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Business Law Chapter 44 Homework Accurate Credit Transactions Act 2003 The Major

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12 pages
Word Count
8825 words
Book Title
Business Law: Text and Cases 14th Edition
Authors
Frank B. Cross, Kenneth W. Clarkson, Roger LeRoy Miller
1
Chapter 44
Consumer Law
INTRODUCTION
Many federal and state administrative agencies are focused on what has become a vast area of government
regulationconsumer 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. Pufferyvague
generalities and obvious exaggerationsis 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
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
Federal Trade Commission (FTC) charged POM with, and held POM liable for, making false, misleading, and
unsubstantiated representations in violation of the FTC Act. POM was barred from running future ads
asserting that its products treat or prevent any disease unless armed with “randomized, controlled, human
clinical trials demonstrating statistically significant results.” POM appealed.
The U.S. Court of Appeals for the District of Columbia Circuit affirmed. “An advertiser who makes express
representations about the level of support for a particular claim must possess the level of proof claimed in the
ad and must convey that information to consumers in a non-misleading way.”
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Notes and Questions
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
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.
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).
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”
gaming experience, but did not state an additional purchase was required to attain that resolution were
sufficient to plead members of the public were likely to be deceived).
Transamerica Corp. v. Moniker Online Services, LLC, 672 F.Supp.2d 1353 (S.D.Fla. 2009) (service mark
owner's allegationsthat 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 notfell 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).
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
investigation, often after a consumer complaint. The investigation may lead to a formal com-
plaint. If the alleged offender does not agree to settle, a hearing is held before an ad-
ministrative law judge.
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
An injury to a commercial interest in reputation or sales.
Direct causation of the injury by false or deceptive advertising.
A loss of business from consumers or other buyers who were deceived by the advertising.
CASE SYNOPSIS
Case 44.2: Lexmark International, Inc. v. Static Control Components, Inc.
Lexmark International, Inc., sells the only style of toner cartridges that work with the company's laser
printers. Other businessesremanufacturersacquire and refurbish used Lexmark cartridges to sell in
competition with the cartridges sold by Lexmark. Static Control Components, Inc., makes and sells
components for the remanufactured cartridges, including microchips that mimic the chips in Lexmark’s
cartridges. Lexmark released ads that claimed Static Control’s microchips illegally infringed Lexmark’s
patents. Lexmark then filed a suit in a federal district court against Static Control, alleging violations of
intellectual property law. Static Control counterclaimed, alleging that Lexmark engaged in false advertising in
violation of the Lanham Act. The court dismissed the counterclaim. On Static Control’s appeal, the U.S. Court
of Appeals for the Sixth Circuit reversed the dismissal. Lexmark appealed.
The United States Supreme Court affirmed the lower court’s ruling. The Supreme Court’s decision
clarified that businesses do not need to be direct competitors to bring an action for false advertising under the
act. A cause of action for false advertising under the Lanham Act extends to plaintiffs whose interests “fall
within the zone of interests protected by the law.” To establish a claim, a plaintiff must allege an injury to a
commercial interest in reputation or sales proximately caused by a violation of the statute. Static Control met
this test.
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Notes and Questions
Under the Court’s ruling in this case, is Static Control now entitled to relief? Nobased 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
cause of action for false advertising, a plaintiff must plead and prove an injury to a commercial interest in
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
false advertising under the Lanham Act. But Static Control cannot obtain relief without evidence of an injury
proximately caused by Lexmark's alleged misrepresentations. The Court held here only that Static Control is
entitled to a chance to prove its case, not that it has already proved it.
Two rival carmakers purchase airbags for their cars from different third-party manufacturers. The first
carmaker, hoping to divert sales from the second, falsely proclaims that the airbags used by the second
carmaker are defective. Who among these parties can successfully allege proximate cause as part of a
false advertising claim brought under the Lanham Act? Under these facts, both the second carmaker and
its airbag supplier could suffer injury to their business reputations, and their sales could decline as a result.
Each would be directly and independently harmed by the attack on its merchandise. Consequently, either or
both of them could establish the element of proximate cause to support a claim for false advertising brought
under the Lanham Act.
