CONSUMER PROTECTION
Chapter 19
Meiners, Ringleb & Edwards
The Legal Environment of Business, 12th Edition
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THE FDA: FOOD AND DRUG REGULATION

Food Safety






Pure Food and Drug Act of 1906
Food Drug and Cosmetic Act
(FDCA) 1938
Safety in commercial food, drink,
drugs and cosmetics
Sanitation and misbranding of food
and drug products
Bureau of Chemistry of the
Department of Agriculture
FDA and USDA Standards

Dept. of Agriculture deals with
meat, poultry & eggs

Centers for Disease Control (CDC)
and EPA on food safety issues

Expanded enforcement and
inspection systems and set safe
levels of additives in foods


Food Quality Protection

Food Quality Protection Act
of 1996

Insure “reasonable certainty
of no harm”
Enforcement

FDA can force existing
products--food, cosmetics,
medical devices--removed
from the market, i.e.
silicone breast implants
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CASE
U.S. V. LAGROU DISTRIBUTION SYSTEMS, INC.





LaGrou’s cold storage warehouse in Chicago kept raw, fresh &
frozen meat, poultry and other food products. LaGrou stored
products for commercial customers. 2,000,0000 lbs. of food
went in and out daily.
Manager knew of rats – talked to company president, Stewart,
about the problem. Rats were caught daily; food the rats
gnawed on thrown away.
Customers not told of rats – rather told that food damaged in
shipment and destroyed.
Expert said structural changes in the building needed to
eliminate holes for rats. Stewart said that was too expensive.
Two USDA inspectors saw rodent droppings, etc.
Next day 14 USDA inspectors came along with inspectors from
FDA and IL Dept. of Public Health
(Continued)
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CASE
U.S. V. LAGROU DISTRIBUTION SYSTEMS, INC.





Night before the inspectors came, LaGrou threw away lots of
food and did big cleaning. Employees told inspectors what had
gone on. Huge number of violations found. Warehouse
ordered to closed; 22 million lbs. of food destroyed.
LaGrou convicted of 3 felonies; on probation for 5 years;
ordered to pay $8.2 million restitution and $2 million in fines.
President and manager of company were also convicted.
LaGrou appealed.
HELD: Affirmed.
Situation at the warehouse was dire. Inspector said “worst
case” she had seen in her 28 years with the USDA.
Poor ventilation system – pathogens and viruses could have
become airborne. Also leaking roofs and dripping pipes
carried food-borne pathogens all over.
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NUTRITION LABELING




The Nutrition Labeling and Education Act 1990
Required new regulations
 Apply to hundreds and thousands of products
 Prevent misleading product claims
 Help consumers make informed decisions
 Dept. of Agricultures (regulates meat and poultry)
 Works with FDA to have foods consistent with FDA rules
Nutrients by serving size
 Labels must show certain components in foods by realistic
serving size
 Over 100 categories of food
Standards for health claims
 Words must have certain meanings
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DRUG SAFETY









Food, Drug and Cosmetic Act of 1938
Prohibits sale of any drug until FDA approves application submitted by
manufacturer. Drugs must be safe for intended use.
Designation of Prescription Drugs
Drug Effectiveness
 Kefauver Amendment of 1962 requires FDA to approve drugs based
on their proven effectiveness, not just their safety.
FDA has strict regulations concerning testing and adoption new drugs.
FDA has responsibility for oversight of medical devices, surgical
equipment, power wheelchairs, artificial hearts, pacemakers, etc.
If claims are misleading or safety is an issue, FDA can force removal of
product from the market
Costly for drug companies for research and development
FDA approval is only evidence of safety, NOT A SHIELD against liability.
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CASE
WYETH V. LEVINE







Phenergan is drug approved by FDA in 1955; so was label. One form
of Phenergan is used to treat nausea. Administered either by “IVpush” method (drug injected intravenously) or “IV-drip” (drip feed &
saline solution).
Diane Levine had Phenergan by IV-push to treat nausea. Needle
penetrated an artery; she developed gangrene (known from IV-push
injections); forearm and hand were amputated.
Levine sued Wyeth in state court for failure to warn. Requested
damages for medical expenses and loss of livelihood as a
professional musician. Contended drug labeling defective.
Label warned of gangrene risk from IV-push but did not instruct that
IV-drop method should be used. Wyeth had duty to instruct on
different methods. Wyeth argued claims pre-empted by federal law.
Trial court reject the argument; found for Levine.
Affirmed by Vermont Supreme Court
Wyeth appealed, saying approval of drug use label under Food,
Drug, and Cosmetic Act (FDCA) prevents the claim under state law.
(Continued)
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CASE
WYETH V. LEVINE






