978-1285428222 Chapter 19 Lecture Note Part 2

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Telebrands employed the same strategy in marketing a wide variety of products, so the FTC

2. Suppose some doctor endorses such a product. Is that enough to substantiate claims about the

benefits of the product?

Usually not. Some doctor can be paid to endorse almost anything. Stronger evidence than that is

Add. Case: FTC v. Pantron I (9th Cir., 1994)–Pantron markets The Helsinki Formula. Its ads

claimed it promotes new hair growth for bald men. The FTC sued, claiming the ads were

deceptive for claiming that the product is effective and that there is scientific proof. The FTC

asked for a permanent injunction and redress. Expert testimony stated that the medical literature

is contrary to the claims of the Helsinki Formula and that the studies Pantron relied on failed to

satisfy scientific standards. The product was no different than a placebo. Pantron offered as

evidence its studies by a Finnish and a French doctor, letters from happy customers, and the fact

that less than 3% of the users requested their money back, which they had the right to do. The

judge found the evidence mixed and ordered Pantron to modify its ads somewhat. Both parties

appealed.

Decision: The “district court erred in concluding that Pantron’s representations regarding the

Helsinki Formula’s efficacy did not amount to false advertising.” The weight of scientific

evidence is that the product does no better than a placebo, so the ads were false. Further, by

Add. Info: Hasbro and ad agency Griffin Bacal settled charges brought by the FTC that the

companies deceived consumers by airing a television commercial that falsely portrayed that the

G.I. Joe Battle Copter was able to “hover and fly in a sustained and directed manner.” The toy

was unable to perform as advertised. The companies agree to refrain from deceptive advertising

and Hasbro paid a civil fine of $175,000. Similarly, one of the largest makers of 30-minute TV

“infomercials” agreed to pay $3.5 million to settle false advertising charges for its infomercials

that its products would dissolve cellulite.

Add. Case: Warner-Lambert v. FTC (DC Cir., 1977)–Warner-Lambert makes Listerine mouth

wash. For years, ads for Listerine claimed that by using the product consumers would help

prevent or cure sore throats and colds. These claims were not substantiated. The FTC ordered

Warner-Lambert to cease making such claims and to engage in corrective advertising.

Warner-Lambert challenged the ruling, arguing that even if their claims were false, the FTC

exceeded its authority by issuing the order for corrective advertising.

Decision: The court found that Listerine was neither an effective remedy for colds or sore

throats. Because Listerine had built a substantial reputation, the court held that corrective

Add. Case: Removatron Intl. v. FTC (1st Cir., 1989)–Removatron (R) marketed an “epilator”

product it claimed removed hair permanently, without electrolysis. The product was tweezers,

attached to a device that emitted radio frequency. Supposedly this energy destroyed hair follicles.

R sold its product to beauty shops and supplied promotional information for consumers. R stated

it was “clinically tested and endorsed,” and it was “shown superior” to other hair removal

methods. R cautioned that removal would not work for every client and that permanent removal

might take several treatments. The FTC declared this to be deceptive, and that there was

insufficient basis for the claims, which must be stopped. Future advertising had to be corrected

and previous buyers had to be sent corrected information. R appealed.

Decision: The court found that sufficient evidence existed to support the FTC determination. R

could not produce any scientific test to support its permanent hair removal claims. There was no

“reasonable basis” for the claims. The FTC orders were necessary to ensure compliance with

International Perspective: Foreign Advertising Regulation

Most countries have many fewer controls on ads than does the U.S. Some countries basically

have no controls. Britain has an Office of Fair Trading that is somewhat like the FTC, but the

legal standard is that the ad must misrepresent a product, not just mislead consumers, as in the

U.S. Many ads that would be illegal in the U.S., such as where the product is rigged to look

better than it really does, would not violate ad rules in most European nations or Japan.

False Advertising and the Lanham Act—Private parties may initiate civil actions under the

Lanham Act, which prohibits “false or misleading” ads that may 1) cause confusion about the

affiliation or origin of a good or service or 2) misrepresent the nature of another’s good or

services. U-Haul sued a competitor (Jartran) and won an award of $40 million for deceptive

advertising (double damages from the value of the profits the defendant earned from false ads).

