ANSWERS TO PROBLEMS
1. The Federal Trade Commission (FTC) brings a deceptive trade practice action against
Beneficial Finance Company based on Beneficial’s use of its “instant tax refund” slogan.
The FTC argues that Beneficial’s advertising a tax refund loan or instant tax refund is
deceptive in that the loan is not in any way connected with a tax refund but is merely
Beneficial’s everyday loan based on the applicant’s creditworthiness. Is this an unfair or
deceptive trade practice? Explain.
2. Barnes borrows $10,000 from Linda for one year, agreeing to pay Linda $2,000 in
interest on the loan and to repay the loan in twelve monthly installments of $1,000. The
contract which Linda provides and Barnes signs specifies that the annual percentage rate
is 20 percent. Does this contract violate the Federal Consumer Credit Protection Act?
Why?
3. A consumer entered into an agreement with Rent-It Corporation for the rental of a
television set at a charge of $17 per week. The agreement also provides that if the renter
chooses to rent the set for seventy-eight consecutive weeks, title will be transferred. The
consumer now contends that the agreement is really a sales agreement, not a lease, and
therefore is a credit sale subject to the Truth-in-Lending Act. Explain whether the
consumer is correct.
4. Central Adjustment Bureau allegedly threatened Consumer with a lawsuit, service at his
office, and attachment and sale of his property in order to collect a debt, although it did
not intend to carry out the threat and did not have the authority to commence litigation.
On some notices sent to Consumer, Central failed to disclose that it was attempting to
collect a debt. In addition, Consumer contends that Central sent notices demanding
payment that were purportedly from attorneys but were written, signed, and sent by
Central. Has Central violated the Fair Debt Collection Act? Explain.
5. The Giant Development Company undertakes a massive real estate venture to sell 9,000
one-acre unimproved lots in Utah. The company advertises the project nationally.
Arrington, a resident of New York, learns of the opportunity and requests information
about the project. The company provides Arrington with a small advertising brochure
that contains no information about the developer and the land. The brochure consists of
vague descriptions of the joys of homeownership and nothing else. Arrington purchases a
lot. Two weeks after entering into the agreement, Arrington wishes to rescind the
contract. Will Arrington prevail?
Answer: Consumer Right of Rescission. Yes. The Interstate Land Sales Full Disclosure
Act, which applies to the sale or lease of 100 or more lots of unimproved land as part of a
common promotional plan, requires that the developer file a detailed statement of record
6. Jane Jones, a married woman, applies for a credit card from Exxon but is refused credit.
Jane is bewildered as to why she was turned down. What are her legal rights in this
situation?
7. On a beautiful Saturday in October, Francie decides to take the twenty-mile ride from
her home in New Jersey into New York City to do some shopping. Francie finds that
Brown’s Retail Sales, Inc., has a terrific sale on televisions and decides to surprise her
husband with a new HDTV. She purchases the set from Brown’s on her VISA card for
$1450. When the set is delivered, Francie discovers that it does not work. Brown’s refuses
to repair or replace it or to credit Francie’s account. Francie therefore refuses to pay
VISA for the television. VISA brings a suit against Francie. Will VISA prevail? Why?
8. Frank finds Thomas’s wallet, which contains many credit cards and Thomas’s
identification. By using Thomas’s identification and VISA card, Frank goes on a
shopping spree and runs up $5,000 in charges. Thomas does not discover that he has lost
his wallet until the following day, when he promptly notifies his VISA bank. How much
can VISA collect from Thomas?
9. Robert applies to Northern National Bank for a loan. Before granting the loan, Northern
requests that Callis Credit Agency provide it with a credit report on Robert. Callis
reports that three years previously, Robert had embezzled money from his employer.
Based on this report, Northern rejects Robert’s loan application.
(a) Robert demands to know why the loan was rejected, but Northern refuses to divulge
the information, arguing that it is privileged. Is Robert entitled to the information?
(b) Assume that Robert obtains the information and alleges that it is inaccurate. What
recourse does Robert have?
