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Chapter 44
Consumer Law
INTRODUCTION
Many federal and state administrative agencies are focused on what has become a vast area of government
regulation—consumer protection. Consumer transactions broadly include transactions that involve an exchange of
value for the purpose of acquiring goods, services, land, or credit for personal or family use. Federal and state laws
protect consumers from unfair trade practices, unsafe products, discriminatory or unreasonable credit requirements,
and other problems related to consumer transactions. This chapter focuses primarily on federal legislation.
CHAPTER OUTLINE
I. Advertising, Marketing, and Sales
Sources of consumer protection include federal and state laws, private organizations, and so on. Courts and
other mechanisms (free legal services, small claims courts, recovery of attorneys’ fees in class actions, and
others) encourage consumer action.
A. DECEPTIVE ADVERTISING
• Deceptive advertising is generally defined as advertising that may be interpreted as false or mis-
leading.
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• Deceptive advertising occurs if a reasonable consumer would be misled by the ad. Puffery—vague
generalities and obvious exaggerations—is permissible.
1. Claims That Appear to Be Based on Factual Evidence
Ads that appear to be based on factual evidence but in fact are not are deemed deceptive.
CASE SYNOPSIS—
Case 44.1: POM Wonderful, LLC v. Federal Trade Commission
unsubstantiated representations in violation of the FTC Act. POM was barred from running future ads
The U.S. Court of Appeals for the District of Columbia Circuit affirmed. “An advertiser who makes express
ad and must convey that information to consumers in a non-misleading way.”
POM Wonderful, LLC makes and sells pomegranate-based products. In ads, POM touted medical studies
claiming to show that daily consumption of its products could treat, prevent, or reduce the risk of heart
disease, prostate cancer, and erectile dysfunction. These ads mischaracterized the scientific evidence. The
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Notes and Questions
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.
Isn’t false 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 information and ad
ADDITIONAL CASES ADDRESSING THIS ISSUE —
Deceptive Advertising
Cases considering claims of deceptive advertising include the following.
• Waldman v. New Chapter, Inc., 714 F.Supp.2d 398 (E.D.N.Y. 2010) (food product manufacturer’s
packaging was misleading, in that it gave false impression that consumers were buying more than they
actually received, and purchaser alleged that, had she understood true amount of product, she would not
have purchased it).
• Buetow v. A.L.S. Enterprises, Inc., 713 F.Supp.2d 832 (D.Minn. 2010) (ads for carbon-embedded hunting
clothing including statements such as “complete scent elimination,” “scentfree,” “works on 100% of your scent
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(100% of the time),” “all human scent,” “odor is eradicated,” and graphics showing that human odor cannot
escape carbon-embedded fabric were literally false).
• Transamerica Corp. v. Moniker Online Services, LLC, 672 F.Supp.2d 1353 (S.D.Fla. 2009) (service mark
• Lima v. Gateway, Inc., 710 F.Supp.2d 1000 (C.D.Cal. 2010) (allegations that computer monitor
manufacturer stated monitor could attain a resolution of 2,560 by 1,600 pixels and provide “visually intense”
2. Claims Based on Half-Truths
Ads that appear to be based on factual evidence but in fact are not are deemed deceptive.
3. Bait-and-Switch Advertising
This section highlights Federal Trade Commission (FTC) rules defining and prohibiting bait-and–
4. Online Deceptive Advertising
The FTC Advertising and Marketing on the Internet: Rules of the Road guidelines of 2000 describe
how existing laws apply to online ads. Generally—
5. Federal Trade Commission Actions
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a. Formal Complaint
An FTC action against those who are accused of deceptive advertising begins with an
b. FTC Orders and Remedies
A cease-and-desist order, an order requiring counteradvertising, or a multiple-product order
may be sought.
c. Damages When Consumers Are Injured
The FTC may seek restitution if an ad involves wrongful charges to consumers.
d. Restitution Possible
The FTC may seek restitution if an ad involves wrongful charges to consumers.
6. False Advertising Claims under the Lanham Act
Under the Lanham Act, to state a successful claim, for false advertising a business must
establish—
CASE SYNOPSIS—
Case 44.2: Lexmark International, Inc. v. Static Control Components, Inc.
of Appeals for the Sixth Circuit reversed the dismissal. Lexmark appealed.
this test.
Lexmark International, Inc., sells the only style of toner cartridges that work with the company’s laser
printers. Other businesses—remanufacturers—acquire and refurbish used Lexmark cartridges to sell in
competition with the cartridges sold by Lexmark. Static Control Components, Inc., makes and sells
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Notes and Questions
sales or business reputation proximately caused by the defendant’s misrepresentations. In this case, the
Court ruled that Static Control alleged an adequate basis to proceed in its counterclaim against Lexmark for
entitled to a chance to prove its case, not that it has already proved it.
its airbag supplier could suffer injury to their business reputations, and their sales could decline as a result.
under the Lanham Act.