Many states also have business codes that prohibit false ads; consumers and competitors may

both have the right to bring action under such laws and obtain court orders to correct misleading

ads.

Add. Case: U-Haul v. Jartran (9th Cir., 1986)–U-Haul competitor Jartran had a successful

national ad campaign for a year, during which time its revenues increased from $7 million to

$80 million, while U-Haul’s fell by 4%. Jartran compared itself to U-Haul. The court found that

the (comparison) ads falsely or deceptively represented that Jartran was less expensive than

U-Haul, and that its trucks and trailers were safer, more fuel efficient, and better designed than

U-Haul’s. U- Haul’s damages from loss of business was estimated to be $20 million, which was

doubled to $40 million as Lanham Act provides. Jartran appealed.

Decision: The award was upheld as a proper calculation. The trial court properly found, based

Add. Case: Semco v. Amcast (6th Cir., 1995)–The president of Amcast (Kopp) published an

article on manufacturing beryllium-copper plunger tips in Die Casting Engineer. Amcast

competes with Semco in those tips, but Semco’s tips contain more beryllium, are harder and last

longer, and are double the price of Amcast’s tips. Semco sued Amcast because Kopp’s article

asserted that Amcast tips were as good in quality as Semco tips. Semco claimed the false

statements were the same as false advertising and violated the Lanham Act. Court dismissed the

suit. Semco appealed.

Decision: Reversed. The article by Kopp was commercial speech, hence, Semco does have a

cause of action. Amcast copied the article and distributed it widely, which made it a form of

Add. Case: Consumers Union v. Alta-Dena Certified Dairy (Ct. App., 1992)–Alta-Dena is a

large dairy in California. One product is raw certified milk (RCM); milk not pasteurized but

produced under standards set by the American Association of Medical Milk Commissions. Alta

advertised RCM as healthful for infants and invalids, and produced “under the strictest of health

standards.” Consumers Union sued, alleging false and misleading advertising in violation of

California’s false advertising act. It was shown that the RCM “(1) can contain highly dangerous

organisms, (2) is less safe than pasteurized milk, (3) does not possess superior health and

nutritional benefits, and (4) is not produced under the strictest health standards in the industry.”

Court issued an injunction against further false advertising and ordered Alta to put a warning on

its RCM for ten years: “WARNING: This milk may contain dangerous bacteria. Those facing the

highest risk of disease or death include babies, pregnant women, the elderly, alcoholics, those

with cancer, AIDS or reduced immunity and those taking cortisone, antibiotics or antacids.

Questions regarding the use of raw certified milk should be directed to your physician.” Another

warning was to be placed on all advertisements, and Alta had to pay $123,000 in restitution and

civil penalties. Alta appealed.

Decision: Affirmed. Remedies for false advertising can include corrective advertising. The

Issue Spotter: How Aggressive Can You Be in Advertising?

Let’s assume that you do not make flat out false statements–that opens the door to attack by the

FTC, competitors and consumers. Rather, where do you cross the line when you get critical of

your competitor? One threat is simply that the big competitor sues you, even if it has little chance

of winning, because it has deep pockets and can tie you up in expensive litigation that could hurt

your small business and create doubt in the media about your integrity when the lawsuit is

reported, since it is you being sued for making supposedly false statements. That is costly

“advertising” that can damage reputation, deserved or not. That aside, the main risk is from the

Lanham Act. You must make sure there is no trademark infringement and, more importantly

since infringement is unlikely, that you do not damage the good name of your competitor by

making false statements about their product. Firms get in the most trouble when they make

highly specific comparisons–when that is done, there better be solid evidence, not just opinion,

to back up the claims made, or there could be Lanham damages. General statements about how

our product is better than theirs, is puffery, and not subject to legal attack that could result in a

loss.

Cyberlaw: FTC Watches Tweets

The FTC prosecutes scams and false advertising. This can extend to tweets via Twitter. Ads are

embedded in some tweets, especially from famous people with many followers. If a tweet is in

fact a paid ad, the tweet must say “ad.”

