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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.
