1. C H A P
The Federal Trade
T E R
48
Commission Act and
Consumer Protection Laws
The most exciting thing happening in business is the rise
of vigilante consumers.
Anita Roddick, Founder, The Body Shop
Marketing Week (Feb. 24, 2000)
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2. Learning Objectives
• Describe the powers granted to
the FTC and the key features of an
adjudicative hearing
• Identify and explain the elements
of the deception and unfairness
tests employed by the FTC
• Explain the FTC’s implementation
of many consumer protection laws
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3. Overview
• Before 1914, the rule was caveat
emptor – let the buyer beware
• In some ways, the
rule remains, but
consumers now
demand a certain
level of protection
from unscrupulous
businesses
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4. The FTC
• Federal Trade Commission Act of 1914
enabled creation of the Federal Trade
Commission (FTC) as an independent
agency
• FTC’s principal missions are to keep the
U.S. economy both free and fair
• FTC enforcement devices: issuing trade
regulation rules, facilitating voluntary
compliance, and adjudicative proceedings
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5. FTC Trade Regulation Rules
• FTC trade regulation rules have the force of
law and FTC can proceed directly against
those who engage in prohibited practices:
– Adjudicative proceeding
– Civil penalty up to $10,000 for each knowing
violation of a rule
– Court proceedings to obtain consumer
remedies, such as damages, refund of
money, return of property, or the reformation
or rescission of contracts
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6. FTC Voluntary Compliance
• FTC promotes voluntary compliance with
best practices and regulations by issuing
advisory opinions and industry guides
– Advisory opinion: commission’s
response to a private party’s inquiry
about the legality of a proposed
business action
– Industry guides: FTC interpretations
of the laws it administers
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7. FTC Adjudicative Proceedings
• FTC may take internal administrative action
against those who violate regulations
• FTC gathers evidence about possible
violations from private parties, government
entities, and FTC investigations
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8. FTC Adjudicative Proceedings
• If FTC proceeds against alleged
offender (respondent), it files a formal
complaint and the case is heard in a
public administrative hearing called an
adjudicative proceeding
– FTC administrative law judge presides
• Judge’s decision may be appealed:
first to FTC’s five commissioners, then to
federal courts of appeals and the U.S.
Supreme Court
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9. Adjudicative Orders
• Most common penalty resulting from a final
decision against the respondent is an FTC
cease-and-desist order
– Civil penalty for noncompliance with cease-
and-desist order is < $10,000 per violation
(per day)
• A consent order is an order approving a
negotiated settlement in which respondent
promises to cease certain activities and/or
pay certain fees
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10. FTC Act Section 5
• FTC Act Sec. 5 authorizes commission to
prevent unfair methods of competition
• Thus FTC may regulate anticompetitive
practices made illegal by the Sherman
Act, Clayton Act, and Robinson-Patman
Act, as well as anticompetitive behavior
not covered by other antitrust statutes
and potential or incipient antitrust
violations
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11. Deceptive Acts or Practices
• FTC Act Sec. 5 prohibits unfair or deceptive
acts or practices in commercial settings
• FTC Policy Statement on Deception requires
the Commission to prove the activity is
deceptive or unfair in because it:
(1) involves a material misrepresentation,
omission, or practice; (2) that is likely to
mislead a consumer; (3) who acts
reasonably under the circumstances
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12. Reasonable Consumer Test
• A seller violates Section 5 of the
FTC Act if a statement, omission,
or practice is likely to mislead
reasonable consumers under the
circumstances (reasonable
consumer test)
– Actual deception is not required
– Statements of opinion, sales talk,
or sales puffery are not deceptive
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13. False Claims as
Anticompetitive Behavior
• Companies may sue another alleging the
other is making false claims:
– Pizza Hut sued Papa John’s alleging that
the “Better Pizza. Better Ingredients” claim
was false and misleading
– Storage bag manufacturer S.C. Johnson
sued The Clorox Co. challenging the
truthfulness of Clorox claims that their
storage bags would not leak like other
storage bags
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14. Kraft, Inc. v. Federal Trade Commission
• Facts:
– Kraft, Inc. advertised that Kraft Singles (process
