978-0077733711 Chapter 48 Lecture Note

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Chapter 48 – The Federal Trade Commission Act and Consumer Protection Laws

CHAPTER 48

THE FEDERAL TRADE COMMISSION ACT

AND CONSUMER PROTECTION LAWS

I. OBJECTIVES

This chapter discusses the various forms of direct government regulation for the protection of

consumers. The chapter is intended to acquaint students with: 1) the FTC and its functions

(especially its regulation of unfair and deceptive acts and practices); and 2) consumer protection

regulation broadly conceived. See the Learning Objectives that appear near the beginning of the

chapter.

II. ANSWERS TO INTRODUCTORY PROBLEM:

The case discussed in the introductory problem is Novartis Corp. v. Federal Trade Commission,

223 F.3d 783 (D.C. Cir. 2000).

A. The FTC’s deception test requires proof that the advertiser made a representation, or failed to

make a disclosure, regarding a material matter, and that the representation or failure to

disclose was likely to mislead consumers acting reasonably under the circumstances.

B. The FTC may base a deceptive advertising proceeding on statements that were literally true

but would be impliedly false or misleading. This means that for purposes of the deception

test referred to above, the advertiser’s representation may be either express or implied.

C. In Novartis, the court upheld the FTC’s determination that the Doan’s advertisements were

deceptive.

D. The FTC ordered Novartis to cease making the deceptive implied claim that Doan’s Pills

were more effective for back pain than other pain relievers. In addition, the FTC ordered

Novartis to engage in corrective advertising to counteract the lingering false impression that

might still exist among consumers as a result of the advertiser’s long history of having made

a false claim regarding the performance of Doan’s Pills. Corrective advertising orders in

deceptive advertising cases do not violate the advertiser’s free speech rights because

deceptive advertisements amount to misleading commercial speech, and misleading

commercial speech receives no First Amendment protection. In order for commercial speech

to receive any First Amendment protection, the commercial speech must be nonmisleading.

III. SUGGESTIONS FOR LECTURE PREPARATION

A. Introduction. Tell students what the chapter is about: direct federal regulation for the

protection of consumers. Note how this expanded in the 1960s and 1970s, and note the

corresponding “product liability explosion” discussed in Chapter 20. Then, outline what the

chapter covers.

B. The FTC in General

1. You should begin with a general description of the FTC. Chapter 47 provides material

that can be used to amplify the discussion in this chapter.

2. After generally describing the FTC, state its functions in general terms. You might break

these down as follows: (1) cracking down on anticompetitive practices; (2) regulating

deception; (3) regulating unfair acts and practices; (4) enforcing most of the specific

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consumer protection laws discussed in the last half of the chapter; and (5) enforcing

various other statutes.

3. Briefly note that the FTC’s enforcement role has waxed and waned over time. Suggest

that political factors probably best explain these changes.

C. FTC Enforcement Procedures

1. You should be sure that students understand the following:

a. The differences among industry guides, advisory opinions, and trade regulation rules.

b. The main features of FTC adjudicative proceedings.

c. That, contrary to what the statutory language might suggest, the FTC is not limited to

orders compelling the respondent to “cease and desist.” The various orders possible

in deceptive advertising cases are examples. Example: Problem Case #1.

d. The nature of consent orders and their significance.

2. FTC Actions in Court:

a. The FTC can obtain district court civil penalties in two situations. The first is when a

private party has knowingly violated a trade regulation rule specifying certain

deceptive acts or practices. The second is when the defendant has knowingly violated

a Commission order directed against another party who has engaged in unfair or

deceptive acts or practices. To illustrate the second situation, suppose that the FTC

orders a firm to cease and desist from making certain advertising claims, and a

competitor of the firm makes the same claims with knowledge of the order.

b. The FTC may sue for consumer redress in two situations: (1) when a private party

violates any trade regulation rule defining unfair or deceptive acts or practices; and

(2) when such a party violates a commission order imposed on it because it has

engaged in unfair or deceptive acts or practices, if it reasonably should have known

that the violation was dishonest or fraudulent.

