States' watchdogs sharpen teeth on big business. Attorneys general say federal regulators lack adequate bite
For some time, consumers had been complaining that they could not buy airline tickets at the advertised bargain fares because of restrictions not mentioned in the airlines' ads. Federal regulatory agencies, they said, were doing nothing in response. So the National Association of Attorneys General decided it was time to police these ads. Early this year, NAAG issued its own set of national guidelines, which require the ads to spell out fare limitations. Rather than risk a court fight, the airlines began overhauling their advertising to comply with the guidelines.
Having cut their teeth on corporate giants like Coca-Cola and Kraft Inc., the state attorneys general seem to be ready to take on entire industries.
More recently, attorneys general in several states filed an antitrust suit against the nation's major insurance companies, which they say conspired to reduce or eliminate certain kinds of insurance coverage. The antitrust actions could force a restructuring of the insurance industry.
On a roll, the officials are now taking aim at car rental companies. NAAG has set up a committee to investigate two areas of complaint: hidden charges that can double the advertised rental rates, and collision damage waivers that cause renters to give up basic common law rights.
Not long ago, attorneys general would have concentrated on matters within their own state borders and left nationwide concerns like these to federal authorities. But in this era of deregulation, the states say, federal agencies have been ignoring consumer issues. Mounting complaints from individuals and frustrated consumer protection groups have propelled attorneys general into the national arena.
``With the withdrawal of federal enforcement authority in major areas, including consumer protection, there is a vacuum where perceived abuses are still occurring and where there's no effective remedial action forthcoming from the national level,'' says Oregon attorney general David Frohnmayer, who is president of NAAG.
States into the breach
New York Attorney General Robert Abrams claims that the laissez faire philosophy of the Reagan administration has ``hurt consumers, and it's caused states to step into the breach.'' Agencies around New York State report that they are receiving 25 to 60 percent more consumer complaints now than in pre-Reagan years.
``People are concerned and are angered when the federal government continues to retreat from the historic role and responsibility of enforcing laws and making regulations to protect consumers,'' he says.
Mr. Abrams first got involved in national advertising in 1984, when the Center for Science in the Public Interest, a Washington-based consumer watchdog group, approached him about ads run by Coca-Cola, Pepsi-Cola, Seven-Up, and Royal Crown Cola. The group had filed a petition with the Federal Trade Commission, complaining that ads and labels for diet sodas proclaimed, ``Now with NutraSweet,'' even though the products also contained saccharin. The FTC had not responded. So Abrams challenged the soft drink companies. Soon they changed their wording to ``NutraSweet blend.''
``There's really widespread deceptive advertising in the food industry, primarily involving health and nutrition claims,'' maintains Bruce Silverglade, legal director of the Center for Science. ``The states brought a number of cases that we originally asked the Federal Trade Commission to bring, against Campbell's Soup, McDonald's, the National Coffee Association, Kraft Inc., Del Monte. We had alleged deceptive advertising on the part of all these companies, and the FTC acted practically in no situation. In only one situation did it bring a lawsuit. The states have resolved every one of these complaints.''
Just the threat of a lawsuit in one state has been enough to force most companies to change their advertising nationwide. They don't want to risk the unfavorable publicity a court fight could generate, nor do they want the expense of tailoring ads for individual states.
Flexing for the voters
Muscle-flexing by attorneys general may get quick results and win points with voters in their states (most of these officials are elected), but many people in business and government don't think it's fair.
``Is it fair for a resident of Iowa to receive only advertising that meets the standards of the New York State attorney general?'' John O'Toole, vice-president of the American Association of Advertising Agencies, asks in a recent commentary in Adweek magazine. He warns that ad regulation by the 50 states, even with a common set of guidelines, could become ``a crazy quilt'' of varying interpretations.
``National regulation should come from the national government,'' insists Daniel Oliver, chairman of the FTC. ``[State attorneys general] aren't elected to regulate national advertising. They are elected to deal with problems in their own states. And it's not as if there were no problems in their own states.''
Mr. Oliver contradicts the view that the FTC has been lax in its responsibility to protect consumers. ``You can always find a noisy group to get a response out of some attorneys general [AGs] looking for publicity. If they went to the Federal Trade Commission and couldn't get an answer about a national ad, that means this agency determined that there was nothing wrong. ... Just because companies are knuckling under the pressure from AGs, that doesn't mean the FTC isn't doing its job.''