cheese food slices with at least 51% natural
cheese) contained 5 oz. milk in each slice
• True statement
– FTC brought Sec. 5 suit for deceptive advertising
against Kraft alleging that the milk equivalency
claim was false and misleading because 30% of
calcium in milk is lost through processing
– ALJ found in favor of FTC and ordered Kraft to
cease and desist the milk equivalency claim for
individually wrapped process cheese food slices
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15. Kraft, Inc. v. Federal Trade
Commission
• Procedural History:
• Kraft appealed to FTC
commissioners, which
affirmed and extended
coverage from the
individually wrapped slices
to “any product that is a
cheese, related cheese
product, imitation cheese,
or substitute cheese”
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16. Kraft, Inc. v. Federal Trade
Commission
• Legal Analysis and Holding:
– Kraft appealed to Court of Appeals
– Implied claims (milk equivalency) reasonably
clear from advertisements and Commission
may rely on its reasoned analysis to determine
what claims are conveyed in challenged
advertisement
– Even literally true statements can be misleading
– FTC has discretion to issue “fencing-in” multi-
product orders, thus Commission’s order upheld
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17. Unfair Acts or Practices
• Section 5 prohibits unfair acts or practices
• FTC focuses on harm to consumers, which
must be: substantial, not outweighed by
any offsetting consumer or competitive
benefits produced by the challenged
practice, and a harm that consumers
could not reasonably have avoided
– See FTC Consumer Information webpage
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18. Telemarketing and Consumer Fraud
and Abuse Prevention Act
• FTC issued 1995
Telemarketing Sales Rule (TSR)
prohibiting deceptive and abusive
telemarketing acts or practices
– Telemarketing: plan, program, or
campaign conducted to induce
purchase of goods or services by using
one or more telephones and more
than one interstate telephone call
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19. Telemarketing and Consumer Fraud
and Abuse Prevention Act
• A telemarketer or seller engages in a
deceptive practice if it fails to disclose
certain information to customers before he
pays for telemarketed goods or services
– Information covers total cost, conditions on
use or purchase, refund or exchange policy
• Abusive practice: telemarketer threatens
or intimidates a customer, or calls
repeatedly
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20. Telemarketing and Consumer Fraud
and Abuse Prevention Act
• Other restrictions apply
to telemarketers
– Internet use regulated
as well under 2004 CAN-
SPAM Act
• FTC and state attorneys
general may enforce the
Telemarketing Act and
the TSR against violators
with civil penalties
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21. Do-Not-Call Registry
• FTC and FCC (Federal Communications
Commission) created national
Do-Not-Call Registry which prohibits
telemarketers from placing calls to listed
numbers
• Registry became so popular that
commercial telemarketers initiated
litigation questioning legal validity:
Mainstream Marketing Services, Inc. v.
Federal Trade Commission
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22. Do-Not-Call Registry
• In
Mainstream Marketing Services, Inc. v. Federa
, the federal court of appeals upheld the
do-not-call registry against challenges
based on lack-of-statutory authority and
the First Amendment
Is a Do Not Track
registry the next
step towards
privacy?
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23. Magnuson-Moss Warranty Act
• If the seller provides a written warranty for a
consumer product costing > $15, Act requires
simple, clear, and conspicuous presentation
of certain information:
– Persons protected
– Products, parts, characteristics covered
– What warrantor will do in case of product defect
– Warranty duration
– Consumer procedures in event of defect or failure
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24. Magnuson-Moss Warranty Act
• Act requires disclosure of limitations
• Warranty must be available to
consumer to review prior to sale
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25. Truth In Lending Act
• Applies to creditors who extend credit
to consumers for amounts < $25,000
• Consumer credit
enables the purchase
of goods, services, or
real estate used
primarily for personal,
family, or household
purposes
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26. Truth In Lending Act
• Detailed disclosure provisions apply to three
types of credit:
– Open-end credit covers repeated transactions
and a finance charge computed on an unpaid
balance
– Closed-end credit: covers consumer loans from
a finance company for a specific time period
– Credit card applications and solicitations
• Required disclosures: finance charge,
billing statement, annual percentage rate,
due date, late charge, billing rights, etc.