Under the Court’s ruling in this case, is Static Control now entitled to relief? No—based on a careful
reading of the Court’s ruling in this case, Static Control is not yet entitled to relief. To invoke the Lanham Act’s
B. MARKETING
1. Telephone Solicitation
The Telephone Consumer Protection Act (TCPA) of 1991 prohibits phone solicitation using an
2. Fraudulent Telemarketing
Under the Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994, the FTC issued
the Telemarketing Sales Rule of 1995 to ban misrepresentation and requires disclosure by
telemarketers, including foreign firms. The FTC also set up the national Do Not Call Registry.
ENHANCING YOUR LECTURE—
PROTECTING U.S. CONSUMERS
FROM CROSS-BORDER TELEMARKETERS
telemarketers from misrepresenting information. Significantly, the TSR applies to any offer made to
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)
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consumers in the United States—even if the offer comes from a foreign firm.
A TELEMARKETING SCAM THAT ORIGINATED IN CANADA
consumers in the United States. The telemarketers offered pre-approved Visa or MasterCard credit cards to
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
THE CANADIAN GOVERNMENT AND THE FTC
COOPERATE TO PROSECUTE THE TELEMARKETERS
In addition, the FTC filed a civil lawsuit against the Okses and other Canadian defendants in a federal
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
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?
C. SALES
• States’ “cooling–off” laws permit a buyer to rescind a purchase within a certain period of time. The
FTC has mandated notice to consumers of this right (in Spanish, if the sale was conducted in
Spanish).
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II. Labeling and Packaging Laws
Laws dealing with labels and packages require—
• Accurate information about products.
• Use of language easily understood by the ordinary consumer.
• Disclosure of a product’s ingredients—such as cotton in a garment—in some instances.
• Warnings of potential dangers in some instances.
A. AUTOMOBILE FUEL ECONOMY LABELS
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.
B. FOOD LABELING
Labels are required on, among other products, fresh meats, fruits, and vegetables to indicate where the
food originated. The Fair Packaging and Labeling Act of 1966 requires that product labels identify—
• The product.
• The net quantity of contents; and the size of a serving if the number of servings is stated.
• The manufacturer.
• The packager or distributor.
1. Nutritional Content
Food products must bear labels detailing nutrition, including how much and what type of fat a
product contains. The U.S. Food and Drug Administration and the U.S. Department of Agriculture
are the chief agencies that issue regulations on food labeling.
2. Caloric Content of Restaurant Foods
Under federal law, a restaurant chain with twenty or more locations must post the caloric content of
III. 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
Act (FDCPA). Most of the enforcement of the FDCPA is by the Food and Drug Administration. The act
sets out—
1. Tainted Foods
Under the Food Safety Modernization Act (FSMA) of 2010—
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2. Drugs and Medical Devices
The FDA must ensure that drugs are safe and effective before they are marketed to the public. A
drug’s maker must show that its product meets this standard.
B. THE CONSUMER PRODUCT SAFETY ACT
Consumer product safety legislation dates back at least forty years. The Consumer Product Safety Act
of 1972, among other things, established authority over consumer safety under the Consumer Product
Safety Commission (CPSC).
1. The CPSC’s Authority
The CPSC—
• Conducts research on product safety.
• Maintains a clearinghouse on the risks associated with some products.
• Sets standards for consumer products.
2. Notification Requirements
The Consumer Product Safety Act requires manufacturers to report on any products already sold or
intended for sale if the products have proved to be hazardous.
C. HEALTH-CARE REFORMS
1. Expanded Coverage for Children and Seniors
Under the Patient Protection and Affordable Care Act of 2010—
• Children can stay on their parents’ health insurance until age 26.
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
percent from individuals and small employers, on benefits and quality improvement.
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3. Other Provisions of the Patient Protection and Affordable Care Act
Other provisions cover early retirees, community health centers, public programs, and—
• Insurance companies cannot deny coverage for preexisting conditions or cancel coverage for
IV. Credit Protection
The Consumer Financial Protection Bureau oversees the practices of banks, mortgage lenders, and credit-
card companies.
A. THE TRUTH–IN-LENDING ACT
The Truth-in-Lending Act (TILA) of 1968, 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 available financing terms.
1. Application
Creditors who, in the ordinary course of business, lend money or sell goods on credit to consumers,
or arrange for credit for consumers, are subject to the TILA.
