BL 240 Chapter 21

Product Identification Issues

A number of states and the federal government are considering legislation that would ban the use of words such as milk and burger on the labels of products that are not derived from animal sources. Critics of this regulatory trend reject the idea that consumers are unsure whether almond milk comes from a cow or an Impossible Burger is made with beef. Any confusion that might exist, these observers point out, can be cleared up by the nutritional content label.

Amendments to Credit Card Rules

1. A company may not retroactively increase the interest rates on existing card balances unless the account is sixty days delinquent. 2. A company must provide forty-five days' advance notice to consumers before changing its credit-card terms. 3. Monthly bills must be sent to cardholders twenty-one days before the due date. 4. The interest rate charged on a customer's credit-card balance may not be increased except in specific situations, such as when a promotional rate ends. 5. A company may not charge fees to a customer for being over his or her credit-card limit except in specified situations. 6. When the customer has balances at different interest rates, payments in excess of the minimum amount due must be applied first to the balance with the highest rate. (For instance, a higher interest rate is commonly charged for cash advances.) 7. A company may not compute finance charges based on the previous billing cycle, a practice known as double-cycle billing. This practice hurts consumers because they are charged interest for the previous cycle even though they have paid the bill in full.

Bait-and-Switch Advertising exist if any of the following occurs:

1. Refuses to show the advertised item. 2. Fails to have reasonable quantities of it available. 3. Fails to promise to deliver the advertised item within a reasonable time. 4. Discourages employees from selling the item.

Remedies for Violations

A credit reporting agency that fails to comply with the FCRA is liable for actual damages, plus additional damages not to exceed $1,000 and attorneys' fees. Creditors and other companies that use information from credit reporting agencies may also be liable for violations of the FCRA. The United States Supreme Court has held that an insurance company's failure to notify new customers that they were paying higher insurance rates as a result of their credit scores was a willful violation of the FCRA. Willful violations entitle a consumer to statutory and even punitive damages.

The Truth-in-Lending Act

A key statute regulating the credit and credit-card industries is the Truth-in-Lending Act (TILA), the name commonly given to Title 1 of the Consumer Credit Protection Act (CCPA), as amended. The TILA is basically a disclosure law. It is administered by the Federal Reserve Board and requires sellers and lenders to disclose credit terms and loan terms so that individuals can shop around for the best financing arrangements.

Caloric Content of Restaurant Foods

All restaurant chains with twenty or more locations are required to post the caloric content of the foods on their menus so that customers will know how many calories they are eating. Foods offered through vending machines must also be labeled so that their caloric content is visible to would-be purchasers. In addition, restaurants must post guidelines on the number of calories that an average person requires daily so that customers can determine what portion of a day's calories a particular food will provide.

Consumer Notification and Inaccurate Information

Any time a consumer is denied credit or insurance on the basis of a credit report, the consumer must be notified of that fact and of the name and address of the credit reporting agency that issued the report. The same notice must be sent to consumers who are charged more than others ordinarily would be for credit or insurance because of their credit reports. Under the FCRA, consumers can request the source of any information used by the credit agency, as well as the identity of anyone who has received an agency's report. Consumers are also permitted to have access to the information about them contained in a credit reporting agency's files. If a consumer discovers that a credit agency's files contain inaccurate information, the consumer can report the problem to the agency. On the consumer's written request, the agency must investigate the disputed information. Any unverifiable or erroneous information must be deleted within a reasonable period of time.

The Fair and Accurate Credit Transactions Act

Congress passed the Fair and Accurate Credit Transactions (FACT) Act to combat identity theft. The act established a national fraud alert system. Consumers who suspect that they have been or may be victimized by identity theft can use the system to place an alert in their credit files. The act also requires the major credit reporting agencies to provide consumers with a free copy of their credit reports every twelve months. Another provision requires account numbers on credit-card receipts to be truncated (shortened). This truncation prevents merchants, employees, and others who have access to the receipts from obtaining consumers' names and full credit-card numbers. Financial institutions are required work with the FTC to identify "red flag" indicators of identity theft and to develop rules for disposing of sensitive credit information.

Credit Protection

Credit protection is one of the most important aspects of consumer protection legislation. The Consumer Financial Protection Bureau is the agency that oversees the practices of banks, mortgage lenders, and credit-card companies.

When Is Advertising Deceptive?

Generally, deceptive advertising occurs if a reasonable consumer would be misled by the advertising claim. Vague generalities and obvious exaggerations are permissible. These claims are known as puffery. Advertising that appears to be based on factual evidence but in fact is not reasonably supported by evidence will be deemed deceptive

Formal Complaint

If the FTC concludes that a given advertisement is unfair or deceptive, it drafts a formal complaint, which is sent to the alleged offender. The company may agree to settle the complaint without further proceedings. If not, the FTC may conduct a hearing in which the company can present its defense.

