessen the difficulty. In one case it is asserted that the 
code did not help. In all 11 of the above cases, also, the Code Authority 
is reported to have obtained compliance with the misrepresentation pro- 
visions of the code wholly or largely without recourse to NRA. 

In 1_ case (Canning & Packing Machinery) a general statement is made 
by letter that "Hie trade practice provisions of this code were quite ex- 
tensive and were enforced, with the "result that many unfair practices 
were discontinued and a better feeling engenered among the members of the 
industry." 

The 20 industries whose replies gave no information whatever with 
reference to misrepresentation include: Commercial Stationery & Office 
Outfitting, Hardwood Distillation, Chemical Engineering Equipment, Hoist 
Builders, Saw Mill Machinery, Shovel Dragline & Crane, Valves and Fittings, 
Insecticide and Disinfectant, Marking Devices, Folding Paper Box, Small 
Arms and Ammunition, Secondary Aluminum, Ingot Brass and Bronze, Electrical 
Contractors, Fly Swatter, Dental Goods and Equipment, Reduction Machinery, 
Boiler Mfg., Wood Cased Lead Pencil, and Felt Mfg. 

In some instances these industries replied by questionnaire, but 
more often merely by an explanatory letter. In several cases information 
was supplied with respect to open price filing, and none with respect to 
misrepresentation. In the greater number of instances, however, the Code 
Authorities in this group reported themselves unable to supply any in~ 
formation whatever, giving as reasons, among others - "code never operative" 
(Small Arms & Ammunition, Wood Cased Lead Pencil); "code approved too late", 

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-72- 

or effective period otherwise too short, to provide a sufficient history 
(Fly Swatter, Dental Goods & Equipment, Commercial Stationery); code 
records returned to NBA, destroyed, or otherwise dispersed- (ingot Brass 
and Bronze, Valve & Fittings); "so little "business during tie period" that 
no data of value resulted (Hoist Builders). 

The 16 returns which reported no serious misrepresentation problems 
in their respective industries include: Marble Quarrying, Rolling Kill 
Machinery, Wholesale Hardware Trade, Asphalt & Liastic Tile, Concrete 
Mixer, Marble Contracting, Household Ice Refrigerator, Talc and Soap stone, 
Transparent Materials Converters, Roller and Silent Chain Mfg., Card 
Clothing Mfg. , Wholesale Monumental Marble, Road Machinery, Scientific 
Apparatus, Power and Gang Lawn Mower, and one unidentified. (*) 

The following are the 12 industries which reported misrepresentation 
in some form to be a problem: Batting and Padding, Metal Tank, Metal Window 
Motor Fire Apparatus, Pulp and Paper Mill Wire Cloth, sheet Metal Dis- 
tributors, Warm Air Furnace, Water Meter Mfg., Cutlery, Mnnicure Implements, 
etc., Slide Fastener, and 2 unidentified. 

4. Types of Misreprecentative Practices Complained of. 

In most instances the returns reporting misrepresentation as an 
industry problem gave some details as to the form of misrepresentation in 
question. These are not greatly illuminating, but they may be summarized as 

follows: 

Deceptive Advertising - ""Over-optimistic advertising and sales 
talks a common fault." - Water lipter Mfg . 

Deceptive Advertising, False 'Marking - "Misrepresenting -size and 

capacity of product." - Warm Air Furnace Mfg . 

Deceptive Advertising - ( in the case of one or two small companies 
only) . - Pulp and Paper Mill Wire Cloth Industry . 

Defamation of Competitor's Product - Mo tor. Fire Apparatus. 

False Marking or Branding - "Using materials of lighter gauge than 
specified or generally furnished by most manufacturers. - Metal 
Tank Industry . 

False Marking and Branding - Second-hand materials. - Batting and 
Padding Indurtry . 

(*) Information supplied by questionnaire is kept unidentified for the 

purposes of these reports in certain cases where this was requested 
by those supplying the data. 

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:;isrepresentation of Ratine of Capacity - (Unidentified) 

Misrepresentation arising from "unlimited variety of quality stand- 
ards. 1 " - ("Not very mucii misrepresentation in the industry.") - 
Cutlery, Manicure Implements, etc. 

Departure from Agreed Standards - Metal Window. 

"Every known form of unethical competition is practised in this 
industry." - (Unidentified) 

In addition to these forms of misrepresentation which fall within the 
scope of this study the questionnaires also reported various types of 
deception which have been excluded from it by definition, e. g. secret 
rebates, consignment shipping without publishing fact, unjustified quantity 
discounts, selling new machines as used, and other devices for evasion of 
price provisions. Industries reporting these have been included in this 
analysis of the questionnaires only where they also reported practices 
properly within the scope of the study. 

5. Effect of NRA in Checking the Practices. 

As already stated, 11 of the 12 industries (*) which reported mis- 
representation an important concern with them indicated that conditions 
with respect to it had improved as a result of NRA. The one return in the 
group which stated unequivocally that the code had not improved the situa- 
tion was that for the Sheet Lietal Distributors'. 

The question asked was whether the code provisions .served "materially 
to lessen the prevalence of the practices." The 11 affirmative replies 
were given with varying degrees of emphasis. In five cases there was a 
simple "yes" , or its equivalent. Some of the variants, both up and down 
the scale of enthusiasm, are as follows: 

"Yes - very much so. " - Batting and Padding Industry . 

"Most decidedly so - they practically disappeared." - Metal Window 
Industry . 

"Some effect noted; difficult to say how much." - ( Unidentified ) 

"Very largely" (with respect to one practice); "to some extent" 
(as to another). - Motor Fire Apparatus. 

"Yes, very materially." - Warm Air Furnace . 

"Not enough to get excited about - but the condition was being 
improved a bit." -Water lie tor Mfg . 

I See list in last paragraph of saction 3, "General Analysis of the Returns", 
page 71 . 

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-74- 

6. Success of the Code Authorities in Effecting Compliance. 

The question asked here was "Was the Code Authority able to obtain 
compliance- . . . without recourse to NRA enforcement?" All 11 of the 
replies which admitted misrepresentation as a problem, and found the 
codes helpful, were also in agreement as to the results being obtained 
practically without aid of NRA. enforcement. Six of the 11 answered a 
flat "yes " to the question. Most of the others indicated very slight 
ITRA participation. 

"Yes, to a certain extent. Reference of complaints to NRA did 
not help in enforcement." - Metal Tank Industry . 

"In about 75$ of the cases. IIEA successful in about 5$ only of 
the cases referred to it." - Cutlery, Manicure, etc . 

"Not in all cases, but in a very great many." - Batting and Padding. 

"Did not resort to NRA. enforcement methods; what was accomplished 
was through voluntary means - except in a few cases where USA 
Regional setups were employed." - (Unidentified ) 

"The only compliance wo received ^rta through Code Authority. NRA 
was too _ hesitant to act." - Warm Air Furnacs . 

7 . Obstacles to Functioning of the Misrepresentation Pro- 
visions, 

Two of the replies (Metal Window. 1 unidentified) indicated that no 
obstacle to effective functioning of the provision had been encountered. 
Various difficulties were listed by the others, the one most frequently 
voiced having reference to failure of NRA enforcement and the uncertain- 
ties of the underlying situation. Difficulties of proof, and the im- 
portance of definite product standards, are also stressed. Some of the 
quotations follow: 

"Our code would have been 100$ effective had we been able to 
secure definite compliance through NRA. against one member in the 
early days of the code period; only one definite conviction was 
necessary." - Metal Tank Industry . 

"Industry members did not believe codes could be sustained in 
court. If the legality had been sustained there would have been 
no further trouble." - Batting and Padding. 

"Failure of enforcement program, with consequent psychological 
effect on members." - (Unidentified) 

"Members attorneys advising members that fair trade practice rules 
could not be enforced . . NRA was too hesitant to act." - Warm Air 
Furnace Industry . 

"Difficult to procure evidence in support of complaint (of 
defamation of competitor's products)" - Motor Fire Apparatus . 

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-75- 

"Takes a considerable neriod of time to nail these things down, 
as they are difficult to nrove". - Water Meter Mfg. 

"Pure stubbornness of one individual." - (Unidentified) 

"Lack of uniformity in standards." - Cutlery. Manicure, etc. 

"Misrepresentation was not a factor .... after code inauguration 
led to adoption of uniform standards of quality." - Metal Window 
Industry. 

A single note of somewhat unusual strain appears when one Code 
Authority (also unidentified) lists, in addition to the failures of 
NBA enforcement, "Certain errors of omission or commission on this 
side of the fence", as among the obstacles to smooth functioning of 
their code. 

8. General Conclusions to be Drawn from the Questionnaires 

To whatever extent the data presented in the preceding pages 
may be taken as having general or representative significance, the 
following conclusions based upon them appear to be warranted: 

(l) A total of 12 codes in which misrepresentation was 
viewed as a serious problem, as compared with 16 in 
which it was expressly stated not to be such, and 20 others 
in which no nention of the subject was made, tends strong- 
ly to support the suggestion previously advanced that the 
number of industries in which misrepresentation was viewed 
as a natter of importance was much smaller than the num- 
ber of codes containing provisions concerning it would 
indicate. In fact it is believed that the figures above 
represent a much nearer approximation to the truth namely, 
that the industries in which this type of lorovision was 
given serious attention in practice were in the minority. 

(2) In practically all instances where misrenresentation was 
reported as constituting an industry problem the codes 
helped, often very materially, to mitigate it. 

(3) Compliance with the misrepresentation -orovisions was 
effected almost wholly by the Code Authority themselves, 
with a minimum of recourse to NBA enforcement agencies; 
the latter being due not to any reluctance to invoke 
assistance but to belief that such assistance was in- 
effectual. 

(4) The most serious obstacle to successful administration 
of the provisions, in the view of the Code Authorities, 
was the basic legal weakness of the 1TBA and the fail- 
ure to attempt vigorous enforcement which sprang from it. 

(5) The Code Authority system, as originally designed, with 
firm backing of NBA would, it was felt, have resulted in 
very satisfactory control by the reporting industries of 

971D 



-76- 

their problems of misrepresentation - at least so far as 
competitive interest was. concerned. 

(6) Lack of uniform product standards was found in some in- 
stances to be another obstacle to the obtaining of sat- 
isfactory compliance with the misrepresentation provis- 
ions; and adoption of such standards operated, in at 
least one instance, to eliminate the difficulty. 

(7) There is no clear correlation observable, from these 
questionnaire returns, between the type of industry re- 
porting and the existence of misrepresentation as an 
industry problem. 