FTC v. Ross (p. 1307): The U.S. Court of Appeals for the Fourth Circuit holds that the

FTC has legal authority to obtain monetary consumer redress in court even if the

FTC Act explicitly refers only to obtaining injunctive relief. The Fourth Circuit also

holds that a manager or executive of a company may be held individually liable

(along with the company) for a violation of § 5 of the FTC Act if he or she (1)

participated directly in the deceptive practice or had authority to control those

practices; and (2) had or should have had knowledge of the deceptive practices.

Points for Discussion: Note, as an example of what may violate § 5, the particular

deceptive practices involved in this case (even though the real issues here pertain to

the type of relief the FTC may obtain in court and to the appropriate test for whether

an individual affiliated with a company may be held personally liable). Ask the

students why the court concluded, as many other courts have, that the FTC can seek

and obtain consumer redress when it goes to court even though the FTC Act does not

extend such authority. Note the role of a long line of precedent cases on this issue.

Work through the test identified by the court as the appropriate one for determining

whether an individual can be held personally liable. (See the above statement of the

court’s holdings.)

D. FTC Regulation of Anticompetitive Practices

1. Note the various bases of the Commission’s statutory authority here. The FTC has

independent authority to enforce the Clayton and Robinson-Patman Acts. Furthermore, §

5 is broad enough to encompass all Sherman Act violations. Also, as the text notes, § 5

encompasses anticompetitive behavior not specifically barred by the antitrust statutes just

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mentioned. Then there are the premerger notification requirements of the Hart-Scott-

Rodino Act and the Commission’s ability to attack incipient violations.

2. Tell students that most of the FTC’s efforts involve the orthodox antitrust violations

discussed in the next two chapters, and that any discussion of those efforts here would

largely be duplicative.

E. FTC Regulation of Deceptive and Unfair Acts or Practices

1. Deception

a. Begin by noting that most deception cases involve deceptive advertising. On the

subject of advertising, you might want to weave ethical decision making issues into

your discussion at some point.

b. Outline the elements of a deception case under the FTC’s 1983 Policy Statement.

1) Discuss the various ways that deception can occur (express statements, implied

statements, omissions, even practices). Also, discuss the requirement that

deceptive advertising be “likely to mislead” and note that it does not require

actual deception. The Kraft case, to be examined shortly, is an excellent

classroom discussion vehicle.

2) Discuss the “reasonable consumer” test, its justification, and its applications. It

has been argued that this test may not afford sufficient protection in cases where

unscrupulous parties prey upon the naive, trusting, and unsophisticated.

Examples include telephone pitches to buy “valuable” gems, real estate, oil and

gas leases, etc. Also, it has been argued that the test may not give protection

where the deceptive practice is targeted at a particular group with a special

vulnerability. Terminal cancer patients or AIDS victims might be examples. Here,

however, the Policy Statement arguably addresses the problem. It says that when

deceptive acts are targeted at a particular audience, the FTC will look at its effect

on a reasonable member of that group.

3) Finally, discuss the materiality requirement.

Kraft, Inc. v. Federal Trade Commission (p. 1310): The Seventh Circuit Court of

Appeals upholds the determinations of the administrative law judge and the FTC

Commissioners that in advertisements and commercials for its “Singles” cheese,

Kraft made the false implied claim that each Singles slice contained the same

amount of calcium found in five ounces of milk. Because of calcium losses

during the production process, each Singles slice actually contained 70 percent of

the calcium in five ounces of milk, even though each Singles slice was in fact

made with five ounces of milk. The Seventh Circuit also affirmed the

Commission’s issuance of not only a cease-and-desist order but also a “fencing-

in” order under which Kraft could not make calcium or claims or other nutritional

claims regarding its other cheese products unless it possessed reliable scientific

evidence to support such claims.