FTC Orders and Remedies

If the FTC succeeds in proving that an advertisement is unfair or deceptive, it usually issues a cease-and-desist order to the company. In some circumstances, it may also impose a sanction known as counteradvertising. This requires the company to advertise anew—in print, on the Internet, on radio, and on television—to inform the public about the earlier misinformation. The FTC sometimes institutes a multiple product order, which requires a firm to stop false advertising for all of its products, not just the product involved in the original action.

The Consumer Product Safety Act

In 1972, the Consumer Product Safety Act created the first comprehensive scheme of consumer safety regulation. The act also established the Consumer Product Safety Commission (CPSC), which has far-reaching authority over consumer safety.

Controlling Costs of Health Insurance

In an attempt to control the rising costs of health insurance, the law places restrictions on insurance companies. Insurance companies must spend at least 85 percent of all premium dollars collected from large employers (80 percent of the premiums collected from individuals and small employers) on benefits and quality improvement. If insurance companies do not meet these goals, they must provide rebates to consumers. Additionally, states can require insurance companies to justify any premium increases to be eligible to participate in the health-insurance exchanges created by the act.

Labeling and Packaging

In general, labels must be accurate, and they must use words that are easily understood by the ordinary consumer. In some instances, labels must specify the raw materials used in the product, such as the percentage of cotton, nylon, or other fiber used in a garment. In other instances, the products must carry a warning, such as those required on cigarette and e-cigarette packages and advertising.

Sales

Many states and the FTC have "cooling-off" laws that permit buyers to cancel certain sales contracts within three business days. The FTC rule further requires that consumers be notified in Spanish of this right if the oral negotiations for the sale were in that language. Contracts that fall under these rules include home equity loans, Internet purchases, door-to-door sales, and trade show contracts. The FTC Mail, Internet, or Telephone Order Merchandise Rule protects consumers who purchase goods via the U.S. Postal Service, Internet, or phone. Merchants must ship orders within the time promised in their advertisements and must notify consumers when orders cannot be shipped on time. The rule also requires merchants to issue a refund within a specified period of time when a consumer cancels an order. Under the Postal Reorganization Act, a consumer who receives unsolicited merchandise sent by U.S. mail can keep it, throw it away, or dispose of it in any manner that she or he sees fit. The recipient will not be obligated to the sender.

False Advertising Claims under the Lanham Act

On the federal level, the Lanham Act, which protects trademarks, also covers false advertising claims. To state a successful claim for false advertising under this act, a business must establish the following: 1. An injury to a commercial interest in reputation or sales. 2. Direct causation of the injury by false or deceptive advertising. 3. A loss of business from buyers who were deceived by the advertising.

Deceptive Advertising

One of the most important federal consumer protection laws is the Federal Trade Commission Act. The act created the Federal Trade Commission to carry out the broadly stated goal of preventing unfair and deceptive trade practices, including deceptive advertising.

Bait-and-Switch Advertising

Promoting a low-priced item to attract customers to whom the business then tries to sell a higher priced item

State Laws Concerning False Advertising

State consumer-fraud statutes also prohibit false, misleading, and deceptive advertising. For a consumer to recover under a state law typically requires proof of the following elements: 1. the defendant committed a deceptive or unfair act 2. the act was committed in the course of trade or commerce 3. the defendant intended that others rely on the deception 4. the plaintiff suffered actual damages proximately caused by the deception

Application

TILA requirements apply only to persons who, in the ordinary course of business, lend funds, sell on credit, or arrange for the extension of credit. Thus, sales or loans made between two consumers do not come under the act. Additionally, this law protects only debtors who are natural persons (as opposed to the artificial "person" of a corporation) and does not extend to other legal entities.

The CPSC's Authority

The CPSC conducts research on the safety of individual consumer products and maintains a clearinghouse on the risks associated with various products. The Consumer Product Safety Act authorizes the CPSC to do the following: 1. Set safety standards for consumer products. 2. Ban the manufacture and sale of any product that the commission believes poses an "unreasonable risk" to consumers. (Products banned by the CPSC have included various types of fireworks, cribs, and toys, as well as many products containing asbestos or vinyl chloride.) 3. Remove from the market any products it believes to be imminently hazardous. The CPSC frequently works with manufacturers to conduct voluntary recalls of defective products. 4. Require manufacturers to report on any products already sold or intended for sale if the products have proved to be hazardous. 5. Administer other product-safety legislation.

Notification Requirements

The Consumer Product Safety Act requires the distributors of consumer products to notify the CPSC immediately if they receive information that a product "contains a defect which . . . creates a substantial risk to the public" or "an unreasonable risk of serious injury or death."