Answer: Fair Reportage. (a) Yes. Under the Fair Credit Reporting Act, Robert has the right
to obtain information regarding the nature and substance of all information in the
10. Colgate-Palmolive Co. produced a television advertisement that dramatically
demonstrated the effectiveness of its Rapid Shave shaving cream. The ad purported to
show the shaving cream being used to shave sandpaper. But because actual sandpaper
appeared on television to be regular colored paper, Colgate substituted a sheet of
Plexiglas with sand sprinkled on it. The FTC brought an action against Colgate,
claiming that Colgate’s ad was deceptive. Colgate defended on the ground that the
consumer was merely being shown a representation of the actual test. Explain whether
Colgate has engaged in an unfair or deceptive trade practice.
Answer: The Federal Trade Commission: Standards. Yes, judgment for FTC. The
advertisement was deceptive because it did not appropriately represent an actual test of
the shaving cream. Under the traditional deceptions standard the ad had the tendency or
11. Several manufacturers introduced into the American market a product known as
all-terrain vehicles (ATVs). ATVs are motorized bikes that sit on three or four
low-pressure balloon tires and are meant to be driven off paved roads. Almost
immediately, the Consumer Product Safety Commission began receiving reports of deaths
and serious injuries. As the number of injuries and deaths increased, the CPSC began
investigating ATV hazards. According to CPSC staff, children under the age of sixteen
accounted for roughly half the deaths and injuries associated with this product. What
type of rule, if any, may the CPSC issue for ATVs?
Answer: Consumer Product Safety Commission. Normally, the CPSC has the authority to:
(1) work with consumers and industry to promote voluntary standards for product safety,
(2) set and enforce mandatory standards, (3) ban unsafe products when a safety standard
would not adequately protect the public, (4) order recalls of hazardous products, (5)
12. Sears formulated a plan to increase sales of its top-of-the-line Lady Kenmore brand
dishwasher. Sears’s plan sought to change the Lady Kenmore’s image without
reengineering or making any mechanical improvements in the dishwasher itself. To
accomplish this, Sears undertook a four-year, $8 million advertising campaign that
claimed that the Lady Kenmore completely eliminated the need to prerinse and prescrape
dishes. As a result of this campaign, sales rose by more than 300 percent. The “no
scraping, no prerinsing” claim was not true, however; and Sears had no reasonable
basis for asserting the claim. In addition, the owner’s manual that customers received
after they purchased the dishwasher contradicted the claim.
After a thorough investigation, the Federal Trade Commission filed a complaint against
Sears, alleging that the advertisements were false and misleading. The final FTC order
required Sears to stop making the “no scraping, no prerinsing” claim. The order also
prevented Sears from (1) making any “performance claims” for “major home
appliances” without first possessing a reasonable basis consisting of substantiating tests
or other evidence; (2) misrepresenting any test, survey, or demonstration regarding
“major home appliances”; and (3) making any advertising statements not consistent with
statements in postpurchase materials supplied to purchasers of “major home
appliances.” Sears contends the order is too broad, because it covers appliances other
than dishwashers and includes “performance claims” as well. Explain whether Sears is
correct.
Answer: Multiple Product Order. Judgment for the FTC. The Ninth Circuit Court of
Appeals enforced the order. The court began its analysis by noting that the FTC has wide
latitude for judgment and that the courts would not interfere except where the remedy had
13. Onondaga Bureau of Medical Economics (OBME), a collection agency for physicians,
sent the plaintiff, Seabrook, a letter demanding payment for a $198 physicians’ bill. In
addition to demanding payment, the letter stated that the bureau’s client could commence
against Seabrook a legal action that could result in a garnishment of his wages. Does
OBME’s letter violate the Fair Debt Collection Practices Act in that it (a) does not give
Seabrook the required notice or (b) threatened legal action against him?
14. William Thompson was denied credit based on an inaccurate credit report compiled by
the San Antonio Retail Merchant’s Association. The Association confused Thompson’s
credit history with that of another William Thompson and failed to use social security
numbers to distinguish the two men. The second Mr. Thompson had a poor credit history.
