HANA CALLAGHAN, FORMER DIRECTOR OF GOVERNMENT ETHICS AT THE MARKKULA CENTER FOR APPLIED ETHICS, DISCUSSES POLICY, PROCESS, AND POLITICS. SHE REVIEWS ISSUES SUCH AS CONFLICTS OF INTEREST, TRANSPARENCY, AND THE DUTIES OF LOYALTY AND CARE REQUIRED OF PUBLIC SERVANTS.
John P. Pelissero
Government ethics applies to the processes, behavior, and policy of governments and the public officials who serve in elected or appointed positions. The role of government and its officials is to serve the public interest with ethical awareness and ethical actions. When governments serve the public interest and avoid engaging in behavior that promotes any private interests, they are acting for the common good.
On taking office, every public servant, elected or appointed, enters into a covenant with the people: that as a public official they will seek to promote the public interest in all political processes and ensure that policy adoption and service provision occur without favoritism or discrimination. Moreover, a public official must not use her or his position for personal gain and should avoid even the appearance of having a conflict of interest. An ethical awareness of the obligation to act in the public interest will normally promote fairness and justice, and advance the common good.
One may view government ethics as part of the broader field of political ethics that Dennis F. Thompson (International Encyclopedia of Ethics, June 29, 2019) explains as covering “…the ethics of process, which focuses on public officials, the methods they use, and the institutions in which they act; and the ethics of policy, which concentrates on judgments about the policies and laws governments make.” Political ethics also extends to political processes of a democracy that includes the ethics of elections, campaigns, and voting. Just as governments and their officials must act with ethical awareness, so too do those who run for political offices, engage in political campaigning, and vote in elections. There are ethical practices for candidates, campaigners, and voters that are critical to advance the public interest.
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A trade association executive who had nervously followed certain Congressional hearings recently consulted his antitrust counsel. He informed the latter that these public hearings had questioned the competitive ethics of his industry; explained that he feared regulatory legislation might be forthcoming to police the challenged conduct; and proposed the adoption of a code of ethics, enforceable by industry sanctions, to eliminate the debatable practices in order to forestall the threatened Washington action.
But counsel said, “No.”
This story is all too familiar. In industry after industry a businessman is informed by Congressional hearings that the fairness of competition in his industry is questionable; he fears that regulatory legislation may be enacted; he desires to join with his competitors in an agreement to bar the challenged conduct; but he is advised not to undertake to bring about any such concerted, corrective action.
Businessmen, accordingly, are increasingly disturbed as they observe how Congressional investigations of unfair and deceptive practices have led to the Wool Products Labeling Act of 1939, the Furs Act, and the Textile Fiber Products Identification Act; how those on small business have wound up with the Robinson-Patman, Celler-Kefauver, and Auto Dealer Franchise acts; and how the most recent of them have resulted in the new stringent regulation of the drug industry. Currently, businessmen are fearful that other trade practices now in the Washington spotlight may beget still further regulation of packaging and labeling, of distribution practices, and of health and safety measures. They view this legislative trend as unwise and unnecessary, for these reasons:
- They consider this new legislation to be unwise because they believe that government alone seldom can successfully achieve industrywide reform of trade ethics.
- They think such action to be unnecessary because they are convinced that private self-regulation is competent to do the job.
On both counts, industry asks why it is not permitted to do its own housecleaning instead of having to drift further into the socialistic controls of questionable regulatory legislation.
The objective of the following discussion is to probe into this question—so frequently raised by industry—of who can best deal with trade abuses.
In this presentation I will first review the extent to which government and industry, respectively, are able—or unable—to cope with debatable trade practices. Then, further along in the article, I will offer a proposal that both government and industry might join in a cooperative undertaking, through procedures already sanctioned by existing legislation, to regulate such competitive conduct.
Government Handicaps
The federal antitrust laws require our enforcement agencies to play two major roles. The first of these roles is that of the prosecutor, who is directed to prevent trade restraints. The second is that of the administrator, who is authorized to regulate trade practices. The objective of the former is to ensure the existence of competition by prohibiting restrictive contracts, conspiracies, and monopolies. The purpose of the second is to provide for the fairness of this competition through affirmative as well as negative directives designed to protect the small businessman, the uninformed consumer, and the general public.
These federal agencies have been reasonably successful in achieving the first antitrust objective of proscribing trade restraints. They have found that industry, for the most part, both professes and practices a belief in private initiative in this regard, with the result that the enforcement agencies have had only to detect and destroy from time to time isolated symptoms of cancerous conduct which—if unchecked—would eventually infect and undermine the vigor of competition.
The procedures of the Department of Justice and the Federal Trade Commission have been both well designed and effectively utilized to protect the law-abiding majority from anticompetitive acts of a law-defying minority of American industry.
