978-1285770178 Lecture Note BL ComLaw 1e IM-Ch24 Part 1

whole or in part.

2 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS

whole or in part.

2. Claims Based on Half-Truths

B. BAIT–AND-SWITCH ADVERTISING

Federal Trade Commission (FTC) rules define and prohibit bait-and-switch advertising (refusing to show

an advertised item, failing to have in stock a reasonable quantity of the item, failing to promise to deliver

the advertised item within a reasonable time, or discouraging employees from selling the item).

• Claims must be substantiated.

• Ads must not be unfair (causing a substantial injury that a consumer cannot avoid and that is not

outweighed by a benefit to consumers or competition.

1. Clear and Conspicuous Disclosure

Many state consumer protection laws regulate deceptive online advertising.

CASE SYNOPSIS—

Case 24.1: Hypertouch, Inc. v. ValueClick, Inc.

Hypertouch, Inc., provides e-mail service. ValueClick, Inc., provides online marketing services. ValueClick

contracts with advertisers to send commercial e-mail. Hypertouch filed a complaint against ValueClick and

others for violating a California statute that prohibits e-mail ads containing deceptive content and header

information. The court held that the federal CAN-SPAM Act preempts the California statute and granted a

summary judgment in favor of ValueClick. Hypertouch appealed.

The California Court of Appeal reversed and remanded, holding that California’s statute is not preempted

by the CAN-SPAM Act. The CAN-SPAM Act expressly exempts from preemption state laws that prohibit

“falsity or deception” in commercial e-mail. The California statute imposes strict liability on anyone who

advertises in a commercial e-mail that contains false, deceptive, or misleading information, whether or not the

advertiser has knowledge of the violation. ValueClick included in over 45,000 e-mails received by Hypertouch

customers deceptive “header information.”

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Notes and Questions

Isn’t false header information so transparent that there is no need for a government agency or

court to intervene? Doesn’t the marketplace effectively weed out such deception? False header

information and e-mail ad claims may seem transparent to most of us, but many persons fall victim to such

claims, no matter how false. Undoubtedly, products that do not do what is claimed on their behalf would

eventually disappear from the marketplace, but without some form of policing, others would quickly take their

place, and the truth would be more difficult to distinguish from the noisy barrage of lies.

4 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS

• Transamerica Corp. v. Moniker Online Services, LLC, 672 F.Supp.2d 1353 (S.D.Fla. 2009) (service mark

owner’s allegations—that defendants used well-known service mark to lead consumers to Web sites offering

services similar to those offered by mark owner, and that consumers believed they were accessing mark

owner’s services when they were not—fell under false and misleading ad statutes).

• Smith v. William Wrigley Jr. Co., 663 F.Supp.2d 1336 (S.D.Fla. 2009) (consumer’s allegations that

chewing gum company advertised brand of gum as “scientifically proven to help kill the germs that cause bad

breath,” that there was no scientific proof to substantiate the ad, that consumer bought the gum in reliance on

the ad, and that the company charged a premium based on the ad, adequately stated a claim for unfair and

deceptive trade practices).

• Brewer v. Indymac Bank, 609 F.Supp.2d 1104 (E.D.Cal. 2009) (borrowers’ allegation that lender’s

explanation of the adjustable rate mortgage offered to borrowers was intentionally misleading, deceptive, and

ambiguous was sufficient to state claim for false advertising).

D. FEDERAL TRADE COMMISSION ACTIONS

1. Formal Complaint

An FTC action against those who are accused of deceptive advertising begins with an investigation,

3. Restitution Possible

The FTC may seek restitution if an ad involves wrongful charges to consumers.

ENHANCING YOUR LECTURE—

 PROTECTING U.S. CONSUMERS

FROM CROSS-BORDER TELEMARKETERS 

One of the problems that the Federal Trade Commission (FTC) faces in protecting consumers from

scams is that those involved in the illegal operations frequently are located outside the United States.

Nevertheless, the FTC has had some success in bringing cases under the Telemarketing Sales Rule (TSR)

against telemarketers who violate the law from foreign locations. As discussed in the text, the TSR requires

telemarketers to disclose all material facts about the goods or services being offered and prohibits the

telemarketers from misrepresenting information. Significantly, the TSR applies to any offer made to

consumers in the United States—even if the offer comes from a foreign firm.