Trade Regulation Rules—The FTC has authority to issue trade regulation rules that establish

boundaries for certain practices that may be deceptive. Many such rules exist and typically

address problem areas that the agency has had difficulty with. Proposed rules must be published

in the Federal Register, so parties may comment upon them. Businesses that violate trade

regulation rules may not claim ignorance of rules as a defense to FTC action, all businesses

within an industry are presumed to be aware of rules that effect them.

The Insulation R-Value Rule—This trade regulation rule concerns the labeling and advertising of

home insulation. It requires standard language and testing methods, so that consumers will not be

confused by claims that insulation manufacturers make. Companies claiming to have insulation

of a higher value than they have may face charges from the FTC. Sears failed to disclose the

R-value of insulation it sold and had to pay a $100,000 civil penalty plus agree to comply with

the rules.

The Mail Order Rule—States that if a company sells products through the mail, it must have a

reasonable basis for expecting to ship the product within the time specified in its advertising.

Manufacturers must give consumers the option to cancel orders if they are unable to ship within

the advertised time. The most important effect of the rule has been to give mail order companies

incentives to ship promptly. In 1994 the Rule was extended to cover the $50 billion per year in

sales of products ordered by telephone.

Kids’ Online Privacy Rule—This rule focuses on media oriented at children under age 13.

Content providers must obtain parental consent before obtaining personal information about a

child. Fines up to $1 million have been imposed on violators.

Add. Info–The Used Car Rule—States that car dealers must give consumers clear and complete

information about who pays for repairs after the sale of a car. Dealers must place a buyer’s

guide on the side window of each used car offered for sale. This guide must contain a statement

of the terms of warranty, a statement, prominently displayed, that the car is being sold “as is” or

with a specific warranty; a warning that oral promises are difficult to enforce; and a suggestion

that the consumer ask to have the car inspected by a third party. One car dealer in San

Francisco that failed to comply had to pay a $20,000 civil penalty and agree to no further

violations.

Add. Info: The FTC’s 900-Number Rule states that companies that offer 900-number, or

pay-per-call, telephone services must disclose the costs of those services in their advertising at

the beginning of the call, if the call could cost over $2. Telemarketing also came under

regulation as the FTC requires telemarketers to disclose more information, including telling

customers “promptly and clearly” that they are making a sales call. The precise terms of the sale

must also be clear. States were given more power to prosecute violators, including the right to

seek nationwide injunctions against companies that violate the rules.

Add. Case: Doty v. Frontier Communications (Sup. Ct., Kan., 2001)–Without his knowledge,

Doty’s long-distance telephone service provider was changed by Frontier Comm. When Doty

learned later that he had been slammed, he sued, contending that Frontier had submitted an

unauthorized order for change of service. He sued under the Kansas Consumer Protection Act,

which specifically prohibits slamming. Frontier claimed it had no liability because there was

federal preemption of any state law inconsistent with federal communications statutes and

regulations. The court awarded Doty a statutory penalty of $12,500 plus attorney fees. Frontier

appealed.

Decision: Affirmed. The Federal Telecommunications Act did not preempt the application of

state statutes that prohibit unauthorized change of interstate long-distance telephone services of

Add. Case: Worsham v. Nationwide Ins. (Ct. App., Mary., 2001)–Worsham got a call from a

person who identified herself as calling for Nationwide to ask if he was interested in insurance.

He said he was not and asked to be placed on the do-not-call list. The call came from Gerety, an

independent contractor who sells Nationwide. A month later, Worsham received a similar call

but caller id provided no information. Worsham sued Nationwide for violating the Telephone

Consumer Protection Act for not training personnel to follow the requirements of the law, which

includes not making more than one call when so requested by the consumer. The court dismissed,

holding that Nationwide could not be responsible for the actions of independent contractors.

Worsham appealed.

Decision: Reversed in part. Nationwide did not violate the law by making the first call, so the

issue is whether the second call violated the statute since the law clearly states that to call a

consumer in less than a year after a no-call request has been made is a violation. Since the law

State Deceptive Practices Laws—States have laws that give their AG authority much like the

FTC to go after a wide variety of deceptive business practices. The also give consumers the right

to sue under the statutes and may even allow for punitive damages.

