CHAPTER 21
Consumer Protection
INTRODUCTION
This chapter explores the major acts
that focus on consumer protection
and fairness. Issues of consumer
health and safety are also covered.
Additionally, which agencies handle
consumer issues is addressed.
2
COMMISSIONS AND
AGENCIES
 Independent federal regulatory agencies: the
Federal Trade Commission, the Federal
Communications Commission, the Securities and
Exchange Commission, the Federal Reserve
System, and the Consumer Product Safety
Commission.
 Executive branch departments: The Food and Drug
Administration, Environmental Protection Agency,
and the National Highway Traffic Safety
Administration.
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CONSUMER HEALTH AND
SAFETY
Federal, state, and local regulatory agencies
protect consumers’ health and safety, e.g.,
FDA, the Consumer Product Safety
Commission). FTC regulates labeling and
packaging. States regulate the availability of
alcohol, tobacco, and gambling, no-smoking
areas, and licensing of professional workers
through the granting of various occupational
licenses.
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FOOD SAFETY AND
LABELING
 Product Definition under FDCA: Food and Drug? Distinction is
important because of different provisions of the Food, Drug, and
Cosmetic Act (FDCA) that affect labeling and adulteration.
– Drugs include (1) articles intended for use in the diagnosis,
cure, mitigation, treatment, or prevention of disease; and (2)
articles (other than food) intended to affect the structure or any
function of the body.
– Food is defined as (1) articles used for food or drink; (2)
chewing gum; and (3) articles used for components of either.
– Intent. FDA looks to intent to use a product as a drug in
determining how to categorize it.
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FOOD SAFETY AND
LABELING
 FDA Standards for Food Condemnation
– Depends on whether the product is a natural food or contains additives.
– Additive - anything not inherent in the food product, including pesticide
residue, unintended environmental contaminants, and unavoidably added
substances from packaging. If the additive is injurious, the product is
deemed “adulterated.”
– Natural foods - adulterated if they consist of in whole in part of any filthy,
putrid or decomposed substance. Adulterated natural foods are seized.
Tainted food causes an estimated 6.5 million to 33 million illnesses and
9,000 deaths annually in the United States.
– U.S. importers of food from international vendors are encouraging
produce exporters to have their operations certified by private U.S.
laboratories that inspect the fields, irrigation water and packing
conditions, and the bathrooms workers use.
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ROLE OF THE U.S. DEPARTMENT
OF AGRICULTURE (USDA)
USDA’s primary consumer protection
activities all involve food and include
inspecting facilities engaged in the
slaughtering or processing of meat, poultry,
and egg products; preventing the sale of
mislabeled meat or poultry products; and
offering producers a voluntary grading
program for various agricultural products.
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ROLE OF THE U.S. DEPARTMENT
OF AGRICULTURE (USDA)
 Pesticides - under the FDCA, the FDA shares responsibility with the EPA
for regulating pesticide residues on food.
 Genetically Modified Food - regulatory agencies are developing better
methods for identifying potential allergens and regulatory agencies to
monitor the environmental impact of genetically modified organisms
(GMOs).
 Irradiated Foods - FDA authorized process where fresh and frozen red
meat is passed through a sealed chamber, where it is exposed to gamma
ray radiation. FDA regulations require conspicuous labels “”Treated with
Radiation.”
 Organic Foods - USDA standards ban the use of pesticides, genetic
engineering, growth hormones, and irradiation, and they require dairy
cattle to have access to pasture. Foods grown and processed according
to the standards bear the seal “USDA Organic.”
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ROLE OF THE U.S. DEPARTMENT
OF AGRICULTURE (USDA)
 Food Labeling - FDA has primary responsibility for regulating the packaging
and labeling of food (except meat, poultry, and eggs, which are under the
jurisdiction of the USDA), drugs, medical devices, and cosmetics.
– Fair Packaging and Labeling Act: food label must contain the name and
address of the manufacturer, packer, or distributor; the net quantity on
the front panel, placed in a uniform location; the quantity given in
servings, with the net quantity of each serving stated; and the quantity
listed in certain ways, depending on how the product is classified.
– Nutrition Labeling and Education Act - requires labeling of almost all
foods through a nutrition panel entitled “Nutrition Facts” that includes
ingredients, but restricts nutrient content claims and health claims. The
FDA also regulates use of the words “light,” “fat free,” and “low calorie.”
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DRUGS AND MEDICAL DEVICES
 FDA Standards for Drug Approval - FDA has authority to
require that certain drugs be available only by
prescription. DEA classifies drugs into one of five
different schedules.
 Labeling of Medical Devices - FDA also has jurisdiction.