Judgment of Vermont Supreme Court affirmed.
Issue: Does FDA’s drug labeling “preempt state law product liability
claims?”
Wyeth said impossible to comply to both sate law duties and FDA
labeling duties. Wyeth can change a drug label after FDA approves a
supplemental application.
Can make “changes being effected” (CBE) if label change adds or
strengthens a warning, precaution, contraindication or adverse reaction,
dosage, administration – anything that will increase safe use of product.
Wyeth can do this without FDA approval
Risk information accrues over time – FDA allows for changes when info.
is discovered. FDA does not bear responsibility for drug labeling –
Wyeth does.
FDA can reject labeling and review supplemental application. Stronger
state law warning does not pre-empt Congress’s authority – state laws
are complementary to FDA regulation.
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THE FTC AND CONSUMER PROTECTION

The Federal Trade Commission (FTC) established in
1915

To enforce antitrust laws

But also devotes resources to the Bureau of
Consumer Protection

Protect against “unfair and deceptive acts or practices
in or affecting commerce”
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THE FTC AND CONSUMER PROTECTION

Complaint begins legal process

Many complaints settled by consent decree - terms of
settlement frequently include


Prohibition of practices

Redress for consumers

Payment of civil penalties
A few cases get administrative trials at FTC

May appeal to commissioners for review

May next appeal to Federal Court of Appeals
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UNFAIR AND DECEPTIVE ACTS OR PRACTICES



FTC has considerable leeway
Deception Policy Statement: (To give staff guidance)
 1) Misrepresentation or omission of information
 2) Likely to mislead reasonable consumer
 3) Deception is material
Clarifying the elements:
 1) Failure to reveal information is NOT deceptive if
 There is no affirmative misrepresentation that takes
advantage of consumer misunderstanding
 2) Look at entire content
 3) Reasonable consumer is ordinary person
 Ads for very young or sick have a tougher standard
 4) Must be likely to affect consumer’s product choice
 5) No proof of injury to consumer is needed
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DEFINING UNFAIRNESS

Usually tagged onto deceptive charge

1) Causes substantial harm to consumers

2) Consumers cannot reasonably avoid injury

3) Injury is harmful in its net effect


Costs and benefits are compared
Examples of Deception

Telemarketing Fraud

Oil-and-Gas-Well “Investments”

Work-at-Home Opportunities

Invention-Promotion Scams
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CASE
FTC V. JOHN BECK AMAZING PROFITS, LLC
In 2004, several “wealth-creation” products sold via
infomercials on Internet. One was “John Beck System.”
Promised to teach buyers to get real estate cheap
 Consumers paid $39.95/month by credit card
 Received information kit and were members of a
“club” unless took steps to cancel membership
 In 2009 FTC moved to shut it down
 Alleged multiple violations of FTCA.
 Sought injunctive relief and $300 million in monetary
damages for customers
 FTC moved for summary judgment. Defendants
objected.

(Continued)
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CASE
FTC V. JOHN BECK AMAZING PROFITS, LLC







Representation likely to mislead: (1) Representation is likely to mislead;
(2) Advertiser lacked reasonable basis for its claims
Expressly or implicitly represented that consumers who use the system
are likely able to
 (1) Purchase homes, at gov’t tax sales “free and clear” of mortgages
or liens for very low prices
 (2) Earn lots of money renting or selling home they purchase
 (3) Quickly & easily earn lots of money with little investment.
FTC said these representations were either false or unsubstantiated
Falsity: Purchaser of tax lien or certificate doesn’t get deed at sale
 Doesn’t have right to sell the property
 Instead have right to collect delinquent taxes
Exceptional when purchaser has title/possession sells property.
Sales are once a year, bidding is high % of FMV of property
HELD: Summary Judgment Granted.
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REGULATING ADVERTISING CLAIMS

Advertising substantiation program

Advertisement must be truthful and non-deceptive;

Advertisers must have evidence to back claims; AND

Advertisements cannot be unfair.

