Consumer Protection

Consumer Protection Chapter 19 Meiners, Ringleb & Edwards The Legal Environment of Business, 12th Edition

The FDA: Food and Drug Regulation • Food Safety • Pure Food and Drug Act of 1906 • Food Drug and Cosmetic Act (FDCA) 1938 • Safety in commercial food, drink, drugs and cosmetics • Sanitation and misbranding of food and drug products • Bureau of Chemistry of the Department of Agriculture • FDA and USDA Standards • Dept. of Agriculture deals with meat, poultry & eggs • Centers for Disease Control (CDC) and EPA on food safety issues • Expanded enforcement and inspection systems and set safe levels of additives in foods • Food Quality Protection • Food Quality Protection Act of 1996 • Insure “reasonable certainty of no harm” • Enforcement • FDA can force existing products--food, cosmetics, medical devices--removed from the market, i.e. silicone breast implants

CaseU.S. v. LaGrou Distribution Systems, Inc. • LaGrou’s cold storage warehouse in Chicago kept raw, fresh & frozen meat, poultry and other food products. LaGroustored products for commercial customers. 2,000,0000 lbs. of food went in and out daily. • Manager knew of rats – talked to company president, Stewart, about the problem. Rats were caught daily; food the rats gnawed on thrown away. • Customers not told of rats – rather told that food damaged in shipment and destroyed. • Expert said structural changes in the building needed to eliminate holes for rats. Stewart said that was too expensive. Two USDA inspectors saw rodent droppings, etc. • Next day 14 USDA inspectors came along with inspectors from FDA and IL Dept. of Public Health (Continued)

CaseU.S. v. LaGrou Distribution Systems, Inc. • Night before the inspectors came, LaGrou threw away lots of food and did big cleaning. Employees told inspectors what had gone on. Huge number of violations found. Warehouse ordered to closed; 22 million lbs. of food destroyed. • LaGrou convicted of 3 felonies; on probation for 5 years; ordered to pay $8.2 million restitution and $2 million in fines. President and manager of company were also convicted. LaGrou appealed. • HELD: Affirmed. • Situation at the warehouse was dire. Inspector said “worst case” she had seen in her 28 years with the USDA. • Poor ventilation system – pathogens and viruses could have become airborne. Also leaking roofs and dripping pipes carried food-borne pathogens all over.

Nutrition Labeling • The Nutrition Labeling and Education Act 1990 • Required new regulations • Apply to hundreds and thousands of products • Prevent misleading product claims • Help consumers make informed decisions • Dept. of Agricultures (regulates meat and poultry) • Works with FDA to have foods consistent with FDA rules • Nutrients by serving size • Labels must show certain components in foods by realistic serving size • Over 100 categories of food • Standards for health claims • Words must have certain meanings

Drug Safety • Food, Drug and Cosmetic Act of 1938 • Prohibits sale of any drug until FDA approves application submitted by manufacturer. Drugs must be safe for intended use. • Designation of Prescription Drugs • Drug Effectiveness • Kefauver Amendment of 1962 requires FDA to approve drugs based on their proven effectiveness, not just their safety. • FDA has strict regulations concerning testing and adoptionnew drugs. • FDA has responsibility for oversight of medical devices, surgical equipment, power wheelchairs, artificial hearts, pacemakers, etc. • If claims are misleading or safety is an issue, FDA can force removal of product from the market • Costly for drug companies for research and development • FDA approval is only evidence of safety, NOT A SHIELD against liability.

