1104 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
unintentional and the result of a “bona fide error” despite following procedures designed to avoid such
errors.
CASE SYNOPSIS—
Case 45.3: Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich, LPA
On behalf of Countrywide Home Loans, Inc., the law firm of Carlisle, McNellie, Rini, Kramer & Ulrich, LPA (Carlisle),
initiated a foreclosure action against Karen Jerman. She was served notice that the debt would be assumed valid unless
she disputed it in writing. She objected. Carlisle determined that the debt had been paid and withdrew the foreclosure
suit. Jerman then filed a suit in a federal district court against Carlisle, alleging that the notice violated the FDCPA. The
court ruled in Carlisle’s favor. The U.S. Court of Appeals for the Sixth Circuit affirmed. Jerman appealed.
…………………………………………………………..……………………………………………………………………
Notes and Questions
What should the notice to the debtor have stated to avoid the suit in this case? From the Court’s opinion it
seems clear that the notice should not have told the debtor that the debt would be assumed valid unless it was
disputed in writing. The notice might have left out the “in writing” clause to avoid this suit, or it might have been
phrased to tell the debtor what to do in the case of a dispute without expressing any assumptions.
ANSWERS TO QUESTIONS AT THE END OF CASE 45.3
1. One of the concerns raised by Carlisle was that if attorneys could be held liable for their reasonable
misinterpretations of the FDCPA’s requirements, it would unleash a “flood of lawsuits” against creditors’
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2. Jerman’s attorneys contended that if the Court agreed with Carlisle’s argument (that the bona fide error
defense included errors in legal interpretation), ethical debt collectors would be placed at a disadvantage.
Why would this be? According to Jerman’s attorneys, if attorneys could avoid liability under the FDCPA on the
ground that they made a mistaken legal interpretation of the act, this would give a competitive advantage to debt
collectors who press the boundaries of lawful conduct. In other words, attorneys would easily be able to violate the act
E. GARNISHMENT OF WAGES
Most states provide for garnishment, but the law varies among the states as to how it is done. The Constitution
V. Consumer 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. The act
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—
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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.
ADDITIONAL BACKGROUND—
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
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
unfair surprise . . . and not of disturbance of allocation of risks because of superior bargaining power.
1108 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
TEACHING SUGGESTIONS
1. Ask students to discuss examples of puffing involving nationally advertised products. How do companies
advertise their products when they wish to engage in aggressive marketing campaigns? Do these campaigns
ever involve what are arguably false statements of fact?
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
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.
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 product. Puffing
2. How does a bait-and-switch advertisement work? Bait-and-switch advertising involves displaying a low price in a
3. What are some of the actions that may be taken by the FTC against deceptive advertising practices?
4. How do state and federal laws regulate door–to-door sales? States have enacted “cooling–off” legislation, which
5. When must a recipient of unsolicited merchandise return the merchandise to the sender? Never. Under the
6. What should a consumer do, before applying for credit, to avoid disputes? The best tactic might be aggression—
7. What are some of the tactics that may not be used by collection agencies to collect debts? A collection agency
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 hazardous to consumers. The CPSC also has the
1110 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
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
Footnote 32: 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
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 “are intended to redress
the concrete loss that the plaintiff has suffered by reason of the defendant’s wrongful conduct.” In contrast, punitive damages
“serve a broader function aimed at deterrence and retribution.”
What is the source in the law for reviewing an award of punitive damages according to its “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 process when they constitute an arbitrary
deprivation of property.” In this case, the ratio of the award of statutory damages to punitive damages was 80 to 1. The United
States Supreme Court has upheld ratios of punitive damages to compensatory damages of as much as 526 to 1, and “neither the
Supreme Court nor Congress has found it appropriate or necessary to impose a limit on punitive damages awards in the FCRA
context, including claims based on willful violations of the Act.”
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Footnote 43: Mirama Enterprises, Inc. (now Aroma Housewares Co.) sells small kitchen appliances, including,
between 1996 and 1998, a juicer. Aroma began receiving complaints of exploding juicers in early 1998, and filed a report with
the Consumer Product Safety Commission (CPSC) in November, which recalled the juicer in June 1999. The federal government
filed a suit against Mirama, seeking damages for its alleged failure to notify the CPSC earlier. The court ruled in the
government’s favor. Mirama appealed. In United States v. Mirama Enterprises, Inc., the U.S. Court of Appeals for the Ninth
Circuit affirmed. The Consumer Product Safety Act requires distributors to report each individual unit about which they receive
information that “reasonably supports the conclusion that such product * * * contains a defect which could create a sub–
stantial product hazard * * * or * * * creates an unreasonable risk of serious injury or death “ Thus “Aroma was required to
report not merely the twenty-three juicers that shattered, but the 30,000 to 40,000 juicers in the stream of commerce that
might well pose an unreasonable risk of serious injury to consumers. When it failed to do so, Aroma committed 30,000 to
40,000 reporting offenses.
Did the circumstances in this case also satisfy the “unreasonable risk of serious injury or death” reporting
requirement? Yes. The incidents in this case were enough for a “reasonable person to be able to conclude that the juicer posed
an unreasonable risk of serious injury or death.