Fuel Economy Labels on Automobiles

The Energy Policy and Conservation Act (EPCA) requires automakers to attach an information label to every new car. Among other information, the label must include a fuel-economy estimate provided by the Environmental Protection Agency (EPA).

Equal Credit Opportunity

The Equal Credit Opportunity Act (ECOA) amended the TILA in 1974. The ECOA prohibits the denial of credit solely on the basis of race, religion, national origin, color, gender, marital status, or age. The act also prohibits credit discrimination on the basis of whether an individual receives certain forms of income, such as public-assistance benefits.

Drugs and Medical Devices

The FDA also has the responsibility of ensuring that drugs and medical devices are safe and effective before they are marketed to the public. Because the FDA must ensure the safety of new medications, there is always a delay before new drugs become available to the public.

Food Safety

The FDCA establishes food standards, specifies safe levels of potentially hazardous food additives, and provides classifications of foods and food advertising. Most of these statutory requirements are monitored and enforced by the Food and Drug Administration (FDA). One specific area of concern for the FDA is food contamination. Congress enacted the Food Safety Modernization Act (FSMA) to provide greater government control over the U.S. food safety system. The FSMA gives the FDA authority to directly recall any food products that it suspects are contaminated (rather than relying on the producers to recall items). The FSMA requires most food producers (including manufacturers, processors, packers, and distributors) to pay a fee and register with the U.S. Department of Health and Human Services. (There are some exceptions for small farmers.) The act also requires owners and operators of related facilities to analyze and identify food safety hazards, implement preventive controls, monitor effectiveness, and take corrective actions. The FSMA places additional restrictions on importers of food and requires them to verify that imported foods meet U.S. safety standards.

Fraudulent Telemarketing

The FTC has established rules governing telemarketing. The FTC's Telemarketing Sales Rule (TSR) requires a telemarketer to identify the seller's name, describe the product being sold, and disclose all material facts related to the sale (such as the total cost of the goods being sold). The TSR makes it illegal for telemarketers to misrepresent their goods or services. A telemarketer must also remove a consumer's name from its list of potential contacts if the customer so requests. An amendment to the TSR established the national Do Not Call Registry. Telemarketers must refrain from calling those consumers who have placed their names on the list. Significantly, the TSR applies to any offer made to consumers in the United States—even if the offer comes from a foreign firm. Thus, the TSR helps to protect consumers from illegal cross-border telemarketing operations.

Online Deceptive Advertising

The FTC has issued guidelines to help online businesses comply with the laws prohibiting deceptive advertising. These guidelines include the following requirements: 1. All ads—both online and offline—must be truthful and not misleading. 2. The claims made in an ad must be substantiated—that is, advertisers must have evidence to back up their claims. 3. Ads cannot be unfair, which the FTC defines as "likely to cause substantial consumer injury that consumers could not reasonably avoid and that is not outweighed by the benefit to consumers or competition." 4.Ads must disclose relevant limitations and qualifying information concerning the claims advertisers are making. 5. Required disclosures must be "clear and conspicuous." For instance, because consumers may not read an entire Web page, an online disclosure should be placed as close as possible to the claim being qualified. Generally, hyperlinks to a disclosure are recommended only for lengthy disclosures. If hyperlinks are used, they should be obvious and should be placed as close as possible to the relevant information.

The Fair Credit Reporting Act

The Fair Credit Reporting Act (FCRA) protects consumers against inaccurate credit reporting and requires that lenders and other creditors report correct, relevant, and up-to-date information. The act provides that consumer credit reporting agencies may issue credit reports to users only for specified purposes. Legitimate purposes include the extension of credit, the issuance of insurance policies, and in response to a consumer's request.

The Fair Debt Collection Practices Act

The Fair Debt Collection Practices Act (FDCPA) attempts to curb abuses by collection agencies. The act applies only to specialized debt-collection agencies and attorneys who regularly attempt to collect debts on behalf of someone else, usually for a percentage of the amount owed. Creditors attempting to collect debts are not covered by the act unless, by misrepresenting themselves, they cause the debtors to believe that they are collection agencies.

Content of Food Product Labels

The Fair Packaging and Labeling Act requires that food product labels identify: 1. the product, 2. the net quantity of the contents (and, if the number of servings is stated, the size of a serving), 3. the manufacturer, and 4. the packager or distributor. The act includes additional requirements concerning descriptions on packages, savings claims, components of nonfood products, and standards for the partial filling of packages. Food product labels must also detail the products' nutritional content, including the number of calories and the amounts of various nutrients. The Nutrition Labeling and Education Act requires standard nutrition facts (including the amount and type of fat that the food contains) to be listed on food labels and regulates the use of such terms as fresh and low fat.

