Kraft, Inc. v. Federal Trade Commission

Kraft, Inc. ("Kraft") asks us to review an order of the Federal Trade Commission ("FTC" or "Commission") finding that it violated §§ 5 and 12 of the Federal Trade Commission Act ("Act"), 15 U.S.C. §§ 45, 52. The FTC determined that Kraft, in an advertising campaign, had misrepresented information regarding the amount of calcium contained in Kraft Singles American Pasteurized Process Cheese Food ("Singles") relative to the calcium content in five ounces of milk and in imitation cheese slices. The FTC ordered Kraft to cease and desist from making these misrepresentations and Kraft filed this petition for review. We enforce the Commission's order.

Three categories of cheese compete in the individually wrapped process slice market: process cheese food slices, imitation slices, and substitute slices. Process cheese food slices, also known as "dairy slices," must contain at least 51% natural cheese by federal regulation. 21 C.F.R. § 133.173(a)(5). Imitation cheese slices, by contrast, contain little or no natural cheese and consist primarily of water, vegetable oil, flavoring agents, and fortifying agents. While imitation slices are as healthy as process cheese food slices in some nutrient categories, they are as a whole considered "nutritionally inferior" and must carry the label "imitation." Id. at § 101.3(e)(4). Substitute slices fit somewhere in between; they fall short of the natural cheese content of process cheese food slices yet are nutritionally superior to imitation slices. Id. at § 101.3(e)(2). Consistent with FTC usage, we refer to both imitation and substitute slices as "imitation" slices.

Kraft Singles are process cheese food slices. In the early 1980s, Kraft began losing market share to an increasing number of imitation slices that were advertised as both less expense and equally nutritious as dairy slices like Singles. Kraft responded with a series of advertisements, collectively known as the "Five Ounces of Milk" campaign, designed to inform consumers that Kraft Singles cost more than imitation slices because they are made from five ounces of milk rather than less expensive ingredients. The ads also focused on the calcium content of Kraft Singles in an effort to capitalize on growing consumer interest in adequate calcium consumption.

The FTC filed a complaint against Kraft charging that this advertising campaign materially misrepresented the calcium content and relative calcium benefit of Kraft Singles. The FTC Act makes it unlawful to engage in unfair or deceptive commercial practices, 15 U.S.C. § 45, or to induce consumers to purchase certain products through advertising that is misleading in a material respect. Id. at §§ 52, 55. Thus, an advertisement is deceptive under the Act if it is likely to mislead consumers, acting reasonably under the circumstances, in a material respect. Thompson Medical Co., 104 F.T.C. 648, 788 (1984), aff'd, 791 F.2d 189 (D.C.Cir.1986), cert. denied, 479 U.S. 1086, 107 S.Ct. 1289, 94 L.Ed.2d 146 (1987), Cliffdale Assocs., Inc., 103 F.T.C. 110, 164-66 (1984); Federal Trade Commission Policy Statement on Deception, 103 F.T.C. 174 (1984) (appended to Cliffdale Assocs.) [hereinafter "FTC Policy Statement"]. In implementing this standard, the Commission examines the overall net impression of an ad and engages in a three-part inquiry: (1) what claims are conveyed in the ad; (2) are those claims false or misleading; and (3) are those claims material to prospective consumers.

Two facts are critical to understanding the allegations against Kraft. First, although Kraft does use five ounces of milk in making each Kraft Single, roughly 30% of the calcium contained in the milk is lost during processing. Second, the vast majority of imitation slices sold in the United States contain 15% of the U.S. Recommended Daily Allowance (RDA) of calcium per ounce, roughly the same amount contained in Kraft Singles. Specifically then, the FTC complaint alleged that the challenged advertisements made two implied claims, neither of which was true: (1) that a slice of Kraft Singles contains the same amount of calcium as five ounces of milk (the "milk equivalency" claim); and (2) that Kraft Singles contain more calcium than do most imitation cheese slices (the "imitation superiority" claim).1

The two sets of ads at issue in this case, referred to as the "Skimp" ads and the "Class Picture" ads, ran nationally in print and broadcast media between 1985 and 1987. The Skimp ads were designed to communicate the nutritional benefit of Kraft Singles by referring expressly to their milk and calcium content. The broadcast version of this ad on which the FTC focused contained the following audio copy:

Lady (voice over): I admit it. I thought of skimping. Could you look into those big blue eyes and skimp on her? So I buy Kraft Singles. Imitation slices use hardly any milk. But Kraft has five ounces per slice. Five ounces. So her little bones get calcium they need to grow. No, she doesn't know what that big Kraft means. Good thing I do.