A TELEMARKETING SCAM THAT ORIGINATED IN CANADA

Oleg Oks and Aleksandr Oks, along with several other residents of Canada, set up a number of sham

corporations in Ontario. Through these businesses, they placed unsolicited outbound telephone calls to

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whole or in part.

consumers in the United States. The telemarketers offered pre-approved Visa or MasterCard credit cards to

those consumers who agreed to permit their bank accounts to be electronically debited for an advance fee of

$319.

The telemarketers frequently promised that the consumers would receive other items—such as a cell

phone, satellite dish system, vacation package, or home security system—at no additional cost. In fact, no

consumers who paid the advance fee received either a credit card or any of the promised gifts. Instead,

consumers received a “member benefits” package that included items such as a booklet on how to improve

their creditworthiness or merchandise cards that could be used only to purchase goods from the catalogue

provided.

THE CANADIAN GOVERNMENT AND THE FTC

COOPERATE TO PROSECUTE THE TELEMARKETERS

The FTC, working in conjunction with the U.S. Postal Service and various Canadian government and law

enforcement agencies, conducted an investigation that lasted several years. Ultimately, in 2007 Oleg and

Aleksandr Oks pleaded guilty in Canada to criminal charges for deceptive advertising. They were barred from

telemarketing for ten years.a

In addition, the FTC filed a civil lawsuit against the Okses and other Canadian defendants in a federal

court in Illinois. The court found that the defendants had violated the FTC Act and the TSR and ordered them

to pay nearly $5 million in damages.b

FOR CRITICAL ANALYSIS

Suppose this scam had originated in a country that is not as cooperative as Canada is with the

United States. In that situation, how would the FTC obtain sufficient evidence to prosecute the foreign

telemarketers? Is the testimony of U.S. consumers regarding phone calls they receive sufficient

proof? Why or why not?

a. Oleg was also sentenced to a year in jail and two years’ probation.

b. Federal Trade Commission v. Oks, ___ F.Supp.2d ___, 2007 WL 3307009 (N.D.Ill. 2007). The court entered its final judgment on

March 18, 2008.

E. TELEMARKETING AND FAX ADVERTISING

1. Statutory Remedies

The Telephone Consumer Protection Act (TCPA) prohibits phone solicitation using an automatic

phone dialing system or a prerecorded voice and the transmission of ads via fax without the re–

cipient’s permission. Junk fax fines can be $11,000 per day.

Laws dealing with labels and packages are designed to require accurate information about the products and

to warn about potential dangers.

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whole or in part.

A. FUEL ECONOMY LABELS ON AUTOMOBILES

The Energy Policy and Conservation Act of 1975 requires automakers to include the Environmental

Protection Agency’s fuel economy estimate on a label on every new car.

CASE SYNOPSIS—

Case 24.2: Paduano v. Honda Motor Co.

Gaetano Paduano bought a new Honda Civic Hybrid in California. The EPA fuel economy estimate on the

label—mandated by the federal Energy Policy and Conservation Act (EPCA)—was forty-seven miles per

gallon (mpg) for city driving and forty-eight mpg for highway driving. Honda’s sales brochure added, “Just

drive the Hybrid like you would a conventional car and save on fuel bills.” The car’s fuel economy proved to

be less than half of the EPA estimate. A Honda employee told Paduano that to achieve the estimate he would

have to drive in a manner that “would create a driving hazard.” When American Honda Motor Co. refused to

buy the car back, Paduano filed a suit in a California state court against the automaker, alleging deceptive

advertising in violation of the state’s Consumer Legal Remedies Act and Unfair Competition Law. Honda

argued that the EPCA preempted these claims. The court issued a judgment in Honda’s favor. Paduano

appealed.

The state intermediate appellate court concluded that the federal law did not preempt Paduano’s claims,

and reversed and remanded. Paduano “seeks to prevent Honda from making misleading claims about how

easy it is to achieve better fuel economy. Contrary to Honda’s assertions, if Paduano were to prevail on his

claims, Honda would not have to do anything differently with regard to its disclosure of the EPA mileage

estimates.” In fact “allowing states to regulate false advertising and unfair business practices may further the

goals of the EPCA.”

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Notes and Questions

Is the ruling in this case favorable for the auto market? Why or why not? In the long-term, the ruling

might improve the market by leading to more truthful advertising and consumer confidence in that advertising.

The same result could undercut sales and profit, however, by increasing consumer mistrust of auto sellers’

statements about their products. In the short-term, the decision could lead to a loss of profit through refunds

and replacements to consumers situated similarly to the plaintiff in this case.