The Problem
However, the federal agencies have not been as successful in discharging their further duties of regulating trade practices. Among businessmen there is no comparable consensus on which competition is fair and which is unfair, with the result that many practices viewed as objectionable by Pennsylvania Avenue may be accepted as ethical by Wall Street and Main Street. Under these circumstances, the procedures of the Department and the Commission have not been effective in controlling trade ethics in our competitive economy.
It is true that the proceedings initiated by government for the purpose of regulating unethical conduct take time. Due process requires government counsel to investigate carefully before instituting appropriate administrative or judicial proceedings. Due process similarly obligates Commission and courts to consider fully the facts and the law before they decide whether or not to condemn the practices involved. And due process further guarantees the right of appeal by the defendants from any such condemnation. The resulting time lag between complaint and final judgment necessarily ensures a substantial lease on life for even challenged forms of unfair competition.
The length of time required by government to engage in the regulation of trade practices, however, represents only a small part of the problem. Two far more substantial handicaps are faced by government when it seeks to control competitive ethics. These handicaps are, respectively, a lack of funds and a lack of industrial know-how.
Lack of Funds.
A shortage of funds is the principal barrier faced by government enforcement agencies when they seek to regulate trade practices. As previously noted, a particular competitive act which is challenged by such an agency frequently is viewed by many—and sometimes by all—members of an industry to be ethical. The expense of investigating, litigating, and adjudicating the legality of such an act which may be widespread in an industry, and thereafter of ensuring compliance with any resulting ruling condemning such conduct, is substantial. It follows that government is able to finance only a few industrywide proceedings—and then with respect to only a few practices of these industries—out of its enforcement funds.
The futility of expecting that the government by itself, with its limited funds, may do more than upgrade the ethics of a few lines of commerce is illustrated by the dubious advertising practices of some of our industries. Claim after claim, ranging from mild foolishness to malicious fraud, is made for well-known products. The advertisers of these products on occasion concede to their counsel that their statements are vulnerable, but they assert that fantasy—like fire—must be met with comparable fantasy in the course of competition. Government attorneys of course valiantly rush out, seize a stray offender from time to time, and eventually proceed to try and convict him; but these commendable forays interfere little with the overall jungle warfare of the industries involved.
The unreality of believing that the government agencies, without assistance, have the resources to impose industrywide regulations in the field of ethics is further indicated by the discriminatory prices and terms that prevail in many lines of commerce. Powerful buyers in these industries play seller against seller and ultimately force their vendors to grant them favorable treatment unjustified on any legal, economic, or moral grounds. The occasional proceedings directed against those giving and/or receiving these discriminations are of concern to the few respondents involved, but their competitors continue to engage in the objectionable practices. And when the government does attempt to proceed against all members of an industry participating in such unlawful conduct, it becomes mired in a morass of almost insoluble problems.1
The problem of government in obtaining compliance, arising out of this shortage of funds, was candidly admitted only recently by Paul Rand Dixon, Chairman of the Federal Trade Commission, as follows:
“Speaking for the FTC, I can assure you that our funds are so limited that the most effective role we can fill is that of a guide. We have only enough resources to illuminate problem areas, to point out the boundaries of illegality, to encourage businessmen to stay within them, and to bring action against the few who thumb their nose at their competitors, the public welfare, and the law.”2
Lack of Know-How.
An understandable lack of detailed knowledge of the workings of our industrial economy also constitutes a substantial barrier to effective regulation of trade practices by government.
In part, this lack of knowledge of industry is due to the substantial turnover of government personnel which has always plagued Washington. A young attorney on the staff of an enforcement agency usually acquires a realistic insight into the day-to-day operations of a few lines of commerce, but during this period of time he is also apt to acquire a wife and a child or children. Eventually, he tends to accept more remunerative employment in private industry. His place is then taken by a novice, who may also in turn be lost to government service just when he becomes most valuable.
In large part, however, this lack of detailed familiarity with industry is due to what has been termed the second American revolution. Thus new products and new industries are proliferating in our economy. Also, manufacturers are becoming wholesalers and retailers; retailers are becoming wholesalers, and both, on occasion, are engaging in manufacturing. Moreover, competitors in one line of commerce are diversifying by invading other lines of trade.
Under these circumstances, no single man or group of men in government service could possibly have more than the most superficial awareness of the complex commercial intercourse which speeds today over our ever changing industrial highways.
Government’s resultant imperfect knowledge of industry represents a formidable obstacle to its efforts to regulate trade practices. In the first place, government counsel is largely unaware of many questionable practices that are well known to those who buy and sell in the market. In the second place, even when this conduct is called to Washington’s attention, government counsel is unable to determine the legality of the practices until after intensive investigation and careful evaluation.
