Suggested Additional Assignments
Research: Unfair or Deceptive Advertising
Ask students to bring to class an ad that they think is deceptive or unfair. They could either clip an ad
from a newspaper or magazine, or record one from television.
Research: Credit Reports
Ask students to order a credit report from one of the three national credit reporting agencies. They can
obtain ordering information from the following websites:
Equifax (http://www.equifax.com)
Experian (http://www.experian.com)
TransUnion (http://www.transunion.com)
Did the results surprise them? Was any of the report’s information false?
Note: assign this research enough in advance of class to allow time for processing the request.
Chapter Overview
Chapter Theme
This chapter covers statutes that are designed to protect consumers. It also discusses the important role
that the FTC plays in enforcing consumer rights.
Federal Trade Commission
Congress created the FTC in 1915 to regulate business. Although its original focus was on antitrust law, it
now regulates a wide range of business activities that affect consumers, everything from advertising to
consumer loans to warranties to debt collection practices.
Consumer Financial Protection Bureau
In 2010, Congress created the Consumer Financial Protection Bureau (CFPB) to regulate consumer
financial products and services, including mortgages, credit cards and private student loans.
Sales
Section 5 of the Federal Trade Commission Act (FTC Act) prohibits “unfair and deceptive acts or
practices.”
Deceptive Acts or Practices
An advertisement is deceptive if it contains an important misrepresentation or omission that is likely to
mislead a reasonable consumer.
Case: Federal Trade Commission v. Direct Marketing Concepts, Inc.1
Facts: Direct Marketing Concepts, Inc. broadcast an infomercial for Coral Calcium that featured a
spokesperson named Robert Barefoot. In the ad, his claims were as bare as his feet. He asserted that
virtually all diseases — heart disease, cancer, lupus, multiple sclerosis, Parkinson’s — are caused by a
condition called acidosis. And that calcium derived from Okinawan coral cures these diseases by
rendering the body more alkaline: “I’ve had 1,000 people tell me how they’ve cured their cancer. I’ve
witnessed people get out of wheelchairs with multiple sclerosis just by getting on the coral.”
1 624 F.3d 1; 2010 U.S. App. LEXIS 21743 UNITED STATES COURT OF APPEALS FOR THE FIRST
CIRCUIT, 2010.
To bolster his claims, Barefoot noted that unspecified articles from the Journal of the American Medical
Association and the New England Journal of Medicine “said that calcium supplements reverse cancer. ..
that’s a quote.” During an 18 month period, this infomercial generated $54 million in sales.
The FTC filed suit against the company and its owners, alleging that the infomercials were deceptive. The
trial court granted the FTC’s motion for summary judgment, ruling that the infomercials were misleading
as a matter of law and, therefore, there was no need for a trial. Defendants appealed.
Issue: Were these infomercials misleading as a matter of law?
Excerpts from Judge Thompson’s Decision: When the FTC brings an action based on the theory that
advertising is deceptive because the advertisers lacked a reasonable basis for their claims, the FTC must:
(1) demonstrate what evidence would in fact establish such a claim in the relevant scientific community;
and (2) compare the advertisers’ evidence to that required by the scientific community to see if the claims
have been established.
On the first prong, the FTC produced four expert declarations which demonstrated that the claims
could be substantiated by double-blind, placebo-controlled human studies. To be sure, there may be other
scientific evidence that could be sufficient. But the government established that some scientific evidence
is required for substantiation, and thus satisfied the first prong. Because the Defendants neither produced
nor pointed to any evidence to raise even the tiniest of fact issues, summary judgment was appropriate on
the first prong.
On the second prong, the FTC relied on the same four expert declarations, in which the experts compared
the Defendants’ evidence to the available literature and concluded in each case that the Defendants’
evidence was woefully inadequate. The experts specifically opined that: (1) there was no evidence that
calcium cures cancer; (2) there was some evidence that calcium might lower blood pressure but none that
it cures heart disease; (3) there was no evidence whatsoever that calcium has any effect on autoimmune
disorders; [and] (4) there has been no research published in the Journal of the American Medical
Association or the New England Journal of Medicine indicating that calcium “reverses” cancer.
