978-1285860381 Chapter 39 Solution Manual Part 1

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Suggested Additional Assignments

Research: Unfair or Deceptive Advertising

Ask students to bring to class an ad that they think is deceptive or unfair. They could either clip an ad

from a newspaper or magazine, or record one from television.

Research: Credit Reports

Ask students to order a credit report from one of the three national credit reporting agencies. They can

obtain ordering information from the following websites:

Equifax (http://www.equifax.com)

Experian (http://www.experian.com)

TransUnion (http://www.transunion.com)

Did the results surprise them? Was any of the report’s information false?

Note: assign this research enough in advance of class to allow time for processing the request.

Chapter Overview

Chapter Theme

This chapter covers statutes that are designed to protect consumers. It also discusses the important role

that the FTC plays in enforcing consumer rights.

Quote of the Day

“Everyone lives by selling something.” –Robert Louis Stevenson (1850-1894), Scottish author of

Treasure Island and Kidnapped.

Federal Trade Commission

Although its original focus was on antitrust law, the Federal Trade Commission (FTC) now regulates a

wide range of business activities that affect consumers. The FTC can impose a fine or file suit in federal

court asking for damages on behalf of an injured consumer.

Consumer Financial Protection Bureau

In 2010, Congress created the Consumer Financial Protection Bureau (CFPB) to regulate consumer

financial products and services, including mortgages, credit cards, and private student loans.

Sales

Section 5 of the Federal Trade Commission Act (FTC Act) prohibits “unfair and deceptive acts or

practices.”

Deceptive Acts or Practices

An advertisement is deceptive if it contains an important misrepresentation or omission that is likely to

mislead a reasonable consumer.

Case: Federal Trade Commission v. Direct Marketing Concepts, Inc.1

Facts: Direct Marketing Concepts, Inc., broadcast an infomercial for Coral Calcium that featured a

spokesperson named Robert Barefoot. In the ad, his claims were as bare as his feet. He asserted that

virtually all diseases — heart disease, cancer, lupus, multiple sclerosis, Parkinson’s — are caused by a

condition called acidosis. And that calcium derived from Okinawan coral cures these diseases by

rendering the body more alkaline: “I’ve had 1,000 people tell me how they’ve cured their cancer. I’ve

witnessed people get out of wheelchairs with multiple sclerosis just by getting on the coral.”

To bolster his claims, Barefoot noted that unspecified articles from the Journal of the American Medical

Association and the New England Journal of Medicine “said that calcium supplements reverse cancer . . .

that’s a quote.” During an 18 month period, this infomercial generated $54 million in sales.

The FTC filed suit against the company and its owners, alleging that the infomercials were deceptive. The

trial court granted the FTC’s motion for summary judgment, ruling that the infomercials were misleading

as a matter of law and, therefore, there was no need for a trial. The defendants appealed.

Issue: Were these infomercials misleading as a matter of law?

Excerpts from Judge Thompson’s Decision: When the FTC brings an action based on the theory that

advertising is deceptive because the advertisers lacked a reasonable basis for their claims, the FTC must:

(1) demonstrate what evidence would in fact establish such a claim in the relevant scientific community;

and (2) compare the advertisers’ evidence to that required by the scientific community to see if the claims

have been established.

On the first prong, the FTC produced four expert declarations which demonstrated that the claims

could be substantiated by double-blind, placebo-controlled human studies. To be sure, there may be other

scientific evidence that could be sufficient. But the government established that some scientific evidence

is required for substantiation, and thus satisfied the first prong. Because the Defendants neither produced

nor pointed to any evidence to raise even the tiniest of fact issues, summary judgment was appropriate on

the first prong.

On the second prong, the FTC relied on the same four expert declarations, in which the experts compared

the Defendants’ evidence to the available literature and concluded in each case that the Defendants’

evidence was woefully inadequate. The experts specifically opined that: (1) there was no evidence that

calcium cures cancer; (2) there was some evidence that calcium might lower blood pressure but none that

it cures heart disease; (3) there was no evidence whatsoever that calcium has any effect on autoimmune

disorders; [and] (4) there has been no research published in the Journal of the American Medical

Association or the New England Journal of Medicine indicating that calcium “reverses” cancer.