Admittedly, administrative agencies often possess special competence and knowledge, particularly where the agency concerns itself only with a single industry.3 In the case of the Department of Justice and the Federal Trade Commission, however, this expertise represents the professional skills of lawyers and economists trained to research and analyze controversial. issues—untainted by the practical know-how of businessmen, engineers, and bankers.
The government could, of course, obtain sufficient knowledge of industry to enable it to regulate trade practices throughout our economy if it were given huge sums and large staffs to enable its investigators to prowl regularly through our factories and our offices—interrogating employees, studying commercial practices, and reviewing files. But any such knowledge would be acquired in depth only at the expense of creating a police state as repugnant to Washington as it would be to industry. In his previously quoted speech, the FTC Chairman emphasized:
“That the FTC could be, or would be, a Gestapo is ridiculous. The very magnitude of its law enforcement responsibilities in relation to the size of its staff makes this impossible. And the idea of a Gestapo is as repugnant to us at the FTC as it is to those whose business we regulate.”4
Government Suggestion
It is not surprising, therefore, that the government itself is beginning to doubt its ability—unaided—to regulate the fairness of competitive practices throughout our economy. Its agencies tend to prefer directing their legal proceedings against trade restraints (in the discharge of their primary duty to ensure vigorous competition), and to encourage self-policing by industry to take care of the less pressing problems of commercial irregularities (in fulfillment of their secondary obligation to bring about fair competition).
Moreover, in the forefront of this salutary self-evaluation of government’s role in trade regulation has been the Federal Trade Commission. For example, in its 1964 Annual Report, the Commission frankly conceded that “if the Commission could persuade business to do its own housecleaning, the public interest would be served just as well, faster, and at a fraction of the cost.”5
The individual members of the Commission, in fact, have recently been engaged in what appears to be almost a campaign to convince the Congress, the bar, and the businessman that industry participation in self-regulation is in the public interest. The public addresses of the commissioners have repeatedly included a plea that coercion from government be supplemented by cooperation from industry. Thus in addressing members of the bar, A. Everette MacIntyre, one of the veterans of the Commission, recently stressed that:
“The Chairman, speaking for the Commission, [has] advised that it has now ‘turned a difficult corner in veering from patternless hit-and-miss law enforcement to a guidance role that invites, encourages, and backstops efforts of American business to police itself’…”6
Again, when speaking to businessmen, Mary Gardiner Jones, the most recently appointed member of the Commission, in a similar vein emphasized “the need to supplement industry self-regulation by government regulation in order to ensure that our economy will remain competitive…”7
The contrast between the old legalistic and the current realistic approach of the Federal Trade Commission toward regulating business ethics reminds me of the difference between two ministers who sought to upgrade the moral conduct of their congregations some years ago. The first thundered with traditional theology to the effect that God would some day punish their sinful conduct. The second asked his congregation to help God by forming groups to deal today with these earthly errors. The Commission is wisely supplementing the liturgy of litigation with the learning of laymen to achieve fair competition in industry.
Industry Shortcomings
The businessman, in promoting compliance with our antitrust laws, also has available to him two potential roles. The first is to police the practices of his individual enterprise; the second is to cooperate with competitors in controlling the conduct of his industry.
The businessman—in the exercise of his first role—has developed reasonably effective programs to regulate the internal acts of his own corporate enterprise. Procedures have been worked out to eliminate both unlawful restraints and unfair practices incompatible with healthy competition. These programs, when properly administered, have repeatedly been found to be effective in safeguarding management and its stockholders from the penal and civil dangers inherent in antitrust violation.
The Problem
The industrialist, however, has often curtailed his individual compliance program by limiting its operations primarily to the elimination of unlawful restraints—with less attention being paid to the regulation of the ethical practices of his personnel—because he has been forbidden by the courts to undertake the second role of ensuring parallel ethical conduct by his competitors.
There are two reasons why the businessman has often refused to accept the commercial handicap of discontinuing the use of debatable trade practices by his company when such questionable conduct is rampant among his competitors. In the first place, he has not believed that many of the practices challenged in Congressional hearings are unfair. In the second place, he has been prevented from joining with his competitors to eliminate such conduct even when he agrees that the conduct is unfair.
The courts over the years have erected such substantial barriers to industrywide compliance programs and to industry-sponsored ethical programs that corporate attorneys have been forced to advise against most such cooperative attempts at self-regulation. It has been for the latter reason particularly that internal as well as external policing of trade abuses by some companies in some industries has been noticeable for its ineffectiveness.
Agreement on Compliance.