William MacLeod, director of the FTC's bureau of consumer protection, asserts that the commission did not need to take any action on the soft drink ads, since the advertising industry's self-regulatory system was already at work on the case.
``The national advertising division of the Council of Better Business Bureaus issued its report on the matter in March 1984, before any action was taken or announced by any government entity,'' he says. ``Shortly after that, New York announced its action with regard to Coca-Cola.''
Mr. MacLeod adds that the FTC has been supportive of the self-regulatory system as an efficient monitor for industries. ``If the self-regulatory mechanism can clean up advertising that we do not have to spend taxpayer dollars cleaning up, then everybody is better off.''
An important aspect of rooting out false advertising, MacLeod cautions, is making sure you don't overdo it and deny consumers information that is potentially valuable to them.
He points to a case involving a Kraft ad that read: ``Cheez Whiz, real cheese made easy. ... It's a blend of Kraft cheddar and colby cheeses and other wholesome ingredients.''
At the urging of the Center for Science, the attorney general for Texas challenged the ad, alleging that it falsely represented the product as real cheese and sold it at cheese prices, when it was only 51 percent cheese (the rest being whey and additives). Kraft stopped running the ad.
``I would be very interested to hear arguments as to how this Kraft advertisement was hurting consumers,'' MacLeod comments. ``What they were trying to show in these ads is how Cheez Whiz can be heated more easily and then served as a sauce over foods, the various uses you can put it to; and this is useful information to consumers.''
The US Department of Transportation is so concerned about preserving information in advertising that it has threatened to sue any state attorney general who tries to enforce the NAAG guidelines for air fare ads in any way inconsistent with the department's own guidelines. The department reports that of the thousands of consumer complaints it received during 1987, only 411 were about airline advertising.
``We feel like deregulation has been extremely successful, and one reason is that there's been a great deal of competition, specifically price competition. That's the reason that there are so many, many more people flying today than there were before,'' says Wayne Vance, general counsel of the Transportation Department. ``The first couple months of this year, after the NAAG guidelines came out, we felt like we saw, particularly in broadcast advertising, much less competition, and I think it can be attributable to concern over the NAAG guidelines.''
The threat of a lawsuit doesn't seem likely to deter the attorneys general. ``There's no one trembling with anxiety that some federal agency will bring a lawsuit,'' says Mr. Frohnmayer, the NAAG president. ``If it does, it does, and we're used to advocating our position in court and presumably would do so.''
In any case, a court test will probably be unnecessary, since the state attorneys general are pleased with the changes airlines have been making in their advertising, according to Frohnmayer and Abrams.
``As a result of those guidelines ... we have seen ads suddenly overnight altered for the better,'' Abrams says. ``Where in the past they were only giving one-way prices, they're now giving round-trip prices. Whereas in the past they weren't giving all of the restrictions, they're now pointing out what some of the limits are.''
Although NAAG doesn't have a specific agenda of future investigations, it is looking into airline reservation systems, for-profit vocational schools, and the cable television industry. It also plans to work for tougher federal regulation of all-terrain vehicles.
Frohnmayer says he doesn't worry that a few overzealous attorneys general could undermine NAAG's newfound clout by trying to enforce overly strict interpretations of its guidelines.
``Having devoted the time that we have to developing a common baseline understanding, there's probably a fair amount of peer group influence within our association to keep people from taking a precarious and potentially invalid legal position.''
Over the seven years he has been a member of the organization, he has noticed ``a growth of collegiality and communication among the various states in NAAG. I've seen a much more reflective atmosphere and also one where there's a much greater willingness to act in concert uniformly on areas of common concern.''
Action on many fronts
Since 1987, state attorneys general have taken the following actions:
Sued Aetna, Hartford, Allstate, and Cigna over premiums charged for insurance liability coverage.
Won a $16 million settlement from Chrysler for owners of cars with rolled-back odometers.
Won more than $1 million for buyers of Minolta cameras on charges that the company refused to let dealers sell its cameras at discount.
Issued merger guidelines that are tougher than federal regulations.
Persuaded airlines to give more explicit information in ads for bargain fares.
Meanwhile, the attorneys general are also:
Meeting with car rental companies to make changes in their advertising.
Examining airline reservation systems.
Working for tougher regulation of all-terrain vehicles.
Looking into the cable television industry.
Source: Business Week.