However, even if a manufacturer provides the FDAmandated warnings, it still could be found liable under
state product liability law for failure to warn if reasonable
manufacturers would have done more.
 Drug Advertising - FDA recently relaxed rules for
advertising of prescription drugs on television and radio.
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HEALTH CLAIMS AND LABELING
OF DIETARY SUPPLEMENTS
 The Dietary Supplement Health and Education Act.
– Regulates the sale of dietary supplements only
when the supplement contains a new dietary
ingredient or poses a safety risk.
– Dietary supplements include vitamins, minerals,
herbs, and amino acids.
– Dietary supplements can be characterized as
drugs.
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HEALTH CLAIMS AND LABELING
OF DIETARY SUPPLEMENTS
 The Nutrition Labeling and Education Act
– Creates a safe harbor for health claims on
dietary supplements.
– But FDA validates health claims only if
there was substantial scientific agreement
among experts.
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LABELING OF OTHER
PRODUCTS
 Clothing - FTC has primary responsibility for
regulating the packaging and labeling of
commodities to protect distributors and consumers
against misbranding and false advertising.
 Alcohol - BATF regulations attach legal meanings to
various statements made on wine labels, including
the vintage year, grape variety, producer, and
alcohol content, the disclosure of risks of birth
defects, the impaired ability to drive a car and
cautions against its use with machinery.
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LABELING OF OTHER
PRODUCTS
 “Made in USA”—regulated by FTC.
– “All or virtually all” of the product must be made in the
fifty states, the District of Columbia, or the U.S. territories
and possessions.
– “All or virtually all” means that all significant parts and
processing that go into the product must be of U.S.
origin.
 State Labeling Laws - many states, through their use of
labeling laws, have taken steps to protect consumers from
dangerous products. Historically, these laws have sought to
protect consumers from risks that involved the danger of
imminent bodily harm.
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BROADCASTING AND THE
INTERNET
 Broadcasting - by Federal Communications Commission
(FCC)
– FCC seeks to ensure that broadcast media are competitive
and operate for the public’s benefit and use.
– FCC enforcement is through license renewals.
– Licenses cannot be transferred or assigned unless the
FCC determines it is in the public interest.
 The Internet - has spawned new types of fraudulent schemes,
such as online auction fraud, pyramid schemes, and
securities fraud. The FTC, the U.S. Department of Justice, and
the Securities and Exchange Commission are active in
prosecuting offenders.
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THE CONSUMER PRODUCT
SAFETY COMMISSION (CPSC)
 Scope. Protect public against unreasonable risks of injury
associated with consumer products (including infant
products and toys) and assistance to consumers in
evaluating the comparative safety of such products.
– CPSC sets consumer product safety standards, such as
performance or product-labeling specifications.
– Any interested person may petition the CPSC to adopt a
standard or begins a proceeding to develop a standard
by publishing a notice in the Federal Register inviting
any person to submit an offer to do the development.
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THE CONSUMER PRODUCT
SAFETY COMMISSION (CPSC)
 Penalties
– Unlawful to manufacture for sale, offer for sale, distribute
in commerce, or import into the United States a
consumer product that does not conform to CPSC
standards.
– Violators are subject to civil penalties, criminal penalties,
injunctive enforcement and seizure, private suits for
damages, and private suits for injunctive relief.
– The CPSC may require manufacturers to repair, modify,
or replace the product, or refund the purchase price.
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AUTOMOBILES
The National Highway Traffic Safety Administration
(NHTSA), an agency of the U.S. Department of
Transportation, has the power to establish motor
vehicle safety standards, engage in testing and
development of motor vehicle safety, prohibit
manufacture or importation of substandard
vehicles, and develop tire safety. States refusing to
comply with established federal standards are
denied federal highway funds.
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PRIVACY PROTECTIONS
Technological developments, especially the Internet, have
made it possible to amass large amounts of detailed
personal information.
 Domestic. Federal and state governments introduced more
than one hundred privacy bills in three general categories:
– (1) bills aimed at the financial industry to prohibit or limit
use of account-related information;
– (2) bills to regulate the use of information collected by
online service providers and Web sites; and
– (3) bills to prevent state agencies from selling
information about people who do business with the state,
including obtaining driver’s licenses.
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PRIVACY PROTECTIONS
 International. Russia passed a law to
eavesdrop on all cellular telephone, pager
communications and internet traffic. In
contrast, a French court ruled on November
2, 2000, that e-mail is covered by French
privacy laws. Britain adopted regulations in
October 2000 empowering employers to
monitor employees’ e-mails and Internet
activity.
