Abusing Loopholes in the Legal System - Efficiency Considerations of Differentiated Law Enforcement Approaches in Misleading Advertising

Abstract

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 society. This is particularly so because in many cases the enforcement response given a legal breach is slow or does not happen at all. A discrepancy can be observed between mala fide and bona fide traders. While the latter inadvertently breach 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. This paper deals with the efficient design of enforcement mechanisms addressing misleading advertising laws. Enforcement is crucial to induce individuals to law-abiding behaviour. Here, it is approached from the deterrence perspective. The 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. This article's 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 two mentioned types of traders calculate with differently high benefits. Thus they are to be deterred by different means which calls for a differentiated approach in legal responses and institutions involved. Path dependency explains why no one-size-fits-all solution is available for all European Member States, and the paper aims at providing a set of design requirements that can be adapted to the respective legal system.