Points for Discussion: This case is an excellent illustration of how a false

implied claim may be present even when an underlying factual matter (here, that

each Singles slice is made with five ounces of milk) is truthfully stated. The

court sees ample reason for the ALJ and the Commission to have concluded that

consumers would get the erroneous impression that each Singles slice contains

the same amount of calcium in five ounces of milk. Kraft thus went nowhere

with the argument that the truth of its “made with five ounces of milk” statement

should insulate it from deceptive advertising scrutiny. Do your students agree

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that the implied claim concerning calcium content was present in the ads and

commercials?

Note the extent to which the Seventh Circuit pays deference to the supposed

expertise of the Commission. The court holds that the Commission need not

have reviewed extrinsic evidence (e.g., a consumer survey) as a prerequisite to

identifying a false implied claim–at least when the implied claim is obvious. In

other words, the Commission may simply review the challenged ads and apply its

expertise to determine that misleading claims–whether express or implied–are

present in the ads. Also note that the Seventh Circuit pays considerable

deference to the Commission in terms of the orders it issues once it finds that

deceptive advertising occurred. The court’s rejection of Kraft’s challenge of the

“fencing-in” order effectively boils down to a ruling that if the Commission

reasonably believes such an order is necessary, the Commission is entitled to

issue such an order and the court will not second-guess the Commission on that

point.

Do your students agree with the court’s conclusion that the milk equivalency

claim was material? Isn’t 70 percent of the calcium in five ounces of milk still a

significant amount of calcium? Of course, as the court pointed out, a consumer

interested in calcium content would prefer a product with 100 percent of the

calcium in five ounces of milk over a product with only 70 percent. Yet

evidently no cheese slice made with five ounces of milk could actually have 100

percent of the calcium in that amount of milk, because calcium is lost in the

production process. So, if the product with 70 percent of the calcium is the best

alternative realistically available, wouldn’t the consumer concerned about

calcium content still want the 70-percent slice? Questions along these lines may

be interesting to explore with the class. The court’s resolution of the materiality

issue provides another indication of the court’s tendency to defer to the expertise

and reasonable determinations of the Commission.

Note also how Kraft’s own conduct helped bolster the conclusion that the milk

equivalency claim was material. As the court pointed out, Kraft ignored

warnings that the implied claim was both present and material. Moreover, Kraft

spent a great deal of money on the advertising campaign in which the milk

content of Singles slices and the virtues of calcium were loudly trumpeted.

These facts indicate that Kraft must have thought that the milk and calcium

references were material. If the advertiser thought those matters were important

enough to be highlighted repeatedly for consumers, those references (and the

implied representation present in them) probably were material.

Finally, note the ease with which the court rejects Kraft’s First Amendment

argument. Deceptive commercial speech, after all, receives no First Amendment

protection. Kraft went nowhere with the argument that the Commission’s orders

could chill nondeceptive speech. The court noted that Kraft remained free to say

all sorts of things in its cheese products ads. Kraft was not even prohibited from

making calcium representations or other nutritional representations. Kraft simply

had to have reliable scientific evidence to support any such claims.

Additional Examples: Problem Cases #1, #2, #3, and #7.

c. The Global Business Environment box at p. 1312 of the text contains information on

how nations from various parts of the world take legal aim at the problem of

deceptive advertising.

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Chapter 48 – The Federal Trade Commission Act and Consumer Protection Laws

2. Unfairness

a. Outline the elements of the unfairness test.

1) One example of monetary harm under the “substantial injury” element of the test

involves coerced purchases of unwanted goods or services (e.g., where the

seller’s service personnel dismantled home furnaces and then refused to

reassemble them until consumers agreed to buy services or replacement parts).

The Commission has also said, however, that it will not seek to ban an

advertisement merely because it offends the tastes or social beliefs of some

viewers.

2) One might argue that the “balancing” or “net effects” test required by the second

element is typical of the Commission’s general approach over roughly the past 15

years. In this connection, the FTC has said that it will take account of the various

costs that a remedy will entail. These, it said, include not only the costs to the

parties directly before the agency, but also the burdens on society in general in

the form of increased paperwork, increased regulatory burdens on the flow of

information, and reduced incentives to innovation and capital formation.

3) With regard to the last element, the FTC has said that its main concern is with

situations in which consumers are prevented from making effective decisions.