CASE: Schuchmann v. Air Services Heating and Air Conditioning Ct. App., Mo., 2006)—

Schuchmann bought a heating and a/c unit with a lifetime warranty in 1998. Air Services worked

on it for five years but then refused to provide more service as it was losing money. Schuchmann

sued that was a violation of the Missouri Merchandising Practices Act. The court awarded him

$1,047 plus costs. Air appealed.

Decision: Affirmed. It does not matter if Air intended to breach the warranty or not. The fact is

Questions: 1. The court affirmed that the seller violated the state deception law by refusing to

honor the warranty on a product. The air conditioner was more than five years old. Is it

reasonable to expect “lifetime” service?

It may not be sensible, but the seller made that specific promise when the good was sold. The

2. What does the court mean that the state statute uses “broad strokes” to prevent evasion “due to

overly meticulous definitions”?

Add. Case: Vagias v. Woodmont Properties (Super. Ct., N.J., 2006)–The Vagias wanted to buy

a house in Montville because of its reputation for good schools. They told their real estate agent

they wanted to be in Montville, not other locations. They bought a new house in a development

called Woodmont Court at Montville. The builder and agent said the house was in Montville, as

did the settlement statement. After they moved in, they learned it was in Towaco, not Montville,

so they could not send their son to the school they wanted. They sued the builder and realtor

under the New Jersey Consumer Fraud Act. They contended that those parties misrepresented

the legal location of their house. The trial court dismissed the suit; the Vagias appealed.

Decision: Reversed and remanded. The real estate agent engaged in misrepresentation of a

serious matter that can be a violation of the Consumer Fraud Act. Under the Act, one need not

Add. Info.: Magnuson-Moss Warranty Act—This amended the FTC Act and gives the agency

power to set guidelines for consumer product warranties. Compliance with the Act does not

seem to be problematic and few cases have been brought under the law.

Warranties must include information about items such as: what parts or types of problems are

covered by the warranty; what the period of coverage is; what actions will be taken to correct

problems; how the consumer can get warranty service; and how state law may affect the

warranty.

All products that cost more than $10 and have a warranty must comply with the Act. The

warranty must state clearly if it is a full or limited warranty. A warranty is full if a) services will

be provided to anyone who owns the product during the course of the warranty period, b) the

Add. Case: Peterson v. Volkswagen (Ct. App., Wisc., 2004)–Peterson leased a new VW Beetle

from North Shore Bank, which bought the car from a VW dealer. VW issued North Shore a

written warranty. North Shore assigned the warranty rights to Peterson. She had many problems

with the car. Authorized dealers were unable to repair it in four attempts. Peterson then revoked

her acceptance of the vehicle in writing. VW refused, so Peterson sued VW for breach of the

warranty under the Magnuson-Moss Act. The trial court dismissed the suit, holding that

Peterson is not a consumer as defined under the Act because she is a lessee of the vehicle.

Peterson appealed.

Decision: Reversed. The purpose of the Act is to protect the ultimate user of a product. As the

term warranty is defined in the Act, it does not specify that the sale must be made to the

consumer with passage of title for the warranty to be effective. Peterson is qualified as a

Add. Case: FTC v. Virginia Homes (D. Md., 1982)–Virginia Homes (VH) distributed mobile

homes to consumers through dealers in 11 states. From 1975 to 1978, each sale included a

warranty. In 1978, VH modified its warranty at FTC request, which had determined that the

warranty violated the Magnuson-Moss Act. The FTC asked VH to notify holders of its old

warranty (before 1978) that a new warranty, with greater protection, was available. Defendant

refused. The FTC sued, alleging violations of both the FTC Act and the Magnuson-Moss Act,

requesting injunctive relief to require VH to notify all holders of old warranties of their

expanded rights.

Decision: VH was in violation of both the FTC Act and the Magnuson-Moss Act and the FTC

had the power to seek compulsory notification. The agency can “shape remedies which go

CONSUMER CREDIT PROTECTION—The first federal legislation dealing with the

relationship between consumers and credit was the Consumer Credit Protection Act of 1968. The

CCPA has become an umbrella law that contains several other credit-related laws. Discussions of

these follow.