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PRIVACY PROTECTIONS
 Financial Institutions - The Gramm-Leach-Bliley Act
requires financial institutions (banks, debt
collectors, credit counselors, retailers, and travel
agencies) to provide privacy protections to
consumers, including requiring notice before
sharing personal information with other entities and
restricting the right to give out personal
information. The act also requires financial
institutions to disclose annually their privacy policy
and to give customers the right to opt-out of
disclosures to third parties.
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STATE OCCUPATIONAL
LICENSING
State departments of consumer affairs protect the public by
examining and licensing firms and individuals who possess
the necessary education and demonstrated skills to perform
their services competently. Among the occupations
generally regulated are accountants, architects, barbers,
contractors, cosmetologists, dentists, dry cleaners,
marriage counselors, nurses, pharmacists, physical
therapists, physicians, and social workers. Attorneys are
regulated by state bar associations and the courts. State
departments of consumer affairs also investigate and
resolve consumer complaints and hold public hearings
involving consumer matters.
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UNFAIRNESS, DECEPTION,
AND FRAUD
Regulatory agencies, such as the FTC, the
FDA, the FCC and the SEC, are involved in
the area of unfair and deceptive trade
practices and consumer fraud. These federal
agencies regulate advertising, packaging and
labeling, pricing, warranties, and numerous
sales practices.
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ADVERTISING AND
WARRANTIES
 Companies sometimes make claims that are deceptive
or false. Legal solutions to this problem have
historically involved three separate approaches: the
common law, statutory law, and regulatory law.
 Common Law - provides two remedies for a consumer
who has been misled by false advertising.
– Consumer can sue for breach of contract.
– Consumer can also sue for fraud (deceit) that
requires knowledge by the seller that the
misrepresentation is false.
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ADVERTISING AND
WARRANTIES
 Statutory Law - UCC and Lanham Act may protect
consumers from false advertising.
– UCC Express Warranty - any statement, sample, or model
if it is part of the basis of the bargain. Consumer can sue
for breach of express warranty.
– Lanham Act - forbids the use of any false “description or
representation” in connection with any goods or services
and provides a private cause of action for any competitor
injured by any other competitor’s false claims.
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LANHAM ACT
Case 21.1 Synopsis. Mead Johnson & Co. v. Abbott Laboratories.
Abbott manufactures the infant formula Similac and advertises it as the
“1st Choice of Doctors.” Mead Formula, which manufactures a competing
infant formula (Enfamil), sued Abbott, alleging that its claim that Similac
was the first choice of doctors was misleading and violated the Lanham
Act. In support of its claims, Mead Johnson introduced evidence from a
survey of women who had recently purchased or contemplated
purchasing formula to determine how consumers interpreted the claim
“1st Choice of Doctors.” The court ruled that Abbott could not claim that
its product was the first choice because a majority of doctors did not
prefer it. Accordingly, the court held that “1st Choice of Doctors” violated
the Lanham Act. Abbott appealed. ISSUE: Did Abbott’s claim that its
infant formula was the first choice of doctors violate the Lanham Act?
HELD: REVERSED and DISMISSED. Abbott did not violate the Lanham Act
so it could continue to advertise Similac as the first choice of doctors.
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ADVERTISING AND
WARRANTIES
 FTC Regulatory Law - The Federal Trade Commission is
charged with preventing unfair and deceptive trade practices,
including false advertising.
– Deceptive Price - sale of advertised items at higher prices
to customers unaware of the advertised price, bait and
switch advertising rules if it refuses to show an advertised
item, fails to have a reasonable quantity of the item in
stock, fails to promise to deliver the item within a
reasonable time, or discourages employees from selling
the advertised item.
– Quality Claims - made without any substantiation are
deceptive. But obvious exaggerations and vague
generalities are considered puffing and not deceptive.
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FTC REGULATORY LAW
 Testimonials and Mock-ups - persons who endorse a product
that do not, in fact, use or prefer it, are considered to be
deceptive.
 Enforcement - FTC has the power to issue cease and desist
orders to advertisers who employ deceptive or unfair advertising
methods. A cease and desist order instructs advertisers to stop
using the methods deemed unfair or deceptive. Remedies
include civil damages, and affirmative or corrective advertising.
 Infomercials - advertisements generally presented in the format
of half-hour television talk shows or news programs. Their very
format, however, may present problems by blurring the line
between advertising and regular television programming.
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DECEPTIVE TRADE PRACTICE
Case 21.2 Synopsis. L & F Products v. Proctor & Gamble Co.