B. MARKETING
1. Telephone Solicitation
The Telephone Consumer Protection Act (TCPA) of 1991 prohibits phone solicitation using an
automatic phone dialing system or a prerecorded voice and the transmission of ads via fax without
the recipient’s permission. Junk fax fines can be $11,000 per day.
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
 
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
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consumers in the United Stateseven 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
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 itemssuch as a cell
phone, satellite dish system, vacation package, or home security systemat 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.
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).
The FTC “Mail or Telephone Order Merchandise Rule” of 1993 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.
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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 garmentin 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
the foods on its menu, including food offered through vending machines. Exempt are condiments,
daily specials, and food offered for less than sixty days. Guidelines on the number of calories an
average person needs daily must also be posted.
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 todays 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
Food standards.
Safe levels of potentially hazardous additives.
Classifications of advertising.
A food registry.
Record-keeping requirements.
Provisions for inspections.
1. Tainted Foods
Under the Food Safety Modernization Act (FSMA) of 2010
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The Food and Drug Administration can recall food products that may be tainted.
Any person who makes, processes, packs, distributes, receives, holds, or imports food
products must pay a fee and register with the U.S. Department of Health and Human Services.
Owners and operators of facilities must analyze and identify food safety hazards, implement
preventive controls, monitor effectiveness, and take corrective actions.
Imported foods must meet U.S. safety standards.
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.
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
hazardous.
Administers other product safety legislation.
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.
Lifetime and annual limits on care are eliminated.
Preventive services, such as cancer-screening, must be provided without cost to patients.
Medicare patients get a 50 percent discount on name-brand drugs.
Medicare’s prescription drug coverage gap will close by 2020.
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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States can require insurance companies to justify premium increases to participate in a health
insurance exchange.
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
technical mistakes.
Small businesses are eligible for tax credits for providing insurance benefits to workers.
States can receive federal funds to cover low-income individuals and families.
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.
Retail and installment sales.
Car loans.
Home improvement loans.
Real estate loans when the amount financed is less than $25,000.
3. Equal Credit Opportunity
The Equal Credit Opportunity Act of 1974 prohibits (1) denial of credit on the basis of race, religion,
national origin, color, sex, marital status, age and (2) credit discrimination based on whether an
individual receives certain forms of income.
4. Credit-Card Rules
Liability of a cardholder is $50 per card for unauthorized charges made before the issuer is notified
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
10 UNIT NINE: GOVERNMENT REGULATION
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.
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.
Require companies to provide forty-five days’ notice to consumers before changing credit-card
terms.
Require companies to send out monthly bills to cardholders twenty-one days before the due
date.
Prevent companies from increasing the interest rate on a customer’s credit-card balance
except in certain situations such as the expiration of a promotional rate.
Prevent companies from charging over-limit fees except in certain situations.
Require companies to apply payments in excess of the minimum amount due to the
customer’s highest-interest balance first when the borrower has balances with different rates.
Prevent companies from computing finance charges based on the previous billing cycle.
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
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,
Comcast, without Santangelo’s authorization, pulled his credit report. The inquiry depleted Santangelo’s credit
score. He filed a complaint in a federal district court against Comcast, alleging that a violation of the Fair
Credit Reporting Act (FCRA). Arguinh that Santangelo lacked standing and failed to sufficiently allege an
CHAPTER 44: CONSUMER LAW 11
FCRA violation, Comcast filed a motion to dismiss.
The court denied Comcast’s motion. Because the FCRA grants consumers a legally protected interest in
limiting access to their credit reports and provides redress for violations, * * * Santangelo’s allegations about
Comcast’s interference with that legally protected interest are sufficient to establish * * * standing.” As for
Santangelo’s allegations, “Comcast’s mere violation of its alleged agreement not to pull Santangelo’s credit
report does not support an FCRA claim. But the possibility that the company itself believed that its customers’
creditworthiness was irrelevant if they paid a deposit is enough.”