Truth-In-Lending Act—TILA was the first law to come under the CCPA umbrella. It requires

creditors in consumer transactions to disclose certain basic information about the cost and terms

of credit. The Act is meant to encourage competition in the consumer credit markets by

standardizing terms for easier comparison from lender to lender. The Act was amended to

included the Consumer Leasing Act (which requires standardized terms be disclosed in consumer

leases of personal property), and the Fair Credit Billing Act (which establishes procedures for

consumers to follow when credit cards are lost or stolen or when billing errors on credit cards

occur).

Finance Charge Disclosures—TILA requires consumers be given standardized loan terms before

they commit to a credit transaction. The Act covers “natural persons” only, not business

organizations, and does not apply to transactions involving friends or family. A finance charge

must be levied for the Act to apply, or if there is no finance charge, the consumer must make

more than four installment payments before TILA kicks in. The Act does not apply to consumer

transactions for more than $25,000 (except for real estate transactions).

Add. Case: Hamm v. Ameriquest Mortgage Co. (7th Cir., 2007)–Several parties got

mortgages from Ameriquest. They sued Ameriquest for violating the Truth in Lending Act (TILA).

They claimed Ameriquest failed to state explicitly the payment period in TILA disclosure

statements. The lower courts had conflicting rulings on the issues, so the appeals court reviewed

the matter.

Decision: On a 30-year mortgage, the disclosure form said you have 359 payments of a certain

amount and one payment (the last month) of a slightly different amount. It did not state there

were 360 payments as TILA requires. That is a violation of TILA. It clearly requires a statement

Add. Case: Turner v. Beneficial (11th Cir., 2001)–Turner bought a satellite dish system from

Star Vision based on an ad that said the monthly charge would be $39.95. Financing was

provided by Beneficial and Star Vision. The monthly bill was, in fact, $48.36. Turner claimed

that the TILA disclosure statements failed to reveal the true cost of financing the dish. She did

not read the disclosure statements, and so did not rely on them, but claims she is entitled to

damages for Beneficial’s failure to provide proper disclosure that complied with TILA. Beneficial

concedes that the disclosure was improper but since Turner did not read them she did not rely

upon them to her detriment, so could not have suffered an injury. The court held that detrimental

reliance is a necessary element under TILA and denied class certification on the claim. Turner

appealed.

Decision: Affirmed. “We hold that detrimental reliance is an element of a TILA claim for actual

damages, that is, a plaintiff must present evidence to establish a causal link between the

Credit Cost Disclosure—Transactions covered by TILA must disclose the finance charge and

annual percentage rate of the transaction. These items must be featured most prominently in the

credit agreement. Regulation Z covers the necessary parts of the finance charge: service, activity,

carrying and transactions charges; loan fees and points; charges for mandatory credit life,

accident and/or health insurance; and, in non-real estate transactions, fees for credit reports and

appraisals.

Add. Case: Handy v. Anchor Mortgage Corp. (7th Cir., 2006)–Handy obtained a new mortgage

on her home from Anchor. TILA requires that a creditor clearly disclose to a borrower her right

to rescind the loan within three business days. If the creditor fails to do so, the right to rescind

may be extended to three years. Two years after obtaining the mortgage, Handy sought to

rescind the loan based on TILA disclosure defects. At closing, she was given two rescission

forms, one form was proper; the other stated that if she rescinded, it would not cancel the loan.

The trial court held for Anchor, ruling that the different forms were not significant, that Handy

could have still rescinded within three days if she wanted to do so. Two years later made little

sense. She appealed.

Decision: Reversed and remanded. Providing the borrower two rescission forms, one of which

was inappropriate, violates the TILA requirement that the notice be clear and conspicuous. An

Enforcement and Penalties—Persons or businesses violating TILA may face civil and criminal

penalties. Creditors may avoid liability by correcting violations within fifteen days from the date

of discovery and before the consumer notifies the FTC of violations. Good faith efforts to follow

the Federal Reserve Board comments may also shield a creditor from liability. Otherwise,

creditors may be sued for up to $1,000, court costs, and attorneys’ fees. Willful or knowing

deception may involve criminal sanctions and fines of up to $5,000. (Note: Most states have very

similar laws.)