2. Disclosure Requirements
Under Regulation Z, in any transaction involving a sales contract in which payment is to be made in
more than four installments, a lender must disclose all the credit terms clearly and conspicuously.
This includes—
• Installment loans.
3. Equal Credit Opportunity
The Equal Credit Opportunity Act of 1974 prohibits (1) denial of credit on the basis of race, religion,
ADDITIONAL BACKGROUND—
The Fair Credit Billing Act
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card and explain the basis of the alleged error. The company must resolve the dispute within ninety days,
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
5. 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.
B. THE FAIR CREDIT REPORTING ACT
Under the Fair Credit Reporting Act of 1970, consumer credit reporting agencies may issue credit
reports only for certain purposes (extension of credit, etc.). Under the act, consumers must be notified
when information is being given out by a credit agency about their credit standing.
CASE SYNOPSIS—
Case 44.3: Santangelo v. Comcast Corporation
Credit Reporting Act (FCRA). Arguinh that Santangelo lacked standing and failed to sufficiently allege an
Comcast Corporation provides Internet service. Comcast requires a $50 deposit from any customer who
opts to forego a credit inquiry or whose credit report includes an “unsatisfactory” credit score. Keith
Santangelo, a Comcast customer, opted to pay the deposit in lieu of a credit inquiry. Despite this choice,
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FCRA violation, Comcast filed a motion to dismiss.
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Notes and Questions
case, not that he has already proved it.
Under the court’s ruling in this case, is the plaintiff now entitled to relief? No. The court here only
ADDITIONAL BACKGROUND—
Credit Reports
information contained in their reports. Despite concerns expressed in Congress and elsewhere, however, the
FCRA contains no requirement that the information contained in the credit report be relevant. In other words,
consumers, annually, copies of their credit reports on request, free of charge. Due to current difficulties in
obtaining the free reports, however, and because the reports do not include the FICO scores developed by
Before approving loan applications, commercial lenders will typically order a credit report from a credit
bureau to determine the applicant’s creditworthiness and to assess any risks of default by the applicant.
Credit bureau reports typically provide financial data about the applicant’s bank accounts and credit card
accounts. These reports may also include such things as any unsatisfied judgments or charges. Because
1. Consumer Notification and Inaccurate Information
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2. Remedies for Violations
A credit agency may be liable for actual damages and additional damages up to $1,000, plus
attorneys’ fees. Creditors and others, including insurance companies, that use credit information
may also be liable.
C. THE FAIR AND ACCURATE CREDIT TRANSACTIONS ACT
• The Fair and Accurate Credit Transactions Act (FACT Act) of 2003 established a national “fraud
alert” system so that consumers who suspect identity theft can place an alert on their credit files.
D. THE FAIR DEBT COLLECTION PRACTICES
The Fair Debt Collection Practices Act (FDCPA) of 1977 regulates the practices of collection agencies
1. Requirements of the Act
The FDCPA prohibits—
• Contacting the debtor at the debtor’s place of employment if the employer objects.
• Contacting the debtor during inconvenient times or at any time if an attorney represents the
2. Enforcement of the Act
The FTC enforces the act. Penalties include actual damages, additional damages not to exceed
ADDITIONAL BACKGROUND—
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State Consumer Protection Laws
does not provide precise standards for determining whether a contract is unconscionable, it does suggest that
State consumer protection laws include provisions that, like federal statutes, are directed at deceptive
trade practices. The Uniform Commercial Code (UCC) sections on warranties and unconscionability, and the
Purposes:
as to be unconscionable under the circumstances existing at the time of the making of the contract. . . . The
1. This section is intended to make it possible for the courts to police explicitly against the contracts or
clauses which they find to be unconscionable. In the past such policing has been accomplished by adverse
TEACHING SUGGESTIONS
1. Ask students to discuss examples of puffing involving nationally advertised products. How do compa-
nies advertise their products when they wish to engage in aggressive marketing campaigns? Do
these campaigns ever involve what are arguably false statements of fact?
2. Ask students whether corrective advertising in an excessively harsh remedy for dealing with past decep-
tive advertising campaigns because the FTC may simply issue cease-and-desist orders. Is the corrective
advertising remedy used to inform consumers about the true worth of a particular product or simply
to punish the company for its past practices?
3. Are there certain circumstances in which a person receiving unsolicited merchandise should be
required to return the merchandise to the sender if he or she does not wish to purchase it? What are
some of the reasons that the federal government might wish to make no exceptions to the rule freeing
consumers of any liability for failing to return unsolicited merchandise?
4. At the federal level, consumer law is inseparable from administrative law. For this reason, you may find it
helpful when studying the law in this chapter to consider the material in the chapter on administrative law.