L & F manufactures Lysol cleaning products. P & G manufactures Spic
and Span cleaner. P & G began using comparative ads against an
unnamed competitor, intended to be Lysol. Among the items in the ad, P
& G added substances to the soap scum for better filming, and used
laboratory-developed soil instead of ordinary soil. L & F claimed this
was a deceptive trade practice. The district court dismissed the
compliant. ISSUE: Is it a deceptive trade practice (1) to make cleaning
residue more easily filmed by adding substances, or (2) to simulate
without disclosure the wiping of ordinary soil with the actual wiping of
laboratory-developed soil? HELD: Dismissal AFFIRMED. Court of
appeals stated that the substances added for filming were in some
cleaning products, and there was nothing deceptive about the soil used
in the ad. Therefore, there was nothing false or misleading about the ad.
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ADVERTISING AND
WARRANTIES
 Magnuson–Moss Warranty Act - designed to inform
consumers about the products they buy.
– Scope - when a seller offers a written warranty on
goods costing more than $15, she must “fully and
conspicuously disclose in simple and
understandable language the terms and conditions
of the warranty.”
– Full vs. Limited Warranty.
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FULL VS. LIMITED
WARRANTY
A full warranty:
 Must give the consumer the right to free repair of the
product within a reasonable time or,
 After a reasonable number of failed attempts to fix the
product, permit the customer to elect a full refund or
replacement.
 Warrantor may not impose any time limit on the
warranty’s duration, and CONTINUED
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FULL VS. LIMITED
WARRANTY
 Warrantor may not exclude or limit damages for
breach of warranty unless such exclusions are
conspicuous on the face of the warranty.
 Any warranty that does not meet these minimum
federal standards must be designated as “limited.”
 A written warranty may not disclaim implied
warranties, such as the implied warranty of
merchantability.
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ADVERTISING AND
WARRANTIES
State Lemon Laws - deal with warranties on new
cars and new mobile homes. These lemon laws are
designed to protect consumers from defective
products that cannot be adequately fixed. For
example, a new must conform to the warranty given
by the manufacturer. If, after a reasonable number
of attempts (usually four), the manufacturer or
dealer is unable to remedy a defect that
substantially impairs the value of the car, the car
must be replaced or the purchase price refunded.
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SALES PRACTICES
Laws designed to protect consumers from unfair and
deceptive trade practices often impose disclosure
requirements of specific forms of sales practices: UCC
provides for unconscionability, door-to-door sales require
notice of a 3 day “cooling off” period during which the
consumer can rescind the contract, pyramid schemes (multilevel marketing) involve the recruitment of additional sellers
(or even receives commissions on the sales of the recruits)
and telemarketing’s use of auto dialers and “900” numbers
regulated by the Telephone Consumer Protection Act (TCPA)
regulated by the FCC, requiring warranty labels on new and
used cars, disclosures in real estate transactions.
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CONSUMER CREDIT
PROTECTION
 Truth-in-Lending Act (TILA) - requires clear disclosure
of credit terms.
– Applies only to credit transactions (for example,
sales, loans, and leases) between creditors and
consumers, not to credit transactions between two
consumers.
– Debtors must be natural persons - corporations and
other entities are not protected.
– Consumers may be required to arbitrate their claims
if they agreed to do so when applying for credit.
– improvement loans, and certain real estate loans in
which the amount financed is less than $25,000.
35
TRUTH-IN-LENDING ACT (TILA)
 TILA has different requirements for Open-End vs.
Closed-End Credit.
– Open - occurs when the parties intend the creditor to make
repeated extensions of credit (for example, Visa or MasterCard).
– Closed - involves only one transaction (for example, a car or house
loan).
 Regulation Z - applies to any credit contract in which
payment is to be made in more than four installments and the
credit is primarily for personal, family, or household
purposes, e.g., car loans, student loans, home.
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TRUTH-IN-LENDING ACT (TILA)
 Credit and Charge Cards - TILA limits the liability of credit
card holders to $50 per card for unauthorized charges made
before a card issuer is notified that the card has been lost or
stolen. Once a card issuer has been notified, a card holder
incurs no liability from unauthorized use. A credit or charge
card company also cannot bill a consumer for unauthorized
charges if the card was improperly issued by the card
company.
 Home Equity Lending Plans - consumers a right of
rescission generally available for three days if all procedures
are properly followed by the lender, three years if they are
not.
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TRUTH-IN-LENDING ACT (TILA)
 Credit Advertising - any advertised specific credit terms
must actually be available and that any credit terms (for
example, finance charge or annual percentage rate)
mentioned in the advertisement must be explained fully.
 Credit Billing - requires creditors, such as credit card
companies, to respond to consumer complaints with an
acknowledgment of the complaint, followed by a
reasonable investigation to determine whether the
complaint is justified. Companies cannot evade this
requirement by canceling a cardholder’s account.