Additional examples: where sellers of medical cures exercise undue influence

over susceptible groups such cancer or AIDS victims; the furnace-dismantling

scheme noted above; Problem Case #4.

4) The Ethics in Action box that appears near the end of the chapter (at p. 1331)

discusses the legal and ethical issues presented by a well-known unfairness case,

In re International Harvester Co. This case is a good discussion vehicle

3. Discuss the various remedies that the FTC may order in advertising cases. Note that some

of these go beyond the act’s express language. Examples: Problem Case #1; Kraft

(discussed earlier).

4. Mention that FTC orders against deceptive or unfair advertising may be subject to First

Amendment commercial speech attacks. (See Chapter 3.) As noted earlier, however,

protection of commercial speech does not extend to false or deceptive advertising. This

means that First Amendment-based defenses to restrictions on deceptive advertising are

generally doomed to failure (as in Kraft). The most that such arguments have much

chance of accomplishing is an occasional cutback in the scope of an FTC order. Because

unfair advertising is not necessarily deceptive, however, such advertising could carry a

claim to the intermediate level of First Amendment protection accorded commercial

speech. Thus, a First Amendment defense could have a somewhat better chance of

success in an unfair advertising proceeding. Even then, however, a court may be fairly

likely to hold that narrowly tailored FTC regulation of unfair advertising does not run

afoul of the partial First Amendment protection for commercial speech.

F. Consumer Protection Laws

1. Note how we define the term “consumer protection” for purposes of this chapter’s

coverage.

2. Telemarketing Sales Rule (TSR) (promulgated pursuant to the Telemarketing and

Consumer Fraud and Abuse Prevention Act)

a. Discuss what perceived problems Congress was attempting to deal with when it

enacted the statute and directed the FTC to promulgate appropriate regulations (a

directive to which the FTC responded with the TSR).

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Chapter 48 – The Federal Trade Commission Act and Consumer Protection Laws

b. Explain what a telemarketer is (and isn’t), for purposes of the TSR. Outline the

disclosure obligations, as well as the prohibitions, placed on telemarketers by the

TSR. Ask the students whether they think that the TSR is likely to be effective in

addressing the problems and abuses Congress and the FTC sought to reduce or

eliminate.

Example: Problem Case #7.

3. Do-Not-Call Registry.

a. Provide a general overview of the Do-Not-Call Registry’s legal bases and operation,

including its “opt-in” feature. See p. 1315 and the facts section of the Mainstream

Marketing case. Stress that it applies to unsolicited commercial telemarketing calls

and does not restrict political or charitable fundraising calls. Note that some states

have their own do-not-call laws of a similar nature.

b. Does the Do-Not-Call Registry violate the First Amendment rights of commercial

telemarketers? That was a key issue in Mainstream Marketing.

Mainstream Marketing Services, Inc. v. Federal Trade Commission (p. 1315): The

Tenth Circuit Court of Appeals holds that the FTC had statutory authority to create

the Do-Not-Call Registry (as did the FCC), and that the registry does not violate

commercial telemarketers’ First Amendment rights.

Points for Discussion: Briefly note the statutory authority issue, which basically

boils down to this: Even if it was not crystal clear whether the statute initially relied

on by the FTC granted the agency the authority to establish as Do-Not-Call Registry,

a later enactment by Congress obviously gave such authority to the FTC. The court’s

main focus in this case was on the First Amendment issue. Ask about: the type of

speech at issue here (commercial speech); what commercial speech is; and the level

of First Amendment protection received by commercial speech (intermediate, as

opposed to the “full” protection extended to noncommercial speech). Provide an

overview of the controlling Central Hudson test. For purposes of that test, does the

government have a substantial underlying regulatory interest at stake? (Of course.)

Note that the case then boils down to the “reasonable fit” elements of the Central

Hudson test. Ask what caused the court to conclude that the Do-Not-Call Registry

was narrowly tailored to the fulfillment of the government’s underlying interest. On

what sorts of precedents did the court rely? What if the Do-Not-Call Registry had

also restricted political speech and charitable fundraising calls? Would the outcome

of this case have been different? (Probably so, in view of the greater First

Amendment protection extended to noncommercial speech.)