Thompson made numerous attempts to have the Association correct its mistake, but the
error was never corrected. Has the Association violated the Fair Credit Reporting Act?
Explain.
15. Thompson Medical Company manufactures and sells Aspercreme, a topical analgesic.
Aspercreme is a pain reliever that contains no aspirin. Thompson’s advertisements
strongly suggest that Aspercreme is related to aspirin, however, by claiming that it
provides “the strong relief of aspirin right where you hurt.” Is Thompson’s advertisement
for Aspercreme false and misleading? Explain.
16. Mary Smith bought a car from Doug Chapman under an installment sales contract.
Smith carried the insurance on the car, as required by the contract. Shortly after Smith
purchased the car, it was wrecked in an accident. Smith’s insurance company paid
Chapman the installments still owed on the car, as well as Smith’s equity in the car. Smith
requested a new car from Chapman under an installment plan the same as the one under
which she had purchased the first car. Chapman refused, claiming that the contract for
the first car allowed him to retain the equity amount as security interest and that Smith
understood this as a term of the contract. The provision relating to the security interest
appeared on the back of the contract, although the Truth-in-Lending Act required it to be
on the front side. The front side had a notice referring to provisions on the back side.
Explain whether Chapman’s contract violates the Truth-in-Lending Act.
17. The Federal Trade Commission (FTC) ordered Warner-Lambert to cease and desist from
advertising that its product, Listerine antiseptic mouthwash, prevents, cures, or alleviates
the common cold and sore throats. The order further required Warner-Lambert to
disclose in future advertisements that “[c]ontrary to prior advertising, Listerine will not
help prevent colds or sore throats or lessen their severity.” Warner-Lambert contended
that even if its past advertising claims were false, the corrective advertising portion of the
order exceeded the FTC’s statutory power. The FTC claimed that corrective advertising
was necessary in light of Warner-Lambert’s 100 years of false claims and the resulting
persistence of erroneous consumer beliefs. Explain whether the FTC is correct.
18. Lenvil Miller owed $2,501.61 to the Star Bank of Cincinnati. Star Bank referred
collection of Miller’s account to Payco-General American Credits, Inc. (Payco), a debt
collection agency. Payco sent Miller a collection form. Across the top of the form was the
caption, “DEMAND FOR PAYMENT,” in large, red, boldface type. The middle of the
page stated “THIS IS A DEMAND FOR IMMEDIATE FULL PAYMENT OF YOUR
DEBT,” also in large, red, boldface type. That statement was followed in bold by “YOUR
SERIOUSLY PAST DUE ACCOUNT HAS BEEN GIVEN TO US FOR IMMEDIATE
ACTION. YOU HAVE HAD AMPLE TIME TO PAY YOUR DEBT, BUT YOU HAVE NOT.
IF THERE IS A VALID REASON, PHONE US AT [***] TODAY. IF NOT, PAY US—
NOW.” The word “NOW” covered the bottom third of the form. At the very bottom in the
smallest type to appear on the form was the statement, “NOTICE: SEE REVERSE SIDE
FOR IMPORTANT INFORMATION.” The notice was printed in white against a red
background. On the reverse side were four paragraphs in gray ink. The last three
paragraphs contained the validation notice required by the Fair Debt Collection
Practices Act (FDCPA) to inform the consumer how to obtain verification of the debt.
Miller sued Payco on the ground that the validation notice did not comply with the
FDCPA. Miller argued that even though the validation notice contained all the necessary
information, it violated the FDCPA because it contradicted other parts of the collection
letter, was overshadowed by the demands for payment, and was not effectively conveyed
to the consumer. Discuss whether Payco has violated the FDCPA.