CaseWyeth v. Levine • Phenergan is drug approved by FDA in 1955; so was label. One form of Phenergan is used to treat nausea. Administered either by “IV-push” method (drug injected intravenously) or “IV-drip” (drip feed & saline solution). • Diane Levine had Phenergan by IV-push to treat nausea. Needle penetrated an artery; she developed gangrene (known from IV-push injections); forearm and hand were amputated. • Levine sued Wyeth in state court for failure to warn. Requested damages for medical expenses and loss of livelihood as a professional musician. Contended drug labeling defective. • Label warned of gangrene risk from IV-push but did not instruct that IV-drop method should be used. Wyeth had duty to instruct on different methods. Wyeth argued claims pre-empted by federal law. • Trial court reject the argument; found for Levine. • Affirmed by Vermont Supreme Court • Wyeth appealed, saying approval of drug use label under Food, Drug, and Cosmetic Act (FDCA) prevents the claim under state law. (Continued)

CaseWyeth v. Levine • Judgment of Vermont Supreme Court affirmed. • Issue: Does FDA’s drug labeling “preempt state law product liability claims?” • Wyeth said impossible to comply to both sate law duties and FDA labeling duties. Wyeth can change a drug label after FDA approves a supplemental application. • Can make “changes being effected” (CBE) if label change adds or strengthens a warning, precaution, contraindication or adverse reaction, dosage, administration – anything that will increase safe use of product. Wyeth can do this without FDA approval • Risk information accrues over time – FDA allows for changes when info. is discovered. FDA does not bear responsibility for drug labeling – Wyeth does. • FDA can reject labeling and review supplemental application. Stronger state law warning does not pre-empt Congress’s authority – state laws are complementary to FDA regulation.

The FTC and Consumer Protection • The Federal Trade Commission (FTC) established in 1915 • To enforce antitrust laws • But also devotes resources to the Bureau of Consumer Protection • Protect against “unfair and deceptive acts or practices in or affecting commerce”

The FTC and Consumer Protection • Complaint begins legal process • Many complaints settled by consent decree - terms of settlement frequently include • Prohibition of practices • Redress for consumers • Payment of civil penalties • A few cases get administrative trials at FTC • May appeal to commissioners for review • May next appeal to Federal Court of Appeals

Unfair and Deceptive Acts or Practices • FTC has considerable leeway • Deception Policy Statement: (To give staff guidance) • 1) Misrepresentation or omission of information • 2) Likely to mislead reasonable consumer • 3) Deception is material • Clarifying the elements: • 1) Failure to reveal information is NOT deceptive if • There is no affirmative misrepresentation that takes advantage of consumer misunderstanding • 2) Look at entire content • 3) Reasonable consumer is ordinary person • Ads for very young or sick have a tougher standard • 4) Must be likely to affect consumer’s product choice • 5) No proof of injury to consumer is needed

Defining Unfairness • Usually tagged onto deceptive charge • 1) Causes substantial harm to consumers • 2) Consumers cannot reasonably avoid injury • 3) Injury is harmful in its net effect • Costs and benefits are compared • Examples of Deception • Telemarketing Fraud • Oil-and-Gas-Well “Investments” • Work-at-Home Opportunities • Invention-Promotion Scams

CaseFTC v. John Beck Amazing Profits, LLC • In 2004, several “wealth-creation” products sold via infomercials on Internet. One was “John Beck System.” Promised to teach buyers to get real estate cheap • Consumers paid $39.95/month by credit card • Received information kit and were members of a “club” unless took steps to cancel membership • In 2009 FTC moved to shut it down • Alleged multiple violations of FTCA. • Sought injunctive relief and $300 million in monetary damages for customers • FTC moved for summary judgment. Defendants objected. (Continued)

CaseFTC v. John Beck Amazing Profits, LLC • Representation likely to mislead: (1) Representation is likely to mislead; (2) Advertiser lacked reasonable basis for its claims • Expressly or implicitly represented that consumers who use the system are likely able to • (1) Purchase homes, at gov’t tax sales “free and clear” of mortgages or liens for very low prices • (2) Earn lots of money renting or selling home they purchase • (3) Quickly & easily earn lots of money with little investment. • FTC said these representations were either false or unsubstantiated • Falsity: Purchaser of tax lien or certificate doesn’t get deed at sale • Doesn’t have right to sell the property • Instead have right to collect delinquent taxes • Exceptional when purchaser has title/possession sells property. • Sales are once a year, bidding is high % of FMV of property • HELD: Summary Judgment Granted.