Health Care Reforms

The Patient Protection and Affordable Health Care Act of 2010 gave Americans new rights and benefits with regard to health care. The legislation also prohibited certain insurance company practices.

Credit Card Rules

The TILA also contains provisions regarding credit cards. One provision limits the liability of a cardholder to $50 per card for unauthorized charges made before the creditor is notified that the card has been lost. If a consumer receives an unsolicited credit card in the mail that is later stolen, the company that issued the card cannot charge the consumer for any unauthorized charges. Another provision requires credit-card companies to disclose the balance computation method used to determine the outstanding balance and to state when finance charges begin to accrue. Other provisions set forth procedures for resolving billing disputes with the credit-card company. These procedures may be used if, for instance, a cardholder wishes to withhold payment for a faulty product purchased with a credit card.

Telephone Solicitation

The Telephone Consumer Protection Act (TCPA) prohibits telephone solicitation using an automatic telephone dialing system or a prerecorded voice. The act is enforced by the Federal Communications Commission (FCC). Congress passed the Pallone-Thune Telephone Robocall Abuse Criminal Enforcement and Deterrence (TRACED) Act, which is an amendment to the TCPA. The TRACED Act broadens the definition of prohibited robocalls and requires telephone providers to offer consumers more effective robocall-blocking options. Additionally, it gives the FCC the ability to impose substantial fines on individuals or business entities.

Food Labeling

The U.S. Food and Drug Administration (FDA) and the U.S. Department of Agriculture (USDA) are the primary government agencies that issue regulations on food labeling. These rules are published in the Federal Register and updated annually.

Disclosure Requirements

The disclosure requirements are found in Regulation Z, issued by the Federal Reserve Board of Governors. If the contracting parties are subject to the TILA, the requirements of Regulation Z apply to any transaction involving an installment sales contract that calls for payment to be made in more than four installments. Transactions subject to Regulation Z typically include installment loans, retail and installment sales, car loans, home-improvement loans, and certain real estate loans if the amount of financing is less than $58,300. Under the provisions of the TILA, all of the terms of a credit instrument must be clearly and conspicuously disclosed. A lender must disclose the annual percentage rate (APR), finance charge, amount financed, and total payments (the sum of the amount loaned, plus any fees, finance charges, and interest at the end of the loan). The TILA provides for contract rescission (cancellation) if a creditor fails to follow the exact procedures required by the act.

Enforcement

The enforcement of the FDCPA is primarily the responsibility of the Federal Trade Commission. A debt collector who fails to comply with the act is liable for actual damages, plus additional damages not to exceed $1,000 and attorneys' fees. Debt collectors who violate the act are exempt from liability if they can show that the violation was not intentional and resulted from a bona fide error. The "bona fide error" defense typically has been applied to mistakes of fact or clerical errors.

The Federal Food, Drug, and Cosmetic Act

The most important federal legislation regulating food and drugs is the Federal Food, Drug, and Cosmetic Act (FDCA). The act protects consumers against adulterated (contaminated) and misbranded foods and drugs.

Expanded Coverage

The reforms expanded access to health care by enabling more children to obtain health-insurance coverage. In addition, the reforms allowed young adults (under age twenty-six) to remain on their parents' health insurance. The act also ended lifetime limits and most annual limits on care, and gave patients access to recommended preventive services (such as cancer screening and vaccinations) without cost. Under most standard health-care plans, Medicare recipients receive a 75 percent discount on the cost of name-brand and generic drugs.

Requirements

Under the FDCPA, a collection agency may not do any of the following: 1. Contact the debtor at the debtor's place of employment if the debtor's employer objects. 2. Contact the debtor at inconvenient or unusual times (such as three o'clock in the morning), or at any time if the debtor is being represented by an attorney. 3. Contact third parties other than the debtor's parents, spouse, or financial adviser about payment of a debt unless a court authorizes such action. 4. Harass or intimidate the debtor (by using abusive language or threatening violence, for instance) or make false or misleading statements (such as posing as a police officer). 5. Communicate with the debtor at any time after receiving notice that the debtor is refusing to pay the debt, except to advise the debtor of further action to be taken by the collection agency. The FDCPA also requires a collection agency to include a validation notice whenever it initially contacts a debtor for payment of a debt or within five days of that initial contact. The notice must state that the debtor has thirty days in which to dispute the debt and to request a written verification of the debt from the collection agency. The debtor's request for debt validation must be in writing. Whether a debt is legally enforceable is a central fact about the character and legal status of that debt. The question before the court in the following case was whether a misrepresentation about that fact violates the FDCPA.

Possible FTC Remedies

When a company's deceptive ad leads to wrongful charges to consumers, the FTC may seek other remedies, including damages and restitution.

Federal Trade Commission Actions

When the FTC receives numerous and widespread complaints about a particular problem, it will investigate.