With respect to the questionnaires in general it is felt that 
they represent a very reasonable return from the total mailing and 
that, except for the absence of any retail code, they offer a repre- 
sentative random sample of the codes as a whole. Furthermore, .the 
conclusions which they indicate will, in general, be found to be sup- 
ported by the evidence presented elsewhere in this report. 

A very considerable expression of the retail trade point of view 
as to the misrepresentation provisions will be found included in the 
data from Local and Regional Code Authorities presented in the sec- 
tion following. 



9710 



-77- 

D. Field Work With Local and Regional Code Authorities * 

In order to increase the amount of direct evidence tending to 
throw light u'oon operation of the code provisions, arrangements were 
made for direct contact .work "between representatives of the IRA. State 
and Regional Offices, and the former local code authorities of a group 
of industries which had employed a decentralized system of code admin- 
istration* 

The questions propounded '-ere designed to "bring out the facts 
concerning the compliance effort of the code authorities an general, 
and that affecting misrepresentative and deceptive practices in parti- 
cular. Originally a coverage in the areas of all the State Offices had 
been intended. The work was only partially completed when the field 
staff was terminated. 

A considerable amount of data relative to misrepresentations 
was, however, secured from representative groups of local authorities in 
several industries, notably the large retail trades, and in various lesser 
degrees from a number of others. These industries include: 

Retail Trade Crushed Stone, Sand & Gravel 

Retail Drug Farm Equipment Mfg. 

Retail Food & Grocery Graphic Arts - Commercial Relief 
Motor Vehicle Retailing ' Printing 

Wholesale Confectionery Household Goods Storage & Moving 

Retail Monument Paper Distributing 

Wholesale Monumental Granite 

The information specifically requested with respect to misrep- 
resentation included: (l) what, if any, misrepresentative practices had 
been a problem with the industry in that area; (2) what efforts had been 
made to correct them prior to NEA. and with what success; (3) specifi- 
cally, had the aid of the Federal Trade Commission been invoked; (4) did 
the liRA code serve effectively to check the practices, and what princpal 
difficulties of administration were encountered; (5) ernlain the definite 
procedure employed for dealing with violations. 

The replies received are summarized, code by code, in the sec- 
tions following. (*) 

1. Retail Trade (Code No. 60) 

Interviews with 47 Local Retail Code Authorities were planned 
in order to c'over this field. Returns from 27 of these were received. 
Three of the reports were without definite information of any sort, go 
far as misrepresentative practices were concerned, leaving a usable total 
of 24, an approximately 50 per cent coverage. The returns were very well 
distributed, geographically, as the following list of cities represented 
shows. A wide copulation range is also included. 



(*) Original reports in files of Trade Practice Studies Section, Divi- 
sion of Review, 1IRA. 



9710 



-78- 



Alban;-, lie 1 " York 
Atlanta, Georgia 
Augusta, Maine 
Casper, Wyoming 
Charleston, South Carolina 
Dallas, Texas 
Hartford, Connecticut 
Helena, Montana 
Houston, Texas 
Indianapolis, Indian?. 
Jackson, Mississippi 
Los Angeles, California 



Louisville, Kentucky 
Manchester, lie 1 - Hampshire 
Menrphi s , Tenne sc ee 
Milwaukee, Wisconsin 
Minneapolis , Minnesota 
Horfolk, Virginia 
Philadelphia, Pennsylvania 
Providence, Rhode Island 
Richmond, Virginia 
Santa Pe , lie'-' Mexico 
Sioux Palls, South Dakota 
Topeka, Kansas 



The following is an analysis of the inf ro/.iation as furnished 
to the field workers by representatives of the Local Code Authorities 
which operated in these cities. 

a. General Results of the Questions., 

Twenty-one of the 24 replies tabulated stated that nisrepre- 
sentative practices of some kind constituted an industry problem. Man- 
chester, Hew Hampshire, found "ITo misrepresentation or deception in trade 
evident;" Helena, Montana., reported no particular problem; and Providence, 
R. I. indicated that the Better Business Bureau had the situation well 
in hand. 

In 20 of these 21 cases the 1TRA was repoi ted as having served 
to improve the situation. 

Prior to NRA, attempts to co :>e with the practices had been 
made in 15 instances, in 12 of these with some measure of success. 

In only 2 instances had cooperation with the Federal Trade 
Commission been attempted, in ooth cases successfully, 

b. Types of Practices Complained Of 

The question put to the code authorities had enumerated the 
following unfair practies:' inaccurate advertising, deceptive labeling 
or packaging, price misrepresentations, misrepresentations concerning 
competitor or his goods. Eight of the 21 affirmative responses stated 
that "all" of these practices were indulged in in cheir territory. In 
10 other cases false advertising was specified; in 8, price misrepre- 
sentations; in 8, misrepresentation of competitors; and in 2, deceptive 
labeling. False advertising was thus a fa'ctor in 18 of the 21 terri- 
tories., .and misrepresentations of price or competitor in 16 each. IIo 
specific instances of the form in which any of these were encountered 
were given. 

c. Efforts at Control Prior to IIRA. 



The mediums reported employed to check the practices prior 
to IRA wore: Better Business Bureaus (in six instances), trade asso- 
ciations (twice), local Chamber of Commerce, State -advertising laws 
(Minnesota) State and local ordinances (Connecticut). Of the 12 in- 
stances where some success was reported obtained, 4 ',vere only "fair". 



-79- 

The Better Business Bureaus appear as most frequently successful. 
"Friendly cooper- tion" , - Chamber of Commerce, and in one case a 
Better Business Bureau, were credited with total failures. 

d. Effect of NBA Operation. 

Twenty of the 21 local authorities which found misrepresen- 
tation a problem reported that 1IEA helped the situation, but with 
various qualifying expressions - "usually", "largely so", "very help- 
ful", "yes, but not very effective", "moderately", "substantially' 1 ', 
"as much as could have been expected", and so on. 

The one response which flatly denied any benefit from USA 
gave c-.s its reason "lack of enforcement from ITashington." 

Other obstacles encountered include: the difficulty of secur- 
ing of proof, difficulty of drawing a proper line between true and mis- 
representative advertising, opposition of one or two large violators, 
"so many items they coulu keep on misrepresenting - a different article 
each day" (perhaps a commentary on the practice of settling violations 
by signing of "certificates of compliance" )« 

e. Methods of Effecting Compliance. 

Fourteen of the local authorities reported having some estab- 
lished procedure for determining and dealing with violations. Some' of 
the particular devices mentioned follow. Two stated that they used the 
Better Business Bureaus, nine employed shoppers to make purchases, 2 
employed regular investigators, 2 regularly checked on the local retail 
advertising, one made a practice of photographing misrepresentative win- 
dow displays, one employed a detective agency, two relied principally 
on affidavits and other evidence supplied by complainants. 

One statement of method and attitude in the matter of com- 
pliance may be quoted verbatim: 

"By far the great bulk of our work was done informally. 
To handle the great bulk of cases that are involved in 
. trade practice procedure it is impossible, to handle them ' 
in a formal manner; that' is, by following some judicial 
procedure such as the Federal Trade Commission. This 
can be done for the particularly difficult and incorri- 
gible case. We collected evidence through shoppers and 
if we felt the case was sufficiently serious and might 
involve later controversies, we got our information in 
affidavit form." (Indianapolis, Indiana, Code Authority). 

f. Conclusions. 

The following conclusions appear to be indicated by the infor- 
mation summarized above: 



9710 



•■-80- 

1. Misrepresentations of various types were widely prevalent 
in retail trade throughout the country, 

2. Deceptive advertising, and misrepresentations as to price 
and competitors' goods, were the forms most frequently en- 
countered. 

3. No generally adequate method of dealing with the practices 
existed before 1IRA. 

4. 1THA, through the local code authorities, was successful 
in nearly every area queried, in abating in some degree 
the use of such methods. 

5. The local retail code authorities were on the whole active 
and effective in securing compliance with the. misrepresen- 
tation provisions of their code,, generally without recourse 
to HRA. 

6. The complaint of failure of 1IRA enforcement, heard so fre- 
quently elsewhere with relation to this subject, is notice- 
ably absent, with one exception, from these reports. 

2. Retail Drug Trade 

Twenty- two out of a projected 45 reports were received from 
the Local Code Authorities of this industry. The geographical coverage 
was very largely the same as for the Retail Trade inquiry, for the rea- 
son that the work for both these industries (and for the Retail Pood & 
Grocery Trade which is considered below) was in the main done concurrently 
in each area, so that where there is a return for one there is usually, 
though not always, a return for each. 

In the present case St. Louis, Denver, San Francisco, Wilmington, 
Del., Essex County, N. J., and Nashville, Tenn. are added to the list 
shown under Retail Trade above, while Albany, Augusta, Me., Casper, T7yo. , 
Indianapolis, Jackson, Miss., Louisville, Ky. , Manchester, N.H., Memphis, 
Providence, Sante Pe, and Sioux Palls, S.D. do not appear. 

The questions concerning misrepresentation put to the local 
authorities were the same. 

a. Summary of Results 

The general picture presented by these returns is very similar 
to that already outlined for the general Retail Trade. Twenty-one of 
the 22 reporting authorities found misrepresentation a source of trouble 
in their areas. Eight reported ""all" of the types in question as present, 
while 8 others specified false advertising, 9 specified price misrepre- 
sentation, 5 deceptive labeling, 3 defamation of competitor, 1 dece2otive 
packaging, and 1 substitution for standard brands. 



9710 



-81** 



Less effective work appearently had "been done in dealing with 
the subject prior to 1JRA than in the general retail trade, only 8 re- 
turns reporting any prior activity, with results negative in two in- 
stances, "fair" in four, and good in only two. The Better Business 
Bureaus were reported influential in only two instances. Other factors 
given help were the Virginia Trade Law, and the Wisconsin State Depart- 
ment of Markets, The federal Trade Commission had "been invoked in two 
instances, without success in oither. 

In 18 of the 21 reports the effect of IDA was stated to have 
been helpful. In 2 cases it did not help, and in 1 the authority felt 
the record was not sufficient "for an intelligent answer." There are 
the usual qualifications, running the gamut from "excellent results", 
"decided aid", to "fairly well", "not much - no help from Washington". 
This latter note begins to appear more frequently. "The principal dif- 
ficulty of enforcement was the delay in getting any action from IDA in 
Washington and red tape connected with the administration." "It 
appeared in every case we failed because IDA officials seemed to think 
they were all border-line cases, and violators soon found this out." 
Also two more to the same general effect. 

A considerably smaller proportion of the retail drug author- 
ities reported jiny definite form of compliance procedure than for the 
general retail trade. The same general methods are mentioned - check- 
ing of ads, shopping with witnesses, affidavits as to purchases, photo- 
graphs of displays, etc. 

b. Conclusions. 

