1091
Chapter 45
Consumer Law
See Separate Lecture Outline System
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.
ADDITIONAL RESOURCES—
VIDEO SUPPLEMENTS
The following video supplements relate to topics discussed in this chapter—
1092 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or
in part.
PowerPoint Slides
To highlight some of this chapter’s key points, you might use the Lecture Review PowerPoint slides compiled for
Chapter 45.
Business Law Digital Video Library
The Business Law Digital Video Library at www.cengage.com/blaw/dvl offers a variety of videos for group or
individual review. Clips on topics covered in this chapter include the following.
• Drama of the Law
Advertising and Communication Law: Bait and Switch—Advertising sales and promotions are utilized to draw
the customer’s attention and to bring them into a business. What are the legal ramifications if the advertised item is
altered or replaced with another product?
Consumer Protection: Fair Credit Reports—In selling a vehicle, or other large ticket items, a seller often checks
Pharzime Corporation, Scene 1—A marketing vice president at a pharmaceutical company tries to gain the
CHAPTER OUTLINE
I. Deceptive Advertising
Deceptive advertising is generally defined as advertising that may be interpreted as false or misleading. Deception and
half-truths are contrasted with puffing, and examples are provided.
ANSWER TO VIDEO QUESTION LTR. A
Is the auto dealership’s advertisement for the truck in the video deceptive? Why or why not? Advertising
will be deemed deceptive if a consumer would be misled by the advertising claim. Although the advertisement
CHAPTER 45: CONSUMER LAW 1093
unavailable to the consumer. In this situation, the dealership only had one truck available at that price, a fact stated in
very small print that the consumer would not likely see.
ANSWER TO VIDEO QUESTION LTR. B
Is the advertisement for the truck an offer to which the dealership is bound? Does it matter if Betty
detrimentally relied on the advertisement? No, an advertisement is generally an invitation to make an offer rather
than an offers. The dealership has not obligated itself in any way to sell the truck to Betty. Only in rare
circumstances—if an advertisement is very specific, for example—will a court interpret an ad to be an offer. In this
situation, the ad is general, and the court will not likely find it to be an offer. It also would not matter that Betty
detrimentally relied on the ad by driving three hours and undergoing difficulties in getting to the dealership.
ANSWER TO VIDEO QUESTION LTR. C
Is Tony committed to buying Betty’s trade-in truck for $3,000 because that is what he told her over the
CASE SYNOPSIS—
Case 45.1: Federal Trade Commission v. QT, Inc.
QT, Inc., and others marketed the Q-Ray Ionized Bracelet, claiming that it offered immediate, significant, or
complete pain relief and could cure chronic pain. A federal district court labeled the claims fraudulent, forbid further
promoting of the bracelet, and ordered QT to pay $16 million, plus interest, into a fund to be distributed to QT’s
customers. QT appealed.
The U.S. Court of Appeals for the Seventh Circuit affirmed. “Proof is what separates an effect new to science from a
swindle. Defendants themselves told customers that the bracelet’s efficacy had been ‘test–proven’; * * * but
defendants have no proof of the Q-Ray Ionized Bracelet’s efficacy. The ‘tests’ on which they relied were bunk. * * *
What remain are testimonials, which are not a form of proof.”
…………………………………………………………..…………………..……………………………………………….
1094 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
Notes and Questions
Aren’t such claims as those at the center of this case so transparent that there is no need for a
ANSWER TO “WHAT IF THE FACTS WERE DIFFERENT” IN CASE 45.1
Assume that the defendant had actually conducted scientific studies, which had proved inconclusive.
How might the judge have ruled in that situation? It is unlikely that the judge would have ruled differently if the
defendant’s claims had been based on “inconclusive studies” rather than “bunk” and “testimonials.” Inconclusive
studies are not a reliable “form of proof” either.
ANSWER TO “THE ETHICAL DIMENSION” QUESTION IN CASE 45.1
Most people have seen infomercials. Does the fact that QT, Inc., used infomercials to make fraudulent
promotional claims mean that all products “pitched” on television are suspect? Why or why not? No. A medium
is only a tool for fraud, not fraud itself. In fact, a claim that can be shown to be fraudulent about one product may
represent the truth about another. In this case, for instance, the bracelet at issue did nothing to relieve pain as its
promoter claimed. The same statement about aspirin, however, would be true.
ADDITIONAL CASES ADDRESSING THIS ISSUE —
Recent cases considering claims of deceptive advertising include the following.