The record contains a slew of documents, including excerpts from Barefoot’s books, excerpts from
Barefoot’s deposition testimony, a number of popular science and pseudoscientific articles, and one
preliminary study. Barefoot’s books present jumbles of quotes from scientists, scientific review articles,
and scientific studies interspersed with references to Reader’s Digest and other general-consumption
reductions of these studies. However, none of these scientists or studies supports the panacean claims
made in the Coral Calcium infomercial. The Defendants therefore engaged in deceptive advertising as a
matter of law.
The Defendants attempt to head off the above analysis by asserting that their infomercials advanced no
actual health claims but, instead, presented only puffery, which was further attenuated by the presence of
general disclaimers. However, specific and measurable claims are not puffery, and may be the subject of
deceptive advertising claims. [T]he Defendants’ infomercials presented specific and measurable health
claims.
Disclaimers or qualifications in any particular ad are not adequate to avoid liability unless they are
sufficiently prominent and unambiguous to change the apparent meaning of the claims and to leave an
accurate impression. The disclaimers at issue here did nothing to affect the meaning of the infomercials’
health claims. The infomercial transcripts reveal only disclaimers that the infomercials are paid
advertising. In contrast, the health claims were bold and straightforward, presented by supposed experts
as testable observations backed up by clinical trials and studies.
[W]e affirm the district court’s grant of summary judgment.
Decision: Yes, the infomercials were misleading and no trial was needed.
Reasoning: To make claims such as these, Defendants must have some scientific evidence. But
medical experts for the FTC testified that there is no evidence that calcium cures any of the diseases listed
in the infomercial. Nor have there ever been any articles in serious medical journals that would support
such claims.
The only evidence for these infomercials are excerpts from Barefoot’s books, his deposition
testimony, and some popular science and pseudoscientific articles, which include references to magazines
such as Reader’s Digest. But none of these sources (other than his own writings) support Barefoot’s
claims. Therefore, the defendant has engaged in deceptive advertising as a matter of law.
Defendants also allege that the claims were nothing but puffery and that the disclaimers in the ads
were sufficient to defeat a deceptive advertising claim. However, specific and measurable claims are not
puffery. And the only disclaimer was the notice that the ads were paid advertising
Question: Did the court find that the FTC met the two requirements that the defendant lacked a
reasonable basis for its claims?
Question: What was an argument that Defendants asserted?
Additional Case: You Be The Judge: Federal Trade Commission v.
Business Card Experts, Inc.2
Facts: Business Card Experts, Inc. (BCE) grossed over $16 million selling business card dealerships. The
prices of the dealerships ranged from $10,000 to $25,000.
BCE recruited dealers through advertisements on the Internet and in newspapers and magazines. The
ads claimed that dealers could earn $150,000 or more per year, when in fact only one or two people ever
earned a third of that. Of the 1,300 people who purchased BCE dealerships, only about 300 were still
ordering cards from BCE at the time of this suit.
BCE sales representatives told potential dealers that they could not lose money on the dealerships,
and they were sometimes offered what they described as “money back guarantees”, which meant dealers
received free boxes of cards and those who sold all of the free boxes at the suggested retail price of
$49.95 would recoup their initial investment. But only about three percent of dealers actually recouped
their investment.
When potential dealers asked for references, BCE sales reps lied and said they were independent
dealers earning a living from selling business cards. The sales reps would offer prospective dealers
exclusive territories knowing there were other dealers in the same areas, and one salesperson told an FTC
investigator posing as a potential dealer that “We make over $200,000 a year net profit doing this
business.” When in reality he had ordered only five boxed of cards in the prior three years. Another sales
rep told and FTC investigator that he had fifteen people working for him and earned his investment back
in three to four months, when in reality he sold less than $19,000 worth of cards in three years.
Dealers did testify that the BCE website was helpful for ordering cards, the cards were good quality,
and they were competitively priced.
The court granted the FTC’s motion for a temporary restraining order. It enjoined BCE from selling
dealerships, froze the company’s assets, and appointed a receiver to run the business. The FTC asked that
the restraining order become permanent.
You Be The Judge: Did BCE violate §5 of the FTC Act? If so, what is the proper remedy?
Holding: Yes, BCE violated the FTC Act and an injunction is the proper remedy. In this case, according
to the court, in order to evaluate whether an injunction is the proper remedy, the Court need only consider
the FTC’s likelihood of success on the merits of their case and the balance of any conflicting equities.