Again it is to be concluded that misrepresentations were a 
general problem of the trade, and that in the large majority of cases 
NRA was effective to a greater or less degree in restraining the prac- 
tices. 

The retail drug trade aopears to hrve been less generally 
active before IDA than the retail trade in combating the use of misre- 
presentations; and perhaps there was somewhat less effort put forth by 
the local retail drug code authorities during the period of code admin- 
istration. 

There is an increased complaint of the failure of IDA encorce- 

ment to back up the code authority compliance effort, which may or may 
not be indicative also of an increased tendency to lean upon the IDA 
agencies in the handling of the job. 

3. Retail Pood and Grocery Trade. 

Returns from the local authorities. i$ this trade number 25, 
out of a possible 47. The cities represented all fall within the two 
groups already given for the two preceding trades, with the single addi- 
tion of Bismarck, II. I). The identical questions concerning misrepresen- 
tation were employed. 



9710 



-82- 

a. Summary of Results, 

Results '"'ere approximately the same as those already reported 
for the general retail arid drug trades. Twenty-one of the retail food 
and grocery authorities attested the general presence of the misrepre- 
sentation problem, with much the sane proportion of specific types of 
practice noted. The score in favor of NBA was somewhat smaller here, 
17 affirming with varying emphasis that its effect had been good, 4 
stating unequivocally that no "benefits had accrued. 

Complaints of the failure of NRA enforcement continued: "There 
was a complete "breakdown of the trade practice provisions. This was en- 
tirely due to lack of enforcement byllJBAin Washington. ITeither this 
agency nor the State f ice were supported in the prosecution of a single 
ca.se." "Ho action taken "by IfEA, such as prosecutions." "No difficulty 
as long as we had them bluffed. Broke down completely when retailers 
found there were no teeth in the law," 

On the Other side of the picture the following may "be quoted 
from a State Office's contribution to one of the returns: 

"The. .. .Local Retail Pood and Grocery Code Authority, like 
most others with which this office had experience, practically 
ceased to function after organization, with the exception of 
the collection of assessments. 

"There is no evidence that the Code Authority handled any 
Trade Practice complaints after the State HRA Office was set 
up in early 1934, AH such complaints were "brought to the 
State Office by members of the trade or of the Code Author- 
ity. It was impossible to get the Code Authority' to take 
any action on complaints, and the burden of compliance was 
taken up by the State Office. In the one or two instances 
where the State Office insisted the Code Authority handle 
the complaint, nothing was done by the Code Authority." 

There is definitely less material on the organization and pro- 
cedure of the local authorities for obtaining compliance in the returns 
for this trade than in either of the two preceding. 

b. Conclusions. 

The information supplied as to this trade tallies to a very 
high degree with that received from the two preceding or.es. It would 
appear reasonably evident, if no other evidence existed, that in these 
three largest and most important of the retail trade groups, handling 
a great variety of commodities and dealing directly with the vast mass 
of the consuming public misrepresentative practices of various kinds 
are of general prevalence. 

It is also apparent that, while industry efforts to control 
the situation prior to ITtA ^ere only occasionally effective, under the 
codes improvement was very generall"'' achieved. 



9710 



-83- 

That these conditions and results may be taken as probably 
characteristic, not only of thesd three codes but also of the retail 
sector of the distributive system in general, is indicated by further 
comparison with the data concerning two other retail trades - Motor 
Vehicle Retailing and Retail Monument - to be presented below, and also 
by contrast with the information supplied with respect to the eight 
codes other than retail which are included in these local code author- 
ity results. (*) 

4. Crushed Stone, Sand and Gravel Industry (Code No. 109) 

Reports were received of 23 interviews with former members 
of the District or Area Committees (sub-code authorities^ of this 
industry. A total of 106 such interviews were originally projected. 

Twenty- three states also were included in the areas covered 
by the reports. These included Arizona, California, Colorado, Connecti- 
cut, Indiana; Iowa, Kansas, Kentucky, Maine, Massachusetts, Minnesota, 
Montana, New Hampshire, New Mexico, New York, South Dakota., Tennessee, 
Texas, Utah, Vermont, Virginia, Wisconsin and Wyoming. 

In some instances the .reporting committee represented an 
area of several states, and in others only a local region within a 
state. 

a. Da.ta Reported. . , 

To the question whether misrepresentations were a problem in 
the industry in that area 11 of the 23 replies said "no", 8 said "yes", 
and 2 made no definite statement. As to the specific types of misrepre- 
sentation encountered, 1 stated deceptive advertising, 3 price misre- 
presentations, 4 misrepresentation of competitors' goods, and 1 "all". 

Of the 3 replying "yes" to the above, 7 stated that NRA ha.d 
improved the situation, ("to certain degree", "effectively", "very 
helpful", "very salutary effect", "effectively until members learned 
ways to evade it"); 1 denied any benefit - "no enforcement over at- 
tempted". Three others made the familiar complaint that weakness of 
NRA enforcement was the principal obstacle to effective administration. 

One reply reported attempt to work with the Federal Trade 
Commission, without result. Several others reported_ "no" - ("processes 
too slow ana too timid"). Only two committees reported definite proced- 
ure for handling complaints. 

b. Summary. 

In contrast to the retail codes, only a little more than a 
third of the responses showed misrepresentations to be an industry 
problem. Misrepresentative advertising dropped to a secondary place 
among the practices reported, while misrepresentation of prices and 
of competitors' goods assumed first importance. Both of these show- 
ings are what might be expected the type of industry being such as 
would apparently not readily lend itself to ordinary misrepresenta- 
tions, and one in which, as was stated several, times, "little ad- 
vertising is done". 



(*) Comoare table y, 87, below 
9710 



-84- 

The results of HRA were again almost unanimously reported 
beneficial where the unfair practices existed, and again the com- 
plaint of inadequate enforcement was repeatedly raised. ' The general 
tenor of the replies gives the impression that the trade practice 
work of the committees was rather loose-jointed. 

5. Motor Vehicle Retailing- (Code Ho. 46). 

Sixteen of a possible 35 State or Regional Advisory Committees 
provided responses to the queries concerning misrepresentation. The re- 
porting 'Committees were loc-tedm Atlanta, 'Des Moines, Denver, Hartford, 
Los Angeles, Louisville, Minneapolis, Milwaukee, Jackson, Miss., Newark, 
Omaha, Richmond, Seattle, Sioux Palls, Santa Fe, and. Wilmington,. Del. 

a. Data Reported 

Fifteen committees reported misrepresentative practices preva- 
lent - advertising, 9; price, 9; competitors' goods, 4; '"all", 1. 

Twelve stated that HRA had' helped; 3 that it had not.* 

4 A t I 

Five had sought aid from the Federal Trade Commission; 4 with- 
out success. 

As to the degree of effectiveness of HRA: "partially", '"ade- 
quately", "during first 6 months", "somewhat", "effectively", "99$ dur- 
ing first 6 months", "only temporarily"" , were among the qualifying 
phrases. 

Five replies stressed failure of HRA enforcement - ("Code was 
very detrimental to legitimate, conscientious dealers. It placed a prem- 
ium on dishonesty on account of lack of enforcement"). Other difficul- 
ties cited were the looseness and indefiniteness of the dode provisions 
concerning advertising (mentioned twice), and difficulty of securing evi- 
dence of violation. '. ' ', 

A considerable number of the'se Committees appeared t'o have 
well-established procedure for dealing "ith complaints. 

b. Summary 

. In general', the pro3)ortion of IIRA success here appears to be 
somewhat less than with the codes already dealt, and the complaints of 
failure of enforcement somewhat greater. Genuine misrepresentative 
practices appear to have been less of an industry 'oroblem than in the 
other three retail trades, but considerably more so than in the Crushed 
Stone Industry. There is evidence in the replies that' in reporting 
"price misrepresentations" there has been a tendency to interpret the 
term as referring to deception as to -orices actually charged the customer, 
(that is, evasions of the minimum ^rice provisions), rather than to -orice 
deceptions to_ the- customer. In all but two instances, however, where 
price misrepresentations were reported misre-orecentative .advertising 
was also shown to be present. Like most of the local retail code auth- 
orities, these committees seem to have been rather generall]' on the job 
in their compliance effort. 

9710 



II 



-85- 

6. Paper Distributing Trade (Code No, 176). 

Regional Committees or Sub- Commit tees from 12 areas representing all or 
a part of 13 states (*) furnished data for this code. Six answered "yes 
to the question whether misrepresentation constituted an industry prob- 
lem, 5 "no", and 1 failed to deal with the subject. 

Price misrepresentations, deceptive labeling, and misrepresen- 
tation of competitors' goods were "orincipally complained of. ("Another 
trick of the industry was to change and remove labels "out on by the manu- 
facturer when the goods did not meet .the standards of the trade.") False 
advertising seems to have been of relatively little importance. 

In 4 cases the effect of '.HA was reported favorable; in 2 the 
results were negative. In one of the favorable fcur the benefit was 
during "the first three months". Three complaints of laxity of NRA 
support in enforcement are made. The majority of the committees seem 
to have had definite compliance procedure. 

This industry appears in a number of areas to have been suc- 
cessful prior to HRA in handling misrepresentative practices through 
its trade associations and other organized effort. The Pine Paper 
Group (Hew York City) "called upon the Federal Trade Commission and were 
successful to a. large degree in eliminating these conditions in their 
group." ' 

The influence of standardisation is indicated by the follow- 
ing excerpt (Minneapolis Trading Area.) - 

"It was determined (in the pre-NRA period) that 
the main source of the troubles besetting the trade 
arose from the lack of simplification and standardization 
of the kinds of paper handled. Eventually considerable 
standardization resxilted, thus removing many of the past 
difficulties." 

7. Set-Up Paper Box Industry - (Code No. 167) 

Five of ten Divisional Committees of this industry (Minnea- 
polis, St. Louis, Nashville, Dalla.s, and Richmond) were interviewed. 
Four reported various types o" misrepresentation, principally as to 
price. Cne found no problems of the sort. Three stated emphatically 
that the NRA had been of no hel ) ("All coi:roetition continued as if 
there had been no code"). One considered that it had. Efforts of the 
industry to deal with its own rroblems prior to NRA seem to have met 
with about the same degree of non-success. There is indication that 
in several instances the Code Authorities were either ina.ctive or in- 
effectual in their methods, which may be a partial explanation of the 
negative results obtained. 



(*) New York, Montana, Georgia, Maine, Hew Hampshire, Minnesota, 
Missouri, Colorado, Oklahoma, Kansas, Connecticut and Texas. 

