IV. Enforcement

Law and Economics of Enforcing Misleading Advertising Laws: Incentives of Bona and Mala Fide Traders Assessed


Franziska Weber


Misleading advertisements, such as for ring tones, being a typical example of an unfair commercial practice have over the past years caused substantial harm to European consumers, and to society. This is particularly so because in many cases the enforcement response given a legal breach is slow or does not happen at all. The harm is typically trifling for the individual, but widespread.[2] A discrepancy can be observed between mala fide and bona fide traders. While the latter inadvertently breaches the law, rogue traders' interests lie in the short-term profit generated by illegal activity. They do not mind changing sectors and try to hide, abusing current loopholes in the legal system. The gap between both types of traders is arguably increasing and so are the profits of the mala fide traders, not least due to new technologies that facilitate their operations; most prominently the internet. There wish to thank the participants of the workshop 'Experiencing the Unfair Commercial Practices Directive' (Durham, December 2012), of the German Association of Law and Economics Annual Meeting (Magdeburg, October 2012) and of my seminar: 'Abusing Loopholes in the Legal System - Efficiency Considerations of Differentiated Law Enforcement Approaches in Misleading Advertising, Amsterdam Centre for the Study of European Contract Law - Consumer Law Series' (Amsterdam, March 2013) for their valuable comments is a high potential for keeping one's anonymity when operating via the internet - it renders it difficult to verify the seat of the traders' business premises.[3]

This chapter deals with the efficient design of enforcement mechanisms addressing misleading advertising laws. Enforcement is crucial to induce individuals to law-abiding behaviour. The goal is to add to the knowledge on design requirements for optimal enforcement solutions, particularly in terms of players that need to be involved. The Unfair Commercial Practices (UCP) Directive leaves national legislators with considerable discretion regarding the enforcement and the provisions, and institutions involved in the countries thus vary and not in all countries the optimal balance might have been struck yet.[4]

In line with the law and economics approach, enforcement shall be discussed from the point of view of deterrence theory. According to this theory, the incentives of a (potential) wrongdoer to break the law can be eliminated if the sanction for her wrongdoing multiplied by the probability of detection and the dependent probabilities of apprehension and conviction are at least equal to her benefits from a violation.[5] The prevention perspective can furthermore add to deterrence.[6] The aim of this chapter is not to advocate perfect, but rather optimal, enforcement. The cost perspective is considered and the level of enforcement that society considers desirable shall be found. Different institutions have different sanctions at their availability and their respective powers influence the probabilities of detecting a wrong and apprehending and convicting someone. Common European definitions of the following enforcement solutions shall be discussed: private - via the civil court or Consumer Alternative Dispute Resolution (CADR) - and public law enforcement - via an administrative agency or a criminal court, same as self-regulatory systems. Aside from individual litigation, the costs and benefits of various types of group litigation as a procedural tool will be assessed.[7] In order to come to conclusions on the enforcement mechanisms, the efficiency of substantive law need not be evaluated.

The two mentioned types of traders calculate with differently high benefits. Consequently they are to be deterred by different means that call for a differentiated approach in legal responses and institutions involved. Throughout the chapter, two hypothetical case studies - a bona fide and a mala fide trader case scenario (to be set out) - within misleading advertisement shall illustrate what is needed from the enforcement side. Path dependency explains why no one-size-fits-all solutions are available in the European Union, and the chapter aims at providing a set of design requirements that can be adapted to the respective legal system, particularly in terms of the players that need to be involved.[8]

After this introduction, an analytical framework is set out (Section 2) whose parameters are applied when assessing the value of different enforcement mechanisms, specifically in the case of misleading advertising (Section 3). This application leads to design suggestions for optimally mixing the enforcement mechanisms (Section 4). The chapter ends with some conclusions (Section 5).

  • [1] This chapter strongly builds upon F Weber, 'Abusing Loopholes in the Legal System - Efficiency Considerations of Differentiated Law Enforcement Approaches in Misleading Advertising' (2012) 5(4) Erasmus Law Review, and is partly extracted from F Weber, The Law and Economics of Enforcing European Consumer Law. A Comparative Analysis of Package Travel and Misleading Advertising (Markets and the Law Series, Ashgate, 2014). The latter contains an even more in depth study of enforcement of misleading advertisement, including a comparative legal assessment.
  • [2] In contrast, see F Weber, 'Assessing Existing Enforcement Mechanisms in Consumer Law - The Unavailability of an Allrounder' (2011) 3 Swedish Journal of European Law (Europarättslig tidskrift) 536-554. It illustrates the considerations for a high damage case.
  • [3] A recent National Audit Office report has identified the costs to consumers, and hence the economy, of sharp practices as £6.6 billion in the United Kingdom. As reasons for Consumer Protection Cooperation (CPC) regulation facilitating cross-border cooperation in certain consumer law violations: (at that time) Health and Consumer Protection Commissioner David Byrne said: 'Catching rogue traders is hard enough in a single Member State but it becomes almost impossible when they relocate to another country', Press releases RAPID, 'No Hiding Place for Rogue Traders: Commission Proposes EU-wide Network of National Watchdogs' (22 July 2003) europa.eu/rapid/press-release_IP-03-1067_en.htm?locale=en. Cross-border problems are growing as rogue traders adapt to new technologies and opportunities. For example, the European Advertising Standards Alliance (EASA) estimates that around 63% of the cross-border complaints received between 1992 and 2002 concerned rogue or peripheral traders, and this rises to about 86% for direct mail. As will be set out, this research is restricted to case studies on traders that hide within the countries while traders hiding behind country borders are likewise increasingly a problem.
  • [4] See art 10 on enforcement of the Directive 2005/29/EC of the European Parliament and of the Council of 11 May 2005 concerning unfair business-to-consumer commercial practices in the internal market and amending Council Directive 84/450/EEC, Directives 97/7/EC, 98/27/EC and 2002/65/EC of the European Parliament and of the Council and Regulation (EC) No 2006/2004 of the European Parliament and of the Council ('Unfair Commercial Practices Directive'). See also the contribution in this volume of Marios Koutsias and Christopher Willett ('UK Implementation of the Unfair Commercial Practices Directive'). Also in this volume, Dorte Poelzig, 'Private or Public Enforcement of the UCP Directive? Sanctions and Remedies to Prevent Unfair Commercial Practices', refers more specifically to the requirements that the UCP Directive stipulates in terms of enforcement.
  • [5] See GS Becker, 'Crime and Punishment: An Economic Approach' (1986) 76 Journal of Political Economy 169-217.
  • [6] See S Shavell 'The Optimal Structure of Law Enforcement' (1993) 36 Journal of Law and Economics 255-288; T Friehe and A Tabbach, 'Preventive Enforcement' (2013) 35 International Review of Law and Economics.
  • [7] For the remainder of the chapter these different enforcement solutions shall be labelled 'enforcement mechanisms'.
  • [8] See P Legrand, 'European Legal Systems Are Not Converging' (1996) 45 International and Comparative Law Quarterly 52-81; K Heine and W Kerber, 'European Corporate Laws, Regulatory Competition and Path Dependence' (2002) 13 European Journal of Law and Economics 47-71; AI Ogus, 'The Economic Basis of Legal Culture: Networks and Monopolization' (2002) 22(3) Oxford Journal of Legal Studies 419-134.
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