ANSWER TO “THE ETHICAL DIMENSION”

QUESTION IN CASE 24.2

Suppose that the defendant automaker had opposed this action solely to avoid paying for a car

that had proved to be a “lemon.” Would this have been unethical? Explain. Arguably, a judgment

against the defendant in this case could have applied to a large number of vehicles—and potentially to other

vehicle makers’ products—and this might have led to a significant payout to many consumers, undercutting

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profit. Is it unethical for a business firm to assert a position in litigation solely out of a concern for profit, rather

than out of a belief in the truth or “rightness” of the position? Because of the many stakeholders to whom a

business may owe a duty, there are many circumstances in which a firm could act ethically in forcefully

maintaining a position in the “game” of litigation that might be “weak” in terms of its truth or rightness.

Arguably, shareholders are owed a return on their investments, employees are owed jobs and payment for

their work, communities are owed vibrant economies, and so on. None of this would be possible if the

business at the core did not make a profit. Of course, there should be at least some basis in truth or rightness

for a legal argument, or it may ultimately prove to be a losing argument, in which circumstance the business’s

obligations would not be met.

whole or in part.

III. Sales

A. TELEPHONE AND MAIL-ORDER SALES

• The FTC “Mail or Telephone Order Merchandise Rule” covers sales in which orders are transmitted

using computers, fax machines, or similar means over phone lines. The rule covers shipping, notice

of delays, and refunds.

IV. Protection of Health and Safety

A. THE FEDERAL FOOD, DRUG, AND COSMETIC ACT

The Pure Food and Drug Act of 1906, as amended in 1938, is today’s Federal Food, Drug and Cosmetic

a. Tainted Foods

There have been many high-profile recalls of potentially tainted food products.

b. Modernization Legislation

Under the Food Safety Modernization Act (FSMA)—

implement preventive controls, monitor effectiveness, and take corrective actions.

• Imported foods must meet U.S. safety standards.

2. Drugs

The FDA must ensure that drugs are safe and effective before they are marketed to the public.

whole or in part.

• Sets standards for consumer products.

• Bans the manufacture or importation and sale of products that are potentially hazardous to

consumers.

• Removes from the market any products imminently hazardous.

• Requires manufacturers to report on products sold or intended for sale that have proved to be

C. HEALTH-CARE REFORMS

1. Expanded Coverage for Children and Seniors

Under the Patient Protection and Affordable Care Act of 2010—

2. Controlling Costs of Health Insurance

Under the Patient Protection and Affordable Care Act of 2010—

• Insurance companies must spend 85 percent of premium dollars from large employers, and 80

card companies.

A. THE TRUTH–IN-LENDING ACT

The Truth-in-Lending Act (TILA), which is administered by the Federal Reserve Board, requires sellers

and lenders to disclose credit or loan terms to debtors so that the latter may shop around for the best

whole or in part.

1. Disclosure Requirements

• Car loans

• Home improvement loans

• Real estate loans when the amount financed is less than $25,000

2. Equal Credit Opportunity

the card is lost. An issuer cannot bill for unauthorized charges if a card was improperly issued. To

withhold payment for a faulty product, a cardholder must use specific procedures.

ADDITIONAL BACKGROUND—

The Fair Credit Billing Act

In 1974, Congress enacted the Fair Credit Billing Act as a part of the Truth–in-Lending Act. Under the

terms of the Fair Credit Billing Act, a buyer can withhold payment for a product that was bought with a credit

card and that is alleged to be defective. It is up to the credit card issuer to intervene and attempt to settle the

dispute. A buyer does not have an unlimited right to stop payment, however. The buyer must first exercise a

good faith effort to get satisfaction from the seller.

Other provisions of the Fair Credit Billing Act relate to disputes over billing. If a debtor believes there is an

error in a bill, the debtor may suspend payment until the credit card company investigates the complaint. The

credit card holder, within sixty days of receipt of the disputed bill, must write to the company issuing the card

and explain the basis of the alleged error. The company must resolve the dispute within ninety days, during

which time it can neither close the account or issue additional financing charges. If, however, the error is

unfounded and is resolved against the debtor, the creditor may seek to collect finance charges for the entire

period for which payments were not made.

4. Amendments to Credit-Card Rules

Other, more recent provisions—

• Protect consumers from retroactive increases in interest rates on existing card balances

unless the account is sixty days delinquent.

• Require companies to provide forty-five days’ notice to consumers before changing credit-card

terms.