9710 



-86- 



8. Retail Monument Industry - (Code Ho. 366) 

Returns from 4 of 8. Regional Committees ('California, Oregon, 
Nebraska, Iowa, Kansas, Missouri', South Dakota) showed nisrepresentative 
practices of various, sorts prevalent in each. All reported s-one de- 
gree of benefit from "RA - "material extent", "very well",, "to some 
degree", "only partially" . All also sounded the note of comalaint 
over handicaps imposed by ineffective enforcement backing.'. Little 
appears to have been accomplished by the industry itself in combating 
the practices prior to the code. 

9. Wholesale Confectionary Industry- (Code Ho. 458) 

Misrepresentative practices were a distrubing influence in 
a distinct minority of the areas reporting for- this trade. Iline of 
the 14 (out of a possible 51) replies indicated no oroblem; 5 answered 
affirmatively. (*) Four of these reported iiRA benefit, but for the 
most part in very mild terms ("to certain extent", "for a little 
while"). Three complaints as to lack of enforcement appear. 



(*) The reporting cities: Hew York,Des Moines, Minneapolis, Denver, 
Louisville, Jackson, Miss., Indianapolis, Hashville, Roanoke, 
Concord, II. II., Oklahoma. City, Dallas, Atlanta, Milwaukee. 



9710 



-87- 



10. Farm Equipment Mfg. Industry - (Code No. 39) 

Only 3 replies, of apossible 13, were received from this indus- 
try, and none indicated' any problem with respect to misrepresentation, 
JTwo stated that what practices cf the sort had existed prior to the code 
lhad been taken care of by cooperative efforts within' the industry 

11. Household Goods Storage & Moving - (Code No. 399) 

Results of 4 interviews out of 12 projected were received from 
this industry. Three reported difficulty with misrepresentations, chief- 
,ly with respect to price and competitors' services, 'Ho results due to 
MA were reported, this being attributed to the fact that the entire 
code quickly failed to function as a result, among other things, of con- 
troversies over relations with the code for the Trucking Industry. One 
reply stated it to be the consensus of opinion that if the code provi- 
sions had been given opportunity to function, they would have served 
effectually 'to check the misrepresentative practices. 

12. Graphic Arts (Commercial Relief Printing) - (Code No. 287) 

Six returns were received for this group. ; Five reported no mis- 
representation problem. The sixth reported misrepresentations as to 
price and competitors' products, which were "reasonably" corrected by the 
code, \ 

13. Wholesale Monumental ;Granite - (Code No, 449) 

Reports were received from two Divisional Control Committees of 
this industry, both of which stated that no problem as to misrepresen- 
tative practices existed. 

14. General ; Summary 

The principal information : set forth in the preceding pages is 
presented below, for comparative purposes, in tabular form: 



9710 



-88- 



Industry 



Tabulation of Lo ca l Code Au thority Re turns 

: No. of:Misrep'n : NRA : 
:Returns:Rept 'd a, : 'Code: 
:Rec'd : Problem :a Ifelo: 



Complaint : Success ' : 


Work 


as to En- : in Prior : 


With 


forcemt. : Regul'n : 


PTC 



* He tail Trade : 24 7 



*Retail Drug *: 32 



21 



21 



20 



18 



12 



♦Retail Pood & 
Grocery i 


25 : 


21 : 


17 • 


3 : 


5 


1 


*Motor Vehicle 
Retail 


16 


15 


12 


5 




5 


* Re tail Monu- 
ment 


4 


4 


4 


4 


1 




#Crushed Stone, 
Sand, etc. 


21 


8 


7 


3 


2 


2 


#Paper Dis- 
, tributing. 


12- 


6 


4 


! 3., 


2 


1 


# Set-up 

Paper Box 


5 


4 


1 


: l 


1 




^Wholesale 

Confectionery 


14 : 


5 


4 


3 




1 


#Parm : 

Equipment : 3 








p 




^Household G-oods 
Moving, etc. 


4 


3 








1 _u 


#Graphic Arts 


6 


1 


1 








#T/holesale Monu 
mt. Granite 


2 


























Total, 13 codes 


158 


109 


88 


: 26 


31 


: 14 


* Total, 5 Re- 
tail codes 


91 


82 s 


71 


16 


24 ' 


: 10 


#Total, 8 

other codes 


67 "' 


27 


17 


: 10 


: 7 


: 4 



An examination of these figures shows that 109 of the total of 
158 responses received, or 69 percent, reported misrepresentations as 
constituting an industry problem. The proportion is not evenly distribut- 
ed through the different types of reporting industries, however. Taking 
the five retail trades as a group, we find that the proportion of affirma- 
tive replies on this point is slightly in excess of 90 percent, whereas 
for the other group comprising the remaining 8 miscellaneous industries 
it is only a little over 40 percent. 

Taking the 109 affirmative replies as a base, the portion of 
this entire number in which it is said that the NRA codes were of assis- 
tance in dealing with the existing misrepresentation problem amounts to 
88, or approminately 81 percent. Again, however, there is considerable 
disparity between the groups, the retail codes showing nearly 87 percent 
reporting MA a help, as against 63 percent of the miscellaneous group 
so finding. 



9710 



-89- ... 

By the side of the 81 percent of cases in which NBA was in some 
degree successful may "be placed the 31 instances, or something over 26 
percent, in which the industries, by their own efforts prior to NBA, had 
I met with some measure of success in handling the problem of these, practices. 

1 • In 14' of the 309 replies answering "yes" to the question whether 
there was misrepresentation, some attempt to work with the Federal Trade 
Commission was reported. In 3 cases this course had been found helpful. 
In 7 instances no benefit was reported. The other 4 reports were to the 
effect that Trade Practice Converence agreements had been' adopted, but 
without further statement as to the results obtained from these. 



In nearly one-fourth of all the instances where misrepresentation 
was reported, failure of the NBA to back up the codes with adequate' en- 
forcement was affirmed as the cause of the ineffectiveness, or failure of 
full effectiveness, of the code provisions in dealing with the situation. 

The conclusions indicated by the summary data are substantially 
those which have been noted in dealing with the individual codes: 

(1) M'isrepresentative practices were industry problems in the 
great majority of all the codes reporting, and were 
prevalent , ' in one or more of 'the industries, in all sections 
of the country. 

(2) Such practices were more generally encountered in the re- 
tail trades than in the industries comprising the miscellane- 
ous group. 

(3) Prior to MA no generally effective method of dealing with 
the practices had been developed by the industries them- 
selves, although some success in this had been achieved by 
the three large retail trades. 

(4) The effect of ERA was helpful in abating the practices in a 
very large majority of the areas reporting, and particularly 
so among the retail trade codes. 

(5) The local code authorities in the retail trade codes appear 
to have been somewhat more active in dealing with the 
practices in question than were those in the miscellaneous 
codes. 

(6) Little effort had been made by the regional trade groups to 
enlist the aid of the Federal Trade Commission in attacking 
their problems of misrepresentation, and the efforts which 
had been made were in half the cases not productive of im- 
portant results. 

(7) State laws, municipal ordinances, trade associations, Better 
Business Bureaus, and technical societies were factors men- 
tioned in one or more instances as having contributed to 
successful efforts to discourage misrepresentations prior 

9710 



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to the codes. 

(8) Lack of adequate enf orceraent , including specifically failure 
to assess penalties against violators, was the principal, 
and in fact the only cause generally alleged as explanation 
for failure of the provisions to operate satisfactorily. 

In the great majority of cases, especially in the retail 

trades, the reporting groups appear to have felt that with 

proper enforcement to "back the efforts of the local code 

authorities the codes would have very largely solved their 

problems with respect to misrepresentations. 

(9) In several instances the general problem of drawing a proper 
line bet-veen truthful and deceptive advertising, and of a 
working definition of misrepresentations of other kinds, 

was touched upon by the code authorities as one of the 
difficulties of administering the provisions; but no con- 
structive suggestions were advanced. 

(10) In one or two instances, also it was reported that aid in 
.dealing with misrepresentations had been derived from the 
adoption of definite commodity standards. 



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-9!- 

E. Analysis of OA Compliance Cases. 

The preceding sections of this chapter have discussed the opera- 
tion of the misrepresentation provisions largely in terms of opinions 
and attitudes, as expressed by the Code Authorities, or otherwise on 
record in the NRA files. This section aims to supplement that evidence 
by such statistical data as is obtainable from the records of ERA compli- 
ance and enforcement. 

1. Tabulations of State Compliance Records. 

As a part of the general compilation of NRA records, tabulations 
have been made by the Statistics Section, Field Division, of the various 
types of trade practice complaints referred to the State Compliance 
Offices for action by Code Authorities or other complainants. Data for 
115 codes (75 basic, 40 supplemental) are available at the time of com- 
pleting this report. 

The figures for these 115 codes give a total of 23,611 trade 
practice cases of all types reported for compliance action to the NRA 
State offices throughout the country. Of this number, 1,619 or 6.8 per- 
cent, are shown to have been misrepresentation cases of some type.(*) 

The forms of misrepresentation specifically reported in the 
Field Division tabulations include different types of advertising mis- 
representations, false labeling, marking and branding, inaccurate under- 
selling claims, misrepresentations of a competitor or his goods, and 
miscellaneous deceptive selling methods. 

The tabulations also break down the cases into four classes, ac- 
cording to general disposition effected: (l) Adjusted (that is, viola- 
tion found and some corrective action taken); (2) No violation found; 
(3) Case dropped (for lack of evidence, withdrawal of complaint, etc.); 
and (4) Case pending on May 27, 1935, w.ien the codes lapsed. 

a. Relative Frequency of Misrepresentation Cases 

To indicate,! irst, the relative freouency with which the various 
type of misrepresentation cases occurred in this group of codes, and, 
second, the comparative disposition of the different classes of case, 
the following summary table has been prepared: 



(*) Summary figures in files of Commodity Information Unit, Trade 
Practice Studies Section, Division of Review; Compliance 

folder. 



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-92- 



Cases Affecting 

False, misleading and 
inaccurate advertising 



Disposition of Cases 
Total Adjusted No Viol'n Dropped Pending 



517 



346 



120 



37 



14 



False and misleading 
labeling, branding, etc. 



131 



71 



44 



10 



Advertising provisions of 

Retail & Retail Food Codes 392 



260 



101 



16 



15 



Inaccurate underselling 
claims 



84 



56 



23 



Other advertising 
re ■-trictions ! 