38
CONSUMER CREDIT
PROTECTION
 Fair Credit Reporting Act (FCFA) - allows
consumers to request all information (except
medical information) on themselves, the
source of the information, and any recent
recipients of a report. The FCRA also gives
consumers a right to have corrected copies
of their credit reports sent to creditors. The
FTC has primary responsibility for the
enforcement of the FCRA.
39
CONSUMER CREDIT
PROTECTION
 Use of Credit Reports in Employment Decisions
- an employer must notify the individual in
writing that a report may be used and obtain the
individual’s consent. However, an employer may
not rely on a credit report to take adverse action
(defined as denying a job applicant a position,
reassigning or terminating an employee, or
denying a promotion), unless it first provides
the individual with a “pre–adverse action
disclosure.”
40
CONSUMER CREDIT
PROTECTION
 Equal Credit Opportunity Act - prohibits
discrimination in the granting of credit on the
basis of race, color, religion, national origin,
sex or marital status, age, applicants whose
income derives from public assistance; and
applicants who have exercised in good faith
any right under the CCPA.
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CONSUMER CREDIT
PROTECTION
 Fair Debt Collection Practices Act - regulates debt collectors
and debt-collection practices and provides a civil remedy for
anyone injured by a violation of the statute.
 Electronic Fund Transfer Act (EFTA) and Debit Cards
– On-Line Debit Cards (ATM cards) and Preauthorized Fund
Transfers –PIN-protected cards issued by banks for use with
automatic teller machines (ATMs) and point-of-sale transactions.
Customer liability is usually limited to no more than $50 required
to issue receipts with every ATM transaction.
– Off-Line Debit Cards (which may bear the Visa or MasterCard
logo) have the characteristics of both an ATM card and a credit
card, and they can be used without a personal identification
number.
42
FAIR DEBT COLLECTION
PRACTICES ACT
Case 21.4 Synopsis. Bartlett v. Heibel
Heibel is an attorney hired by Micard Services, a credit card
company, to collect a debt from Bartlett. Heibel sent Bartlett a
“dunning” letter that stated what Bartlett needed to do to avoid
litigation. The letter also contained close paraphrasing of the FDCPA
language on the subject; Heibel then added additional language that
was confusing or contradictory. Bartlett never read the letter. Bartlett
sued Heibel claiming the confusing letter violated the FDCPA.
Heibel’s defense was that Bartlett never read the letter. The trial court
ruled for Heibel. ISSUE: Does a dunning letter violated the FDCPA by
describing the debtor’s and collector’s respective rights in a way that
confuses the debtor about his rights? HELD: REVERSED. The court
of appeals ordered damages for Bartlett. The writing of the confusing
letter violated the FDCPA.
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STATE LAWS REGULATING
CONSUMER CREDIT
 Uniform Consumer Credit Code (UCCC) - adopted in a few states. The
UCCC is intended to replace a state’s consumer credit laws, including
those that regulate usury, installment sales, consumer loans, truth in
lending, and garnishment.
 Installment Sales - caps on the legal interest rate and permissible charges
such as late charges and deferral charges. In addition, the state statutes
discuss remedies and attorney’s fees, as well as any party’s right to
assign the sales contract.
 Consumer Loans - generally, these statutes require compliance with the
state’s usury statute, although often a lender may be granted an
exemption from the usury statute by obtaining a specified license in the
state.
 State Credit Card Regulation - usury statutes and credit card fee limits in
effect in the state in which the credit card operation is located apply to all
customers, regardless of where they live.
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THE RESPONSIBLE
MANAGER
Complying with Consumer Protection Laws
 Managers should:
– Ensure that employers are aware of, and in compliance with,
various federal and state consumer protection regulations.
– Procedures should be in place to educate employees about
important consumer law topics, especially civil and criminal
liabilities.
– Product recalls may be necessary to correct a defective
product.
– Ethically issue a warning about a product defect it discovers
after its product is sold.
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THE RESPONSIBLE
MANAGER
Complying with Consumer Protection Laws
 Managers should:
– Consider implementing and internal product safety
committee to conduct regular product safety inspections.
– Refrain from making claims that may be deceptive or
false.
– Be aware that many discriminatory practices in the
extension of credit are illegal.
– Endeavor to self-regulate or, at least, work closely with a
regulatory agency to establish industry standards that
meet the concerns of both the agency and the company.
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REVIEW
1. Why does the TILA provide for a right of
recission for home equity loans?
2. What can you, as a consumer, request under
the Fair Credit Reporting Act?
3. What is “bait and switch” advertising?
47