The record contains a slew of documents, including excerpts from Barefoot’s books, excerpts from

Barefoot’s deposition testimony, a number of popular science and pseudoscientific articles, and one

preliminary study. Barefoot’s books present jumbles of quotes from scientists, scientific review articles,

and scientific studies interspersed with references to Reader’s Digest and other general-consumption

reductions of these studies. However, none of these scientists or studies supports the panacean claims

made in the Coral Calcium infomercial. The Defendants therefore engaged in deceptive advertising as a

matter of law.

The Defendants attempt to head off the above analysis by asserting that their infomercials advanced no

actual health claims but, instead, presented only puffery which was further attenuated by the presence of

general disclaimers. However, specific and measurable claims are not puffery, and may be the subject of

deceptive advertising claims. [T]he Defendants’ infomercials presented specific and measurable health

claims.

Disclaimers or qualifications in any particular ad are not adequate to avoid liability unless they are

sufficiently prominent and unambiguous to change the apparent meaning of the claims and to leave an

1 624 F.3d 1; 2010 U.S. App. LEXIS 21743 UNITED STATES COURT OF APPEALS FOR THE FIRST

CIRCUIT, 2010

accurate impression. The disclaimers at issue here did nothing to affect the meaning of the infomercials’

health claims. The infomercial transcripts reveal only disclaimers that the infomercials are paid

advertising. In contrast, the health claims were bold and straightforward, presented by supposed experts

as testable observations backed up by clinical trials and studies.

[W]e affirm the district court’s grant of summary judgment.

Question: Did the court find that the FTC met the two requirements that the defendant lacked a

reasonable basis for its claims?

Question: What was an argument that the defendants asserted?

Additional Case: You Be The Judge: Federal Trade Commission v.

Business Card Experts, Inc.2

Facts: Business Card Experts, Inc. (BCE) grossed over $16 million selling business-card dealerships.

The prices of the dealerships ranged from $10,000 to $25,000.

BCE recruited dealers through advertisements on the Internet and in newspapers and magazines. The

ads claimed that dealers could earn $150,000 or more per year, when in fact only one or two people ever

earned a third of that. Of the 1,300 people who purchased BCE dealerships, only about 300 were still

ordering cards from BCE at the time of this suit.

BCE sales representatives told potential dealers that they could not lose money on the dealerships,

and they were sometimes offered what they described as “money back guarantees”, which meant dealers

received free boxes of cards and those who sold all of the free boxes at the suggested retail price of

$49.95 would recoup their initial investment. But only about three percent of dealers actually recouped

their investment.

When potential dealers asked for references, BCE sales reps lied and said they were independent

dealers earning a living from selling business cards. The sales reps would offer prospective dealers

exclusive territories knowing there were other dealers in the same areas, and one salesperson told an FTC

investigator posing as a potential dealer that “We make over $200,000 a year net profit doing this

business.” When in reality he had ordered only 5 boxed of cards in the prior three years. Another sales

rep told and FTC investigator that he had fifteen people working for him and earned his investment back

in three to four months, when in reality he sold less than $19,000 worth of cards in three years.

Dealers did testify that the BCE website was helpful for ordering cards, the cards were good quality,

and they were competitively priced.

The court granted the FTC’s motion for a temporary restraining order. It enjoined BCE from selling

dealerships, froze the company’s assets, and appointed a receiver to run the business. The FTC asked that

the restraining order become permanent.

You Be The Judge: Did BCE violate §5 of the FTC Act? If so, what is the proper remedy?

Holding: Yes, BCE violated the FTC Act and an injunction is the proper remedy. In this case, according

to the court, in order to evaluate whether an injunction is the proper remedy, the Court need only consider

the FTC’s likelihood of success on the merits of their case and the balance of any conflicting equities.