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27. Truth In Lending Act
• Provisions deal with consumer credit
advertising, such as preventing a
creditor from “baiting” customers
• Regulates the home equity loans,
including advertisements, terms, and
actions a creditor may take against a
defaulting consumer
• Provisions cover credit cards
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28. Fair Credit Reporting Act
• Applies to consumer reporting agencies
that regularly compile credit-related
information on individuals for the purpose of
furnishing consumer credit reports to users
• Agency must adopt procedures to:
– Ensure users of information employ information
only for certain limited business purposes
– Ensure maximum possible accuracy
– Avoid including obsolete information in a
report
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29. Fair Credit Reporting Act
• Also imposes disclosure duties on users of
credit reports, such as lenders and
employers
• If user obtains an investigative consumer
report, user must inform person under
investigation about report request and
the possible sensitive information in the
report
• FCRA violations also violate FTC Act Sec. 5
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30. Fair Credit Reporting Act
• Person disputing accuracy
or completeness of credit
report’s information may
compel a reinvestigation
by credit reporting agency
• Credit bureau must delete
information from file if
information inaccurate or
unverifiable
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31. Fair Credit Reporting Act
• If user rejects credit or insurance
application, user must inform applicant
of reasons for rejection or higher rates
charged
• See
Safeco Insurance Co. of America v. Burr
in which Supreme Court ruled that
insurance companies using credit reports
may be liable for willful violations of FCRA
if they show reckless disregard for the law
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32. Fair Credit Reporting Act
• Criminal penalties
possible for persons
who knowingly and
willfully obtain
consumer information
from credit bureau
under false pretenses
• See
Fair Credit Reporting Act
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33. Fair and Accurate Credit
Transactions Act (FACT)
• A series of amendments to the Fair Credit
Reporting Act, FACT permits victims of
identity theft to file theft reports with
consumer reporting agencies
• Requires agencies to include “fraud alerts”
in credit reports about consumers who
believe they are victims of the fraudulent
use of their financial information
• See FTC ID Theft information
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34. Equal Credit Opportunity Act
• Prohibits credit discrimination on the
bases of sex, marital status, age, race,
color, national origin, religion, and
obtaining public assistance
• Applies to all entities that regularly
arrange, extend, renew, or continue
credit
• FTC Equal Credit Opportunity webpage
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35. Fair Credit Billing Act
• Provisions cover credit card billing
disputes
– Cardholder must give issuer written notice of
alleged error in billing statement within 60 days
of time the statement is sent to cardholder
– Card issuer must either (1) correct cardholder’s
account, or (2) send cardholder written
statement justifying billing statement’s
accuracy
• See FTC Fair Credit Billing webpage
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36. The Dodd-Frank Act
• Created the Consumer Financial Protection
Bureau (CPFB), charged with authority to
mandate clear, accurate disclosures of
information that consumers need in
shopping for mortgages, credit cards, and
other financial products
• Law also prohibits hidden fees and
deceptive practices by financial institutions,
and otherwise protects consumers in their
financial transactions
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37. Fair Debt Collection Practices Act
• Applies to debts that involve money,
property, insurance, or services obtained
by a consumer for consumer purposes
• Prohibits debt collectors from contacting
third parties such as debtor’s employer,
relatives, or friends, and limits a
collector’s contacts with debtor
• See FTC Fair Debt Collection webpage
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38. Fair Debt Collection Practices Act
• Prohibits specific debt collection methods:
– Harassment, oppression, or abuse
– False or misleading misrepresentations
– Unfair practices
See
Evory v. RJM Acquisit
.
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39. Product Safety Regulation
• Most important federal product safety
law is the Consumer Product Safety Act
(CPSA) which established the
Consumer Product Safety Commission
(CPSC)
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40. Product Safety Regulation
• CPSC (1) issues consumer product safety
standards, (2) issues bans of certain
hazardous products; (3) may bring civil
suits in federal district court to eliminate
dangers presented by imminently
hazardous consumer products, and (4)
after receiving notice of hazards, may
issue orders to private parties to address
“substantial product hazards”
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41. Test Your Knowledge
• True=A, False = B
– The FTC has rulemaking and enforcement
powers, but must file a case in a federal
court.
– FTC gathers evidence about possible
violations solely from government entities
and FTC investigations.
– A consent order is an order approving a
negotiated settlement in which respondent
promises to cease certain activities and/or
pay certain fees.
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42. Test Your Knowledge
• True=A, False = B
– FTC Act Sec. 5 prohibits unfair or deceptive
acts or practices in commercial settings.
– The FTC Telemarketing Act prohibits
telemarketing to individual citizens.
– If a seller gives a written warranty for a
consumer product costing > $15, the
warranty must have simple, clear, and
conspicuous presentation of warranty
details.
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43. Test Your Knowledge
• Multiple Choice
– Deceptive practices under Sec. 5 must:
a) involve a material misrepresentation
b) the representation must be likely to
mislead a consumer
c) the consumer must act reasonable
under the circumstances
d) all of the above
e) all of the above plus result in a sale
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44. Test Your Knowledge
• Multiple Choice
– Jordan is late on paying a store charge card.
Jordan received a call claiming that the
store would have Jordan arrested for fraud
unless payment was made in five days.
Which of the following is true?
a) Jordan must pay the bill or be arrested
b) The store violated the Fair Debt Collection
Practices Act
c) Jordan must file a lawsuit against the store
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45. Test Your Knowledge
• Multiple Choice
– Which of the following is not a
consumer protection law?
a) Fair Credit Reporting Act
b) Federal Registration Act
c) Truth in Lending Act
d) Fair Debt Collection Practices Act
e) Equal Credit Opportunity Act
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46. Thought Questions
• A customer is the most important visitor on our
premises, he is not dependent on us. We are
dependent on him. He is not an interruption in our
work. He is the purpose of it. He is not an outsider in
our business. He is part of it. We are not doing him a
favor by serving him. He is doing us a favor by giving
us an opportunity to do so.
– Attributed to Mahatma Gandhi
What has been
your experience as
a customer?
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