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Notes and Questions
Under the court’s ruling in this case, is the plaintiff now entitled to relief? No. The court here only
denied the defendant’s motion to dismiss. The court ruled that Santangelo had standing to proceed and that
he sufficiently alleged an FCRA violation. This means that the plaintiff is entitled to a chance to prove his
case, not that he has already proved it.
ADDITIONAL BACKGROUND
Credit Reports
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
these reports figure prominently in any decision by the lender to approve or deny credit, significant problems
can result when these reports contain erroneous or irrelevant data.
To avoid such problems, Section 607(a) of the Fair Credit Reporting Act (FCRA) [15 U.S.C. § 1681]
requires that credit bureaus maintain adequate procedures to insure that obsolete data is not included in any
credit report. The FCRA also requires that credit bureaus take reasonable steps to verify the accuracy of the
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,
all sorts of extraneous data, regardless of whether or not it reflects on the creditworthiness of the applicant,
may be included in the report.
Due to problems arising from misinformation in as many as a third of consumers’ credit files, under the
Fair and Accurate Credit Transactions Act of 2003, the major credit-reporting agencies must provide
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
Fair Isaac Corp. on which lenders and others commonly rely, many consumers might find it more effective to
buy the reports from a source that includes the FICO score in the reports.
1. Consumer Notification and Inaccurate Information
12 UNIT NINE: GOVERNMENT REGULATION
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.
The FACT Act requires credit-reporting agencies to provide consumers with free copies of their
reports and to stop reporting allegedly fraudulent information once a consumer shows that identify
theft occurred.
Businesses are required to include shortened (“truncated”) account numbers on credit card
receipts.
Businesses are also required to provide consumers with copies of records that help prove an
account or transaction was fraudulent.
D. THE FAIR DEBT COLLECTION PRACTICES
The Fair Debt Collection Practices Act (FDCPA) of 1977 regulates the practices of collection agencies
collecting consumer debts. It applies only to debt-collection agencies that, usually for a percentage of the
amount owed, attempt to collect debts on behalf of someone else.
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
debtor.
Contacting third parties other than the debtor’s parents, spouse, or financial advisor about
payment unless a court agrees.
Using harassment, or false and misleading information.
Contacting the debtor any time after the debtor refuses to pay the debt, except to advise the
debtor of further action to be taken.
Collection agencies must give a debtor a validation notice that states he or she has thirty days to
dispute the debt and request written verification of it.
2. Enforcement of the Act
The FTC enforces the act. Penalties include actual damages, additional damages not to exceed
$1,000, and attorneys’ fees. Debt collectors are not liable if they can show that a violation was
unintentional and the result of a “bona fide error” despite following procedures designed to avoid
such errors.
ADDITIONAL BACKGROUND
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State Consumer Protection Laws
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
Uniform Consumer Credit Code (UCCC) sections on truth in lending, maximum credit ceilings, door-to-door
sales, referral sales, and fine-print clauses, also apply in situations involving consumers..
Perhaps the most significant consumer protection provided by the UCC is the principle of
unconscionability based on UCC 2302. This section, as interpreted by the courts, prohibits the enforcement
of contracts that are so one-sided and unfair that they “shock the conscious” of the court. Although the UCC
does not provide precise standards for determining whether a contract is unconscionable, it does suggest that
such a contract must greatly offend our sense of justice and fairness. The purpose behind this protection is
explained in the following excerpt from UCC 2302, Comment 1.
Purposes:
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
construction of language, by manipulation of the rules of offer and acceptance or by determinations that the
clause is contrary to public policy or to the dominant purpose of the contract. This section is intended to allow
the court to pass directly on the unconscionability of the contract or particular clause therein and to make a
conclusion of law as to its unconscionability. The basic test is whether, in the light of the general commercial
background and the commercial needs of the particular trade or case, the clauses involved are so one-sided
as to be unconscionable under the circumstances existing at the time of the making of the contract. . . . The
principle is one of the prevention of oppression and unfair surprise . . . and not of disturbance of allocation of
risks because of superior bargaining power.
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.