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Cyberlaw Link
What legal protection against cyberfraud exists? What are the legal issues for advertising and
promoting a product on a Web site?
DISCUSSION QUESTIONS
1. What is puffing? Puffing consists of vague generalities and obvious exaggerations about a particular prod–
2. How does a bait-and-switch advertisement work? Bait-and-switch advertising involves displaying a low
price in a store window, for example, of a particular item that will likely be unavailable to the consumer, who will then
the item.
3. What are some of the actions that may be taken by the FTC against deceptive advertising practices?
Assuming that the FTC investigation indicates that further action is warranted by the government, the FTC may issue
4. How do state and federal laws regulate door-to-door sales? States have enacted “cooling–off” legislation,
5. When must a recipient of unsolicited merchandise return the merchandise to the sender? Never.
Under the Postal Reorganization Act of 1970, any unsolicited merchandise sent by U.S. mail may be retained, used,
6. What should a consumer do, before applying for credit, to avoid disputes? The best tactic might be
7. What are some of the tactics that may not be used by collection agencies to collect debts? A col-
8. What are the primary functions and powers of the Consumer Products Safety Commission (CPSC)?
The CPSC conducts research on the safety of individual products, and it maintains a clearinghouse on the risks
9. Should the Internet make it easier or more difficult to insure that the information provided to and by
credit reporting agencies is accurate? Why? The Internet may make it easier to insure the accuracy of credit
10. States also offer protection for consumers under the Uniform Commercial Code (UCC) and other
statutes. What standard does the UCC provide for determining whether a contract is unconscionable?
Perhaps the most significant consumer protection provided by the UCC is the principle of unconscionability based on
ACTIVITY AND RESEARCH ASSIGNMENT
Ask students to call local credit bureaus and find out about the procedure and expense involved in securing a
credit report on a particular individual. The students should also attempt to ascertain what sorts of procedures are
used by the individual bureaus to safeguard the privacy of the individual featured in the report and the criteria used to
determine the personal information that will be included in the report.
EXPLANATIONS OF SELECTED FOOTNOTES IN THE TEXT
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Footnote 5: Through Verity International, Ltd., and Automatic Communications, Ltd. (ACL), Robert Green
In Federal Trade Commission v. Verity International, Ltd., the U.S. Court of Appeals for the Second Circuit
affirmed. “To prove a deceptive act or practice under {Section] 5(a)(1) [of the FTC Act], the FTC must show three
third parties—and the case was remanded for a determination of the size of this award.
How did the defendants’ billing system operate? The court explained, “When a computer user visited a
Why did consumers believe that they had to pay the charges for these calls? The court explained that,
among other things, “The bills . . . contained a ‘1–800’ number provided for line subscribers to call with questions
How might the defendants have avoided the charges against them in this case? Of course, if the
defendants had conducted a more reputable business in a less questionable manner, there may have been no basis
for the charges against them. The FTC brought its charges, however, after receiving more than 500 complaints from
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As an administrative agency, what powers might the FTC use to more precisely determine the number
of consumers who paid their phone bills but did not use, or authorize others to use, the defendants’
services? The FTC, or any administrative agency seeking to make such an estimate, might use its investigatory
Footnote 14: 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 47 miles per
gallon (mpg) for city driving and 48 mpg for highway driving. Honda’s sales brochure added, “Just drive the Hybrid like
In Paduano v. American Honda Motor Co., a state intermediate appellate court concluded that the federal
Is the ruling in this case favorable for the auto market? Why or why not? In the long-term, the ruling
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
What does the interpretation of the law in this case suggest to businesspersons who sell products
labeled with statements mandated by federal or state law? The result of the decision in the Paduano case may
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Footnote 31: Rex Saunders obtained an auto loan from Branch Banking & Trust Company of Virginia (BB
& T). Contrary to its usual procedure, BB & T did not give Saunders a payment coupon book and rebuffed his
attempts to make payments. A copy of the title for the vehicle indicated no loan. When BB & T discovered its mistake,
it demanded full payment, plus interest and penalties. When payment was not immediately forthcoming, BB & T
What is the difference between an award of compensatory damages and an award of punitive
damages? The two serve different purposes. In the words of the court in the Saunders case, compensatory damages
“arbitrariness”? The court in this case cited the due process clause of the Constitution’s Fourteenth Amendment,
The jury awarded Saunders only $1,000 in statutory damages, but under the circumstances, this was
the maximum allowed under the FCRA. What does the fact that the jury felt compelled to award the maximum
allowable amount indicate about the ethics of BB & T’s conduct? The court felt that the jury’s award of the