Section 5 of the FTC Act prohibits “unfair or deceptive acts or practices in or affecting
commerce.” According to the court, to establish liability under section 5, the FTC must prove that
Defendants made a material misrepresentation that was likely to mislead customers acting reasonably
2 2007 U.S. Dist. LEXIS 31366, United States District Court for the District of Minnesota, 2007.
under the circumstances. Misrepresentations about expected profits from a business or returns from an
investment violate section 5.
The record contains ample evidence that BCE made material misrepresentations that could, and
did, mislead reasonable consumers. BCE sales representatives told outright lies to the FTC investigator
about their own and others’ experiences as BCE dealers. They falsely claimed to earn large incomes from
selling business cards and to employ numerous people to sell business cards for them. BCE also
disseminated materially misleading advertising about the potential for huge profits and the certainty of
earning back initial investments. The FTC has shown an overwhelming likelihood that it will succeed on
its claims.
BCE does not dispute that it lacks sufficient assets to compensate the pool of potential victims. It is
also clear that, in its current form as a receivership, BCE has or will soon become a money-losing
operation. The status quo is therefore not sustainable. The Court has carefully balanced, on the one hand,
BCE’s interest in maintaining BCE in its current form in case they ultimately prevail, against, on the other
hand, the interests of potential victims and active BCE dealers. In light of the FTC’s very strong
likelihood of success, the most important interest at stake is that of the potential victims. Thus, the FTC’s
request for an injunction is allowed.
Question: Is it reasonable for someone to believe that she could make $150,000 per year by selling
business cards?
Question: Is it the role of the law to protect the silly and gullible?
Answer: The law does not protect people from making bad investment decisions. However, it does
require that sellers tell the truth. In this case, regardless of whether it was reasonable to expect to
Question: Did BCE tell the truth?
Question: Were these business card dealerships a good investment?
Question: Was it legal to sell them anyway?
Unfair Practices
The FTC Act prohibits unfair acts or practices. A practice is unfair if:
It causes a substantial consumer injury
The harm of the injury outweighs any countervailing benefit, and
The consumer could not reasonably avoid the injury
In addition, the FTC may decide that a practice is unfair simply because it violates public policy, even if it
does not meet these three tests.
Research: Unfair or Deceptive Advertising
If students located ads that they think are deceptive or unfair, ask them to show these ads to the class.
General Questions:
What is deceptive or unfair about the ad?
What is the difference between deceptive and unfair?
Do you generally believe advertisements you see?
Should the FTC be more or less aggressive in its efforts to stamp out deceptive ads?
Additional Sales Rules
FTC rules prohibit bait-and-switch advertisements. They also regulate mail or telephone order merchan-
dise, unordered merchandise, and door-to-door sales.
Question: Have students ever been the victims of bait-and-switch sales practices? Have they noticed
what some stores do to prevent charges of baiting and switching?
Question: Is this a satisfactory solution?
Answer: It is better than receiving nothing, but certainly not as good as getting the item the first time.
The FTC has established the following rules for merchandise bought by mail, by telephone, or online:
FTC rules prohibit telemarketers from calling any telephone number listed on its do-not-call registry.
Question: Many charities send out return address labels printed with the recipient’s name, hoping for
a contribution In return. Does the recipient have a (legal) obligation to make a contribution if she
keeps the labels? What if she uses them?
General Questions:
Would you feel a moral obligation to make a donation if you used the address labels?
Have students received other free gifts?
Has any student ever worked as a door-to-door salesperson?
What do you think about the FTC rules regulating door-to-door sales?
Have students had problems ordering merchandise from catalogs? Or do they find that
almost all companies comply with FTC guidelines?
Consumer Credit
Example
The newest controversy in consumer loans involves so-called “payday lending companies.” Ima Poor
is living from paycheck to paycheck. She can pay all her regular expenses, barely, but has no savings.
One broken arm later and she finds herself $500 in debt. How can she pay? She goes to a payday
lending company, which agrees to give her $100 in cash on the spot. In return, she gives the company
a check for $130, which they promise not to cash until her next payday two days later. Unfortunately,
but predictably, she cannot afford to pay the loan when payday rolls around, so she asks the company
to renew the loan again, which the company is happy to do–for another $30 fee. She then takes out
another payday loan to cover accumulated fees on the first one. One of the checks she makes out to
the lender bounces. That costs her $80 in fees from the bank and the lender. When the lender sues her
over the bounced check, she has to pay treble damages, $150 in lawyers’ fees, and $60 for court costs.