Singers: Kraft Singles. More milk makes 'em ... more milk makes 'em good.

Lady (voice over): Skimp on her? No way.

See CX 62C & Z-72 (television ad); CX 62 Z-33 (print ad); Complaint p 5 and Exs. AD; IDF 26, 44.2 The visual image corresponding to this copy shows, among other things, milk pouring into a glass until it reaches a mark on the glass denoted "five ounces." The commercial also shows milk pouring into a glass which bears the phrase "5 oz. milk slice" and which gradually becomes part of the label on a package of Singles. In January 1986, Kraft revised this ad, changing "Kraft has five ounces per slice" to "Kraft is made from five ounces per slice," IDF 28; see CX 276F, CX 106 (emphasis added), and in March 1987, Kraft added the disclosure, "one 3/4 ounce slice has 70% of the calcium of five ounces of milk" as a subscript in the television commercial and as a footnote in the print ads.

The Class Picture ads also emphasized the milk and calcium content of Kraft Singles but, unlike the Skimp ads, did not make an express comparison to imitation slices. The version of this ad examined by the FTC depicts a group of school children having their class picture taken, and contains the following audio copy:

Announcer (voice over): Can you see what's missing in this picture?

Well, a government study says that half the school kids in America don't get all the calcium recommended for growing kids. That's why Kraft Singles are important. Kraft is made from five ounces of milk per slice. So they're concentrated with calcium. Calcium the government recommends for strong bones and healthy teeth!

Photographer: Say Cheese!

Kids: Cheese!

Announcer (voice over): Say Kraft Singles. ' Cause kids love Kraft Singles, right down to their bones.

See CX 275I & CX 62 Z-11 (television ad); CX 62 Z-55 (print ad); see also IDF 38. The Class Picture ads also included the subscript disclaimer mentioned above.

After a lengthy trial, the Administrative Law Judge (ALJ) concluded that both the Skimp and Class Picture ads made the milk equivalency claim. Specifically, the ALJ found that the juxtaposition of references to milk and calcium, along with the failure to mention that calcium is lost in processing, implied that each Kraft Single contains the same amount of calcium as five ounces of milk, and that the altered audio copy and subscript disclosure were confusing and inconspicuous and thus insufficient to dispel this impression. Further, the ALJ concluded that both sets of ads falsely conveyed the imitation superiority claim; he determined that reasonable consumers would take away the net impression that Kraft Singles contain more calcium than imitation slices because Kraft Singles contain five ounces of milk and imitation slices have little or no milk. According to the ALJ, both claims were material because they implicated important health concerns. He therefore ordered Kraft to cease and desist from making these claims about any of its individually wrapped slices of process cheese food, imitation cheese, or substitute cheese.

The FTC affirmed the ALJ's decision, with some modifications. In re Kraft, Inc., FTC No. 9208 (Jan. 30, 1991). As to the Skimp ads, the Commission found that four elements conveyed the milk equivalency claim: (1) the use of the word "has" in the phrase "Kraft has five ounces per slice"; (2) repetition of the precise amount of milk in a Kraft Single (five ounces); (3) the use of the word "so" to link the reference to milk with the reference to calcium; and (4) the visual image of milk being poured into a glass up to a five-ounce mark, and the superimposition of that image onto a package of Singles. It also found two additional elements that conveyed the imitation superiority claim: (1) the express reference to imitation slices combined with the use of comparative language ("hardly any," "but"); and (2) the image of a glass containing very little milk during the reference to imitation slices, followed by the image of a glass being filled to the five-ounce mark during the reference to Kraft Singles. The Commission based all of these findings on its own impression of the advertisements and found it unnecessary to resort to extrinsic evidence; it did note, however, that the available extrinsic evidence was consistent with its determinations.

