A character in a novel once stated that the problem is not that we need more laws to protect us, we just need a way to practically use the laws that already exist. Much the same can be said of the hodgepodge of State and Federal law that abounds with the purpose of protecting the consumer. The laws are good, the laws are powerful and the problem arises due to the fact that an overburdened government has understaffed the agencies that often enforce the laws and the average consumer has neither the time, money nor inclination to start a crusade to right a wrong when the actual monies lost to the consumer are a few dollars.
Thus we again confront a recurring theme of United States law-a magnificent system of laws and courts that are too often so expensive in time and money to use that the justice theoretically possible is hard to attain.
That said, the wise consumer, by judicious use of the various tools available, can often find relief from violation of the consumer protection laws and if a significant amount of money is at stake, the laws are often quite useful. The first step is a grasp of the basic laws and tools available. And if you are a business confronted with an irate consumer or governmental agency making a claim, it is equally vital for you to understand the legal framework for the claims.
This article shall outline the Federal laws pertaining to consumers. Every state also has state laws involving consumer protection and legal advice is needed to investigate those as well. Some states, such as California and New York, have more powerful consumer protection than the Federal government does in some fields-but all are understaffed and at times difficult to deal with when one makes a complaint. Often, the consumer must seek private remedy if relief is to be realistically sought.
Pursuant to the common law doctrine of caveat emptor, the buyer could not recover from the seller for defects on the property that rendered the property unfit for ordinary purposes. Caveat emptor is Latin for let the buyer beware. Both Congress and state legislatures have enacted consumer protection laws intended to limit abuses inherent in the common law approach that would have the buyer beware. A person violating the provisions of a consumer protection statute is generally liable even though there was no intention to violate the law. Liability also exists even though the breach was a single occurrence rather than a pattern of repeated conduct.
First Step: Proof of Consumer Status
A consumer claiming that there has been a violation of the consumer protection statute has the burden of proving that the statutory definition of consumer has been satisfied. The word consumer normally refers to individuals or households that use goods and services generated within the economy. End user is the common term used. Note that end user does not mean end user for only personal non business use. The item purchased could be used for business purposes that are meant to generate income. A good example of that is purchasing a computer for your home office. Under most definitions, that transaction would fall under consumer protection laws. However, that same computer, purchased by a conglomerate for its personnel, would not.
Legal Action by Consumer
Some consumer protection statutes provide that a consumer who is harmed by a violation of the statutes may sue the business or organization that acted improperly. The consumer may sue to recover a specified penalty or may bring an action on behalf of consumers as a class. Consumer protection statutes are often designed to rely on private litigation as an aid to enforcement of the statutory provisions. In such an action, a consumer must show that the defendant engaged in misconduct of the kind prohibited by the applicable consumer protection statute. At times, legal fees may be awarded to the consumer who prevails in such an action. The actual statute at issue must be reviewed to determine if these private causes of action lie and, as discussed in the final section of this article, the prospective plaintiff must carefully consider the cost benefit of the action. See our article on American Litigation as well as Buying Justice.
Advertising, Representations and Consumer Protection
The Federal Trade Commission (FTC) works to ensure that the nation’s markets are efficient and free of practices which might harm consumers. To ensure the smooth operation of our free market system, the FTC enforces federal consumer protection laws that prevent fraud, deception, and unfair business practices. The Federal Trade Commission Act allows the FTC to act in the interest of all consumers to prevent deceptive and unfair acts or practices. In interpreting the Act, the Commission has determined that, with respect to advertising, a representation, omission, or practice is deceptive if it is likely to mislead consumers and affect consumers’ behavior or decisions about the product or service. In addition, an act or practice is unfair if the injury it causes, or is likely to cause, is substantial, not outweighed by other benefits, and not reasonably avoidable.
The FTC Act’s prohibition on unfair or deceptive acts or practices broadly covers advertising claims, marketing and promotional activities, and sales practices in general. The Act is not limited to any particular medium. Accordingly, the Commission’s role in protecting consumers from unfair or deceptive acts or practices encompasses advertising, marketing, and sales online, as well as the same activities in print, television, telephone and radio.
For certain industries or subject areas, the Commission issues rules and guides. Rules prohibit specific acts or practices that the Commission has found to be unfair or deceptive. Guides available from the FTC (see link below) help businesses in their efforts to comply with the law by providing examples or direction on how to avoid unfair or deceptive acts or practices. Many rules and guides address claims about products or services or advertising in general and is not limited to any particular medium used to disseminate those claims or advertising. Therefore, the plain language of many rules and guides applies to claims made on the Internet. Solicitations made in print, on the telephone, radio, TV, or online naturally fall within the Rule’s scope.
