Consumer Protection

Chapter 19

FDA: Food and Drug Regulation

• Food Safety

– Food Drug and Cosmetic Act (FDCA) 1938

– Safety in commercial food, drink, drugs and cosmetics

– Expanded FDA reach to false advertising of drugs

– Expanded enforcement and inspection and set safe levels of additives in foods

• FDA and USDA Standards

– Dept. of Agriculture deals with meat, poultry & eggs

– Centers for Disease Control (CDC) and EPA on food safety issues

• Food Quality Protection– Food Additives Amendment

(Delaney Clause) added to FDCA in 1958 more authority (very strict) on additives

– Replaced by flexible Food Quality Protection Act of 1996

– “Reasonable certainty of no harm”

• Enforcement – FDA can force existing products--

food, cosmetics, medical devices--removed from the market, i.e. silicone breast implants

Nutrition Labeling and Education Act 1990

• Required new regulations in 1994– apply to more than 250,000

products– prevent misleading product

claims– help consumers make

informed decisions

• 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• fresh--can’t have

been processed, frozen or preserved

• low fat – 3 or fewer grams of fat per 100 grams of food

• low calorie--fewer than 40 calories per 100 grams

Drug Safety – Food, Drug and Cosmetic Act of 1938

• Prohibits sale of drug until FDA approves manufacturer’s application• Drug must be safe for its intended use• Designation of Prescription Drugs by FDA

– Some drugs sold by pharmacies only with a physician’s permission• 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 adoption of new drugs.• FDA has responsibility for oversight of medical devices, surgical equipment,

power wheelchairs, artificial hearts, pacemakers, etc.• FDA approval is evidence of safety, not a shield against tort liability.• If claims are misleading or safety is an issue, FDA can force removal of product

from the market• R&D very costly for drug companies

Wyeth v. Levine• Phenergan was 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.• Contended drug label defective .• Label warned of gangrene risk from IV-push but did not instruct that IV-drop method

should be used if possible.• 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 by FDA prevents the claim under state

law. (Continued)

Wyeth v. Levine, cont.

• 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 standards and FDA labeling duties.• Court noted that 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.

Federal Trade Commission (FTC)

• 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”

• Enforcement of Magnuson-Moss Warranty Act

Unfair and Deceptive Acts and Practices

• FTC has considerable leeway• Deception:

– 1) misrepresentation or omission of information– 2) likely to mislead reasonable consumer– 3) deception is material

• Clarifying the elements:– 1) not all omissions are deceptive– 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

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

Regulating Advertising Claims• Advertising substantiation program

– Advertisement must be truthful and non-deceptive;– Advertisers must have evidence to back claims; AND – Advertisements cannot be unfair.

• Must have reasonable basis for 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

• Note regarding telemarketers– Subject to the Telephone Consumer Protection Act and Telemarketing and Consumer

Fraud and Abuse Prevention Act– The result is the FTC’s Telemarketing Sales Rule– Consumers can sue telemarketers for damages if they violate consumers’ instructions to

be removed from call lists.

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

Trade Regulation Rules(Setting Boundaries for Practices)

• R-Value rule– standardize measures and terminology re: home

insulation• Mail-order rule

– reasonable basis for expecting to ship products w/in time they say

• i.e. “allow 5 weeks for shipping” or must ship within 30 days

• Used car rule– dealers must give clear information on who pays

for repairs after sale– Buyer’s Guide must be put in the car window

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; 4. violation of the Insurance Code

Consumer Credit Protection Act (CCPA) Major Elements

• Truth-in-Lending Act– Consumer Leasing Act– Fair Credit Billing Act

• Restrictions on Garnishments• Fair Credit Reporting Act• Equal Credit Opportunity Act• Fair Debt Collection Practices Act• Electronic Funds Transfer Act

Consumer Credit Protection Requirements for Creditors

• Disclose all relevant terms • Provide procedures for correcting inaccurate

bill and charges• Provide accurate information in consumer

reports• Not use race or sex in determining

creditworthiness• Abusive debt collection techniques prohibited• See Exhibit 19.1

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 • 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 criminal penalties 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 Credit Sale Disclosure Form

• 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

• 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 care 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 w/in 30 days– give consumers 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 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

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

Chuway v. National Action Financial Services, Inc.

• Debt collector National Action sent Chuway a letter that 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)

Chuway v. National Action Financial Services, Inc., cont.

• HELD: Reversed and remanded. Chuway wins.• 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. Credit card company (not debt collector) may charge interest until the debt is finally paid.

• Communications must be clear to the creditor.• For 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

The Consumer Financial Protection Bureau

• 2010 Dodd-Frank Act• Established new agency: Consumer Financial Protection Bureau

(CFPB) within the Federal Reserve• Still “getting up to speed”• 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