• Waldman v. New Chapter, Inc., __ F.Supp.2d __, 2010 WL 2076024 (E.D.N.Y. 2010) (food product
purchased it).
your scent (100% of the time),” “all human scent,” “odor is eradicated,” and graphics showing that human odor cannot
escape carbon-embedded fabric were literally false).
CHAPTER 45: CONSUMER LAW 1095
1096 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
A. BAIT–AND-SWITCH ADVERTISING
This section highlights Federal Trade Commission (FTC) rules defining and prohibiting bait-and-switch advertising
B. 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—
• Ads must be truthful and not misleading).
C. FTC ACTIONS AGAINST DECEPTIVE ADVERTISING
1. The Complaint Order
2. The Cease-and-Desist Order
A cease-and-desist order or an order that requires counteradvertising may be issued. FTC orders may be
appealed, but courts generally defer to the FTC’s judgment.
D. TELEMARKETING AND FAX ADVERTISING
• 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.
ENHANCING YOUR LECTURE—
PROTECTING U.S. CONSUMERS
FROM CROSS-BORDER TELEMARKETERS
CHAPTER 45: CONSUMER LAW 1097
One of the problems that the Federal Trade Commission (FTC) faces in protecting consumers from scams is that
those involved in the illegal operations frequently are located outside the United States. Nevertheless, the FTC has had
some success in bringing cases under the Telemarketing Sales Rule (TSR) against telemarketers who violate the law
from foreign locations. As discussed in the text, the TSR requires telemarketers to disclose all material facts about the
goods or services being offered and prohibits the telemarketers from misrepresenting information. Significantly, the
TSR applies to any offer made to consumers in the United States—even if the offer comes from a foreign firm.
A TELEMARKETING SCAM THAT ORIGINATED IN CANADA
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
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?
2008.
II. Labeling and Packaging Laws
Laws dealing with labels and packages are designed to require accurate information about the products and to warn
about potential dangers.
1098 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
A. FEDERAL STATUTES
Some of the specific federal laws in this area include—
• The Fur Products Labeling Act of 1951.
CASE SYNOPSIS—
Case 45.2: Paduano v. Honda Motor Co.
Gaetano Paduano bought a new Honda Civic Hybrid in California. The EPA fuel economy estimate on the label—
mandated by the federal Energy Policy and Conservation Act (EPCA)—was 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.
…………………………………………………………..……………………………………………………………………
Notes and Questions
Is the ruling in this case favorable for the auto market? Why or why not? In the long-term, the ruling might
improve the market by leading to more truthful advertising and consumer confidence in that advertising. The same
result could undercut sales and profit, however, by increasing consumer mistrust of auto sellers’ statements about
their products. In the short-term, the decision could lead to a loss of profit through refunds and replacements to
consumers situated similarly to the plaintiff in this case.
ANSWER TO “THE ETHICAL DIMENSION” QUESTION IN CASE 45.2
CHAPTER 45: CONSUMER LAW 1099
ANSWER TO “THE LEGAL ENVIRONMENT DIMENSION”
QUESTION IN CASE 45.2
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 a
B. FOOD LABELING
The U.S. Food and Drug Administration and the U.S. Department of Agriculture are the chief agencies that issue
regulations on 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.
III. Sales
Disclosure is the general purpose of federal consumer laws. The FTC, the Federal Reserve Board of Governors, and
other federal agencies have authority in this area. States have enacted “cooling–off” legislation, which permits a buyer
1100 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
to rescind a door-to-door purchase within a certain period of time. The FTC has also mandated a three-day cooling-off
period with notice to consumers of this right (in Spanish, if the transaction was conducted in Spanish).
A. TELEPHONE AND MAIL-ORDER SALES
CHAPTER 45: CONSUMER LAW 1101
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. 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.
1. Disclosure Requirements
2. Equal Credit Opportunity
3. 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
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.
4. Additional Credit-Card Protection
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.
5. Consumer Leases
Under the Consumer Leasing Act of 1988, those who lease consumer goods in the ordinary course of their
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.
1. Consumer Notification and Inaccurate Information
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. 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
ADDITIONAL BACKGROUND—
CHAPTER 45: CONSUMER LAW 1103
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 irrele-
vant 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
D. THE FAIR DEBT COLLECTION PRACTICES ACT
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,
1. Prohibited Debt Collection Tactics
The FDCPA prohibits—
• Contacting the debtor at the debtor’s place of employment if the employer objects.
2. Notification and Bona Fide Errors