The Commission then examined the Class Picture ads--once again, without resorting to extrinsic evidence--and found that they contained copy substantially similar to the copy in the Skimp ads that conveyed the impression of milk equivalency. It rejected, however, the ALJ's finding that the Class Picture ads made an imitation superiority claim, determining that the ads neither expressly compared Singles to imitation slices, nor contained any visual images to prompt such a comparison, and that available extrinsic evidence did not support the ALJ's finding.

The FTC next found that the claims were material to consumers. It concluded that the milk equivalency claim is a health-related claim that reasonable consumers would find important and that Kraft believed that the claim induced consumers to purchase Singles. The FTC presumed that the imitation superiority claim was material because it found that Kraft intended to make that claim. It also found that the materiality of that claim was demonstrated by evidence that the challenged ads led to increased sales despite a substantially higher price for Singles than for imitation slices.

Finally, the FTC modified the ALJ's cease and desist order by extending its coverage from "individually wrapped slices of cheese, imitation cheese, and substitute cheese" to "any product that is a cheese, related cheese product, imitation cheese, or substitute cheese." The Commission found that the serious, deliberate nature of the violation, combined with the transferability of the violations to other cheese products, justified a broader order. Kraft filed this petition to set-aside the Commission's order or, alternatively, to modify its scope.

Our standard for reviewing FTC findings has been traditionally limited to the highly deferential, substantial evidence test. FTC v. Indiana Fed'n of Dentists, 476 U.S. 447, 454, 106 S.Ct. 2009, 2015, 90 L.Ed.2d 445 (1976); Hospital Corp. of Am. v. FTC, 807 F.2d 1381, 1384 (7th Cir.1986), cert. denied, 481 U.S. 1038, 107 S.Ct. 1975, 95 L.Ed.2d 815 (1987). However, Kraft argues as a threshold matter that two recent Supreme Court decisions, Bose Corp. v. Consumers Union, 466 U.S. 485, 510-11, 104 S.Ct. 1949, 1965, 80 L.Ed.2d 502 (1984), and Peel v. Attorney Registration and Disciplinary Comm'n, 496 U.S. 91, 110 S.Ct. 2281, 110 L.Ed.2d 83 (1990), compel us to review the FTC's factual findings de novo because they implicate Kraft's first amendment commercial speech rights.

A deferential standard in reviewing FTC findings long predates Bose and Peel. In FTC v. Colgate-Palmolive Co., 380 U.S. 374, 385, 85 S.Ct. 1035, 1043, 13 L.Ed.2d 904 (1965), the Supreme Court held that while the words "deceptive advertising" set forth a legal standard that derives its final meaning from judicial construction, an FTC finding is "to be given great weight by reviewing courts" because it "rests so heavily on inference and pragmatic judgment" and in light of the frequency with which the Commission handles these cases. Id. at 385, 85 S.Ct. at 1043. However, Colgate-Palmolive preceded the extension of first amendment protection to commercial speech, see, e.g., Virginia Pharmacy Bd. v. Virginia Citizens Consumer Council, Inc., 425 U.S. 748, 770, 96 S.Ct. 1817, 1829, 48 L.Ed.2d 346 (1976), and subsequent cases examining the contours of that right.

Bose was a libel case holding that appellate courts have a constitutional responsibility to review de novo a lower court finding of fact that a defamatory statement was made with actual malice. Bose, 466 U.S. at 510-11, 104 S.Ct. at 1965. The Court declared that judges, as expositors of the Constitution, must independently decide whether evidence in the record is sufficient to strip allegedly libelous speech of first amendment protection. The Court, however, explicitly left unresolved the question of whether this higher standard of review extended to commercial speech cases. Id. at 504 n. 22, 104 S.Ct. at 1961 n. 22. Kraft asserts that the Court has since answered that question. Peel held that a state regulation prohibiting attorneys from advertising a specialty or certification violated the first amendment and, significantly, a plurality of four Justices reviewed this issue de novo, Peel, 496 U.S. at 108, 110 S.Ct. at 2291 (citing Bose), while Justice Marshall, writing separately, and providing a fifth vote, apparently did so as well. Id. at 111-117, 110 S.Ct. at 2293-96 (concurring opinion). Thus, Peel arguably extended de novo review to another subcategory of constitutionally protected speech, commercial advertising.

