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Administrative Agencies
The Federal Trade Commission Act and Consumer Protection Laws
Antitrust: The Sherman Act
The Clayton Act, The Robinson-Patman Act, and
Antitrust Exemptions and Immunities
Employment Law
Environmental Regulation
© 2010 The McGraw-Hill Companies, Inc. All rights reserved.
The Federal Trade Commission Act and
Consumer Protection LawsThe most exciting thing happening in business is the rise of vigilante consumers.
Anita Roddick, Founder,The Body ShopMarketing Week(Feb. 24, 2000)
© 2010 The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objectives
v The Federal Trade Commissionv Anticompetitive behavior and deceptive
practicesv Consumer protection laws
48 - 3
v Before 1914, the rule was caveat emptor – let the buyer beware
Overview
48 - 4
v In some ways, that rule remains, but consumers now demand a certain level of protection from unscrupulous businesses
v Federal Trade Commission Act of 1914 enabled the creation of the Federal Trade Commission (FTC) as independent agency
v FTC’s principal missions are to keep the U.S. economy both free and fair
v FTC enforcement devices: issuing trade regulation rules, facilitating voluntary compliance, and adjudicative proceedings
The FTC
48 - 5
v FTC trade regulation rules have the force of law and FTC can proceed directly against those who engage in prohibited practices:w Adjudicative proceedingw Civil penalty up to $10,000 for each knowing
violation of a rulew 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
48 - 6
v FTC promotes voluntary compliance with best practices and regulations by issuing advisory opinions and industry guidesw Advisory opinion: commission’s response to a
private party’s inquiry about the legality of a proposed business action
w Industry guides: FTC interpretations of the laws it administers
FTC Voluntary Compliance
48 - 7
v FTC may take internal administrative action against those who violate regulations
v FTC gathers evidence about possible violations from private parties, government entities, and FTC investigations
FTC Adjudicative Proceedings
48 - 8
v 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 proceedingw FTC administrative law judge presides
v Judge’s decision may be appealed: first to FTC’s five commissioners, then to federal courts of appeals and U.S. Supreme Court
FTC Adjudicative Proceedings
48 - 9
v Most common penalty resulting from a final decision against the respondent is an FTC cease-and-desist order w Civil penalty for noncompliance with cease-and-
desist order is < $10,000 per violation (per day)
v 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
48 - 10
v FTC Act Sec. 5 authorizes commission to prevent unfair methods of competition
v 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
48 - 11
v FTC Act Sec. 5 prohibits unfair or deceptive acts or practices in commercial settings
v Commission must prove the activity is deceptive or unfair
v To be deceptive under FTC Policy Statement on Deception, an activity must: (1) involve 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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v 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)w Actual deception is not required
Reasonable Consumer Test
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Statements of opinion, sales talk, or sales puffery are
not deceptive
v Companies may sue another alleging the other is making false claims:w Pizza Hut sued Papa John’s alleging that the
“Better Pizza. Better Ingredients” claim was false and misleading
w Storage bag manufacturer S.C. Johnson sued The Clorox Co. alleging that Clorox claims that Clorox-manufactured storage bags would not leak like other storage bags
False Claims as Anticompetitive Behavior
48 - 14
Kraft, Inc. v. Federal Trade Commission
v Facts: w Kraft, Inc. advertised that Kraft Singles (process
cheese food slices with at least 51% natural cheese) contained 5 oz. milk in each slicewTrue statement
w 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
w ALJ found in favor of FTC and ordered Kraft to cease and desist the milk equivalency claim for individually wrapped process cheese food slices
48 - 15
v Procedural History: v 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”
48 - 16
Kraft, Inc. v. Federal Trade Commission
v Legal Analysis and Holding: w Kraft appealed to Court of Appealsw 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
w Even literally true statements can be misleadingw FTC has discretion to issue “fencing-in” multi-
product orders, thus Commission’s order upheld
48 - 17
Kraft, Inc. v. Federal Trade Commission
v Section 5 prohibits unfair acts or practicesv 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 avoidedw See FTC Consumer Information webpage
Unfair Acts or Practices
48 - 18
v FTC issued 1995 Telemarketing Sales Rule (TSR) prohibiting deceptive and abusive telemarketing acts or practiceswTelemarketing: 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
48 - 19
v 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 servicesw Information covers total cost, conditions on
use or purchase, refund or exchange policy
v Abusive practice: telemarketer threatens or intimidates a customer, or calls repeatedly
Telemarketing and Consumer Fraud and Abuse Prevention Act
48 - 20
v Other restrictions apply to telemarketersw Internet use regulated as well
under 2004 CAN-SPAM Act
v FTC and state attorneys general may enforce the Telemarketing Act and the TSR against violators with civil penalties
Telemarketing and Consumer Fraud and Abuse Prevention Act
48 - 21
v FTC and FCC (Federal Communications Commission) created national Do-Not-Call Registry which prohibits telemarketers from placing calls to listed numbers
v Registry became so popular that commercial telemarketers initiated litigation questioning legal validity: Mainstream Marketing Services, Inc. v. Federal Trade Commission
Do-Not-Call Registry
48 - 22
v 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
48 - 23
v If the seller provides a written warranty for a consumer product costing > $15, Act requires simple, clear, and conspicuous presentation of certain information:w Persons protectedw Products, parts, characteristics coveredw What warrantor will do in case of product defectw Warranty durationw Consumer procedures in event of defect or failure
Magnuson-Moss Warranty Act
48 - 24
v Act requires disclosure of limitationsv Warranty must be available to consumer to
review prior to sale
Magnuson-Moss Warranty Act
48 - 25
v Applies to creditors who extend credit to consumers for amounts < $25,000
Truth In Lending Act
48 - 26
v Consumer credit enables the purchase of goods, services, or real estate used primarily for personal, family, or household purposes
v Detailed disclosure provisions apply to three types of credit:w Open-end credit covers repeated transactions
and a finance charge computed on an unpaid balance
w Closed-end credit: covers consumer loans from a finance company for a specific time period
w Credit card applications and solicitationsv Required disclosures include finance charge,
billing statement, annual percentage rate, due date, late charge, billing rights, etc.