105 



10 



Misrepresentations of com- 
petitors or their goods 
(defamation) 



225 



49 



101 



7 



Deceptive selling 
methods 



125 



24 



Other 

mi srepresentations 



40 



24 



TCTAL-i ;i 33EP3S33NTATI0NS 



1,619 1,005 



376 



139 



49 



These figures show misrepresentative advertising of some sort to 
have characterized the great majority of all the cases, with defamation 
of competitors second, and deceptive labeling third. 

Of the total 1,619 cases, violation was f-und and adjustment of 
some sort effected in 1,005 instances, or something more than 62 percent 
of the entire number. This was a slightly larger proportion of adjust- 
ments than for the trade practice provisions as a whole, which showed 
12,449 out of 23,611 cases adjusted, a little less than 57 percent. 

As between the different types of violations, adjustments were 
effected in tne following proportions of cases: false advertising in 
general, 67 percent; advertising provisions of the retail codes, 66 per- 
cent; inaccurate underselling claims, 67 percent; other advertising re- 



9710 



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strictions, 88 percent; deceptive selling methods, 70 percent; misbrand- 
ing, 54 percent; defamation of .competitor, 30 percent. 

b. Distribution in Retail and Won- Retail Codes 

The most conspicuous point tc be observed concerning the rela- 
tive distribution of the misrepresentation cases as between types of 
codes is their very great concentration in the retail trade group. Nine 
retail trade codes are found to account for 1,298 of the 1,619 misrepre- 
sentation cases shown for the entire 115 cedes, a proportion of 80.2 
percent. Three codes - Retail Trade, Retail Food and Grocery, and Re- 
tail Jewelry contributed 891 of these cases. 

The distribution of the misrepresentation cases among this 
group by code and by type of Violation, is shown in the table following: 



Code 



T ype of Provision Affected (*) 



A 3 



D 



Misrep'n Tr.Prac. 
C- Total i of All Cases 



47 11 79 



Retail Trade 180 1 235 34 

Retail Food & Groc 62 2 107 24 

Retail Jewelry 49 [ - 

Retail Solid Fuel 33 

Motor Tehicle Retail 56 - 

Retail Tire & Bat. 9 - 

Retail Monument 19 1 

Retail Tobacco 12 - 

Retail Lumber 5 1 



43 10 

95 4 

4 1 

8 66 



505 
295 
191 
107 



28.9 

11.3 

64.5 

6.3 



- 


- 


3 - 


17 


76 


17.1 


6 


20 


26 


5 


66 


8.5 


2 


1 


3 


12 


38 


4.8 


- 


- 


- 


1 


13 


3.5 


- 


- 


- 


2 


8 


1.6 



TOTAL - 9 RETAIL 425 389 77 103 182 1,299 14.1 

The general distribution among the remaining 106 codes is as 



follows; 



No misrepresentation cases 46 codes 

1 to 5 such cases 42 codes 

5 to 10 cases 11 codes 

More than 10 cases 7 codes 

Average number per code 3.0 cases 



(*) A- False and misleading advertising 
B- False labeling, marking, branding 
C- Advertising provisions of Retail Trade, Retail Food and 

Grocery and Retail Jewelry codes. 
D- Inaccurate underselling claims. 
E- Other advertising restrictions 

F- Misrepresentations of competitors or their goods (defamation) 
G- Other deceptive soiling methods. 



9710 



-94- 

Among the group of codes shown to have referred either none, or 
not more than five misrepresentation cases, are: Sill: Textile, Undergar- 
ment and Negligee, Toy and Plaything, Business Furniture, Bottled Soft 
Drink, Can Manufacturing, Candy Manufacturing, Electrical Manufacturing, 
Rubber Manufacturing, Fire Extingui slier, Cotton Garment, Luggage and 
Leather Goods, Funeral Supply, Canvas Goods, Lumber and Timber, Mayonnaise, 
Men's Clothing, Dental Laboratory, Paper and Pulp, and nearly all 
supplements of the Wholesale Trade Code. 

The seven codes with 10 or mere reported cases each are: Bedding, 
Macaroni, Cleaning and Dyeing, Scientific Apparatus, Wholesale Confection- 
ery, Plumbing .Fixtures, and the basic Wholesale Trade Code. 

c . Summary 

The two points indicated above, the particular activity with 
respect to misrepresentative practices in the retail codes, and the lack 
of record of suca activity in a large proportion of the remaining codes, 
bear out evidence to a similar effect which has been presented in earlier 
sections of this chapter. 

Suggestion has also been made of the possible reasons for the 
relative scarcity of record, as contrasted with the preponderant number 
of codes which contain misrepresentation provisions, i.e. that the pro- 
visions in many cases were merely formally included, without real indus- 
try interest in the subject; and/or, tnat in others an interest existed, 
but the subject was dealt with without recourse to 17RA aid to effect 
compliance. 

In many instances no doubt the provisions were included principal- 
ly at the suggestion of the Deputies, or because it was being generally 
done. In various industries, too, misrepresentations such as this report 
is concerned with do act, in fact, constitute appreciable problems. 
Data from the Federal Trade Commission records shown above (*) indicate 
a rather restricted group of industries, chiefly concerned with consumer 
goods, with respect to which the Commission has found occasion to take 
action in restraint of misrepresentative practices. 

Again, what the code-sponsoring industries were primarily inter- 
ested in were practices which were competitively troublesome; they 
would hardly be apt to concern themselves greatly about methods which, 
while perhaps vexatious to the buying public, did not create difficulties 
for the industries themselves. It is notable that in the retail trades, 
where the record of referred cases is largest, the types of misrepre- 
sentative practices employed were particularly obnoxious competitively. 

As to the handling of misrepresentations without reference to NRA, 
the discussions of tne Coffee and Dog Food codes previously presented, 
and various returns from the Code Authority questionnaires, indicate that 
in a number of cases the Code Authorities did actively attempt to admin- 



(*) Chapter III, Section III, p. 30, above. 
9710 



.-95- 

ister the misrepresentation previsions without calling upon NRA, either 
because they found themselves able to obtain satisfactory compliance by 
their own efforts, or because they felt that no effective help was to be 
had . 

Informal representations received from one or two Quarters, also, 
indicate that in some cases the Code Authorities were inclined simply to 
file away the records of complaints of misrepresentation violations in 
their archives, rather than to take any action tending to draw attention 
to the presence of such practices in their industries. 

Finally there must be borne in mind the fact that, with a very 
considerable number of the codes, no Code Authority organization was 
ever effected for dealing with code violations of any sort. 



9710 



-ye- 

2- Farther Analysis of Tyue anc : Disposition of Compliance Cases, 



The tabular material given above indicates only the 2" enera l type - 
not the specific form - of the misrepresentation violations reported; 
and in the cases where violations '/ere found, the "adjusted" column 
gives no indication of the irecise form which the adjustment took. These 
further details are not obtainadld at the present time from the Field 
Division's compilations. To supply them in some degree, a sample of 
cases obtained from the Washii. ton Cn^pliance Division files has been 
analyzed. 

The material . iven below illustrates in a number of instances the 
specific deceptive practices which '.'.'ere coi.i '■lainec' of in the different 
industries representee, and shows the nature of the disposition made of 
the case where violation was found. 

Code Violation Char ed Disposition 

Retail Trade Misleading combination sale Case closed by Certif- 

prices. icate of Compliance. 

11 " false claim that pods were Oral Agreement with State 
union made and labeled. Office tc comply. 

"■ " Advertising "no interest do violation found. 
added" in tim u ■.- lent sales. 

" " Misleading statement re Certificate of Connli- 
repossessed ool.c . ance . 

" " Advertising current ,po o( 3- s Certf . of Comp. 
at cue rates and sellin dis- 
continued items. 

" " Misleading advertising, "buy Respondent removed ads 
direct from mill" . and case closed. 



False advertising of goods. Certf. of Compl . 

False "clearance sale." 31ue Eagle removed. 

Violation of advertising After F.T.C. report, 

provisions. Certf. of Compliance. 

G-oods not as advertised. Certf. of Compl. 

Goods not as advertised. ho violation found. 

Advertised "forced sue" Consent decree obtained 

but bought pods to include and -penalties assessed. 
in sale. 

Two-price policy. Case rejected - no vio- 
lation found. 



9710 



-97- 



Code 



Retail Trade 



Violation C^ar.ed 
Inaccurate advertising 



Disposition 

Case closed when both 
Parties stopped ads. 



ii n 



ii n 



ii ii 



Falsely advertised merchan- 
dise as unclaimed freight. 

Falsely advertised stock as 
part of "bankrupt stock " 

Advertising "irre -alar 1 .' 
Ho s i o ry as "p e rf set. " 



jondent desisted; 
case closed. 

Case dropped. Respond- 
ent too small. 

After I'.T.C - report, 
Certf. of compi'. ; also 

another later. 



ii ti 



ii it 



ii it 



I ne c cur at e ly adv e r t i s e d 

wal 1 ; ap e r . 

Misrepresentation of costs 
and sale "orices. 

Inaccurate advertising • 



Certf. of Compl, 



Case .lending May 27, 
1935. 

Case pending May 27, 



n it 



Advertised "Forced to 
Vacate" and then later 
renev/ed lease . 

Inaccurate advertisin_ , 



Blue Eagle removed. 



Referred to F.T.C. who 
secured Certf. of Compl 



ii ii 



it ii 



ii it 



Retail Dm: 



n ii 



Misleading advertising re 
trade-in-allowance on furni- 
ture . 



Falsely advertised savin s 
to buyers of --O.j-SOjJ. 

Misleading statements by 

force. . 

Slogan "We will not be 
under-sold" mi sleading 
and inaccur, ,te . 

Inaccurate advertising and 
underselling claims. 



Blue Eagle removed for 
refusal to sign Certf. 
of Compl . and case 
pending. 

Case pending May 27, 
1955. 

F.T.C investigated and 

secured Certf. of Compl, 

Certificate of Com- 
pliance . 



Case dropped, because 
poorl5 r prepared and un- 
important . 



Motor Vehicle 
Retail 



Inaccurate advertising. 



Closed by Certf. of 
Compliance. 



Ho. 9710 



-98- 



Code 

Motor Vehicle 
Retail 

Motor Vehicle 
Retail 



Violation Charged 



Disconnect in-' speedometer . 



Misrepresented condition of 
truck. 



Disposition 



Closed by Certf . of Compl, 



Case adjusted. No Certf. 
of Compliance. 



Motor Vehicle 
Retail 



Disconnectin, ; speedometers. 



Obtained consent decree and 
case closed. 



Motor Vehicle 
Retail 



Disconnecting speedometer, 
etc . 



Insufficient evidence; 
case droij ied. 



Motor Vehicle 
Retail 

Motor Vehicle 
Retail 



Disconnect in"- speedometer 



Inaccurate advertising and 
failing, to connect speedo- 
me t e r . 



