The Federal Trade Commission Act sets the guidelines underpinning the FTC's consumer-protection enforcement

• The Federal Trade Commission Act created the Federal Trade Commission (FTC), the US agency that protects consumers and promotes competition.
• The law empowers the FTC to stop businesses from unfair practices like false advertising.
• The FTC Act also empowers the agency to stop illegal monopolies from stifling startups.

The Federal Trade Commission (FTC) is a government agency that protects consumers against unfair business practices such as false advertising. It also promotes competition in business.

When you buy a product, are you confident that you're actually getting what a business claims to be selling? For example, if you buy a T-shirt that claims to be 100% cotton, are you absolutely sure that's the case? Or do you think there's a good chance the shirt is made of other materials? Most US consumers probably don't consider these sorts of issues, thanks in large part to the FTC.

The FTC helps protect consumers from businesses doing "anything that would be unfair, misleading, deceptive, or anti-competitive," says Shawn Collins, a shareholder at the law firm Stradling Yocca Carlson & Rauth, who has represented companies before the FTC.

What is the Federal Trade Commission Act?

The Federal Trade Commission Act, signed into law by President Woodrow Wilson in 1914, created the FTC and helped define the agency's powers. It came about as part of the government's antitrust efforts, where they wanted to crack down on businesses unfairly monopolizing industries and engaging in anticompetitive behavior.

Key provisions in the FTC Act

Here's a breakdown of the key parts of this law:

• Section 1: This establishes the FTC, specifying that the agency should consist of five commissioners appointed by the president. It limits the number of commissioners of the same political party to three.
• Section 5: As amended, this part states: "Unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce, are hereby declared unlawful."
  This section "is intentionally very vague" to give the FTC its mandate to protect consumers, explains Collins.
• Sections 6, 9, and 20: These give the FTC investigative powers, such as to subpoena evidence related to unfair competition.

The FTC Act has helped US commerce and business practices in many ways, including:

• Protecting consumers from false advertising: This can help both businesses and individuals. "From a macroeconomic perspective, you want to encourage consumers to go out and make purchases. In order for that to happen, they have to have confidence that the things that are being advertised to them or represented to them are, in fact, what they represent to be," says Collins.
• Preventing illegal monopolies: It's not necessarily illegal to have so much business success that a company becomes dominant within an industry. But the FTC can go after companies that illegally monopolize industries, such as trying to purposefully block competitors from having a fair shot.
• Preventing price fixing: In contrast with monopolies, sometimes companies cooperate too much. That can happen with price fixing, where companies coordinate to set prices at a certain level, rather than competing fairly on their own.

Quick tip: The FTC Act of 1914 created the Federal Trade Commission, which enforces fair business practices, as defined in the FTC Act.

Enforcement

In one respect, the FTC enforces the FTC Act, considering that the agency gets its power from the law to take action against business practices that harm consumers and competition. The FTC can get businesses to stop unfair acts by taking action like sending out a cease-and-desist notice. It also might go through the judicial system to try to get the offending company to pay a fine, for example.

But the Supreme Court curbed the agency's enforcement power in 2021. In AMG Capital Management LLC v. FTC, the High Court found that the agency wasn't properly following the FTC Act by going directly to the courts instead of first following an administrative process when seeking fines from offending companies

"At a certain point in time, the FTC started going directly to federal district courts. And so that recent Supreme Court decision said they don't have the authority to do that, because Congress only gave them the authority to seek relief through their administrative legal proceedings," explains Collins. These proceedings can be less efficient than district courts, he adds.So, in this sense, the judicial system, including the Supreme Court, can play a role in ensuring that the FTC Act is properly enforced.

Amendments

The FTC Act has been amended many times through the years. Some of the more prominent examples include:

• Wheeler-Lea Act (1938): This enabled the FTC to protect consumers from "unfair or deceptive acts or practices" rather than just unfair competition
• Trans-Alaska Pipeline Authorization Act (1973): This expanded the FTC's power to take enforcement directly to courts, though the FTC's use of this amendment to quickly obtain fines was challenged by the AMG Capital Management case.
• US SAFE WEB Act (2006): This expanded the FTC's abilities to enforce consumer protection, particularly those with an international component.

Quick tip: The FTC also has powers stemming from amendments to laws other than just the FTC Act. For example, based on the Robinson-Patman Act of 1936, which amended the Clayton Act (another antitrust law), the FTC also enforces against price discrimination.

A history of the Federal Trade Commission Act

The FTC Act has been around for over a century, and the way businesses operate and consumers engage in the economy has changed dramatically over that time. Still, the FTC Act has held up as an important law that can be used to help ensure business fairness.Here are some of the key developments in its history:

• Agency independence: A 1935 Supreme Court case stemming from President Franklin Delano Roosevelt's firing of a commissioner helped establish the independence of government agencies like the FTC. The ruling confirmed that, based on the FTC Act, only Congress could remove FTC commissioners.

• Divesting assets: The FTC Act helps ensure that corporate mergers and acquisitions don't result in anticompetitive behavior. That doesn't just mean blocking M&A. It can also mean making sure deals go through in a fair way. So, in 1999, the FTC filed a complaint regarding a proposed merger between Exxon and Mobil, which the agency said would reduce competition in several areas. That led to Exxon/Mobil agreeing to divest more than 2,000 gas stations, among other assets.

• Looking into consumer privacy: In 2020, the FTC issued orders to nine social media and video streaming platforms to share more about their use of consumers' personal information, among other data. This order stems from the FTC Act enabling the agency "to conduct wide-ranging studies that do not have a specific law enforcement purpose," the FTC notes.

The financial takeaway

The FTC Act has had a meaningful impact on business and commerce over the years, helping to protect consumers from unfair practices and promote fair competition. And the fact that the law was a central part of a 2021 Supreme Court case underscores how relevant it still is.

Ultimately, the FTC Act helps support the economy. Without confidence that companies are being fair and truthful, you might be reluctant to spend money. That also hurts competition, as new companies, for example, might struggle to gain consumer trust if other businesses previously made it seem like everyone's lying.

The FTC is "an entity that was born out of the notion that consumers need to have confidence in the marketplace, confidence in the goods and services that they're buying and consuming," says Collins. So, next time you make a purchase, remember that there's a good chance the FTC helped enable you to trust that you're getting what you think you're buying.