It is understandable why businessmen in most cases have been advised to refrain from any joint do-it-yourself vigilante action by competitors to achieve compliance with our laws on trade regulation. This is because self-government—of business, by business, and for business—has been tried and repeatedly found wanting in the courts.
The history of our economy has been replete with self-appointed trade groups which have sought at the outset to achieve desirable social goals but whose members have eventually drifted into restraints meriting confinement in society’s gaols. Marching behind banners and slogans of fair competition, these competitors have all too soon tired of public service and have then retired to liquidate competition in the good fellowship of private room service. The fairly recent electrical proceedings, moreover, teach us that history is still tending to repeat itself—with the place of the conspiracy alone being changed from hotel to motel.
In view of these all too clearly recorded shortcomings of industrywide self-regulation—both past and present—the courts have become as skeptical of business procedures attempting to ensure fair competition as businessmen have been doubtful of governmental proceedings seeking fair practices. On the one hand, our judges have praised the programs adopted by individual companies to ensure compliance with our laws, but, on the other hand, they have strongly condemned industry programs initiated in concert by competitors to achieve this objective.
Thus the courts have resolutely outlawed industry self-government even where it has sought only to prohibit clear violations of law. A familiar illustration of this judicial hostility toward industrial self-government was the ruling of our Supreme Court on the attempt by a branch of the garment industry to curtail the piracy of designs. The Court felt so deeply that businessmen should not be permitted to regulate themselves that it sweepingly ruled:
“Even if copying were an acknowledged tort under the law of every state, that situation would not justify petitioners in combining together to regulate and restrain interstate commerce in violation of federal law…”8
The right of an industry to police its own violations of law has, therefore, been limited by the courts largely to those areas subject to special regulatory legislation. As explained by the Supreme Court in ruling on private sanctions imposed by the New York Stock Exchange:
“It is plain, to begin with, that…collective action of the Exchange and its members would, had it occurred in a context free from other federal regulation, constitute a per se violation of Section I of the Sherman Act.”9
The impact of these rulings on voluntary self-regulation has recently been dramatized by the current predicament of the carpet industry. With the enactment of the Robinson-Patman Act, the industry allegedly through concert of action abandoned certain volume discounts believed to be of doubtful validity under this act. The Department of Justice, thereupon, sued the industry for unlawful parallel action and forced the carpet manufacturers to restore this questionable pricing practice. Thereafter, decades later, the Federal Trade Commission brought suit against this industry for continuing to grant those same volume discounts, and certain of these proceedings are still pending.
Agreement on Ethics.
The courts, moreover, have been even more critical of industry self-regulation where businessmen have attempted not merely to ban clear violations of law, but also to upgrade the practices and products of their industry. This has been the case even where the sole objective of the parties was to impose higher ethical standards throughout their industry.
It is true that the courts have approved limited agreements by businessmen to collect and circulate statistical and other trade information, in order to ensure more informed competition in the marketplace.10 In addition, the exchange of other data to enable the detection of fraud has been sanctioned.11 Nevertheless, the courts have even frowned on too generous a disclosure of confidential information to other members of an industry,12 and have condemned too friendly a discussion of competitive decisions.13 Proceeding from there, the judiciary has struck down most other programs involving more than the usual public information activities of trade associations for improving industry standards. Thus industry agreements to eliminate inferior merchandise14 and to impose ethical codes of conduct15 have been proscribed.
Indeed, the Supreme Court has gone so far as to rule that a program by public utilities to supply gas only to gas burners which have passed laboratory tests is vulnerable to attack.16 This extreme position by our highest court seems to echo an earlier holding that:
“Violations of antitrust law could not be defended on the ground that a particular accused combination would not injure but would actually help manufacturers, laborers, retailers, consumers, or the public in general.”17
The state of the law is such today that a government attorney who discovers a code of ethics as part of the operating papers of a trade association frequently believes that this alone justifies an antitrust investigation, and expects confidently that it will lead to the discovery of criminal antitrust violations.
It follows that the members of an industry who take the law into their own hands—by establishing their own self-governing body—may thereby be placing themselves in the hands of the law.
Judicial Suggestion
These discouraging rulings by the courts, however, do not indicate that the judiciary is unsympathetic to the desire of businessmen to ensure compliance with the law and to improve ethical standards throughout their industry. The position of our judges, rather, is that industry should submit their proposals to government and should induce the latter to provide the relief sought.