Lack of evidence; case 
dropped . 

l T o violation. 



Motor Vehicle 
Retail 



Incorrect and misleading prices 
in newspaper advert i sin'.. 



Certificate of Compliance. 



Retail Food and 
Grocery 

Retail Pood and 
Grocery 

Canvas Goods 
Industry 

Lumber & Timber 
Products 



Selling merchandise inferior 
to that advertised. 

Misleading advertising of 
egg grades. 

Misrepresentation of pro- 
due t s by s al e smen . 

Billing No . 2 Common Fir as 

No . 1 . 



Certificate of Com- 
pliance . 

Certificate of Com- 
; iliance. 

Certificate of Com- 
pliance . 

Case dropped. Respondent 
was wholesaler and not in 
code . 



Package Medicine Inaccurate advertising. 



Retail Jewelry 



B edding I ndus try 



Inaccurate advertising; re- 
pair work at uniform ;rice. 

False labels, "new Material" 
tag when it was used material, 



Not subject to Code. 
Case dropped. 

Blue Eagle removed and 
case sending May 27, 1935. 

Case .'ending on May 27, 
1935. 



Chain Mfg. 
Industry 



Mi si eading Advert i s ing . 



Blue Eagle removed. 
Case referred to Liti- 
gation and returned; in- 
sufficient evidence. 



Photographic & 

Photo Finishing 



Advertised "new and better" 
method of photography, which 
Association claimed false. 



No violation. 



9710 



-99- 



Coc'.e Violation CI ar e d Pis .'0 sit ion 

Retail Solid Fuel iviisre iresentation and usin ; Po violation. 

f f al cc measures . 

Coffee Industry Inaccurately advertising Certificate of 

"dated" coffee as not over Comoliance. 
10 days old. 
11 " Misrepresentation as to in- To r.T.C. Dismissed 
.predients other than coffee. for lac 1 -; of Jurisdic- 

tion (Not interstate 
commerce .) 

" " Misrepresentation as to in :re-_ ■ Certificate of Com- 
dients other than coffee. ^liance. 



dialysis of the manner in which the above cases were disposed of 
shows that in 19 instances they were closed uion respondent's signing of 
a Certificate of Compliance, and in 6 other cases by oral or other informal 
agreement to comply. In 5 cases the Blue Ba;le was removed, the action 

in 3 instances being appealed. In two cases consent decrees were 
obtained, ani. one of these a Denaltv was assessed. 

"po violation" was found in 6 of the cases, and 6 others were 
dropped, 4 for lack of evidence or faulty Presentation of the case, and 2 
because respondent was found not subject to the code in question. Six 
cases were still pendin at the time the codes lapsed. 

'Without knowledge of the merits of these particular cases it is 
not possible to pass upon this record as a commentary on 1I2A conuli^nce 
work. The freqnent Code Authority complaint of lack of support, however, 
insofar as it included the specific allegation of habitual use of the 
Certificate of Compliance, ;.oes seem to receive some sup art. Prom the 
available data it ap ieo.rs arobable that 31 of the cited cases involved a 
real violation. In 2-~> oi these a Certificate of Compliance or other agree- 
ment to desist was accepted as satisi'yin the charge, pive Blue Za.,les 
were removeu, at least temporarily, and one actual penalty was assessed. 



The above section rounds oat the Picture of the operation of the 
ITRA with respect to the misrepresentation provisions of the codes as the 
available records reveal it. 

In the f ollouin , chapter an oxitline of some other forms of control and 
influences which operate to discourage misrearesentative practices in 
Particular fields will be . iven. 



9710 



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TTie general findings and conclusions of the entire LIISIGPSZSZLTTATIOIT 
AiJD DECEPxIOlT portion of the study have already "been su uuarized at the 
head of the report. 



9710 



-101- 
CHAPTZT. FIV3 



0T' 3,3 ;.;iSHEPilES iJi: r i?ATIOi: ooi?trol 



I. F3DFFAL LFC-ISLATIOiJ 

The tvo preceding chapters have dealt r ith the principal methods - 
the Federal Trade Conmiission machinery and the 1TBA codes - which have 
teen employed to exercise statutory control over, among other things, 
misrepresentative and deceptive practices in advertising and selling, 
on a national scale. Both of these attempts have viewed the practices 
primarily in terms of unfair methods of competition, and have aimed at 
their restraint chiefly in the interest of the members of the partic- 
ular tra.de or industry involved. Other Federal legislation exists in 
"•hich control of unfair and deceptive practices in a particular field 
is the aim, and where the effort to this end is predicated largely 
uoon other public concerns. 

A. The Food and Drug Admiiiistr ati ox . 

The Federal Food and Drag Act, adooted in 1906', seeks primarily to 
project the consuming public from abuses in the preparation and marketing 
in interstate commerce of these necessaries of life and health. The 
Act confers upon the Secretary of Agriculture, through the Food and Drug 
Administration, wide powers to prevent adulteration of foods and medicin- 
al preparations, and misrepresentation concerning them in the form of 
labeling and branding. 

The Act forbids the movement in interstate commerce of "any article 
of food or drug which is adulterated or misbranded within the meaning 
of this Act". (*) Section 3 empowers the Secretary of Agriculture to 
"make uniform rules and regulations for carrying out the provisions 
of this act." The Act specifically provides that any drug or article 
of food is to be deemed misbranded "the package or label of --hich shall 
bear any statement, design, or device regarding such article, or the 
ingredients or substances contained therein which shall be false or 
misleading in any particular; "also "any food or drug product which is 
falsely branded as to the State, Terrotory or country in which it is 
manufactured or produced." (**) Various other specifications concern- 
ing both adulteration and misbranding are written into the Act, and 
numerous regulations having the force of lav/ have been promulgated by 
the Food and Drug Administration. 

The Act provides for enforcement of its provisions directly through 
the courts, both ^oy criminal prosecution, v, ith fines and imprisonment, 
and civil action with penalty of seizure and condemnation of the adul- 

(*) The Food and Drugs Act, June 30, 1006, as Amended August 23, 1912, 
Mar. 3, 1913, March 4, 1913, July -A,,- 1919, January IS, 1927, 
and July 3, 1930. 

(**) Ibid. Sec. 3 

9710 



-102- 

terated or misbranded goods. A field staff of about 150 is employed 
by the Administration in inspection and the collection of evidence 
with respect to compliance with the requirements of the Act. 

There is general agreement that the Food and Drug Act has worked 
decided improvement in the character of interstate traffic in food, and 
that it has ;one far to eliminate frlse and deceptive narking and 
branding. The authority of the Act does not, however, e::tend to adver- 
tising, and one result of this has been to cause a shifting over of 
misrepresentations from the medium of branding to that of advertising. 
The Food and Drug Administration has a collection of comparative exhibits 
illustrating,. .product by product, the way in which subject matter 
barred from the labels has concentrated in the advertisements. Modifi- 
cations of the Food and Drug Act now pending in Congress provide specifi- 
cally for extension of the Administration's control to mis representa- 
tive advertising of foods and drugs. (*) 

3. Other Regulatory Statute s. 

The Federal Alcohol Administration Act of August 29, 1935, in 
Sec. 5 entitled "Unfair Competition and Unlawful Practices", makes 
illegal the labeling or advertising o^ the 5roducts concerned except 
in accordance v/ith regulations to be prescribed by the Administrator 
such as will, among other things, (1) "prevent the deception of the 
consumer with respect to" and (2) "provide the consumer with adeauate 
information as to"the products so labeled and. advertised. (**) 

The Securities Exchange Act of 1934 provided: 

" Regulation of th e Us% of hani mlative or Deceptive Devices". 

Sec. 10 "It shall be unlawful for any person, directly or indi- 
rectly, by the use of any nierm:- or instrumentality of interstate 
commerce or of the malls, or of any facility of any national 
securities exchange - 

(b) "To use or employ in connection with the purchase or sale 
of any security . . my manipulative or deceptive contrivance in 
contravention of such rules and regulations as the Commission may 
prescribe. . in the public interest or for the protection of in- 
vestors." (***) 

Both Acts provide substantial fines as penalty for violation of 
their terms. 

The Postal Lai s empower the postmaster General to withhold use of 
the mails and forbid payment of money orders - 

(*) S. 5. 74 Cong. 1st. Ses. (Copeland Fill) "To prevent adulteration, 
misbranding, and false advertising of food, drugs, devices and 
cosmetics." etc. Also S. 580 fox* the same purpose. 

(**) Public - N . 401 - 74th Congress, Sec. 5. e.f. 

(***) Public - No. 391 - 73d Congress (H.H. 9323) Section 10. 

9710 



-103- 



"... upon evidence satisfactory to him that any -person or company 
is engaged in conducting a lottery'. ..or is conducting any other 
scheme or device for obtaining money or property of any kind 
through the mails by means of false or fraudulent pretences. . "(*) 

These penalties may he applied by Fraud Orders, without court 
action, although relief may he sought by appeal. Criminal action is also 
possible, this section of the Act employing the language "writing, 
circular, pamphlet or advertisement." Technically, prosecution might 
be brought solely on the fact of transmission of false or fraudulent 
advertising through the mails; but as a. practical matter it is generally 
found necessary to show direct harm, either physical or Pecuniary, to 
the complainant, courts and juries being hesitant aJbout imposing 
criminal penalties for the pr; ctices in themselves. 

It will be noted with respect to each of the first three statutes 
mentioned above - the Pood and Drug Act, the Federal Alcohol Control 
Act, and the Securities Exchange Act - that general prohibitions u^on 
misrepresentation in marking, branding, labeling and/or advertising 
are further implemented by enabling clauses permitting, or renuiring, 
the administrative agencies to adopt regulations for their enforcement - 
that is, in effect, to define the sco^e of the control set uo by the 
statute. It is the general type of method which, in the opinion of 
many, was originally intended by Congress to be the procedure of the 
Federal Trade Commission - "unfair methods of competition" declared 
unlawful, with v.ide discretion left the Couimission to decide as to the 
applicability of the phrase to specific practices. 

In practice, as has been shown in the discussion of the Commission 
above, the right to prescribe as to the definition and interpretation 
of unfair methods of competition has been exercised by the courts. 
Some modification of the Federal Trade Commission Act to empower the 
Commission to set up affirmative standards for determining unfair 
competition, as the Food, and Drug Administration is empowered to set 
uo affirmative standards for determininp as to adulterations and mis- 
brandings, would appear to be one possible solution of the auestion of 
increasing the Commission 1 s effectiveness in its field. 