Answer: Creditors’ Remedies. The FDCPA requires a debt collector to send a consumer,
either in its initial communication or within five days of its initial communication, a
19. Greg Henson sold his Chevrolet Camaro Z-28 to his brother, Jeff Henson. To purchase
the car, Jeff secured a loan with Cosco Federal Credit Union (Cosco). Soon thereafter,
the car was stolen and Jeff stopped making payments on his loan from Cosco. At the time,
Cosco was unsure whether Greg retained an interest in the car so Cosco sued both Jeff
and Greg for possession of the car. The trial court rendered a default judgment against
Jeff and ruled that Greg had no longer any interest in the car. The court further entered a
deficiency judgment against Jeff in the amount of $4,076. However, the clerk erroneously
noted in the judgment docket that the money judgment had been rendered against Greg
as well as against Jeff. However, the official record of judgments and orders correctly
reflected that only Jeff was affected by the money judgment. Two credit agencies, CSC
Credit Services (CSC) and Trans Union Corporation (Trans Union), relied on the state
court judgment docket and indicated in Greg’s credit report that he owed the money
judgment. Greg and his wife, Mary Henson, allege that they then “contacted Trans
[Union] twice, in writing, to correct this horrible injustice.” When Trans Union did not
respond, the Hensons brought an action alleging violations of the Federal Credit
Reporting Act (FCRA). Explain whether the Hensons should prevail.
Answer: Fair Credit Reporting Act. Under FCRA, a consumer reporting agency is required
to follow “reasonable procedures to assure maximum possible accuracy” of the
information contained in a consumer’s credit report. A credit reporting agency is not
20. Pantron I Corporation and Hal Z. Lederman market a product known as the Helsinki
Formula. This product supposedly arrests hair loss and stimulates hair regrowth in
baldness sufferers. The formula consists of a conditioner and a shampoo, and it sells at a
list price of $49.95 for a three-month supply. The ingredients that allegedly cause the
advertised effects are polysorbate 60 and polysorbate 80. Pantron offers a full
money-back guarantee for those who are not satisfied with the product. The FTC
challenged both Pantron’s claims that the formula arrested hair loss and promoted
growth of new hair as unfair and deceptive trade practices. The FTC presented a variety
of evidence that tended to show that the Helsinki Formula had no effectiveness other than
its placebo effect (achieving results due solely to belief that the product will work). The
FTC introduced expert testimony of a dermatologist and two other experts who denied
there was any scientific evidence that the Helsinki Formula would be in any way useful in
treating hair loss. Finally, the FTC introduced evidence of two studies that had
determined that polysorbate-based products were ineffective in stopping hair loss and
promoting regrowth. In response, Pantron introduced evidence that users of the Helsinki
Formula were satisfied that it was effective. It offered testimony of eighteen users who
had experienced hair regrowth or a reduction in hair loss after using the formula. It also
introduced evidence of a “consumer satisfaction survey” it had conducted. Pantron also
introduced evidence that more than half of its orders come from repeat purchasers, that it
had received very few written complaints, and that very few of Pantron’s customers (less
than 3 percent) had redeemed the money-back guarantee. Pantron finally introduced
several clinical studies of its own, none performed in the United States or under U.S.
standards for scientific studies. The evidence from these studies did show effectiveness,
but the studies were not random, blind-reviewed studies, and thus did not take into
account the placebo effect. Discuss.
Answer: Federal Trade Commission – Standards. Sections 5(a) of the Federal Trade
Commission Act, declares unlawful “unfair or deceptive acts or practices in or affecting
commerce” and empowers the Commission to prevent such acts or practices. Section 12
of the Act is specifically directed to false advertising. That section prohibits the
ANSWERS TO “TAKING SIDES” PROBLEMS
Kevin Miller bought a house in Atlanta in 2009 and took out a mortgage. He lived in the
house until 2012, when he accepted a job in Chicago; from then on, he rented the house. He
received a letter demanding payment from a law firm on behalf of the mortgage company in
2014. By this time, Miller was renting the property to strangers and thus was making a
business use of the property. Miller claimed that the law firm had violated the Fair Debt
Collection Practices Act. The law firm replied that the letter is outside the scope of the Act
because it was trying to collect a business debt rather than a consumer debt.
(a) What are the arguments that the debt is a consumer debt?
(b) What are the arguments that the debt is a business debt?
(c) Which arguments would prevail? Explain.
ANSWER:
(a) The relevant time for deciding whether the debt is business or consumer is the time
that the debt was undertaken. Here the debt was taken by a consumer and only