Nonetheless, we decline to apply de novo review in this context. For one, the implications of Bose are not as clear as Kraft suggests, see FTC v. Brown & Williamson Tobacco Corp., 778 F.2d 35, 41 n. 3 (D.C.Cir.1985) (refusing to extend Bose to the commercial speech context); see also Henry P. Monaghan, Constitutional Fact Review, 85 Colum.L.Rev. 229, 244-47 (1985), and Bose itself suggests that commercial speech might not warrant the higher standard of review established for libel cases. Bose, 466 U.S. at 504 n. 22, 104 S.Ct. at 1962 n. 22 (commercial speech generally considered less susceptible to the chilling effect of state regulation than other forms of speech). Although one might argue that Bose and Peel operating in tandem effectively overrule Colgate-Palmolive, we do not think that the Court intended that result. See Rodriquez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477, 484, 109 S.Ct. 1917, 1921-22, 104 L.Ed.2d 526 (1989) ("If a precedent of this Court has a direct application in a case, yet appears to rest on reasons rejected in some other line of decisions, [Courts] of Appeals should follow the case which directly controls, leaving to [the Supreme] Court the prerogative of overruling its own decisions."). Moreover, there are important distinctions between the sort of appellate review conducted in Bose and Peel and that done in Colgate-Palmolive and this case. The former involved review of court decisions, and courts generally lack the Commission's expertise in the field of deceptive advertising. While it could be posited that it is counter-intuitive to grant more deference to the Commission than to courts, Commission findings are well-suited to deferential review because they may require resolution of "exceedingly complex and technical factual issues." Zauderer v. Office of Disciplinary Counsel of Supreme Court of Ohio, 471 U.S. 626, 645, 105 S.Ct. 2265, 2279, 85 L.Ed.2d 652 (1985); see also Colgate-Palmolive, 380 U.S. at 385, 85 S.Ct. at 1042. In addition, the determination of whether an ad has a tendency to deceive is an impressionistic one more closely akin to a finding of fact than a conclusion of law. National Comm'n on Egg Nutrition v. FTC, 570 F.2d 157, 161 (7th Cir.1977), cert. denied, 439 U.S. 821, 99 S.Ct. 86, 58 L.Ed.2d 113 (1978); Beneficial Corp. v. FTC, 542 F.2d 611, 617 (3d Cir.1976), cert. denied, 430 U.S. 983, 97 S.Ct. 1679, 52 L.Ed.2d 377 (1977).

Most important, the restriction challenged in Peel is a completely different animal than the one challenged here. In Peel, the issue was whether a prophylactic regulation applicable to all lawyers, completely prohibiting an entire category of potentially misleading commercial speech, passed constitutional muster.3 Peel, 496 U.S. at 108-09, 110 S.Ct. at 2292 (plurality); id. at 111, 110 S.Ct. at 2293 (concurrence). Here, by contrast, the issue is whether an individualized FTC cease and desist order, prohibiting a particular set of deceptive ads, passes constitutional muster. See Zauderer, 471 U.S. at 645-46, 105 S.Ct. at 2279 (assessing deceptive advertising under the FTC Act a qualitatively different and more complex task than assessing the validity of a state attorney advertising regulation). We find the restriction at issue in Peel and the one here sufficiently distinct to justify differing levels of appellate review. Accordingly, we decline to review de novo the FTC's findings and, with the substantial evidence test in mind, turn to the facts of this case.

Kraft makes numerous arguments on appeal, but its principal claim is that the FTC erred as a matter of law in not requiring extrinsic evidence of consumer deception. Without such evidence, Kraft claims (1) that the FTC had no objective basis for determining if its ads actually contained the implied claims alleged, and (2) that the FTC's order chills constitutionally protected commercial speech. Alternatively, Kraft contends that substantial evidence does not support the FTC's finding that the Class Picture ads contain the milk equivalency claim. Finally, Kraft maintains that even if it did make the alleged milk equivalency and imitation superiority claims, substantial evidence does not support the FTC's finding that these claims were material to consumers. We address each contention in turn.