Truth In Lending Act
48 - 27
v Provisions deal with consumer credit advertising, such as preventing a creditor from “baiting” customers
v Regulates the home equity loans, including advertisements, terms, and actions a creditor may take against a defaulting consumer
v Provisions cover credit cards
Truth In Lending Act
48 - 28
v Applies to consumer reporting agencies that regularly compile credit-related information on individuals for the purpose of furnishing consumer credit reports to users
v Agency must adopt procedures to: w Ensure users of information employ information
only for certain limited business purposesw Avoid including obsolete information in a reportw Ensure maximum possible accuracy
Fair Credit Reporting Act
48 - 29
v Also imposes disclosure duties on users of credit reports (e.g., lenders, employers)
v If user obtains an investigative consumer report, user must inform person under investigation about report request and the possible sensitive information in the report
v FCRA violations also violate FTC Act Sec. 5
Fair Credit Reporting Act
48 - 30
v Person disputing accuracy or completeness of credit report’s information may compel a reinvestigation by credit reporting agency
v Credit bureau must delete information from file if information inaccurate or unverifiable
Fair Credit Reporting Act
48 - 31
v If user rejects credit or insurance application, user must inform applicant of reasons for rejection or higher rates charged
v 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
Fair Credit Reporting Act
48 - 32
v Criminal penalties possible for persons who knowingly and willfully obtain consumer information from credit bureau under false pretenses
v See Fair Credit Reporting Act
Fair Credit Reporting Act
48 - 33
v A series of amendments to the Fair Credit Reporting Act, FACT permits victims of identity theft to file theft reports with consumer reporting agencies
v Requires agencies to include “fraud alerts” in credit reports about consumers who believe they are victims of the fraudulent use of their financial information
v See FTC ID Theft information
Fair and Accurate CreditTransactions Act (FACT)
48 - 34
v Prohibits credit discrimination on the bases of sex, marital status, age, race, color, national origin, religion, and obtaining income from public assistance
v Applies to all entities that regularly arrange, extend, renew, or continue credit
v See FTC Equal Credit Opportunity webpage
Equal Credit Opportunity Act
48 - 35
v Provisions cover credit card billing disputesw Cardholder must give issuer written notice of
alleged error in billing statement within 60 days of time the statement is sent to cardholder
w Card issuer must either (1) correct cardholder’s account, or (2) send cardholder written statement justifying billing statement’s accuracy
v See FTC Fair Credit Billing webpage
Fair Credit Billing Act
48 - 36
v Applies to debts that involve money, property, insurance, or services obtained by a consumer for consumer purposes
v Prohibits debt collectors from contacting third parties such as debtor’s employer, relatives, or friends, and limits a collector’s contacts with debtor
v See FTC Fair Debt Collection webpage
Fair Debt Collection Practices Act
48 - 37
v Prohibits certain methods of debt collection: w Harassment, oppression, or abusew False or misleading misrepresentationsw Unfair practices
48 - 38
Fair Debt Collection Practices Act
v Most important federal product safety law is the Consumer Product Safety Act (CPSA) which established the Consumer Product Safety Commission (CPSC)
Product Safety Regulation
48 - 39
v 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
48 - 40
Test Your Knowledge
v True=A, False = Bw The FTC has rulemaking and enforcement
powers, but must file a case in a federal court.w FTC gathers evidence about possible
violations solely from government entities and FTC investigations.
w A consent order is an order approving a negotiated settlement in which respondent promises to cease certain activities and/or pay certain fees
48 - 41
Test Your Knowledge
v True=A, False = Bw FTC Act Sec. 5 prohibits unfair or deceptive
acts or practices in commercial settings. w The FTC Telemarketing Act prohibits
telemarketing to individual citizens.w 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.
48 - 42
Test Your Knowledge
v Multiple Choicew 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
48 - 43
Test Your Knowledge
v Multiple Choice
w 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
48 - 44
Test Your Knowledge
v Multiple ChoicewWhich 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
48 - 45
Thought Questions
v 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. w Mahatma Gandhi
48 - 46
What is your experience as a customer?