Thus the Supreme Court has given the green light to business and labor alike—whether individually or collectively—to propose any course of conduct that they desire to the legislative and executive branches of our government. In the famous Noerr ruling—involving an organized campaign by a group of railroads to influence legislation adverse to truckers—the Court stated flatly:
“We think it…clear that the Sherman Act does not prohibit two or more persons from associating together in an attempt to persuade the legislature or the executive to take particular action with respect to a law that would produce a restraint or a monopoly.”18
The courts have thereby assured trade associations and other industry groups which are exposed to criticism from Congressional sources that they at least have the privilege to act in concert in pointing up their problems to our legislative and administrative bodies. Accordingly, businessmen are free to propose codes of ethics, industry standards, and any other restraints which may appeal to them—for adoption by government—with the assurance that they are protected in so doing by a doctrine of antitrust law to the effect that:
“Joint efforts to influence public officials do not violate the antitrust laws even though intended to eliminate competition. Such conduct is not illegal, either standing alone or as part of a broader scheme itself violative of the Sherman Act.”19
These rulings of the courts, however, have thus far given cold comfort to industry. As we have seen, government cannot by itself effectively apply the laws on trade regulation to all of the multiple lines of commerce of our economy (in the absence of public utility laws creating special industry agencies such as the CAB, the FPC, and the ICC). Yet business is informed by the courts that government alone may apply sanctions and improve ethics in any overall industrywide regulation of trade. The conclusion to be drawn from our discussion so far seems to be that, on the one hand, government may but cannot regulate industry, while, on the other hand, businessmen can but may not regulate it.
Proposal: Teamwork
The temptation is strong, at this point, to stop here and conclude, with Omar Khayyam, that we have started with futility and have ended with futility. After “great argument” we seem to have come out by the “same door” we went in. But as the chief of antitrust enforcement in Germany, Dr. Eberhard Gunther, President of the Bundeskartellamt, has observed in a recent letter to me: “As difficult as enforcement may become…as challenging will remain this task.”
The challenging task is how to harness the may or power of government with the can or know-how of business in order to ensure effective trade regulation. And I believe that this challenge not only should, but can, be met by an imaginative use of the court-approved right of industry—as reflected in the Noerr case—to propose to government appropriate action on compliance and ethics.
Three Alternatives
I submit that if industry desires to undertake some form of voluntary self-regulation in order to escape involuntary Congressional legislation, it would be well advised to adopt a program which is to some extent at least the joint production of government and industry. Three alternative procedures are available to achieve such a result:
1. Industry could propose and persuade Congress to adopt a special statute (such as those which authorize the registration of national securities associations with the SEC and voluntary agreements to aid the balance of payments position of the United state).20 This procedure would, of course, be the safest course to follow.
2. Industry, as an alternative, might propose and implement tailor-made guides and rules of the FTC directed at industry practices which need correction. This alternative should also be safe, and certainly could be more readily and expeditiously adapted to deal with industry conduct.
3. Industry, as a further alternative, might propose a voluntary program of self-regulation and apply for an advisory opinion with respect to its legality from either the Department of Justice or the FTC. This third alternative does not give as adequate an antitrust immunity as does a statute, guide, or rule,21 but it would at least involve governmental review and could establish procedures to supplement industry cooperation with governmental compulsion.
The first of the above alternatives is so obvious that no further discussion is needed here of its availability. The second and third forms of industry-government teamwork, however, are less widely understood and so merit analysis. It is of course true that, with “a little bit of luck,” industry may enjoy the happiness of self-regulation without the harassment of any government participation whatever. But it seems to be self-evident that the legitimacy of self-regulation mothered solely by industry—if and when “caught”—is more likely to be questioned by the courts than is cooperative regulation fathered also by the government.
Let us now move in for a closer look at how each of the latter two forms of government participation would operate in this proposed joint undertaking.
Industry Initiative
At a minimum, an industry group which is confronted with Congressional criticism of its trade practices, and fears legislation or worse if it does not clean house, may draft a guide, rule, or rules condemning unethical and encouraging ethical conduct, and may submit its proposal for consideration by the Federal Trade Commission. Following public hearings and due consideration of the form and substance of the proposal, if appropriate, this tendered regulation may then be formally issued as the official view of the government on the practice or practices involved. Thereafter, each member of the industry may be persuaded to execute an undertaking—not with each other but with the Commission—to discontinue the objectionable practice and to pursue a path of rectitude.
The form of such an agreement currently being used by the Commission to implement its Trade Practice Rules is as follows:
Gentlemen:
A copy of the Trade Practice Rules for the _____ Industry, as promulgated by the Commission under date of _____, has been received, and it is our intention to observe such rules in the conduct of our business.
(Name of Concern)
The nature of the industry proposal which should be submitted, of course, must be limited either to ensuring compliance with or to encouraging ethical conduct consistent with our antitrust laws. If its objective is solely to promote antitrust compliance, such a proposal should be unobjectionable. If seeking to go further and upgrade trade ethics, however, any such submission must be carefully scrutinized to ensure that it is, in fact, designed to promote fair competition in a free economy.