4. CAN-SPAM Act (see the Cyberlaw in Action box at p. 1314).

a. Note this act’s purpose and provide an overview of its basic provisions. In addition,

comment on the doubts about its effectiveness.

b. Do Not Track? Note the text’s mention (see p. 1318) of this potential avenue of

regulatory action by the FTC.

c. Note the discussion of the Child Online Privacy Protection Act in the Cyberlaw in

Action box on p. 1318.

5. Magnuson-Moss Act

a. Note that some of Magnuson-Moss’s civil remedies provisions are discussed in

Chapter 20.

b. Emphasize that the act only applies to: a) written warranties (and that it does not

require the giving of such a warranty), b) for consumer products (personal property

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used for personal, family, or household purposes), c) to a consumer. Example:

Problem Case #5.

c. Note also that the portions of the act relevant here apply to consumer products

costing more than $15 per item. The various sections of the FTC regulations

accompanying the act state slightly different dollar figures, however.

d. The material on “required warranty information” should speak for itself. The relevant

regulation can be found at 16 C.F.R. § 701.3.

e. The material on presale availability of written warranty terms is a boiled-down

version of 16 C.F.R. part 702.

6. Truth In Lending Act

a. Emphasize that the TILA is basically a disclosure provision that does little to regulate

the terms of consumer loans.

b. The “scope” material on the TILA should speak for itself.

c. The TILA’s disclosure provisions vary depending on whether the transaction is for

closed-end credit, open-end credit, or credit card applications and solicitations.

d. The Consumer Leasing Act (discussed in some previous editions but not addressed in

this edition) tracks many TILA provisions and makes them applicable to consumer

leases.

7. Fair Credit Reporting Act

a. Begin by describing credit bureaus, the role they play, and the resulting potential for

abuses of all sorts. Then emphasize that we have two relevant actors here (the

consumer reporting agency and the user), and that the FCRA regulates both. Problem

Cases #8 and #9 involve the FCRA’s coverage.

b. When discussing the duties the FCRA imposes on consumer reporting agencies,

emphasize that there are few, if any, limits on the types of data that can be compiled;

and that the act only imposes a duty to adopt reasonable procedures to prevent breach

of the various duties.

c. When discussing the act’s disclosure duties, be sure to distinguish those imposed on

users from those imposed on consumer reporting agencies. Then, track through the

procedures that apply when someone disputes the completeness or accuracy of the

credit bureau’s information.

d. Safeco Ins. Co. of Am. v. Burr (p. 1321): The Supreme Court held that GEICO could

be obligated under the FCRA to notify policyholders of an “increase” in charge based

on credit rating even if the policyholder had no prior dealings with GEICO. The

reasoning is that if the credit rating factors adversely into the calculation of the

charge, then the charge has been “increased” on account of it. The court held the

baseline charge was not the charge that would have been levied based on a perfect

credit rating, but the charge that would have been levied if credit rating had not been

accounted for.

Points for Discussion: It is understandable that GEICO would argue that rates are not

increased when no lower rate was ever in place anyway. But that argument would

seem to make more sense if the purpose of the FCRA was to keep insurance

policyholders apprised of changes in their policies. That is not the purpose of the act;

it is to keep people apprised of the credit information that circulates about them.

With this purpose in mind, it seems completely irrelevant that an earlier rate may

have once been in place under the policy.

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Chapter 48 – The Federal Trade Commission Act and Consumer Protection Laws

8. FACT Act.

a. Note the congressional concern over the identity theft problem–concern that led to

the enactment of the FACT Act. Provide a general overview of the statute, which

contemplates the promulgation of a detailed FTC regulation. Other legislative and

regulatory measures to combat identity theft are quite likely in the near future.

9. Equal Credit Opportunity Act

a. Note the act’s broad coverage, both as to entities covered and prohibited bases of

discrimination.

b. Emphasize that in addition to its broad coverage regarding entities and protected

groups, the ECOA also covers many facets of the decision to grant credit. In fact,

even creditor behavior not specified in the regulations may still violate the ECOA.