Section 5 of the FTC Act prohibits “unfair or deceptive acts or practices in or affecting

commerce.” According to the court, to establish liability under section 5, the FTC must prove that

defendants made a material misrepresentation that was likely to mislead customers acting reasonably

under the circumstances. Misrepresentations about expected profits from a business or returns from an

investment violate section 5.

2 2007 U.S. Dist. LEXIS 31366, United States District Court for the District of Minnesota, 2007.

The record contains ample evidence that BCE made material misrepresentations that

could, and did, mislead reasonable consumers. BCE sales representatives told outright lies to the

FTC investigator about their own and others’ experiences as BCE dealers. They falsely claimed

to earn large incomes from selling business cards and to employ numerous people to sell

business cards for them. BCE also disseminated materially misleading advertising about the

potential for huge profits and the certainty of earning back initial investments. The FTC has

shown an overwhelming likelihood that it will succeed on its claims.

BCE does not dispute that it lacks sufficient assets to compensate the pool of potential victims. It is

also clear that, in its current form as a receivership, BCE has or will soon become a money-losing

operation. The status quo is therefore not sustainable. The Court has carefully balanced, on the one hand,

BCE’s interest in maintaining BCE in its current form in case they ultimately prevail, against, on the other

hand, the interests of potential victims and active BCE dealers. In light of the FTC’s very strong

likelihood of success, the most important interest at stake is that of the potential victims. Thus, the FTC’s

request for an injunction is allowed.

Question: Is it reasonable for someone to believe that they could make $150,000 per year by selling

business cards?

Question: Is it the role of the law to protect the silly and gullible?

Answer: The law does not protect people from making bad investment decisions. However, it does

require that sellers tell the truth. In this case, regardless of whether it was reasonable to expect to

Question: Did BCE tell the truth?

Question: Were these business card dealerships a good investment?

Question: Was it legal to sell them anyway?

Unfair Practices

The FTC Act prohibits unfair acts or practices. A practice is unfair if:

It causes a substantial consumer injury

The harm of the injury outweighs any countervailing benefit, and

The consumer could not reasonably avoid the injury.

Research: Unfair or Deceptive Advertising

If students’ located ads that they think are deceptive or unfair, ask them to show these ads to the class.

General Questions:

What is deceptive or unfair about the ad?

What is the difference between deceptive and unfair?

Do you generally believe advertisements you see?

Should the FTC be more or less aggressive in its efforts to stamp out deceptive ads?

Key Issue: Additional Sales Rules

FTC rules prohibit bait and switch advertisements. They also regulate mail or telephone order merchan-

dise, unordered merchandise, and door-to-door sales.

Question: Have students ever been the victims of bait and switch sales practices? Have they noticed

what some stores do to prevent charges of baiting and switching?

Question: Is this a satisfactory solution?

Question: Many charities send out return address labels printed with the recipient’s name, hoping for

a contribution in return. Does the recipient have a (legal) obligation to make a contribution if she

keeps the labels? What if she uses them?

General Questions:

Would you feel a moral obligation to make a donation if you used the address labels?

Have students received other free gifts?

Has any student ever worked as a door-to-door salesperson?

What do you think about the FTC rules regulating door-to-door sales? (Under the FTC

door-to-door rules, a salesperson is required to notify the buyer that she has the right to cancel the

transaction prior to midnight of the third business day thereafter.)

Have students had problems ordering merchandise from catalogs? Or do they find that

almost all companies comply with FTC guidelines?

Consumer Credit

Example

The newest controversy in consumer loans involves so-called “payday lending companies.” Ima Poor

is living from paycheck to paycheck. She can pay all her regular expenses, barely, but has no savings.