The old type of so-called Group II Rules—which once found favor at the Commission and was later repudiated because it was too restrictive of competition—should not be considered. Among others, rulings might be sought defining trade terms, requiring affirmative disclosures in advertisements, clarifying ambiguous applications of the laws on price discrimination, and—possibly—requiring advance notice to the appropriate administrative agency of proposed acquisitions.
For example, rules with respect to advertising might: (a) prohibit assertions of superiority unless documented by appropriate objective tests; (b) ban “cents off or other savings” claims except where supported by market analyses; (c) require affirmative disclosure of key terms of ambiguous offers; and (d) specify prominent warnings of certain hazards to health or safety.
Again, rules or guides concerning discriminatory practices might: (a) define what constitutes unlike grade and quality; (b) provide that sellers should require certification by wholesale accounts, permitting identification of any sales which are resold through owned and controlled retailers in competition with independent retail accounts; (c) spell out the accounting principles applicable to cost justification; and (d) suggest illustrative procedures for making available promotions on proportionately equal terms.
Industry is most familiar with the Commission’s Trade Practice Rules and may prefer to utilize this route to industrywide virtue. It is reported that such rules are currently in effect in more than 160 industries. Section 1.62 of the General Procedures of the Commission describes the nature of these rules as follows:
“Trade practice rules are designed to eliminate and prevent, on a voluntary and industrywide basis, trade practices which are violative of laws administered by the Commission. The rules interpret and inform businessmen of legal requirements applicable to the practices of a particular industry and provide the basis for voluntary and simultaneous abandonment of unlawful practices by industry members.”22
These rules embrace so many practices, however, that they are reminiscent of the salesman of a wide line of products who knew less and less about more and more until finally he knew nothing about everything. Of more value, therefore, might be the more recent and less formal guides and the equally recent but more formal Trade Regulation Rules, which are tailor-made to deal with a single industrial practice. Some 13 sets of guides and 7 Trade Regulations have been promulgated since their inauguration in the 1950’s and 1960’s respectively. Initiation of a proceeding looking to the issuance of such a Commission ruling is relatively simple. Thus Section 1.66 of these procedures in part states:
“Rulemaking proceedings may be commenced by the Commission upon its own initiative or pursuant to petition therefore filed with the Secretary by any interested person or group.”23
Employment of the know-how of industry, in this fashion, to single out and draft a condemnation of an unlawful practice or an affirmative requirement of ethical competition—when subject to the powers of the commission to review, revise, and, if proper, publish this industry proposal—should do much to start off an industry reform on a sound legal footing. Thereupon, if each member of the industry will agree with the Commission to abide by the published ruling, the commitment of contractual covenants may be added to the persuasion of public penalties in achieving the salutary result desired by both business and government.
A further sanction—to ensure that businessmen take seriously such an industry-proposed and government-approved regulation—would be a requirement that, on publication of the FTC regulation, all companies in the line of commerce affected should be sent a Section 6 questionnaire requiring them to report within go days whether or not they were—as of the date of that report—complying with the provisions of the regulation. In this manner, the irresponsible or irreconcilable minority would be forced under penalty of perjury to choose to conform to the industry standards of fair competition, or to elect to defend promptly in an administrative proceeding its dissenting position.
Staff Investigation
The publication of a guide or rule by the Commission and its endorsement by industry, however, may not suffice to secure continuing compliance by all members of that industry. Supplemental teamwork by businessmen and government may also be necessary in the enforcement of the ruling.
As such a further step, the trade organization cooperating with the Commission might retain a professional staff which could be authorized, on receipt of a complaint or on its own initiative, to investigate compliance with a published guide or rule and to report its findings to the Commission. Such organizations are already in operation in some industries. Needless to say, such a staff should take care not to reveal any facts involving one company to any of its competitors, should avoid making any evaluation of the legality or illegality of the conduct discovered, and should report all facts thus collected by it solely to the Commission.
For example, in order to supplement a guide on business practices, such a staff might investigate pricing to wholesalers, who also sell at retail, in order to determine whether or not wholesale prices are improperly given on retail sales. In addition, complaints of unlawful demands by buyers might be received by it for forwarding—without disclosure of the name of the complainant—to the Commission. Also, an investigation might be made of promotions, to ensure full and adequate publicity of their terms to all competing customers. Questionable practices might be referred to the Commission without editing or recommendation. Furthermore, where—as in some of these examples—any such staff activity relates to the area of price, then the scope and mechanics of these inquiries had best be cleared in advance with the Commission.