The FTC’s Bureau of Consumer Protection protects consumers against unfair, deceptive, or fraudulent practices. The Bureau enforces a variety of consumer protection laws enacted by Congress, as well as trade regulation rules issued by the Commission. Its actions include individual company and industry-wide investigations, administrative and federal court litigation, rule-making proceedings, and consumer and business education. In addition, the Bureau contributes to the Commission’s on-going efforts to inform Congress and other government entities of the impact that proposed actions could have on consumers.
The Bureau of Consumer Protection is divided into six divisions and programs, each with its own areas of expertise. One of the divisions is the Division of Advertising Practices. This division is the nation’s enforcer of federal truth-in-advertising laws. The FTC Act prohibits unfair or deceptive advertising in any medium. That is, advertising must tell the truth and not mislead consumers. A claim can be misleading if relevant information is left out or if the claim implies something that is not true. In addition, claims must be substantiated especially when they concern health, safety, or performance. The type of evidence may depend on the product, the claims, and what experts believe necessary. Sellers are responsible for claims they make about their products and services. Third parties such as advertising agencies or website designers and catalog marketers also may be liable for making or disseminating deceptive representations if they participate in the preparation or distribution of the advertising or know about the deceptive claims.
The Division of Advertising Practices focuses its enforcement activities on claims for foods, drugs, dietary supplements, and other products promising health benefits; health fraud on the Internet; weight-loss advertising and marketing directed to children; performance claims for computers, ISPs and other high-tech products and services; tobacco and alcohol advertising; protecting children’s privacy online; claims about product performance made in national or regional newspapers and magazines; in radio and TV commercials, including infomercials; through direct mail to consumers; or on the Internet.
Note that advertising agencies (and more recently, website designers) are responsible for reviewing the information used to substantiate ad claims. These agencies may not simply rely on an advertiser’s assurance that the claims are substantiated. In determining whether an advertising agency should be held liable, the FTC looks at the extent of the agency’s participation in the preparation of the challenged ad and whether the agency knew or should have known that the ad included false or deceptive claims.
Like advertising agencies, catalog and magazine publishers can be held responsible for material distributed. Publications may be required to provide documentation to back up assertions made in the advertisement. Repeating what the manufacturer claims about the product is not necessarily sufficient.
The Division of Enforcement conducts a wide variety of law enforcement activities to protect consumers, including deceptive marketing practices. This division monitors compliance with Commission cease and desist orders and federal court injunctive orders, investigates violations of consumer protection laws, and enforces a number of trade laws, rules, and guides. A consumer with a complaint should consider approaching the FTC assuming the product is sold in interstate commerce which, if found on the internet, is almost certainly true.
The FTC’s Telemarketing Sales Rule requires certain disclosures and prohibits misrepresentations. The Rule covers most types of telemarketing calls to consumers, including calls to pitch goods, services, sweepstakes, and prize promotion and investment opportunities. It also applies to calls consumers make in response to postcards or other materials received in the mail. Calling times are restricted to the hours between 8 a.m. and 9 p.m. Telemarketers must disclose that it is a sales call, and for which company. It is illegal for telemarketers to misrepresent any information, including facts about goods or services, earnings potential, profitability, risk or liquidity of an investment, or the nature of a prize in a prize-promotion scheme. Telemarketers must disclose the total cost of the products or services offered and all restrictions on getting or using them, or that a sale is final or non-refundable. Although most types of telemarketing calls are covered by the Rule, the Rule does not cover calls placed by consumers in response to general media advertising (except calls responding to ads for investment opportunities, credit repair services, recovery room services, or advance-fee loans). It also does not cover calls placed by consumers in response to direct mail advertising that discloses all the material information required by the Rule (except calls responding to ads for investment opportunities, prize promotions, credit repair services, recovery room services, or advance-fee loans). The Mail or Telephone Order Merchandise Rule requires companies to ship purchases when promised (or within 30 days if no time is specified) or to give consumers the option to cancel their orders for a refund.
“Green Product” Advertising Claims:
Guidelines for using environmental marketing claims have been established by the Federal Trade Commission. The guides themselves are not enforceable regulations, nor do they have the force and effect of law. These guides specifically address the application of Section 5 of the Federal Trade Commission Act that makes deceptive acts and practices in or affecting commerce unlawful to environmental advertising and marketing practices. Guides for the Use of Environmental Marketing Claims provide the basis for voluntary compliance with such laws by members of industry and are available from the EPA and the FTC. The guides apply to advertising, labeling, and other forms of marketing to consumers and do not preempt state or local laws or regulations. Generally, environmental claims must specify application to the product, the package, or a component of either. Environmental claims should not overstate the environmental attributes or benefit. Every express and material implied claim conveyed to consumers about an objective quality should be substantiated and other broad environmental claims should be avoided or qualified.