In determining what claims are conveyed by a challenged advertisement, the Commission relies on two sources of information: its own viewing of the ad and extrinsic evidence. Its practice is to view the ad first and, if it is unable on its own to determine with confidence what claims are conveyed in a challenged ad, to turn to extrinsic evidence. Thompson Medical, 104 F.T.C. at 788-89; Cliffdale Assocs., 103 F.T.C. 110, 164-66 (1984); FTC Policy Statement, 103 F.T.C. at 176. The most convincing extrinsic evidence is a survey "of what consumers thought upon reading the advertisement in question," Thompson Medical, 104 F.T.C. at 788-89, but the Commission also relies on other forms of extrinsic evidence including consumer testimony, expert opinion, and copy tests of ads. FTC Policy Statement, 103 F.T.C. at 176 n. 8.

Kraft has no quarrel with this approach when it comes to determining whether an ad conveys express claims, but contends that the FTC should be required, as a matter of law, to rely on extrinsic evidence rather than its own subjective analysis in all cases involving allegedly implied claims.4 The basis for this argument is that implied claims, by definition, are not self-evident from the face of an ad. This, combined with the fact that consumer perceptions are shaped by a host of external variables--including their social and educational backgrounds, the environment in which they view the ad, and prior experiences with the product advertised, see Richard Craswell, Interpreting Deceptive Advertising, 65 B.U.L. Rev. 658, 672-74, 717 (1985); Richard Pollay, Deceptive Advertising and Consumer Behavior: A Case for Legislative and Judicial Reform, 17 U.Kan.L.Rev. 625, 629-31 (1969)--makes review of implied claims by a five-member commission inherently unreliable. The Commissioners, Kraft argues, are simply incapable of determining what implicit messages consumers are likely to perceive in an ad. Making matters worse, Kraft asserts that the Commissioners are predisposed to find implied claims because the claims have been identified in the complaint, rendering it virtually impossible for them to reflect the perceptions of unbiased consumers. See Comment, The Use and Reliability of Survey Evidence in Deceptive Advertising Cases, 62 Or.L.Rev. 561, 572 (1983) ("since the commissioners are highly trained attorneys with very specialized views of advertising, they lack the perspective to accurately identify the meaning given an advertisement by the general public").

Kraft buttresses its argument by pointing to the use of extrinsic evidence in an analogous context: cases brought under § 43(a) of the Lanham Act. 15 U.S.C. § 1125(a). Courts hearing deceptive advertising claims under that Act, which provides a private right of action for deceptive advertising, generally require extrinsic proof that an advertisement conveys an implied claim. See, e.g., Avis Rent A Car System, Inc. v. Hertz Corp., 782 F.2d 381, 386 (2d Cir.1986); Tambrands, Inc. v. Warner-Lambert Co., 673 F.Supp. 1190, 1198 (S.D.N.Y.1987); see generally Ivan L. Preston, False or Deceptive Advertising Under the Lanham Act: Analysis of Factual Findings and Types of Evidence, 79 Trademark Rep. 508, 526 (1989). Were this a Lanham Act case, a reviewing court in all likelihood would have relied on extrinsic evidence of consumer perceptions. While this disparity is sometimes justified on grounds of advertising "expertise"--the FTC presumably possesses more of it than courts, see American Home Prods. Corp. v. Johnson & Johnson, 577 F.2d 160, 172 n. 27 (2d Cir.1978)--Kraft maintains this justification is an illusory one in that the FTC has no special expertise in discerning consumer perceptions. See Robert Pitofsky, Beyond Nader: Consumer Protection and the Regulation of Advertising, 90 Harv.L.Rev. 661, 678 (1977); Ernest Gellhorn, Proof of Consumer Deception Before the Federal Trade Commission, 17 U.Kan.L.Rev. 559, 564-65 (1969). Indeed, proof of the FTC's inexpertise abounds: false advertising cases makes up a small part of the Commission's workload, see Glen E. Weston, Deceptive Advertising and the Federal Trade Commission: Decline of Caveat Emptor, 24 Fed.B.J. 548, 571 (1964), most commissioners have little prior experience in advertising, see Paul H. LaRue, FTC Expertise: A Legend Examined, 16 Antitrust Bull. 1 (1971), and the average tenure of commissioners is very brief. See Richard A. Posner, The Federal Trade Commission, 37 U.Chi.L.Rev. 47, 86 (1969) (average tenure of four years). That evidence aside, no amount of expertise in Kraft's view can replace the myriad of external variables affecting consumer perceptions. Here, the Commission found implied claims based solely on its own intuitive reading of the ads (although it did reinforce that conclusion by examining the proffered extrinsic evidence). Had the Commission fully and properly relied on available extrinsic evidence, Kraft argues it would have conclusively found that consumers do not perceive the milk equivalency and imitation superiority claims in the ads.