II. STATE STATUTES 

State legislation affecting misrepresentation ha.s dealt with the 
subject almost entirely in terms of police and general welfare powers. 
All but si:: of the States (Arkansas, Georgia, Maine, Mississippi, Hew 
Mexico and Wyoming) have some form of law prohibiting false advertising 
and making violation a misdemeanour. (**) The following statute from 
the Alabama, code is r-uoted as typical of the Sta.te laws on the subject: 

(*) Paragraphs 259, and 732, of Title 39 of the Revised Code, 69th 

Congress. 
(**) Final Feport on Chain Store Investigation, F.T.C. Senate 

Document ilo. 4, 74th Cong. 1C35. :>. 105. 

9710 



-104- 

Untrue advertising is prohibited. If any person, firm corporation, 
or association, or agent or employee thereof, with intent to sell 
or any way dispose of merchandise, real estate, securities, service, 
or anything offered oy such person, firm, corporation, or association, 
or arent or employee thereof, directly or indirectly, offers to the 
public for sale or distribution, or with intent to increase the 
consumption thereof, or to induce the mblic in any manner to enter 
into any obligation relating thereto, or to acnuire title thereto or 
an interest therein, knowingly makes, publishes, disseminates, 
circulates or xla'ces before the public or causes directly or in- 
directly to be made, published, disseminated, circulated or placed 
before the mblic in this 3tat°, in a newspaper, magazine or other 
publication, or in the form of a booh, notice circular, pamphlet, 
handbill, letter, poster, bill sign, placard, card, label or tag, 
or in any other way an advertisement, announcement or statement of 
any sort regarding merchandise, securities, service or anything 
so offered to the public which contains any assertion, representa- 
tion or statement that is untrue, deceptive or misleading; such 
person firm, corporation or association or the members of such firm, 
also the agent and employee shall be guilty of a misdemeanor, 
punishable by a fine or not less than $25 nor more than $i,000, or 
by imprisonment for more than on* 3 year, or by both such fine and 
imprisonment. (*) 

Some of the States, namely, Maryland, Massachusetts, N rth Carolina, 
Pennsylvania, South Carolina, Texas, and '.Vest Virginia provide that, to 
constitute a violation, the advertiser must be aware of the untrue and 
misleading nature of the stad^mmnt, or, that it should be possible, by 
the exercise of reasonable care, for him to have informed himself. (**) 

As to misrepresentations through false labels, marking, or branding, 
a number of the states have Food and Drug laws patterned upon the 
Federal lav; and in addition there are a wide variety of statutes 
designed to rrevent deception in the labeling of other products, such 
as feedstuff s, fertilizer, paints, oils, and turpentine, etc. A compil- 
ation of these would fill a large volume. finally there arc the la 
and local ordinances dealing with false weights and measures and other 
immediate frauds uoon the consumer. 

Prior to IDA there was little if anything in the state statutes * 
dealing with misrepresenta.tion as an aspect of unfair competition. The 
com. ion law was, and is still, the means of relief in intrastate cases 
of this sort. Fifteen states did pass some sort of ir.A statute, either 
based upon the national Act or )a.relleling it in some degree. These 
state Acts were generally limited by their o- n terns to two years, or 
were to run concurrently with the ori ;inal ITI3A, and ar a understood in 
practically all cases to be now expired. (***) 

(*) Alabama Code, sec. 4133. 

(**) Senate Doc. 4, noted above, p. 106. 

(***) The states: California, Colorado, Illinois, Kansas, Kentucky 

(prison industries only), Massachusetts, Mississippi, Missouri, 
Montana, Hew Jersey,, hew Mexico, IV: York, Ohio, Oregon, 
Pennsylvania (Government purchases only), South Carolina, Texas, 
Utah, Virginia, Washing'tqa, "Test Virginia, 'Wisconsin, Wyoming, 
(Data orally from 3. DublicM, Legal research S e ction, Legal 
Division, JI?JL. ) 



-105- 

III. P3IVAT3 AG3NCI3S 

A. Trade Assoc iatio ns . 

A grea.t deal of valuable work in helping to restrain misre"oresenta- 
tive practices in marking, branding, advertising and selling has been 
done by the various trade associations of the country. Both by cooper- 
ation with the Federal Trade Commission am through educational -caimaigns 
carried on among their membership they have contributed to the develop-., 
ment of a higher concept of commercial ethics. 

A number of associations work closely -nth the Commission in check- 
ing uo on violation of fair practice standards and either themselves 
filing applications for complaint or furnishing the data'upon which a 
complaint may be based. Still more definite work is done by groups 
like the National Varnish Manufacturers Association and Paint Manu- 
facturers Association, and the Macaroni Industry, which maintain 
testing laboratories to detect standards violations or discrepancies 
between product and labeling, and report offenders to the Federal Trade 
Commission or the Food ant'- Drue Administration. In some instances they 
go a stea further and collaborate in the development of product 
standards for their industries which will aid enforcement agencies in 
establishing the fact of misrepresentation in cases where definite 
criteria are required. 

Other industries, recognizing the necessity for at least some 
uniform definitions of products and trade terms to arevent deceptions 
due to either confusion or deliberate fraud, have worked out and applied 
this type of standard with a considerable degree of success. Notable 
instances of this are the trade "dictionary" developed by the Tanners 
Council and the standard definitions agreed upon by various fur trade 
grouos. In a. number of cases work of this sort has been incorporated 
in the Group II rules of Trade Practice Conference codes adopted by the 
industries in conjunction with the Federal Trade Commission. 

Approximately 150 industries formulated codes of this type a.rior 
to NRA, almost all of which contained provisions of some sort aimed at 
misrepresentative and deceptive practices. Nov;, with the passing of 
NRA, the way appears to be open for a resumption of that work. If means 
could be found to u ive to the Federal Trade Commission statutory 
authority to approve such agreements, with ower to enforce the rules 
approved, including those of the Group II type, much that was beneficial 
in the trade practice work of NRA might be preserved. 

3. Better Business Bureaus . 

Active cooperation in the work of defining trade terms and develop- 
ing standards of nomenclature, referred to above, has been given by the 
Better Business Bureaus, which have also been important agencies for the 
general policing of advertising in both the national and local fields. 
Founded in 1911, the National Better Business Bureau has been consist- 
ently devoted to a "Truth in Advertising" program, as veil as the elimin- 
ation of other misrepresentations and frauds. There a.re now more than 50 
local bureaus in principal cities through the country. 

9710 



-106- 
Th e Bu.rer3.us receive consumer complaints; maintain shopping services; 
obtain the cooperation of newspapers and radio in suspending advertisers 
who are shown to misrepresent; and work with Federal, State and local 
authorities in "bringing to prosecution violators of the respective laws 
relating to fraud and deceit. Through arrangement with the Periodical 
Publishers Association, the National Bureau helps police the magazine 
industry, doubtful advertisements "being referred to it for check. 
The Bureaus are also important agencies for developing positive 
standards of ethics and criteria of accuracy in advertising, which 
to the extent of their acceptance by the local "business community 
become in effect unofficial extensions of the law governing misrepre- 
sentation. 

During the NBA code period the Better Business Bureaus cooper- 
ated actively with the Code Authorities, especially in the retail 
trade codes. As a sidelight on the influence of IJBA upon advertising, 
one of the Bureaus states: 

"As an aid to persuasion the fact that advertisements 
might be violating an IJBA code has brought many an advertiser 
in. line with Bureau recommendations and oolicy." (*) 

The work of this tyoe of organization, as well as retail and 
wholesale trade associations and others active in the local field, 
is of particular importance because of its effect uoon false and 
unfair practices in intrastate trade, which neither the Federal 
Trade Commission nor, under the doctrine of the Schechter decision, 
any nationally sponsored form of regulation is able to reach. That 
their efforts or those of any now available agencies are sufficient 
to cope satisfactorily with the situation, however, the immense 
amount of compliance work carried on by the local code authorities 
of the various 1TRA retail trade codes in administering their fair 
practice provisions would incline one to c n oubt. 



(*) Annual Be^ort, Better Business Bureau, 'Washington, D. C. , 1934-35, 



page 



mi n .M. 



OFFICE OF THE NATIONAL RECOVERY ADMINISTRATION 
THE DIVISION OF REVIEW 

THE WORK OF THE DIVISION OF REVIEW 

Executive Order No. 7075, dated June 15, 1S35, established the Division of Review of the 
National Recovery Administration. The pertinent part of the Executive Order reads thus: 

The Division of Review shall assemble, analyze, and report upon the statistical 
information and records of experience of the operations of the various trades and 
industries heretofore subject to codes of fair competition, shall study the ef- 
fects of such codes upon trade, industrial and labor conditions in general, and 
ot.ier related matters, sha'l make available for the protection and promotion of 
the public interest an adequate review of the effects of the Administration of 
Title I of the National Inc. istrial Recovery Act, and ti.j principles and policies 
put into effect thereunder, and shall otherwise aid the "resident in carrying out 
nis functions under the said Title. 

The study sections set up in the Division of Review covered these areas: industry 
studies, foreign trade studies, labor studies, trade practice studies, statistical studies, 
legal studies, administration studies, miscellaneous studies, and the writing of cede his- 
tories. The materials which were produced by these sections are indicated below. 

Except for the Code Histories, all items mentioned below are scheduled to be in mimeo- 
graphed form by April 1, 1936. 

THE CODE HISTORIES 

The Code Histories are documented accounts of the formation and administration of the 
codes. They contain the definition of the industry and the principal products thereof: the 
classes of members in the industry; the history of cede formation including an account of the 
sp )ns ring organizations, the conferences, negotiations and hearings which were neld, and 
the activities in connection with obtaining approval of th9 code; the history of the ad- 
ministration of the code, covering the organizati-a and operation of the code authority, 
the difficulties encountered in administration, the extent of compliance or non-compliance, 
and the general success or lack of success of the code; and an analysis of the operation of 
code previsions dealing with wages, hours, trade practices, and other provisions. These 
and other matters are canvassed not only in terms of the materials to be found in the files, 
but also in terms of the experiences of the deputies and others concerned with code formation 
and administration. 

The Code Histories, (including histories of certain NRA units or agencies) are not 
mimeographed. They are to be turned over to the Department of Commerce in typewritten form. 
All told, approximately eight hundred and fifty (850) histories will be completed. This 
number includes all of the approved codes and some of the unapproved codes. (In Work Mate- 
rials No_ 18, Co ntents of Code Histories, will be found the outline which governed the 
preparation of Code Histories.) 