She ultimately pays $1200 on a total loan of $300.
Question: What interest rate is Poor paying?
Question: What other alternatives does she have?
Answer: Not many. Most banks will not make loans for less than $1,000, and her credit rating may
Question: Isn’t this incredibly sleazy on the part of the payday lenders?
Answer: They say that they are performing a vital service, helping out a segment of society that
Question: Forget sleazy, isn’t this illegal, at least in states that have usury statutes?
General Question: Can you see now the point of usury laws and the Truth in Lending statute?
Truth in Lending Act (TILA) General Provisions
Congress passed TILA to ensure that consumers receive adequate information about credit terms before
entering into a loan.
In all loans regulated by the Truth in Lending Act, the disclosure must be clear and in meaningful
sequence. The lender must disclose the finance charge and the annual percentage rate.
Additional Cases: Three TILA Cases
1. IN RE Pittman v. Allright.3 Allright Mortgage Company extended a loan to James Pittman. The loan
documents contained a statement of the amount financed, finance charge, annual percentage rate, and
total of payments. The terms “annual percentage rate” and “finance charge” appeared in the same type
and in boxes identical to the ones in which the “amount financed” and “total of payments” were
presented.
2. Mars v. Spartanburg Chrysler Plymouth, Inc and First National Bank of South Carolina.4 When Mars
purchased a car from Spartanburg Chrysler Plymouth, the defendant used the term “amount financed”
instead of the required term “unpaid balance.”
3. Bonfiglio v. Nugent.5 After his divorce, a court ordered Bonfiglio to pay his wife’s legal fees, which
were $6,385.00. Bonfiglio told the court that he could not afford a lump sum payment and asked to pay in
installments instead. The court agreed that Bonfiglio could pay monthly installments of $250.00, without
interest. As a result, the firm had to wait more than two years to receive all that Bonfiglio owed it.
Bonfiglio wrote a letter to his ex-wife’s lawyer, expressing his thanks for the “extension of credit.”
Twenty days later, he filed suit against the law firm for violating TILA.
Question: Have these firms violated TILA?
Answer:
3 165 Bankr. 586, 1994 Bankr. LEXIS 465 (1994).
4 713 F.2d 65 Court of Appeals for the Fourth Circuit, 1983.
5 986 F.2d 1391, 1993 U.S. App. LEXIS 6524 Court of Appeals for the Eleventh Circuit, 1993.
In the first two cases, the courts held that the lenders had violated TILA, even though the
Question: Note that if Bonfiglio had borrowed money from a bank to pay the law firm, the bank
would have had to comply with TILA. Why should the bank have to comply and not the law firm?
Answer: TILA is complex, with a great number of technical rules. Those not in the business of
Home Loans
Mortgage Loans
TILA prohibits unfair, abusive, or deceptive home mortgage lending practices.
TILA also regulates so-called subprime loans (also known as higher-priced mortgage loans). These are
loans that have an above-market interest rate because they involve high-risk borrowers.
Home Equity Loans
In response to scams, Congress amended TILA to provide additional consumer safeguards for certain
home equity installment loans.
Rescission
Under TILA, consumers have the right to rescind a mortgage for up to three business days after the
signing (including Saturdays). However, if the lender does not comply with the disclosure provisions of
TILA, the consumer can rescind for up to three years from the date of the mortgage.
Credit Cards
Credit and debit cards are extremely important to most consumers so lately they have come under
increased scrutiny from Congress and the regulatory agencies.
Disclosure
TILA establishes disclosure rules for credit cards, which it calls open-end credit. This is a credit
transaction in which the lender makes a series of loans that the consumer can repay at once or in
installments. These rules apply to all consumer credit cards.
Regulation of Credit Card Debt
Credit Card Act of 2009. During the economic crisis that began in 2008, many consumers struggled to
pay their credit card bills. In response, Congress and the Federal Reserve Board increased oversight of
credit card companies. Under these new rules, credit card companies are restricted in how they can
increase interest rates or charge certain fees. It also imposes some new disclosure requirements on the
companies.