Must have reasonable basis for claims

FTC considers following in what is reasonable basis:

Product

Type of claim

Consequences of false claim; benefits of truthful claim

Cost of developing substantiation

Amount of substantiation experts believe is reasonable
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WHAT ADVERTISING IS DECEPTIVE?

Some people many misunderstand an advertisement – not a concern.

I.e. if someone believes Danish pastry is made form Denmark

Hair dye advertised as “permanent” and someone things color will stay forever
– no deception

Gateway Educational Products: Settled FTC charges about ability of its
“Hooked on Phonics”, teaching reading, including those with learning
disabilities – unsubstantiated.

FTC sued Haagen-Dazs about fat and calorie claims on frozen yogurt
products

Company said each with just ‘1 gram of fat & 100 Calories” – in fact contained
12 grams of fat and up to 230 calories per serving

FTC ordered Kellogg to stop claiming that Frosted Mini-Wheats cereal
improved attentiveness in children

Also Kellogg had to stop claiming Rice Krispies improved immunity for
diseases in children

FDA ordered General Mills to stop making health claims Cheerios or have
it classified as a drug
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CASE
TELEBRANDS CORP. V. FTC

Telebrands direct markets several products

Advertise products cost less than others on the market.

Ab Force is an electronic muscle stimulation abdominal
(EMS) belt. Sends small electric current into abs.

Careful to say “the latest fitness craze to sweep the
country” and “promise to get your abs into great shape
fast—without exercise”

Well-muscled models used on TV to demonstrate
product.

FTC sued for false and misleading advertising claims re:
loss of weight, inches of fat, causing well-defined abs and
an effective alternative to exercise.
(Continued)
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CASE
TELEBRANDS CORP. V. FTC

FTC included a “fencing-in” provision against the same
strategy for any other Telebrands products related to weight,
exercise, etc. (i.e. dietary supplements or devices).

Entered order against Telebrands. It appealed.

HELD: Order enforced.

There was no substantiation that Ab Force could deliver
advertised results. Telebrands later admitted results were
“beyond the device’s capabilities,” and “does not cause loss
of weight, inches or fat. . . .”

Telebrands was calculating in its fostering of beliefs about
the product through visual images in their advertisements.
Serious violations – 747,000 units with sales over $19
million.
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FALSE ADVERTISING AND THE LANHAM ACT

Private parties can bring civil actions under the Lanham
Act.

Usually similar to FTC cases, but can also get damages.

States play similar roles as FTC, bringing suit against
those involved in scams and dubious business practices.

Example: Time Warner Cable won suit against DirecTV
for stating views could not get “the best picture out of
some fancy big screen” without satellite television service
– no basis for such a claim.

See Issue Spotter “How Aggressive Can You Be in Advertising?”
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INTERNATIONAL PERSPECTIVE
“FOREIGN ADVERTISING REGULATION”

In Europe ad regulations are tightest in northern
Europe and loosest in the Mediterranean countries

UK: Standard is that an ad is illegal if it misrepresents
a product

U.S.: Ad is illegal if it simply misleads

Japan: Beer ads promote “extra strong” alcohol
content -- illegal in the U.S. under Bureau of Alcohol,
Tobacco & Firearms rules

What is illegal varies across countries.
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TRADE REGULATION RULES

R-Value Rule


Standardize measures and terminology re: home insulation
Mail-Order Rule

Reasonable basis for expecting to ship products w/in
time they say


i.e. “allow 5 weeks for shipping” or must ship within 30 days
Kids’ Online Privacy Rule (COPPA)

Directed at websites & apps directed at kids under 13

Requires service operators to obtain parental consent


Before collecting personal info. about a child
Includes photos & IP addresses
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CYBER LAW
“FTC WATCHES TWEETS”

FTC issues rules re: proper Internet advertising.

Most recently: Possible problems with Tweets.

Tweeter with many followers (movie star, famous
athlete) tweets she used a product that worked great.

Tweets are short; disclaimers will not work.

FTC says that at start of the tweet, should say “Ad”.