One broken arm later and she finds herself $500 in debt. How can she pay? She goes to a payday

lending company, which agrees to give her $100 in cash on the spot. In return, she gives the company

a check for $130, which they promise not to cash until her next payday two days later. Unfortunately,

but predictably, she cannot afford to pay the loan when payday rolls around, so she asks the company

to renew the loan again, which the company is happy to do–for another $30 fee. She then takes out

another payday loan to cover accumulated fees on the first one. One of the checks she makes out to

the lender bounces. That costs her $80 in fees from the bank and the lender. When the lender sues

her over the bounced check, she has to pay treble damages, $150 in lawyers’ fees, and $60 for court

costs. She ultimately pays $1200 on a total loan of $300.

Question: What interest rate is Poor paying?

Question: What other alternatives does she have?

Answer: Not many. Most banks will not make loans for less than $1,000, and her credit rating may

Question: Isn’t this incredibly sleazy on the part of the payday lenders?

Answer: They say that they are performing a vital service, helping out a segment of society that

Question: Forget sleazy, isn’t this illegal, at least in states that have usury statutes?

General Question: Can you see now the point of usury laws and the Truth in Lending statute?

Payday Loans

Payday loans are made to desperate people who need money to make it to the next paycheck. These loans

often carry exorbitant interest rates, with the result that the borrowers never manage to dig out from under

their debt.

Truth in Lending Act (TILA)—General Provisions

Congress passed TILA to ensure that consumers receive adequate information about credit terms before

entering into a loan.

Credit and debit cards are extremely important to most consumers so lately they have come under

increased scrutiny from Congress and the regulatory agencies.

Additional: Three TILA Cases

1. IN RE Pittman v. Allright.3 Allright Mortgage Company extended a loan to James Pittman. The loan

documents contained a statement of the amount financed, finance charge, annual percentage rate, and

total of payments. The terms “annual percentage rate” and “finance charge” appeared in the same type

and in boxes identical to the ones in which the “amount financed” and “total of payments” were

presented.

2. Mars v. Spartanburg Chrysler Plymouth, Inc and First National Bank of South Carolina.4 When Mars

purchased a car from Spartanburg Chrysler Plymouth, the defendant used the term “amount financed”

instead of the required term “unpaid balance.”

3. Bonfiglio v. Nugent.5 After his divorce, a court ordered Bonfiglio to pay his wife’s legal fees, which

were $6,385.00. Bonfiglio told the court that he could not afford a lump sum payment and asked to pay

in installments instead. The court agreed that Bonfiglio could pay monthly installments of $250.00,

without interest. As a result, the firm had to wait more than two years to receive all that Bonfiglio owed

it. Bonfiglio wrote a letter to his ex-wife’s lawyer, expressing his thanks for the “extension of credit.”

Twenty days later, he filed suit against the law firm for violating TILA.

Question: Have these firms violated TILA?

Answer:

Question: Note that if Bonfiglio had borrowed money from a bank to pay the law firm, the bank

would have had to comply with TILA. Why should the bank have to comply and not the law firm?

Answer: TILA is complex, with a great number of technical rules. Those not in the business of

Disclosure

In all loans covered by TILA, the lender must: Disclose all information clearly.

Discuss the amount financed, the total of payments, the finance charge, the annual percentage rate

(APR).

3 165 Bankr. 586, 1994 Bankr. LEXIS 465 (1994)

4 713 F.2d 65 Court of Appeals for the Fourth Circuit, 1983

5 986 F.2d 1391, 1993 U.S. App. LEXIS 6524 Court of Appeals for the Eleventh Circuit, 1993

Home Loans

Mortgage Loans–TILA prohibits unfair, abusive, or deceptive home mortgage lending practices.

Under TILA, lenders: (1) must make a good faith effort to determine whether a borrower can afford to

repay the loan; (2) may not coerce or bribe an appraiser into misstating a home’s value; and (3) cannot

charge prepayment penalties on adjustable rate mortgage.