While Kraft's arguments may have some force as a matter of policy, they are unavailing as a matter of law. Courts, including the Supreme Court, have uniformly rejected imposing such a requirement on the FTC, see Colgate-Palmolive, 380 U.S. at 391-92, 85 S.Ct. at 1046 (FTC not required to conduct consumer surveys before determining that a commercial has a tendency to mislead); National Bakers Servs., Inc. v. FTC, 329 F.2d 365, 367 (7th Cir.1964); Rhodes Pharmacal Co. v. FTC, 208 F.2d 382, 387 (7th Cir.1953), rev'd in part, 348 U.S. 940, 75 S.Ct. 361, 99 L.Ed. 736 (1955); Zenith Radio Corp. v. FTC, 143 F.2d 29, 31 (7th Cir.1944); accord Bristol-Myers Co. v. FTC, 738 F.2d 554, 563 (2d Cir.1984), cert. denied, 469 U.S. 1189, 105 S.Ct. 960, 83 L.Ed.2d 966 (1985); American Home Prods. Corp. v. FTC, 695 F.2d 681, 687 n. 10 (3d Cir.1982); Simeon Management Corp. v. FTC, 579 F.2d 1137, 1146 n. 11 (9th Cir.1978); FTC v. Brown & Williamson Tobacco Corp., 778 F.2d 35, 40-41 (D.C.Cir.1985); Thompson Medical, 791 F.2d at 197, and we decline to do so as well. We hold that the Commission may rely on its own reasoned analysis to determine what claims, including implied ones, are conveyed in a challenged advertisement, so long as those claims are reasonably clear from the face of the advertisement.

Kraft's case for a per se rule has two flaws. First, it rests on the faulty premise that implied claims are inescapably subjective and unpredictable. In fact, implied claims fall on a continuum, ranging from the obvious to the barely discernible. Thompson Medical, 104 F.T.C. at 788-89. The Commission does not have license to go on a fishing expedition to pin liability on advertisers for barely imaginable claims falling at the end of this spectrum. However, when confronted with claims that are implied, yet conspicuous, extrinsic evidence is unnecessary because common sense and administrative experience provide the Commission with adequate tools to makes its findings. See Colgate-Palmolive, 380 U.S. at 391-92, 85 S.Ct. at 1045 (FTC need not conduct a consumer survey in finding commercial misleading); cf. Zauderer, 471 U.S. at 652-53, 105 S.Ct. at 2282 (implied claims that are self-evident do not require the State to conduct a public survey before finding advertisement misleading). The implied claims Kraft made are reasonably clear from the face of the advertisements, and hence the Commission was not required to utilize consumer surveys in reaching its decision.

Second, Kraft's reliance on Lanham Act decisions is misplaced. For one, not all courts applying the Lanham Act rely on extrinsic evidence when confronted with implied claims, see, e.g., Better Business Bureau, Inc. v. Medical Directors, Inc., 681 F.2d 397, 403 (5th Cir.1982); American Home Prods. v. Johnson & Johnson, 654 F.Supp. 568, 583 (S.D.N.Y.1987), but more importantly, when they do, it is because they are ill equipped--unlike the Commission--to detect deceptive advertising. See, e.g., Sandoz Pharmaceuticals Corp. v. Richardson-Vicks, Inc., 902 F.2d 222, 228 (3d Cir.1990); Procter & Gamble Co. v. Chesebrough-Pond's Inc., 588 F.Supp. 1082, 1094 (S.D.N.Y.), aff'd, 747 F.2d 114 (2d Cir.1984). And the Commission's expertise in deceptive advertising cases, Kraft's protestations notwithstanding, undoubtedly exceeds that of courts as a general matter. That false advertising cases constitute a small percentage of the FTC's overall workload does not negate the fact that significant resources are devoted to such cases in absolute terms, nor does it account for the institutional expertise the FTC gains through investigations, rulemakings, and consent orders. The Commissioners' personal experiences quite obviously affect their perceptions, but it does not