Developing Efficient Enforcement Designs in Misleading Advertising

Preliminary Considerations

In this section, different existing enforcement mechanisms as applied to two hypothetical case studies - a bona fide and a mala fide trader case scenario - shall be assessed in a model world based on the European context along the previously explained framework.[1] Misleading advertising, typically, has a small effect on each individual but is widespread.[2] The individual damage incurred in our case scenarios is assumed to be EUR 15.[3] The bona fide trader inadvertently breaks the law (Case Scenario 1).[4] An example of misleading advertising that is illustrative by a mala fide trader (Case Scenario 2) can occur with ring tone advertisement. This has been prominent in the headlines over the last few years, and consumers have been misled into concluding a contract instead of a one-time download. The profit-maximizing mala fide trader calculates her profits up to the moment when she will incur a fine, then hides (within the country)[5] and/or changes the sectors in which she conducts business. She is assumed to primarily operate via the internet. We will refer to both situations in which the competitor incurs a damage of - let's say - EUR 100,000 and those where she has no interest in the case.[6]

Applying the common core of European procedural law[7] the 'loser-pays' rule is assumed for the model world as to the private law proceedings.[8] When it comes to the payment of lawyers, contingency fees shall be excluded, as is currently widely the case in Europe.[9] In terms of group litigation due to the overall strong resistance in Europe to class actions, reference shall only be made to representative actions.[10] The definitions of the mechanisms analysed (civil court, CADR, administrative agency, criminal court, self-regulatory systems and group litigation) will be set out at the beginning of the respective Subsections 3.2.-3.6.[11] In terms of available remedies, three main categories are chosen: compensation, same as the Order for Payment Procedure (Regulation [EC] No 1896/2006 of the European Parliament and of the Council of 12 December 2006 Creating a European Order for Payment Procedure) and Proposal for a Directive of the European Parliament and of the Council on Alternative Dispute Resolution for Consumer Disputes and Amending Regulation (EC) No 2006/2004 and Directive 2009/22/EC (Directive on Consumer ADR) Brussels, 29.11.2011 COM (2011) 793 final. Legislation is upcoming, and possibilities to tackle traders that hide behind borders are on the rise. Concerning cross-border enforcement see also the contribution 'Private or Public Enforcement of the UCP Directive? Sanctions and Remedies to Prevent Unfair Commercial Practices' by Dorte Poelzig in this volume. injunctions and 'fining'.[12] The latter is chosen artificially, and would cover any financial sanction that is not compensation (such as fines, profit disgorgement and the like). Any group litigation is assumed to be able to seek all types of remedies. The same is true for individual actions. Unless indicated otherwise, the available courts and agencies are theoretically empowered to issue any of the remedies.[13] Prima facie all cross-uses of facts and findings in one proceeding of the same claimant are possible.

  • [1] The generic term 'trader' shall be used. The company and the advertiser shall be assumed to be the same, and no additional questions on liability shall be discussed, as it is not relevant to the general argument.
  • [2] See ER Jordan and PH Rubin, 'An Economic Analysis of the Law of False Advertising' (1979) 8(3) Journal of Legal Studies 530: 'no one consumer has an interest to sue'.
  • [3] Jordan and Rubin (1979) 529: the role of advertising differs depending on which type of good is involved. In relation to experience goods (determine the quality only by purchasing and using the goods), advertisers might have an incentive to mislead and make false claims.
  • [4] See MG Faure, AI Ogus and NJ Philipsen, 'Curbing Consumer Financial Losses: The Economics of Regulatory Enforcement' (2009) 31(2) Law & Policy 169.
  • [5] In fact, the trader can also hide abroad and there are various pieces of European legislation available in this regard: Regulation (EC) No 2006/2004 of the European Parliament and of the Council of 27 October 2004 on Cooperation Between National Authorities Responsible for the Enforcement of Consumer Protection Laws (the Regulation on Consumer Protection Cooperation [CPC]), and the European Small Claims Procedure,
  • [6] See Jordan and Rubin (1979) 535: competitors are harmed because sales that they would have made have been diverted to the other firm. They can be expected to lose substantially more than consumers.
  • [7] Apart from a thorough study of three countries - the Netherlands, Sweden and England - in the ambit of the PhD dissertation (see fn 1), a variety of interviews was carried out with a number of different institutions in different Member States and large amounts of information were generated in this way.
  • [8] See C Hodges, S Vogenauer and M Tulibacka (eds), The Costs and Funding of Civil Litigation - A Comparative Perspective (2010) 28: in almost all jurisdictions the general position is that the loser pays the costs of the court, evidence and lawyer (in civil litigation). Some exceptions are possible. In fact, often not the full amount of costs can be shifted.
  • [9] Hourly fees are the rule. There is a strong cultural resistance in many states, see Hodges, Vogenauer and Tulibacka (2010) 25. Such arrangements are banned, e.g., in the Netherlands; see for an overview on rules in various countries, MG Faure, FJ Fernhout and NJ Philipsen, Resultaatgerelateerde beloningssystemen voor advocaten - Een vergelijkende beschrijving van beloningssystemen voor advocaten in een aantal landen van de Europese Unie en Hong Kong (2009).
  • [10] See C Hodges, 'Collective Actions', in P Cane and HM Kritzer (eds) (2010) 707. See the contribution by Hans-W Micklitz ('A Common Approach to the Enforcement of Unfair Commercial Practices and Unfair Contract Terms') in this volume.
  • [11] See also the analysis of the advantages and disadvantages of private and public enforcement by Dorte Poelzig in this volume.
  • [12] In line with the deterrence theory, costly sanctions (like fines) can outweigh low probabilities of detection and uphold the deterrent effects of a legal response in these cases.
  • [13] Imprisonment is considered as an additional sanction in the subsection on criminal law enforcement.
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