The likely reason for this broad coverage is that here we are dealing with

discrimination against groups felt especially deserving of protection. The ECOA

might loosely be regarded as a sort of combined Title VII/Age Discrimination Act for

access to credit. In fact, methods of proof analogous to those used under these acts

sometimes apply in the ECOA context.

Example: Problem Case #10.

10. Fair Credit Billing Act

a. The text’s discussion of this statute is probably best approached by asking the class

questions such as: “What can you do if there is an error in your credit card bill?” Note

that the section of the act dealing with correction of billing errors applies only to

extensions of consumer credit. Example: Problem Case #11.

11. Fair Debt Collection Practices Act

a. Stress that the act generally covers only those in the business of collecting debts

owed to others when they seek to recover consumer debts. Also, you might note that

debt collection tactics can result in intentional tort liability. See Chapter 6.

b. With regard to the statute’s “communication rules,” note that the debt collector can

contact third parties to locate the debtor. However, the act still imposes duties on the

collector in this context. For example, the collector cannot state that the consumer

owes a debt and cannot communicate by post card.

c. Other examples of “harassment or abuse” include: the publication of a list of

consumers who refuse to pay their debts (except to a consumer reporting agency),

and advertisements for the sale of any debt in order to coerce payment of it.

Additional “false or misleading misrepresentations” include statements that any

individual is an attorney. Additional examples of “unfair practices” include:

communicating with the debtor by post card; and taking or threatening to take any

nonjudicial action to dispossess the debtor of his property if there is no right to

possession through an enforceable security interest, there is no present intention to

take possession of the property, or the property is legally exempt from dispossession.

Evory v. RJM Acquisitions Funding, LLC (p. 1327):

The Seventh Circuit held (1) that debt collectors are obligated to provide the same

notice to a lawyer as to an unrepresented debtor; (2) that the standard for deceptive,

harassing, and unfair conduct becomes more lenient when a lawyer is involved; (3)

that the standard for misleading statements shifts as well; (4) that settlement offers

sent directly to consumers may or may not be lawful, depending upon their content;

(5) that coercive settlement offers are not per se lawful simply because they are

addressed to a lawyer; (6) that some “safe harbor” language in a settlement offer will

shield debt collectors from liability; (7) that survey evidence establishing the

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likelihood of deception is best to establish the unlawfulness of a settlement offer; and

(8) that the determination that a statement is false or misleading is not always a

matter of law.

Points for Discussion: Work through the court’s various holdings. Then turn to the

court’s proposed safe harbor language. Isn’t “we are not obligated to renew this

offer” a strange way to keep the debtor aware that his time to pay is not limited?

Understandably, the court wishes to preserve the secrecy that makes a bluff in a

settlement negotiation work. But if the idea is to include language in the bluff that

indirectly renders the bluff transparent, then why preserve the bluff at all?

Additional Examples: Problem Cases #6 and #12.

d. Note the “bona fide error” defense set forth in the FDCPA, but mention the Supreme

Court’s decision in Jerman (see p. 1327of the text). In that case, the Court held that

the bona fide error defense does not apply to mistakes about the legal requirements in

the FDCPA. Rather, it is restricted to mistakes of fact and errors such as clerical

errors.

9. The text’s discussion of product safety-related matters provides a general overview. Note

the roles of the Consumer Product Safety Commission.

IV. RECOMMENDED REFERENCES

A. A GUIDE TO THE FEDERAL TRADE COMMISSION (United States Federal Trade Commission

publication).

B. C. EDWIN BAKER, ADVERTISING AND A DEMOCRATIC PRESS.

C. ROY L. MOORE, ADVERTISING AND PUBLIC RELATIONS LAW.

D. DEAN K. FUEROGHNE, “BUT THE PEOPLE IN LEGAL SAID–“: A GUIDE TO CURRENT ISSUES IN

ADVERTISING.

E. MARGARET C. JASPER, CONSUMER RIGHTS LAW.

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