Home Equity Loans

Congress amended TILA to provide additional consumer safeguards for home equity installment loans. If

a home equity installment loan:

has an APR (interest rate) that is more than 10 percentage points higher than Treasury securities, or

the consumer must pay fees and points at closing that are higher than 8 percent of the total loan

amount, then,

at least three business days before the loan closing, the lender must notify the consumer that (1) he

does not have to go through with the loan (even if he has signed the loan agreement) and (2) he

could lose his house if he fails to make payments, and

loans that are for less than five years may not contain balloon payments (that is, a payment at the end

that is more than twice the regular monthly payment).

Plastic: Credit, Debit, and ATM Cards

Credit, debit, and ATM cards are extremely important to most consumers, so Congress and the regulatory

agencies have built in substantial protection.

Credit CARD Act

Congress passed the Credit CARD Act to prohibit unfair fees and to provide transparency so that

consumers can compare the costs of different cards.

These are the major provisions of the Credit CARD Act:

Due dates must be disclosed.

Increases in rates and fees are not allowed on any charges already incurred (until a cardholder has

missed two consecutive payments).

Late payment fees are limited to $25 for first event and $35 thereafter.

Payment must be applied to whichever debt on the card has the highest interest rate.

Consumers have the right to set a fixed credit limit.

People under 21 cannot obtain a credit card unless they have income or a co-signer.

Liability

Stolen Cards. Under TILA, you are liable only for the first $50 in charges the thief makes before you

notify the credit card company.

Disputes with Merchants

In the event of a dispute between a customer and a merchant, the credit card company cannot bill the

customer if (1) she makes a good faith effort to resolve the dispute, (2) the dispute is for more than $50,

and (3) the merchant is in the same state where she lives or is within 100 miles of her house.

Disputes with Credit Card Companies

The FCBA provides that, if a consumer has a complaint about a bill and writes to the credit card company

within 60 days of receipt of the bill, the company must acknowledge receipt of the complaint within 30

days and, then, within two billing cycles (but no more than 90 days) investigate the complaint and

respond.

Debit and ATM Cards: Fees

Debit cards are used to make purchases (they are also called check cards). ATM cards withdraw cash

from a bank account. In the case of ATM and debit cards, banks cannot overdraw an account and

charge an overdraft fee unless the consumer signs up for an overdraft plan.

Liability If you report the loss before anyone uses your card, you are not liable for any unauthorized

withdrawals.

Case: Kruser v. Bank of America

Facts: Mr. and Mrs. Kruser each had an ATM card for their joint account at the Bank of America. Mr.

Kruser believed his card had been destroyed. It turned out, however, that someone used it to make an

unauthorized withdrawal of $20 from the account in December, which the Krusers did not notice.

Perhaps because, that same month, Mrs. Kruser underwent surgery and was hospitalized for 11 days.

She then spent six or seven months recuperating at home. Her recovery underwent a nasty setback,

however, when she discovered in September that someone had illegally withdrawn $9,020 from the

account during July and August. The Bank refused to refund the money. The Krusers sued, but the

trial court granted the Bank’s motion for summary judgment. The Krusers appealed.

Issue: Did the Krusers’ failure to report the unauthorized withdrawal in December prevent them from

recovering the much larger amount stolen in July and August?

Excerpts from Judge Stone’s Decision: Appellants [that is, Mr. and Mrs. Kruser] contend the

December withdrawal of $20 was so isolated in time and minimal in amount that it cannot be

considered in connection with the July and August withdrawals. They assert the [lower] court’s

interpretation would have absurd results which would be inconsistent with the primary objective of

the [statute]—to protect the consumer. They argue that if a consumer receives a bank statement which

reflects an unauthorized minimal electronic transfer and fails to report the transaction to the bank

within 60 days of transmission of the bank statement, unauthorized transfers many years later,

perhaps totaling thousands of dollars, would remain the responsibility of the consumer.

Here, although the unauthorized transfer of $20 occurred approximately seven months before the

unauthorized transfers totaling $9,020, it is undisputed that all transfers were made by someone using

Mr. Kruser’s card which the Krusers believed had been destroyed. [T]he Bank could have and would

have canceled Mr. Kruser’s card had it been timely notified of the December unauthorized transfer. In

that event Mr. Kruser’s card could not have been used to accomplish the unauthorized transactions in

July and August.