(In the case of all approved codes and also in the case of some codes not carried to 
final approval, there are in NRA files further materials on industries. Particularly worthy 
of mention are the Volumes I, II and III which c nstitute the material officially submitted 
to the President in support of the recommendation for approval of each code. These volumes 
9675—1 . 



set forth the origination of the code, the sponsoring group, the evidence advanced to sup- 
port the proposal, the report of the Division of Research and Planning on the industry, the 
recommendations of the various Advisory Boards, certain types of official correspondence, 
the transcript of the formal hearing, and other pertinent matter. There is also much offi- 
cial information relating to amendments, interpretations, exemptions, and other rulings. The 
materials mentioned in this paragraph were of course not a part of the work of the Division 
of Review. ) 

THE PORK MATERIALS SERIES 

In the work of the Division of Review a considerable number of studies and compilations 
of data (other than those noted below in the Evidence Studies Series and the Statistical 
Materials Series) have been made. These are listed below, grouped according to the char- 
acter of the material. (In Work Materials No 17, Tentative O utl ines an d Summaries of 
S tudies in Process , these materials are fully described). 

Indus t ry S tudies 

Automobile Industry, An Economic Survey of 

Bituminous Coal Industry under Free Competition and Code Regulation, Economic Survey of 

Construction Industry and NRA Construction Codes, the 

Electrical Manufacturing Industry, The 

Fertilizer Industry, The 

Fishery Industry and the Fishery Codes 

Fishermen and Fishing Craft, Earnings of 

Foreign Trade under the National Industrial Recovery Act 

Part A - Competitive Position of the United States in International Trade 1927-29 through 
1934. 

Part B - Section 3 (e) of NIRA and it3 administration. 

Part C - Imports and Importing under NRA Codes. 

Part D - Exports and Exporting under NRA Code3. 
Forest Products Industries. Foreign Trade Study of the 
Iron and Steel Industry, The 
Knitting Industries, The 
Leather and Shoe Industries, The 

Lumber and Timber Products Industry, Economic Problems of the 
Men's Clothing Industry, The 
Millinery Industry, The 
Motion Picture Industry, The 

Migration of Industry, The: The Shift of Twenty-Five Needle Trades From New York State, 
1926 to 1934 

National Income, A study of. 
Paper Industry, The 

Production, Prices, Employment and Payrolls in Industry, Agriculture and Railway Trans- 
portation, January 1923, to date 
Retail Trades Study, The 
Rubber Industry Study, The 
Statistical Background of NRA 

Textile Industry in the United Kingdom, France, Germany, Italy, and Japan 
Textile Yarns and Fabrics 
Tobacco Industry, The 
Wholesale Trades Study, The 
9675. 



- iii - 

Women's Apparel Industry, Some Aspects of the 

Trade P ractic e Stu dies 

Commodities, Information Concerning: A Study of NRA and Related Experiences in Control 
Distribution, Manufacturers' Control of: A Study of Trade Practice Provisions in Selected 

NRA Codes 
Design Piracy: The Problem and Its Treatment Under NRA Codes 
Electrical Mfg. Industry: Price Filing Study 
Fertilizer Industry: Price Filing Study 

Geographical Price Relations Under Codes of Fair Competition, Control of 
Minimum Price Regulation Under Codes of Fair Competition 
Multiple Basing Point System in the Lime Industry: Operation of the 
Price Control in the Coffee Industry 
Price Filing Under NRA Codsa 

Production Control Under NRA Codes, Some Aspects of. 
Resale Price Maintenance Legislation in the United States 

Retail Price Cutting, Restriction of, with special Emphasis on The Drug Industry. 
Trade Practice Rules of The Federal Trade Commission (1914-1936): A classification for 

comparison with Trade Practice Provisions of NRA Codes. 

L abo r Studies 

Employment, Payrolls, Hours, and Wages in 115 Selected Code Industries 1933-1935 

Hours and Wages in American Industry 

Labor Program Under the National Industrial Recovery Act, The 

Part A. Introduction 

Part B. Control of Hours and Reemployment 

Part C. Control of Wages 

Part D. Control of Other Conditions of Employment 

Part E. Section 7(a) of the Recovery Act 
PRA Census of Employment, June, October, 1933 
Puerto Rico Needlework, Homeworkers Survey 

Adm i nistrativ e Studies 

Administrative and Legal Aspects of Stays, Exemptions and Exceptions, Code Amendments, Con- 
ditional Orders of Approval 

Administrative Interpretations of NRA Codes 

Administrative Law and Procedure under the NIRA 

Agreements Under Sections 4(a) and 7(b) of the NIRA 

Approved Codes in Industry Groups, Classification of 

Basic Code, the — (Administrative Order X-61) 

Code Authorities and Their Part in the Administration of the NIRA 
Part A. Introduction 

Part B. Nature, Composition and Organization of Code Authorities 
Part C. Activities of the Code Authorities 
Part D. Code Authority Finances 
Part C. Summary and Evaluation 

9675. 



- iv - 

Code Compliance Activities of the NRA 

Code Making Program of the NRA in the Territories, The 

Code Provisions and Related Subjects, Policy Statements Concerning 

Content of NIRA Administrative Legislation 

Part A. Executive and Administrative Orders 

Part B. Labor Provisions in the Codes 

Part C. Trade Practice Provisions in the Codes 

Part D. Administrative Provisions in the Codes 

Part E. Agreements under Sections 4(a) and 7(b) 

Part F. A Type Case: The Cotton Textile Code 
Labels Under NRA, A Study of 

Model Code and Model Provisions for Codes, Development of 
National Recovery Administration, The: A Review and Evaluation of its Organization and 

Activities 
NRA Insignia 

President's Reemployment Agreement, The 

President's Reemployment Agreement, Substitutions in Connection with the 
Prison Labor Problem under NRA and the Prison Compact, The 
Problems of Administration in the Overlapping of Code Definitions of Industries and Trades, 

Multiple Code Coverage, Classifying Individual Members of Industries and Trades 
Relationship f NRA to Government Contracts and Contracts Involving the Use of Government 

Funds 
Relationship of NRA with other Federal Agencies 
Relationship of NRA with States and Munoipalities 
Sheltered Workshops Under NRA 
Uncodified Industries: A Study of Factors Limiting the Code Making Program 

Legal Stu dies 

Anti-Trust Laws and Unfair Competition 

Collective Bargaining Agreements, the Right of Individual Employees to Enforce Provisions of 

ommerce Clause, Possible Federal Regulation of the Employer-Employee Relationship Under the 

Delegation of Power, Certain Phases of the Principle of, with Reference to Federal Industrial 
Regulatory Legislation 

Enforcement, Extra-Judicial Methods of 

Federal Regulation through the Joint Employment of the Power of Taxation and the Spending 
Power 

Government Contract Provisions as a Means of Establishing Proper Econ mic Standards, Legal 
Memorandum on Possibility of 

Intrastate Activities Which so Affect Interstate Commerce as to Bring them Under the Com- 
merce Clause, Cases on 

Legislative Possibilities of the State Constitutions 

Post Office and Post Road Power — Can it be Used as a Means of Federal Industrial Regula- 
tion? 

State Recovery Legislation in Aid of Federal Recovery Legislation History and Analysis 

Tariff Rates to Secure Proper Standards of Wages and Hours, the Possibility of Variation in 

irade Practices and the Anti-Trust Laws 

Treaty Making Power of the United States 

War Power, Can it be Used as a Means of Federal Regulation of Child Labor? 

9675. 



THE EV IDENCE STUDIES SERIES 

The Evidence Studies were originally undertaken to gather material for pending court 
cases. After the Schechter decision the project was continued in order to assemble data for 
use in connection with the studies of the Division of Review. The data are particularly 
concerned with the nature, size and operations of the industry; and with the relation of the 
industry to interstate commerce. The industries covered by the Evidence Studies account for 
more than one-half of the total number of workers under codes. The list of these studies 
follows: 



Automobile Manufacturing Industry 
Automotive Parts and Equipment Industry- 
Baking Industry 

Boot and Shoe Manufacturing Industry 
Bottled Soft Drink Industry 
Builders' Supplies Industry 
Canning Industry 
Chemical Manufacturing Industry 
Cigar Manufacturing Industry 
Coat and Suit Industry 
Construction Industry 
Cotton Garment Industry 
Dress Manufacturing Industry 
Electrical Contracting Industry 
Electrical Manufacturing Industry 
Fabricated Metal Products Mfg. Industry and 
Metal Finishing and Metal Coating Industry 
Fishery Industry 
Furniture Manufacturing Industry 
General Contractors Industry 
General Contractors Industry 
Graphic Arts Industry 
Graphic Arts Industry 
Gray Iron Foundry Industry 
Hosiery Industry 

Infant's and Children's Wear Industry 
Iron and Steel Industry 



Leather Industry 

Lumber and Timber Products Industry 
Mason Contractors Industry 
Men's Clothing Industry 
Motion Picture Industry 
Motor Vehicle Retailing Trade 
Needlework Industry of Puerto Rico 
Painting and Paperhanging Industry 
Photo Engraving Industry 
Plumbing Contracting Industry 
Retail Lumber Industry 
Retail Trade Industry 
Retail Tire and Battery Trade Industry 
Rubber Manufacturing Industry 
Rubber Tire Manufacturing Industry 
Shipbuilding Industry 
Silk Textile Industry 
Structural Clay Products Industry 
Throwing Industry 
Trucking Industry 
Waste Materials Industry 
Wholesale and Retail Food Industry 
Waste Materials Industry 
Wholesale and Retail Food Industry 
Wholesale Fresh Fruit and vegetable Indus- 
try 
Wool Textile Industry 



THE STATISTICAL MATERIALS SERIES 



This series is supplementary to the Evidence Studies Series. The reports include data 
on establishments, firms, employment, payrolls, wages, hours, production capacities, ship- 
ments, sales, consumption, stocks, prices, material costs, failures, exports and import3. 
They also include notes on the principal qualifications that should be observed in using the 
data, the technical methods employed, and the applicability of the material to the study of 
the industries concerned. The following numbers appear in the series: 
9675. 



- vi - 



Asphalt Shingle and Roofing Industry 

Business Furniture 

Candy Manufacturing Industry 

Carpet and Rug Industry 

Cement Industry 

Cleaning and Dyeing Trade 

Coffee Industry 

Copper and Brass Mill Products Industry 

Cotton Textile Industry 

Electrical Manufacturing Industry 

9675. 



Fertilizer Industry 

Funeral Supply Industry 

Glass Container Industry 

Ice Manufacturing Industry 

Knitted Outerwear Industry 

Paint, Varnish, and Lacquer, Mfg. Industry 

Plumbing Fixtures Industry 

Ray^n and Synthetic Yarn Producing Industry 

Salt Producing Industry 



I 



1