Regulating Advertising Claims • Advertising substantiation program • Advertisement must be truthful and non-deceptive; • Advertisersmust have evidence to back claims; AND • Advertisementscannot be unfair. • Must have reasonable basisfor claims • FTC considers following in what is reasonable basis: • Product • Type of claim • Consequences of false claim; benefits of truthful claim • Cost of developing substantiation • Amount of substantiation experts believe is reasonable

What Advertising Is Deceptive? • Some people many misunderstand an advertisement – not a concern. • I.e. if someone believes Danish pastry is made form Denmark • Hair dye advertised as “permanent” and someone things color will stay forever – no deception • Gateway Educational Products: Settled FTC charges about ability of its “Hooked on Phonics”, teaching reading, including those with learning disabilities – unsubstantiated. • FTC sued Haagen-Dazs about fat and calorie claims on frozen yogurt products • Company said each with just ‘1 gram of fat & 100 Calories” – in fact contained 12 grams of fat and up to 230 calories per serving • FTC ordered Kellogg to stop claiming that Frosted Mini-Wheats cereal improved attentiveness in children • Also Kellogg had to stop claiming Rice Krispies improved immunity for diseases in children • FDA ordered General Mills to stop making health claims Cheerios or have it classified as a drug

CaseTelebrands Corp. v. FTC • Telebrands direct markets several products • Advertise products cost less than others on the market. • Ab Force is an electronic muscle stimulation abdominal (EMS) belt. Sends small electric current into abs. • Careful to say “the latest fitness craze to sweep the country” and “promise to get your abs into great shape fast—without exercise” • Well-muscled models used on TV to demonstrate product. • FTC sued for false and misleading advertising claims re: loss of weight, inches of fat, causing well-defined abs and an effective alternative to exercise. (Continued)

CaseTelebrands Corp. v. FTC • FTC included a “fencing-in” provision against the same strategy for any other Telebrands products related to weight, exercise, etc. (i.e. dietary supplements or devices). • Entered order against Telebrands. Itappealed. • HELD: Order enforced. • There was no substantiation that Ab Force could deliveradvertised results. Telebrandslater admitted results were “beyond the device’s capabilities,” and “does not cause loss of weight, inches or fat. . . .” • Telebrands was calculating in its fostering of beliefs about the product through visual images in their advertisements. Serious violations – 747,000 units with sales over $19 million.

False Advertising and the Lanham Act • Private parties can bring civil actions under the Lanham Act. • Usually similar to FTC cases, but can also get damages. • States play similar roles as FTC, bringing suit against those involved in scams and dubious business practices. • Example: Time Warner Cable won suit against DirecTV for stating views could not get “the best picture out of some fancy big screen” without satellite television service – no basis for such a claim. • See Issue Spotter “How Aggressive Can You Be in Advertising?”

International Perspective“FOREIGN ADVERTISING REGULATION” • In Europe ad regulations are tightest in northern Europe and loosest in the Mediterranean countries • UK: Standard is that an ad is illegal if it misrepresents a product • U.S.: Ad is illegal if it simply misleads • Japan: Beer ads promote “extra strong” alcohol content -- illegal in the U.S. under Bureau of Alcohol, Tobacco & Firearms rules • What is illegal varies across countries.

R-Value Rule Standardize measures and terminology re: home insulation Mail-Order Rule Reasonable basisfor expecting to ship products w/in time they say i.e. “allow 5 weeks for shipping” or must ship within 30 days Kids’ Online Privacy Rule (COPPA) Directedat websites & apps directed at kids under 13 Requiresservice operators to obtain parental consent Before collecting personal info. about a child Includes photos & IP addresses Trade Regulation Rules

Cyber Law“FTC WATCHES TWEETS” • FTC issues rules re: proper Internet advertising. • Most recently: Possible problems with Tweets. • Tweeter with many followers (movie star, famous athlete) tweets she used a product that worked great. • Tweets are short; disclaimers will not work. • FTC says that at start of the tweet, should say “Ad”. • Tweeters will not face prison time, but fines and injunctions could be in order IFTweeters do not make clear they are compensated for peddling a product.