Appellants contend the facts establish that Mrs. Kruser, who was solely responsible for reconciling

the bank statements, was severely ill when the December withdrawal occurred. Therefore, they claim

they were entitled to an extension of time within which to notify the Bank. The evidence appellants

rely upon indicates Mrs. Kruser left her house infrequently during the six or seven months while she

was recuperating. [N]othing in the record reflects any extenuating circumstances which would have

prevented Mr. Kruser from reviewing the bank statements. The understanding he had with Mrs.

Kruser that she would review the bank statements did not excuse him from his obligation to notify the

bank of any unauthorized electronic transfers.

We affirm the judgment.

Question: What is the time period within which one has to report an unauthorized electronic transfer?

Question: Mrs. Kruser, who was solely responsible for reconciling the bank statements, was severely

ill during the time period of the unauthorized transfers. Why didn’t this fact help the Krusers?

Case: Broxton-King v. LaSalle Bank, N.A.

Facts: Eunice Broxton-King paid $28 a month to belong to the YMCA. On the first day of each month,

this sum was transferred automatically from her account at the LaSalle Bank to the YMCA. On August

31, Broxton-King went to the bank, paid an overdraft on her account, and then closed it. However, on

September 1, the bank transferred $28 to the YMCA. Because there was no money in her account, the

bank charged an overdraft fee of $22 and a service charge of $3. The overdraft totaled $53. On September

7, the bank sent Broxton-King a notice of this overdraft. She told the bank that her account had been

closed on August 31, that the debit to the YMCA should be stopped, and the fees refunded. But on

October 1, the bank again debited plaintiff’s checking account for the $28 YMCA fee and added an

additional $27 in overdraft and service fees.

Alleging that the bank had violated the EFTA, Broxton-King filed a pro se lawsuit.6 The bank filed a

motion to dismiss.

Issue: Did the bank violate the EFTA?

Excerpts from Judge Gottschall’s Decision:

Section 1693e of the EFTA provides that “[a] consumer may stop payment of a preauthorized electronic

fund transfer by notifying the financial institution orally or in writing at any time up to three business

days preceding the scheduled date of such transfer.” Defendant argues that plaintiff failed to properly

prevent the transfer of funds to the YMCA. Defendant contends that if plaintiff had wished to prevent the

first transfer of funds in question (the one that occurred on September 1), plaintiff should have, pursuant

to the EFTA, requested a stop to the funds transfer three days prior to the transfer date. Instead, defendant

notes, plaintiff alleges that she closed her account and ended all transactions with her account on August

31: the day before the transfer date.

As for the October 1 transfer of funds, defendant argues, it had properly allowed the funds transfer

because plaintiff had failed to pay off the overdraft resulting from the first transfer of funds. Therefore,

the account remained open during the time of the funds transfer.

Defendant’s motion to dismiss is granted as to plaintiff’s EFTA claim regarding the September 1 transfer.

Because the request happened less than three days prior to September 1, defendant is correct that plaintiff

cannot sue under §1693e of the EFTA for the transfer that occurred on September 1.

It appears, however, that under §1693e of the EFTA, the fact that plaintiff’s account was open is

immaterial to whether plaintiff could stop a funds transfer from her account. Nowhere in the language of

§1693e does the Act require that plaintiff have made the request to stop a funds transfer at a time when

the account was closed, as defendant appears to argue. Defendant’s motion to dismiss is denied as to

plaintiff’s EFTA claim regarding the October 1 transfer.

Question: Under the EFTA, if a consumer wants to stop payment of a preauthorized electronic fund

transfer, what must they do?

Question: What was the Court’s decision regarding the Defendant’s motion to dismiss?

Question: Why the different outcome between the two transfers?

66 Pro se is a Latin phrase meaning “on one’s own behalf.” A pro se lawsuit is one in which the party represents

herself instead of hiring a lawyer.