Is “certainty” required before a company must report to the CPSC? No. Certainty is not the threshold. Companies
must report on receipt of information that “reasonably supports” the conclusion there is a defect. The standard is a “reasonable
person” standard, not a “reasonable expert” standard. Juicers are within the average consumer’s experience and knowledge.
Because a reasonable person would not expect his or her juicer to explode, a reasonable person could conclude that the juicer
made by Aroma contained a defect
1112 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
ANSWERS TO ESSAY QUESTIONS IN
STUDY GUIDE TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
BY HOLLOWELL & MILLER
1. What are some of the more common deceptive advertising techniques and the ways in which the FTC may
deal with such conduct? Advertising will be deemed deceptive if a consumer would be misled by the advertising claim.
Vague generalities and obvious exaggerations are permissible. These claims are known as puffing. Advertising that would
appear to be based on factual evidence but that in fact is scientifically untrue may be deemed deceptive. Advertising to sell two
cans of paint for the price of one and then setting a very high unit price has been held to be deceptive as has advertising
containing celebrity endorsements when the celebrity does not actually use the product. The FTC has also promulgated specific
rules that prohibit so-called “bait-and-switch” advertising techniques—advertisements that specify a very low price for a
particular item that will likely be unavailable to the consumer, who will then be encouraged to purchase a more expensive item.
The low price is the “bait” to lure the consumer into the store. The salesperson is instructed to “switch” the consumer to a
different item. Under the FTC guidelines, bait-and-switch advertising occurs if the seller refuses to show the advertised item,
fails to have in stock a reasonable quantity of the item, fails to promise to deliver the advertised item within a reasonable time,
or discourages employees from selling the item.
2. What are the primary provisions of the Truth–In-Lending Act? The Truth-in-Lending Act (TILA) is basically a
disclosure law. Administered by the Federal Reserve Board, it 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. The TILA applies to creditors who, in the
ordinary course of business, lend money or either sell on credit or arrange for the extension of credit. Only debtors who are
natural persons are protected by the TILA; corporations and other entities created by law are not. Disclosure Requirements.
The disclosure requirements of the TILA are found in Regulation Z, promulgated by the Federal Reserve Board. If the con–
tracting parties are subject to the TILA, the requirements of Regulation Z apply to any transaction involving an installment sales
contract in which payment is to be made in more than four installments. These transactions typically include installment loans,
retail and installment sales, car loans, home improvement loans, and certain real estate loans if the amount of financing is less
than $25,000. Some of the disclosure requirements that may apply to these contracts include the specific dollar amount being
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financed; the annual percentage rate of interest; any financing charges, premiums or points; the number, amounts, and due
dates of payments; and any penalties imposed on delinquent payments or prepayment. Violations of the TILA. Various
penalties apply to creditors who violate the TILA by either failing to provide the disclosure statement or failing to discover an
error in the statement provided. The act confers a private right of action on consumers who have been injured by a creditor’s
violation. If the suit is brought within one year of the date of the violation, the creditor will be liable for twice the amount of the
finance charge, plus attorneys’ fees. Federal agencies, including the Department of Justice and the FTC, may sue violators for
REVIEWING—
CONSUMER LAW
Leota Sage saw a local motorcycle dealer’s newspaper advertisement for a MetroRider EZ electric scooter for
$1,699. When she met the salesperson at the dealership, however, she learned that the EZ model had been sold out.
The salesperson told Sage that he still had the higher-end MetroRider FX model in stock for $2,199 and would offer her
one for $1,999. Sage was disappointed but decided to purchase the FX model. Sage told the sales representative that
she wished to purchase the scooter on credit and was directed to the dealer’s credit department. As she filled out the
credit forms, the clerk told Sage, an African American female, that she would need a cosigner to obtain a loan. Sage
could not understand why she would need a cosigner and asked to speak to the store manager. The manager
apologized, told her that the clerk was mistaken, and said that he would “speak to” the clerk about that. The manager
completed Sage’s credit application, and Sage then rode the scooter home. Seven months later, Sage received a letter
from the FTC asking questions about her transaction with the motorcycle dealer and informing her that it had received
complaints form other consumers. Ask your students to answer the following questions, using the information
presented in the chapter.
1. Did the dealer engage in deceptive advertising? Why or why not? The advertising would mislead a
2. Suppose that Sage had ordered the scooter through the dealer’s Web site but that the dealer had been
unable to deliver it by the date promised. What would the FTC have required the merchant to do in this
1114 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
situation? Under the FTC’s Mail or Telephone Order Merchandise Rule, as amended to include online sales, the dealer
3. Assuming that the clerk required a cosigner based on Sage’s race or gender, what act prohibits such
credit discrimination? The Equal Credit Opportunity Act prohibits the denial of credit solely on the basis of race,
4. What organization ha the authority to ban the sale of scooters based on safety concerns? The CPSC is the
Consumer Product Safety Commission, the organization responsible for setting safety standards for consumer
products. The CPSC has the authority to ban the sale of products, such as scooters, that it deems potentially hazardous
to consumers.
DEBATE THIS:
Laws against bait-and-switch advertising should be abolished because no consumer is ever forced to
buy anything. Just because an advertized item is not available when a consumer goes to buy it does not mean that
sellers should be prevented from “up–selling.” That is to say, sellers should be free to offer higher-priced version of
unavailable lower-priced advertised items. After all, in a free society, consumers can just say no.