Liability
Stolen Cards. Under TILA, you are liable only for the first $50 in charges the thief makes before you
notify the credit card company.
Disputes with Merchants. In the event of a dispute between a customer and a merchant, the credit card
company cannot bill the customer if (1) she makes a good faith effort to resolve the dispute, (2) the
dispute is for more than $50, and (3) the merchant is in the same state where she lives or is within 100
miles of her house.
Disputes with the Credit Card Company. The Fair Credit Billing Act (FCBA) provides additional
protection for credit card holders (and for holders of so-called revolving charge accounts – such as those
from stores).
Case: Gray v. American Express Co.6
Facts: In December, Oscar Gray used his American Express credit card to buy airline tickets costing
$9,312. American Express agreed that Gray could pay for the tickets in 12 monthly installments. In
January, Gray paid $3,500 and then in February an additional $1,156. In March, American Express billed
Gray by mistake for the entire remaining balance, which he did not pay. In April, Gray and his wife went
out for dinner to celebrate their wedding anniversary. When he tried to pay with his American Express
card, the restaurant told him that the credit card company had not only refused to accept the charges for
the meal, but had instructed the restaurant to confiscate and destroy the card. While still at the restaurant,
Gray spoke to an American Express employee on the telephone who informed him, “Your account is
canceled as of now.”
Gray sued American Express for violating the FCBA. The trial court dismissed the complaint on the
grounds that Gray had waived his rights under the FCBA.
Issue: Is American Express liable to Gray for violating the FCBA?
Holding: Yes. The contract between Gray and American Express provided: “We can revoke your right to
use [the card] at any time. We can do this with or without cause and without giving you notice.” However,
the FCBA provides that, “during the pendency of a disputed billing, the card issuer shall not cause the
cardholder’s account to be restricted or closed because of the failure of the obligor to pay the amount in
dispute.” These two provisions are in conflict, and, in such a case, the FCBA prevails.
Question: Doesn’t American Express have the right to cancel an account whenever it wants?
Question: Why shouldn’t American Express have the right to cancel an account anytime? Gray could
always get another card from Visa or MasterCard.
Answer: If every company acted as American Express did in this case, Gray might soon run out of
Question: Gray had signed a contract with American Express that allowed the company to cancel a
Answer: Three possibilities: he did not read the contract carefully, he knew that the FCBA protected
Debit Cards
Liability
Your liability for a stolen debit card is much greater than on a credit card. If you report the loss before
anyone uses your card, you are not liable for any unauthorized withdrawals. If you report the theft
within two days of discovering it, the bank will make good on all losses above $50. If you wait until
after two days, your bank will only replace stolen funds above $500. After 60 days of receipt of your
bank statement, all losses are yours: the bank will not repay any stolen funds.
Fees
6 743 F.2d 10, 240 U.S. App. D.C. 10, 1984 U.S. App. LEXIS 19033 United States Court of Appeals for
the District of Columbia Circuit, 1984
Traditionally banks would charge a flat fee of $20-$30 each time cardholders overdrew their bank
account, no matter how small the overdraft. Under new rules, though, banks are not allowed to
overdraw an account and charge the fee unless the consumer signs up for an overdraft plan.
Credit Reports
Accuracy of Credit Reports
A number of statutes, including the Fair Credit Reporting Act (FCRA), the Fair and Accurate Credit
Transactions Act (FACTA) and Dodd-Frank regulate credit reports. A consumer report is any
communication about a consumer’s creditworthiness, character, general reputation, or lifestyle that is
considered as a factor in establishing credit, obtaining insurance, securing a job, acquiring a government
license, or for any other legitimate business need.
Research: Credit Reports
If you asked students to obtain a credit report, you could now find out what they discovered.
General Questions:
Did anyone have any difficulty in obtaining a credit report?
Did anyone find inaccurate information in his or her report?
Question: What can you do if your credit report contains inaccurate information?
Answer: If a consumer tells an agency that some of the information in his file is incorrect, the agency
must both investigate and forward the data to the information provider. The information provider
Identity Theft
In identity theft, a fraudster steals his victim’s personal information, such as social security number, credit
card information, or mother’s maiden name, and uses it to obtain credit or goods in the victim’s name. In
short, to wreak havoc in the victim’s life. One goal of FACTA was to reduce identity theft.