The Commission then has available the potent weapon of its Section 6 questionnaire, previously referred to, by which it may require reports to be filled out by any corporation thus suspected of a trade regulation violation. On the receipt of a Commission request for such a report, the questioned member of the industry must promptly and accurately supply such facts as will disclose whether or not it is engaging in unlawful conduct. If found to be deficient in compliance, it must thereupon abandon the challenged practice or submit to litigation.
Any such cooperation between private industry and the Commission in investigating possible violations of Commission guides and rules may, of course, require an imaginative reconciliation of the more recent Noerr doctrine with the previous anti-“private policing” rulings of our courts. There is no reason, however, why this may not be possible. For, as one Commissioner, Philip Elman, has recently observed:
“The American economy of the 1960’s…whose outstanding characteristic is its enormous vitality and seemingly inexhaustible capacity for change and growth…can ill afford a mechanical antitrust jurisprudence.”24
FTC Enforcement
It cannot be too strongly emphasized, however, that the sole role of industry, under the Noerr doctrine, should be to persuade government to take action. It must not set itself up as a self-contained private government whereby con~petitors pass judgment and apply sanctions on other competitors. Moreover, strong-minded counsel should take care that familiarity in any program seeking socially desirable compliance does not breed contempt for the laws governing socially undesirable conspiracy.
It is possible, of course, for an industry to form an advisory committee to meet with the Federal Trade Commission and discuss the interpretation and enforcement of the latter’s rulings. Such a committee, however, must be careful to limit its functions to those authorized in the rules of the Commission (16 C.F.R., Ch. 1, Subch. B, Pt. 16), and Executive Order 11007 of February 26, 1962 (27 F.R. 1875). Any such committee, moreover, may meet only at the call of and must be conducted in the presence of a government official. Its members must at all times keep in mind that they may propose, but only government should dispose, in the field of trade regulation.
Advisory Opinions
One caveat, however, should be added. Every principle has its exceptions, and self-regulation of advertising may be one of the exceptions to the views expressed above. The government has long known of the pioneering programs to correct advertising abuses in certain of our industries, as, for example, those involving cigarettes and liquor. In addition, cooperative ventures such as those represented by the Better Business Bureaus, the Television Code of the National Association of Broadcasters, the Standards of Ethical Business Practice of the Direct Mail Advertising Association, and the various codes and recommended practices of the Outdoor Advertising Association of America are welcome street lights on (at times) dimly lit Madison Avenue.
Not only is the government familiar with these helpful policing programs,25 but Congressional hearings have viewed them favourably.26 Any theoretical proceedings by our enforcement agencies charging their sponsors with alleged technical violations of the antitrust laws would result in a storm of well-deserved protests from both Congress and the public. Necessity here knows no antitrust law.
Furthermore, there are limited programs in some industries, outside of the arena of advertising, which also have sought to deal through voluntary codes of conduct with specific trade abuses. Illustrative of such concerted action by industry—independent of government participation—have been voluntary programs to define trade names, to set objective standards, and to ensure adequate disclosure to buyers. More ambitious self-regulation has also been undertaken by the moving picture producers, by the various exchanges, and by organized sports. These groups continually seek to anticipate criticism by reviewing and updating their trade ethics. These programs have been tolerated by government, although on occasion they have been challenged by private complainants.27
The legality of any such voluntary programs of trade regulation which do not use guides or rules cannot be reviewed here. Some are expressly authorized by statute; others are supplementary to and may be impliedly authorized by statutory regulation; and still others may be saved by their lack of any industry sanctions. There is still a rule of reason in antitrust law which will permit exceptions to almost any of its prohibitions.
In view of the general attitude of the courts toward “go it alone” self-regulation by industry, however, the sponsors of such plans might desire to apply for an insurance policy against at least a government suit before commencing operations under these plans. Such an antitrust insurance policy is available in the form of an advisory opinion from either the Federal Trade Commission or the Department of Justice (or both).
It may be of interest to note that advisory opinions approving modest self-regulation of industry practices have been issued by each agency. For example, the program of the Broadcasting Rating Council to establish minimum standards for the accreditation of broadcasting rating services, adopted as the result of Congressional hearings, has been approved by both agencies.28 Again, it is understood that the current Cigarette Code was tentatively cleared by the Department. Furthermore, an ambitious industry code (yet to be reported) has recently been approved by the Commission with this statement:
“The Commission is of the opinion that the principles of ethical practice set forth in the Code and the proposed method for its implementation raise no problems under the laws administered by the Commission. Your proposed Code, if faithfully observed, should aid in the establishment of high ethical standards and the elimination of deceptive practices…”
Apparently there is still some life in an earlier—but until now rarely applied—principle:
“Cooperative endeavor may appropriately have wider objectives than merely the removal of evils which are infractions of positive law.”29
Conclusion
There may be proponents of rugged competition who will view with alarm the suggestions outlined in this article. These dissenting voices may contend that any industry cooperation in the formulation and enforcement of ethical standards for industry will inevitably lead to a cartel form of competition inconsistent with a free economy. Their position, accordingly, may be that Congressional criticism should not be met by any such affirmative cooperation between government and industry seeking to make unnecessary any new regulatory legislation.
