Chapter 48 – The Federal Trade Commission Act and Consumer Protection Laws

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The Federal Trade Commission Act and

Consumer Protection Laws

PA ET RHC 48The most exciting thing happening in business is the

rise of vigilante consumers.

Anita Roddick, Founder, The Body ShopMarketing Week (Feb. 24, 2000)

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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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• Before 1914, the rule was caveat emptor – let the buyer beware

Overview

• In some ways, the rule remains, but consumers now demand a certain level of protection from unscrupulous businesses

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• 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

The FTC

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• 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

FTC Trade Regulation Rules

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• FTC promotes voluntary compliance with best practices and regulations by issuing advisory opinions and industry guides

FTC Voluntary Compliance

– 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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• 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

FTC Adjudicative Proceedings

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• 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

FTC Adjudicative Proceedings

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• 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

Adjudicative Orders

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• 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

FTC Act Section 5

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• 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

Deceptive Acts or Practices

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• 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

Reasonable Consumer Test

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• 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

False Claims as Anticompetitive Behavior

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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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• 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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• 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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• 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

Unfair Acts or Practices

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• 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

Telemarketing and Consumer Fraud and Abuse Prevention Act

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• 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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• 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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• 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

Do-Not-Call Registry

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• In Mainstream Marketing Services, Inc. v. Federal Trade Commission, the federal court of appeals upheld the do-not-call registry against challenges based on lack-of-statutory authority and the First Amendment

Do-Not-Call Registry

Is a Do Not Track registry the next

step towards privacy?

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• 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

Magnuson-Moss Warranty Act

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• Act requires disclosure of limitations• Warranty must be available to

consumer to review prior to sale

Magnuson-Moss Warranty Act

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• Applies to creditors who extend credit to consumers for amounts < $25,000

Truth In Lending Act

• Consumer credit enables the purchase of goods, services, or real estate used primarily for personal, family, or household purposes

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• 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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• 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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• 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

Fair Credit Reporting Act

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• 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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• 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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• 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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• 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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• 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

Fair and Accurate CreditTransactions Act (FACT)

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• 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

Equal Credit Opportunity Act

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• 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

Fair Credit Billing Act

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• 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

The Dodd-Frank Act

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• 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

Fair Debt Collection Practices Act

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• Prohibits specific debt collection methods: – Harassment, oppression, or abuse– False or misleading misrepresentations– Unfair practices

Fair Debt Collection Practices Act

See Evory v. RJM Acquisitions Funding, L.L.C.

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• Most important federal product safety law is the Consumer Product Safety Act (CPSA) which established the Consumer Product Safety Commission (CPSC)

Product Safety Regulation

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• 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”

Product Safety Regulation

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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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• 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.

Test Your Knowledge

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• Multiple Choice– Deceptive practices under Sec. 5 must:

a) involve a material misrepresentationb) the representation must be likely to

mislead a consumer c) the consumer must act reasonable

under the circumstances d) all of the abovee) all of the above plus result in a sale

Test Your Knowledge

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• 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 arrestedb) The store violated the Fair Debt Collection

Practices Act c) Jordan must file a lawsuit against the store

Test Your Knowledge

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• Multiple Choice– Which of the following is not a

consumer protection law? a) Fair Credit Reporting Actb) Federal Registration Actc) Truth in Lending Actd) Fair Debt Collection Practices Acte) Equal Credit Opportunity Act

Test Your Knowledge

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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?

Education

Chapter 48 – The Federal Trade Commission Act and Consumer Protection Laws