Legal Environment, Chapter 19
Standards for health claims Words must have certain meanings
"Fresh" - may not 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 "Light" or "Lite" - foods have 1/3 fewer calories than comparable products "Organic" - must meet FDA and USDA specifications
The Consumer Financial Protection Bureau
2010 Dodd-Frank Act Established 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 Insure 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
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
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. Example: Texas Business & Commerce Code: Consumer may sue when any of following cause of economic damage or 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
What Must Be Communicated to Debtor
Amount of debt Name of creditor Unless consumer disputes validity of debt within 30 days, assume debt is valid Must show proof of debt if disputed Consumers subjected to collection abuses can sue in tort as well as for violations of FDCPA FTC can sue collectors who violate Act
Nutrition Labeling Required new regulations (1990)
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
FTC and Consumer Protection
Complaint issued by agency to company begins legal process Many complaints settled by consent decree - terms of settlement frequently include Prohibition of practices Redress for consumers Payment of civil penalties Some cases get administrative law judge trials at FTC May appeal to commissioners for review May next appeal to federal Court of Appeals
Consumer Credit Card Act
Credit Card Accountability Responsibility and Disclosure Act 2009 (Usually called Consumer Credit Card Act) Amended Truth-in-Lending Act Federal Reserve Board has primary duties of regulating May not raise interest rates on existing 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.
Unfair and Deceptive Acts or Practices
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
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
Consumer Leasing Act
Does for leases what TILA does for consumer credit Applies to personal transactions, not business use or property transactions Applies to leases longer than 4 months and for less than $25,000 Disclosure Requirements: 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
Truth-in-Lending Act (TILA)
Encourage consumers to shop around for credit Standardize loan forms and terms to help consumers understand finance charges Credit Cost Disclosure: 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 criminal penalties for violations
FTC v. Wyndham Worldwide Corp.
Every Wyndham hotel is connected to a management system to process consumer credit information through its data center. FTC alleged Wyndham engaged in cyber security practices that allowed personal data to be stolen. Wyndham's Privacy Policy: "We safeguard our Customers' personally identifiable information by using industry standard practices . . . . [Our] Web sites utilize a variety of different security measures. We create and maintain 'fire walls' and other appropriate safeguards. . . ." Firms website was hacked 3 times in a year. Information for 619,000 customers sent to Russia. Wyndham learned of hacking only after credit card companies complaints. Customers lost at least $10 million and had to deal with problems - changing cards and challenging false charges.
Enforcement
FDA can force existing products--food, cosmetics, medical devices--removed from the market
FTC v. Wyndham Worldwide Corp.
FTC sued: Company engaged in unfair & deceptive trade practices. Company moved to dismiss: Said it was victim of hacking, not the party causing problems. Trial Court: Refused dismissal. Wyndham appealed. Wyndham asserted that a business "does not treat customers in an 'unfair' manner when the business itself is victimized by criminals." FTC issued guidebook in 2007--Protecting Personal Information: A Guide for Business. Describes a "checklist" of practices that forms a "sound data security plan." Guidebook counsels against many of Wyndham's practices. FTC's expert views about characteristics of a "sound data security plan" could have helped Wyndham determine that its conduct might not survive cost benefit analysis. AFFIRMED.
Food Quality Protection
Food Quality Protection Act of 1996 Insure reasonable certainty of no harm"
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 for testing and adoption new drugs. FDA has responsibility for oversight of medical devices, surgical equipment, power wheelchairs, artificial hearts, pacemakers, etc. If claims are misleading or safety becomes an issue, FDA can force removal of product from the market Very costly for drug companies for research and development FDA approval is evidence of safety, not a shield against liability.
Wyeth v. Levine
Judgment of Vermont Supreme Court affirmed. 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. But 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 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.
Nutrients by serving size
Labels must show certain components in foods by realistic serving size Over 100 categories of food
Electronic Fund Transfer Act
Limits liability from stolen ATM card if consumer reports loss of card Regulation E: 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.
Chuway v. National Action Financial Services
National Action, a debt collector, mailed 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.