I submit, however, that any such negative response should be rejected as unrealistic. The risks of industry cooperation under the supervision of government seem far less to me than those of industry regimentation under additional legislative dictation by government. The restraints of businessmen can be caught and remedied, but the restrictions written into law by Congress are rarely repealed. Therefore, it seems far better for industry to attempt to meet the objectives of Congress through cooperating with the government, under the flexible terms of the current generally phrased trade regulation laws, than to be forced by new precise, procrustean regulations to yield any further freedom of commercial action.
It is submitted, furthermore, that the underlying premise of any such dissent may be wrong. Congress is right in desiring in its hearings to protect more than the vigor of competition in our economy—and the more responsible of our industrial leaders will agree that it is right. If some slight softening of competition through self-regulation by industry is the price which we must pay to provide ethical protection to the defrauded consumer and the defenseless competitor, let us pay it. Surely, our nation does not live by bread alone. To this point of view, disciples of Adam Smith and laissez faire may cry “Treason!”—but, if so, I can best reply by repeating the words of a famous Virginian: “If this be treason, make the most of it.”
1. Cf. Abby-Kent Co., Inc., FTC Docket C-328 et seq, CCH Trade Reg. Serv. 17, 310 (1965).
2. Address before International Radio and Television Society, March 3, 1965, New York, New York.
3. See, for example, FTC v. Cement Institute, 333 U.S. 683 (1948).
4. Address before International Radio and Television Society, March 3, 1965, New York, New York.
5. FTC, 1964 Annual Report, CCH Trade Reg. Serv. 50, 106.
6. Address before Indiana Continuing Legal Forum, September 25, 1965, South Bend, Indiana.
7. Address before Bar Association of the District of Columbia, February 25, 1965, Washington, D. C.
8. Fashion Guild v. FTC, 312 U.S. 457, 468 (1941).
9. Silver v. New York Stock Exchange, 373 U.S. 341 (1963).
10. Maple Flooring Manufacturers Association v. United States, 268 U.S. 563 (1925).
11. Cement Manufacturers Protective Association v. United States, 268 U.S. 588 (1925).
12. American Column & Lumber Co. v. United States, 257 U.S. 377 (1921).
13. United States v. American Linseed Oil Co., 262 U.S. 371 (1923).
14. Standard Sanitary Manufacturing Co. v. United States, 226 U.S. 20 (1912); Milk and Ice Cream Can Institute v. FTC, 152 F. 2d 478, 482–483 (7th Cir. 1946).
15. Sugar Institute v. United States, 297 U.S. 553 (1936).
16. Radiant Burners Inc. v. Peoples Gas Light and Coke Company, 364 U.S. 656 (1961).
17. Giboney v. Empire Storage & Ice Co., 336 U.S. 490, 496 (1949).
18. Eastern Railroad Presidents Conference v. Noerr Motor Freight, Inc, 365 U.S. 600 (1961).
19. United Mine Workers of America v. Pennington, 381 U.S. 657, 670 (1965).
20. Section 15A of the Securities Exchange Act, 15 USC 780–3(c) (1964); and 31 USC 931–937.
21. Cf. Parker v. Brown, 317 U.S. 341 (1943).
22. General Procedures of the Federal Trade Commission, 16 C.F.R. Section 1.62 (1965).
23. General Procedures of the Federal Trade Commission, 16 C.F.R. Section 1.66 (1965).
24. Address before First Annual Antitrust Institute, November 5, 1965, Pittsburgh, Pennsylvania.
25. Self-Regulation in Advertising, Report on Operations of Private Enterprise in Important Areas of Public Responsibility, Submitted by the Advertising Advisory Committee to the Secretary of Commerce (1964).
26. Hearings on Cigarette Labeling and Advertising before the Senate Committee on Commerce (S. 559 and S. 547), 89th Congress, 1st Session, March–April 1965.
27. Silver v. N. Y. Stock Exchange, 373 U.S. 341 (1963).
28. See, for example, letters from William H. Orrick, Jr., Assistant Attorney General in Charge of the Antitrust Division, to the National Association of Broadcasters, dated July 16 and September 22, 1964.
29. Sugar Institute v. United States, 297 U.S. 553 (1936).
A version of this article appeared in the March 1966 issue of Harvard Business Review.