Add. Case: Bell v. May Department Stores (Sup. Ct., Mo., 1999)–Bell bought a ceiling fan at

Famous Barr (FB) and charged it to his FB credit card. When the fan did not work, he notified

FB and said he would not pay that portion of his credit card statement until the matter was

resolved. There was correspondence back and forth, Bell noting the problem, FB promising to fix

it, then demanding payment, but doing nothing about the fan. After a year, the parties appeared

to have settled the matter, but FB then demanded payment, late fees, finance charges, closed

Bell’s account, and notified credit bureaus of the matter. Bell protested; FB promised to remedy

the matter, but did not, so the matter remained on Bell’s credit reports. He sued FB for violating

Regulation Z under the Truth-in-Lending Act for not following required procedure when there

was a billing dispute. The court dismissed the case; Bell appealed.

Decision: Reversed. A reasonable jury could find that a billing error existed, and that FB

violated TILA by closing the account and reporting him to credit bureaus. Further, Bell has an

action against FB for damage to his credit expectancy. “Although Bell had no credit application

Add. Info: Attorney fees are routinely granted in TILA violations; but, as the court noted in

Zeisler v. Barash, 25 F.3d 1000 (7th Cir.), if the lender and the borrower work out a settlement,

and the borrower waives payment of attorney fees, the attorney has no right to collect from the

lender.

Consumer Leasing Act—The CLA states that standard terms must be provided to consumers

who shop for leases of personal property that is to be used for personal, family, or household

purposes (such as cars or computers). The lease must be for more than four months and must

involve less than $25,000 for the CLA to apply. The Act does not cover apartment leases and

daily car rentals.

Disclosure Requirements—Under the CLA, consumers must be given information about the

number, amount, and period of payments due and the payment total; any express warranties

offered; who’s responsible for maintaining and servicing the property; whether the consumer has

a purchase option; and what happens if the consumer terminates the lease early. (Note: Leasing

provisions are explained in Regulation M. Criminal penalties under the CLA are the same as

under the TILA. Civil liability is 25% of the amount of monthly payments, or no more than

$1,000, plus court costs and attorneys’ fees. The Federal Reserve issued new regulations to

standardize car lease terms in 1996.)

Fair Credit Billing Act—The FCBA is a 1974 TILA amendment. It addresses problems

consumers may have with inaccurate charges to their credit card accounts, disputes over

accounts, and problems with unsolicited charge cards. The Act establishes procedures to handle

disputes over billing errors, it forbids the mailing of unsolicited credit cards, and establishes

procedures for reporting lost or stolen cards and limits liability for unauthorized charges.

Enforcement—Most consumer billing disputes are handled through the FCBA procedures.

Violators may face civil penalties in an amount equal to twice the finance charge paid by an

injured consumer plus attorneys fees and court costs. Most enforcement actions fall under FTC

jurisdiction; however, regulation of banks is performed by other agencies.

Consumer Credit Card Act—Commonly, Credit CARD Act, amended TILA as of 2010 to

restrict certain practices by card companies. Restricts the time periods in which interest rates

may be changed. Restricts late fees and finance fees and limits issuance of cards to persons under

age 21. Gift cards must last at least five years.

International Perspective: Credit Around the World

The World Bank looked at credit regulations around the world. The practices and laws are very

different across countries. Many countries use a public credit registry where a government

agency runs a databank on debtors and provides the information to creditors. Germany and

France do that; the U.S., Canada, the U.K. and Japan do not. France and China do not allow

private credit bureaus. Consumer rights also vary in strength significantly across nations.

Fair Credit Reporting Act—The FCRA amends the CCPA to regulate credit bureaus. The

purpose of the Act is to encourage the collection and dissemination of accurate credit information

in a confidential manner. Credit bureaus (consumer reporting agencies such as TRW and

Equifax) may sell consumer reports only for those purposes listed in the Act. Other uses require a

court order.