State Deceptive Practices Laws • All states give attorneys general powers similar to FTC. • Can bring suit against those involved in scams/dubious business practices. • Most states have business code/consumer projection act. • Restrict deceptive trade practices. • EXAMPLE: Texas Business & Commerce Code: • Consumer may maintain action where any of following constitute producing if there was cause of economic damage or damages for mental anguish. 1. Use or employment by any person of false, misleading or deceptive act or practice; 2. Breach of express or implied warranty; 3. Any unconscionable action or course of action by any person; or 4. Violation of the Insurance Code

CaseSchuchmann v. Air Services Heating & Air Conditioning, Inc. • Schuchmann bought heating and air conditioning unit for his house with “lifetime warranty” from Air Services in 1998. Air worked on system as needed, but in 2003, refused to honor warranty. Said warranty too costly. • Schuchmann sued, arguing that Air’s action violated the Missouri Merchandising Practices Act. Court awarded Schuchmann $1,047 plus costs. Air appealed. • HELD: Affirmed. • Air contended that Schuchmann must prove that Air intended to default on the warranty from the very beginning of the sale. • Court disagreed. Law is violated “whether committed before, during or after the sale. . . .” • State law is to preserve “honesty, fair play and right dealings in public transactions. . . .”

Consumer Credit Protection • Consumer Credit Protection Act (CCPA) • Truth-in-Lending Act • Consumer Leasing Act • Fair Credit Billing Act • Consumer Credit Card Act • Fair Credit Reporting Act • Fair and Accurate Credit Transactions Act • Equal Credit Opportunity Act • Fair Debt Collection Practices Act • Electronic Funds Transfer Act

Truth-in-Lending Act (TILA) • Encourage consumers to shop around for credit • Standardize loan forms and terms to help consumers understand finance charges • Must disclose cost of credit in dollars and interest rate (Regulation Z) • If loan has these things, they must be listed: • Service, activity, carrying and transaction charges • Loan fees and points • Charges for credit life and credit accident and health insurance • Fees for credit reports in non-real estate • Have civil and criminalpenalties for violations

Consumer Leasing Act • Does for leases what TILA does for consumer credit • Applies to personal transactions, not for business use • Lease must be longer than 4 months and less than $25,000 • See Exhibit 19.2 • Must disclose: • Number, amount and period of payments and total payments • Express warranties • ID party responsible for maintaining the property • If consumer has option to buy and at what terms • Penalties for terminating lease early

Fair Credit Billing Act • Protect consumers from inaccurate charges • FCBA provides: • Procedure to dispute billing errors • Prohibits mailing of unsolicited credit cards • Procedures to report lost/stolen credit cards • Can also sue for civil penalties

Consumer Credit Card Act • Credit Card Accountability Responsibility and Disclosure Act – 2009 – Usually called Consumer Credit Card Act • Amended Truth-in-Lending Act effective 2010 • Federal Reserve Board has primary duties of regulating • May not raise interest rates on exiting balance & promotional rates must last six months • When companies raise rates, give 45 days notice • Restriction placed on late fees • Cards not issued to consumers under age 21 (unless co-signed) • Finance charges can’t be imposed on current and previous balance (double-cycle billing) • Payments on credit card must be applied to higher interest rate of debt portion • Statements must be sent at least 21 days before due date • Gift cards may not expire for at least 5 years

Fair Credit Reporting Act • Regulates credit bureaus • Consumers can see credit reports that result in credit being denied • Credit bureaus must: • Respond to consumer complaints within 30 days • Tell consumers who have asked for their credit history • Provide toll free service number • Get permission before giving report to employer or that contains medical info • FTC’s Disposal Rule applies to all business and persons that use consumer reports • Must be properly destroyed • Must be pulverized, shredded, or erased so info cannot be reconstructed or read • Applies to paper and electronic documents