14 UNIT NINE: GOVERNMENT REGULATION
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
a cease-and-desist order requiring that the company cease and desist its advertising practices. Moreover, the FTC
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-
lection agency may not (1) contact the debtor at the debtor’s place of employment if the debtor’s employer objects; (2)
contact the debtor during inconvenient or unusual times (e.g., call the debtor at 3 o’clock in the morning) or at any
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
associated with different consumer products. Under the Consumer Product Safety Act, the CPSC is authorized to set
standards for consumer products and to ban the manufacture and sale of any product it deems to be potentially
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
16 UNIT NINE: GOVERNMENT REGULATION
Footnote 5: Through Verity International, Ltd., and Automatic Communications, Ltd. (ACL), Robert Green
and Marilyn Shein implemented a billing system that ensured consumers paid charges for accessing “adult”
entertainment. The system billed a computer’s phone-line subscriber for the costwhich was often high, based on the
price of international phone calls to Madagascar. Revenue was divided between Verity, the phone companies, and
others. Phone-line subscribers were misled to believe that they were legally bound to pay. The FTC filed a suit in a
federal district court against Verity, ACL, Green, and Shein, alleging violations of the FTC Act. The court froze the
defendants’ assets and ordered nearly $18 million in restitution. The defendants appealed
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
elements: (1) a representation, omission, or practice, that (2) is likely to mislead consumers acting reasonably under
the circumstances, and [that] (3) * * * is material. The deception need not be made with intent to deceive; it is enough
that the representations or practices were likely to mislead consumers acting reasonably.” In this case, “the FTC
How did the defendants’ billing system operate? The court explained, “When a computer user visited a
website providing adult-entertainment services, the website offered the user the ability to buy adult content using a
downloadable ‘dialer program.’ The user downloaded the dialer program after clicking through a series of website
among other things, “The bills . . . contained a ‘1-800’ number provided for line subscribers to call with questions
about their bills. That number was widely used.” Between July and September 2000, for example, “91,683 bills were
sent to line subscribers and at least 24,986 subscribers contacted Verity about the bills. Calling the customer-service
center was not a positive experience for many invoice recipients. The center was so understaffed that 72% of the calls
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
CHAPTER 44: CONSUMER LAW 17
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
powers to obtain information from, in this case, the phone service providers. For example, during the relevant time
period, one of the providers (AT & T Corporation) gave a phone credit to any consumer who complained about a
charge on its bill. The FTC might subpoena AT & T (and the other providers) to discover how much of this credit was
granted to the defendants-appellants’ customers.
Footnote 14: Gaetano Paduano bought a new Honda Civic Hybrid in California. The EPA fuel economy
estimate on the labelmandated 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
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
In Paduano v. American Honda Motor Co., a 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.”
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.
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’
productsand this might have led to a significant payout to many consumers, undercutting profit. Is it unethical for a
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
open the courtroom doors to other consumers dissatisfied with their vehicles’ fuel economy. This might not bode well
for the motor vehicle industry, for the reasons stated in the answer to the previous question. Ultimately, there could be
18 UNIT NINE: GOVERNMENT REGULATION
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
decided that Saunders was in default, and repossessed and sold the car. The lender forwarded adverse credit
information about Saunders, with added derogatory details, to credit reporting agencies, without noting that Saunders
disputed the information. Saunders filed a suit in a federal district court against BB & T and others, alleging chiefly
violations of the Fair Credit Reporting Act (FCRA). A jury awarded Saunders $1,000 in statutory damages and
$80,000 in punitive damages. BB & T asked the court to reduce the award. In Saunders v. Equifax Information
Services, L.L.C., the court held that BB & T’s actions were “willful” violations of the FCRA. “BB & T caused great
financial and emotional strain to a consumer by failing to properly ‘book’ Saunders' loan in violation of BB & T's own
internal operating procedures.” The jury based its decision on sufficient evidence of misconduct by BB & T, as well as
the lender’s economic ability, in terms of its substantial net worth of more than $3.2 billion, to pay the amount of the
award. Such an assessment has “legitimate punitive and deterrent purpose[s].”
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,
which prohibits the imposition of “grossly excessive or arbitrary punishments.” “[P]unitive damage awards violate due
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
maximum statutory damages “further supports its award of punitive damages that was but a fraction of BB & T's

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