Tweeters will not face prison time, but fines and
injunctions could be in order IF Tweeters do not make
clear they are compensated for peddling a product.
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STATE DECEPTIVE PRACTICES LAWS





All states give attorneys general powers similar to FTC.
Can bring suit against those involved in scams/dubious business
practices.
Most states have business code/consumer projection act.
Restrict deceptive trade practices.
EXAMPLE: Texas Business & Commerce Code:
• Consumer may maintain action where any of following constitute
producing if there was cause of economic damage or damages
for mental anguish.
1. Use or employment by any person of false, misleading or
deceptive act or practice;
2. Breach of express or implied warranty;
3. Any unconscionable action or course of action by any
person; or
4. Violation of the Insurance Code
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CASE
SCHUCHMANN V. AIR SERVICES HEATING & AIR
CONDITIONING, INC.






Schuchmann bought heating and air conditioning unit for his house
with “lifetime warranty” from Air Services in 1998. Air worked on
system as needed, but in 2003, refused to honor warranty. Said
warranty too costly.
Schuchmann sued, arguing that Air’s action violated the Missouri
Merchandising Practices Act. Court awarded Schuchmann $1,047
plus costs. Air appealed.
HELD: Affirmed.
Air contended that Schuchmann must prove that Air intended to
default on the warranty from the very beginning of the sale.
Court disagreed. Law is violated “whether committed before, during
or after the sale. . . .”
State law is to preserve “honesty, fair play and right dealings in
public transactions. . . .”
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CONSUMER CREDIT PROTECTION

Consumer Credit
Protection Act (CCPA)

Fair and Accurate Credit
Transactions Act

Truth-in-Lending Act

Equal Credit Opportunity
Act

Fair Debt Collection
Practices Act

Electronic Funds Transfer
Act



Consumer Leasing Act

Fair Credit Billing Act
Consumer Credit Card Act
Fair Credit Reporting Act
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TRUTH-IN-LENDING ACT (TILA)

Encourage consumers to shop around for credit

Standardize loan forms and terms to help consumers
understand finance charges

Must disclose cost of credit in dollars and interest rate
(Regulation Z)

If loan has these things, they must be listed:


Service, activity, carrying and transaction charges

Loan fees and points

Charges for credit life and credit accident and health insurance

Fees for credit reports in non-real estate
Have civil and criminal penalties for violations
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CONSUMER LEASING ACT




Does for leases what TILA
does for consumer credit

Must disclose:

Number, amount and period
of payments and total
payments

Express warranties

Lease must be longer
than 4 months and less
than $25,000
ID party responsible for
maintaining the property

If consumer has option to
buy and at what terms
See Exhibit 19.2

Penalties for terminating
lease early
Applies to personal
transactions, not for
business use
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FAIR CREDIT BILLING ACT

Protect consumers from inaccurate charges

FCBA provides:


Procedure to dispute billing errors

Prohibits mailing of unsolicited credit cards

Procedures to report lost/stolen credit cards
Can also sue for civil penalties
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CONSUMER CREDIT CARD ACT



Credit Card Accountability Responsibility and Disclosure Act – 2009 –
Usually called Consumer Credit Card Act
Amended Truth-in-Lending Act effective 2010
Federal Reserve Board has primary duties of regulating
 May not raise interest rates on exiting balance & promotional rates
must last six months
 When companies raise rates, give 45 days notice
 Restriction placed on late fees
 Cards not issued to consumers under age 21 (unless co-signed)
 Finance charges can’t be imposed on current and previous
balance (double-cycle billing)
 Payments on credit card must be applied to higher interest rate of
debt portion
 Statements must be sent at least 21 days before due date
 Gift cards may not expire for at least 5 years
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FAIR CREDIT REPORTING ACT




Regulates credit bureaus
Consumers can see credit reports that result in credit being denied
Credit bureaus must:
 Respond to consumer complaints within 30 days
 Tell consumers who have asked for their credit history
 Provide toll free service number
 Get permission before giving report to employer or that contains
medical info
FTC’s Disposal Rule applies to all business and persons that use
consumer reports
 Must be properly destroyed
 Must be pulverized, shredded, or erased so info cannot be
reconstructed or read
 Applies to paper and electronic documents
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FAIR AND ACCURATE CREDIT TRANSACTIONS ACT
(FACT ACT)

FACT Act amended Fair Credit Reporting Act in 2003

Requires major credit reporting services (Experian, TransUnion and
Equifax) to allow consumers to see their credit reports annually for free

Allows consumers to correct bad information

Helps to deal with identity theft

Has numerous requirements

Red Flag Rule (Implemented in 2011)

All creditors must have pro-active protections in place

Includes physicians, other service providers, etc.