Fair and Accurate Credit Transactions Act (FACT Act) • FACT Act amended Fair Credit Reporting Act in 2003 • Requires major credit reporting services (Experian, TransUnion and Equifax) to allow consumers to see their credit reports annually for free • Allows consumers to correct bad information • Helps to deal with identity theft • Has numerous requirements • Red Flag Rule(Implemented in 2011) • All creditors must have pro-active protections in place • Includes physicians, other service providers, etc. • Alerts, notifications, or warnings from consumer reporting agency • Suspicious documents related to credit accounts • Dubious ID information, such as a peculiar address • Unusual use of (activity on) particular account • Also notices from customers, victims of ID theft, law enforcement authorities, & others re: possible ID thefts on accounts

Equal Credit Opportunity Act (ECOA) • Prohibits discrimination against applicants for credit on basis of: • Race, Sex, Color, Religion, National Origin, Marital Status, Receipt of Public Benefits, Good-faith Exercise of Applicant’s Rights under CCPA or Age (prohibited bases) • Can’t discourage person applying for credit • Can’t use info that applicant may have children or likely to have reduced or irregular income • Credit history must be at applicant’s request • Creditor cannot request info re: spouse or former spouse unless • Spouse will use account • Applicant is relying on spouse’s income/alimony/child support • Applicant lives in community property state • See Issue Spotter “Dealing with Customer Records”

ECOA Notification Requirements • Credit denied or less-favorable, creditor must provide written: • Basic provisions of ECOA • Name and address of agency regulating compliance by creditor • Statement of specific reasons for action taken or disclosure of right to get a statement of reasons

Fair Debt Collection Practices Act • Eliminate unfair, deceptive, and abusive collection techniques, but permit reasonable collection practices • Restrictions Imposed • Applied to debt collectors, not creditors collecting own debt • Prohibits threats, obscene language, publication of a list of delinquent consumers, harassing phone calls

CaseChuway v. National Action Financial Services • National Action, a debt collector, mailed Chuway a letter which identified the credit card company she owed money to. • Balance on debt was $367.52 • Letter said the creditor • “has assigned your delinquent account to our agency for collection. Please remit the balance listed above in the return envelope provided. To obtain your most current balance information, please call 1-800-916-9006. Our friendly and experienced representatives will be glad to assist you and answer any questions you have.” • Chuway sued National Action for violating FDCPA – that communication was not proper • District court granted summary judgment for National Action, holding the letter stated “the amount of the debt” and no FDCPA violation. Chuway appealed. (Continued)

CaseChuway v. National Action Financial Services • HELD: Reversed and remanded. • Letter stated balance owed was $367.42. If letter had stopped after “Please remit” sentence, National would be okay. But it went on how to obtain “your most current balance information” – dunning for something more. Communications must be clear to the creditor. • For the debt collector to collect running interest or other charges, must use language • “As of the date of this letter you owe $xxxx (exact amount).” • Then may indicate that “other charges may vary from day to day,” and that due to other charges that may vary, the amount due on the day debtor pays may be greater than indicated. • Then speak about an adjustment that may be necessary after collector receives the debtor’s check, indicating information will be sent before depositing check for collection. • THEN give 1-800 number and address where collecting agency can be reached for further information.

Electronic Fund Transfer Act • Limits liability from stolen ATM card if consumer reports loss of card • No more than $50 if financial institution is notified within 2 days • Maximum liability is $500 if consumer notifies financial institution within 60 days • Financial institutions liable to consumers for damages from failure to make electronic transfers of funds • Consumers have 60 days to report errors; financial institutions must investigate and resolve within 45 days

Consumer Financial Protection Bureau • 2010 Dodd-Frank Act • Established new agency: Consumer Financial Protection Bureau (CFPB) within the Federal Reserve • Complex legislation – Taking years for regulations to be put into effect • Attorneys-general have authority to enforce Bureau rules • Instructions from Congress to the CFPB • Crack down on financial scams/gimmicks aimed at ordinary consumers and debtors • Ensure terms of financial documents are transparent & can be understood by a reasonable consumer • Focus on practice of non-bank institutes, i.e. payday lenders, that seem unfair • Look at existing rules i.e. those of the Equal Credit Opportunity Act, and make sure rules are not in conflict with each other

Consumer Protection