Drug and Device Development
New product averages 3-6 years in making before pre-clinical development. Phase 1: 1 in 5000 gets this far. Test on 100 patients or fewer for maximum tolerated dosage and side effects. Phase II: Several hundred patients are tested to ID stages of disease affected by therapy. Phase III: If Phase II is approved, then goes to test on on several thousand patients so comparison can be made to existing drugs ad placebos. These phases take 8-9 years on average. 90% of drugs that get far do not make final FDA approval. Means only 1 in 50,000 new compounds developed in the lab make it to market. Medical Devices: Instrument, machine, implant or other article used in diagnosis or treatment of disease Each one is assigned a class based on level of control needed for safety.
POM Wonderful, LLC v. FTC
POM Wonderful produces pomegranate based products. From 2003 to 2010 POM touted medical studies ostensibly showing that daily consumption of its products could treat, prevent, or reduce the risk of various ailment, including heart disease, prostate cancer, and erectile dysfunction. POM had in fact sponsored medical research. FTC contended: POM claimed positive findings that the researches themselves did not. FTC found false and unsubstantiated misrepresentations. Ordered POM to cease and desist from making misleading claims re: health benefits Stop running ads asserting products treat or prevent disease - unless in possession of a least 2 randomized, controlled, human clinical trials demonstrating statistically significant results. POM petitioned for review.
Wyeth v. Levine
Phenergan was approved by FDA in 1955; so was label. One form is used to treat nausea. Drug administered either by "IV-push" method (drug injected intravenously) or by "IV-drip" (drip feed). Levine had Phenergan by IV-push for nausea. Needle penetrated an artery; she developed gangrene; 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.
False Advertising and the Lanham Act
Private parties can bring civil actions under the Lanham Act. Cases similar to FTC cases, but private plaintiff can get double damages. 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. States play similar roles as FTC, bringing suit against those involved in scams and dubious business practices.
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) Cannot discourage person applying for credit Cannot 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
Prohibits 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
Fair Credit Billing Act
Protect consumers from inaccurate charges FCBA provides: Standard procedures to dispute billing errors Prohibits mailing of unsolicited credit cards Procedures to report lost/stolen credit cards Enforcement: Can also sue for civil penalties. If successful, creditors are liable for twice the amount of finance charge + attorney's fees + court costs.
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
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 has 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)
Requires major credit reporting services (Experian, TransUnion and Equifax) to let consumers see their credit reports annually for free Allows consumers to correct bad information Helps to deal with identity theft Red Flag Rule 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
Chuway v. National Action Financial Services
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 this 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.
Schuchmann 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. . . ." The law is to preserve "honesty, fair play and right dealings in public transactions. . . ."
Food Safety Modernization Act
The FSMA (2011) strengthens FDA food safety control powers. Issue new standards Latest rules focus on prevention rather than reaction to problems
Trade Regulation Rules--Examples
The Insulation R-Value Rule Standardize measures and terminology for home insulation. All insulation must comport with standards. 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 Kids' Online Privacy Rule (COPPA) Directed on websites, online services & apps directed at children under age 13 Requires site & service operators to obtain parental consent Before collecting personal info. about a child Includes photos & IP addresses
POM Wonderful, LLC v. FTC
To see if ddvertisement is deceptive under Section 5 consider: (i) what claims are conveyed in the ad, (ii) whether those claims were false, misleading, or unsubstantiated, and (iii) whether claims are material to prospective consumers. FTC distinguishes between "efficacy claims" and "establishment claims." Efficacy Claim: Suggests product successfully performs the advertised function or yields the advertised benefit. But includes no suggestion of scientific proof. Establishment Claim: Suggests that product's effectiveness or superiority has been scientifically established. HELD: No bases for setting aside Commission's considered finding of efficacy and establishment claims as unsupported by substantial evidence. HELD: For commercial speech to come within the 1st Amendment, it a least must concern lawful activity and not be misleading. "Misleading advertising" may be prohibited entirely. POM'S ads are "deceptive and misleading" so do not have 1st Amendment protection.
Consumer Credit Protection Act (CCPA) Has Multiple Parts
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
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 considered Examples of Deception Telemarketing Fraud Oil-and-Gas-Well "Investments" Work-at-Home Opportunities Invention-Promotion Scams