Alerts, notifications, or warnings from consumer reporting agency

Suspicious documents related to credit accounts

Dubious ID information, such as a peculiar address

Unusual use of (activity on) particular account

Also notices from customers, victims of ID theft, law enforcement authorities, & others re:
possible ID thefts on accounts
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EQUAL CREDIT OPPORTUNITY ACT (ECOA)






Prohibits discrimination against applicants for credit on basis of:
• Race, Sex, Color, Religion, National Origin, Marital Status,
Receipt of Public Benefits, Good-faith Exercise of Applicant’s
Rights under CCPA or Age (prohibited bases)
Can’t discourage person applying for credit
Can’t use info that applicant may have children or likely to have
reduced or irregular income
Credit history must be at applicant’s request
Creditor cannot request info re: spouse or former spouse unless
 Spouse will use account
 Applicant is relying on spouse’s income/alimony/child support
 Applicant lives in community property state
See Issue Spotter “Dealing with Customer Records”
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ECOA NOTIFICATION REQUIREMENTS

Credit denied or less-favorable, creditor must provide
written:

Basic provisions of ECOA

Name and address of agency regulating compliance
by creditor

Statement of specific reasons for action taken or
disclosure of right to get a statement of reasons
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FAIR DEBT COLLECTION PRACTICES ACT

Eliminate unfair, deceptive, and abusive collection
techniques, but permit reasonable collection practices

Restrictions Imposed

Applied to debt collectors, not creditors collecting
own debt

Prohibits threats, obscene language, publication of
a list of delinquent consumers, harassing phone
calls
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CASE
CHUWAY V. NATIONAL ACTION FINANCIAL SERVICES



National Action, a debt collector, mailed Chuway a letter which
identified the credit card company she owed money to.
Balance on debt was $367.52
Letter said the creditor



“has assigned your delinquent account to our agency for collection.
Please remit the balance listed above in the return envelope provided.
To obtain your most current balance information, please call 1-800916-9006. Our friendly and experienced representatives will be glad to
assist you and answer any questions you have.”
Chuway sued National Action for violating FDCPA – that
communication was not proper
District court granted summary judgment for National Action,
holding the letter stated “the amount of the debt” and no FDCPA
violation. Chuway appealed.
(Continued)
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CASE
CHUWAY V. NATIONAL ACTION FINANCIAL SERVICES

HELD: Reversed and remanded.

Letter stated balance owed was $367.42. If letter had stopped after
“Please remit” sentence, National would be okay. But it went on how to
obtain “your most current balance information” – dunning for something
more. Communications must be clear to the creditor.

For the debt collector to collect running interest or other charges, must
use language

“As of the date of this letter you owe $xxxx (exact amount).”

Then may indicate that “other charges may vary from day to day,” and that due
to other charges that may vary, the amount due on the day debtor pays may
be greater than indicated.

Then speak about an adjustment that may be necessary after collector
receives the debtor’s check, indicating information will be sent before
depositing check for collection.

THEN give 1-800 number and address where collecting agency can be
reached for further information.
©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
ELECTRONIC FUND TRANSFER ACT
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Limits liability from stolen ATM card if consumer
reports loss of card

No more than $50 if financial institution is notified within 2
days
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Maximum liability is $500 if consumer notifies financial
institution within 60 days

Financial institutions liable to consumers for damages
from failure to make electronic transfers of funds

Consumers have 60 days to report errors; financial
institutions must investigate and resolve within 45
days
©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CONSUMER FINANCIAL PROTECTION BUREAU
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2010 Dodd-Frank Act
Established new agency: Consumer Financial Protection Bureau
(CFPB) within the Federal Reserve
Complex legislation – Taking years for regulations to be put into
effect
Attorneys-general have authority to enforce Bureau rules
Instructions from Congress to the CFPB
 Crack down on financial scams/gimmicks aimed at ordinary
consumers and debtors
 Ensure terms of financial documents are transparent & can be
understood by a reasonable consumer
 Focus on practice of non-bank institutes, i.e. payday lenders,
that seem unfair
 Look at existing rules i.e. those of the Equal Credit Opportunity
Act, and make sure rules are not in conflict with each other
©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.