A product which purports to offer an environmental benefit must be backed with factual information. Green Guides govern claims that consumer products are environmentally safe, recycled, recyclable, ozone-friendly, or biodegradable. These guides apply to environmental claims included in labeling, advertising, promotional materials, and all other forms of marketing. The guides apply to any claim about the environmental attributes of a product, package, or service in connection with the sale, offering for sale, or marketing of such product, package, or service for personal, family, or household use, or for commercial, institutional, or industrial use.
According to the guidelines, a product or package should not be marketed as recyclable unless it can be collected, separated, or otherwise recovered from the solid waste stream for reuse or in the manufacture or assembly of another package or product through an established recycling program. Products or packages that are made of both recyclable and non-recyclable components must have any recyclable claim adequately qualified to avoid consumer deception about which portions or components of the product or package are recyclable. Claims of recyclability should be qualified to the extent necessary to avoid consumer deception about any limited availability of recycling programs and collection sites. If an incidental component significantly limits the ability to recycle a product or package, a claim of recyclability would be deceptive. A product or package that is made from recyclable material, but, because of its shape, size, or some other attribute, is not accepted in recycling programs for such material, should not be marketed as recyclable.
Likewise, claims that a product or package is degradable, biodegradable, or photodegradable should be substantiated by competent and reliable scientific evidence that the entire product or package will completely break down and return to nature, i.e., decompose into elements found in nature within a reasonably short time after customary disposal. Claims of degradability, biodegradability, or photo degradability should be qualified to the extent necessary to avoid consumer deception about the product or package’s ability to degrade in the environment where it is customarily disposed and the rate and extent of degradation.
A recycled content claim may be made only for materials that have been recovered or otherwise diverted from the solid waste stream, either during the manufacturing process (pre-consumer) or after consumer use (post-consumer). To the extent the source of recycled content includes pre-consumer material, the manufacturer or advertiser must have substantiation for concluding that the pre-consumer material would otherwise have entered the solid waste stream. In asserting a recycled content claim, distinctions may be made between pre-consumer and post-consumer materials. Where such distinctions are asserted, any express or implied claim about the specific pre-consumer or post-consumer content of a product or package must be substantiated. For products or packages that are only partially made of recycled material, a recycled claim should be adequately qualified to avoid consumer deception about the amount, by weight, of recycled content in the finished product or package. Additionally, for products that contain used, reconditioned, or remanufactured components, a recycled claim should be adequately qualified to avoid consumer deception about the nature of such components. No such qualification would be necessary in cases where it would be clear to consumers from the context that a product’s recycled content consists of used, reconditioned, or remanufactured components.
Note that many states have also enacted “Green” claims statutes and the reader is advised to examine the law of the relevant state.
The Textile, Wool, Fur, and Care Labeling Rules require proper origin and fiber content labeling of textile, wool and fur products, and care label instructions attached to clothing and fabrics.
For a product to bear the label “Made in USA,” the product must be “all or virtually all” made in the United States. The term “United States,” as referred to in the Enforcement Policy Statement, includes the 50 states, the District of Columbia, and the U.S. territories and possessions. “All or virtually all” means that all significant parts and processing that go into the product must be of U.S. origin. That is, the product should contain no, or negligible, foreign content. The product’s final assembly or processing must take place in the United States. The Commission then considers other factors, including how much of the product’s total manufacturing costs can be assigned to U.S. parts and processing and how far removed any foreign content is from the finished product. In some instances, only a small portion of the total manufacturing costs is attributable to foreign processing, but that processing represents a significant amount of the product’s overall processing. Claims that a particular manufacturing or other process was performed in the United States or that a particular part was manufactured in the United States must be truthful, substantiated, and clearly refer to the specific process or part, not to the general manufacture of the product, to avoid implying more U.S. content than exists.
A product that includes foreign components may be called “Assembled in USA” without qualification when its principal assembly takes place in the United States and the assembly is substantial. For the assembly claim to be valid, the product’s last substantial transformation should have occurred in the United States.
The Franchise and Business Opportunity Rule requires franchise and business opportunity sellers to give consumers a detailed disclosure document at least 10 days before the consumer pays any money or legally commits to a purchase of a franchise. The document must include:
- the names, addresses, and telephone numbers of other purchasers
- a fully-audited financial statement of the seller
- the background and experience of the business’s key executives
- the cost of starting and maintaining the business
- the responsibilities of the seller and purchaser once the purchase is made
In addition, companies that make earnings representations must give consumers the written basis for their claims, including the number and percentage of owners who have done at least as well as claimed.
Multi Level Marketing Ventures:
Multi-level marketing (MLM), sometimes known as network or matrix marketing, is a way of selling goods and services through distributors. These plans typically promise that people who sign up as distributors will get commissions two ways: On their own sales and on the sales their recruits have made.
Pyramid schemes are a form of multi-level marketing which involves paying commissions to distributors only for recruiting new distributors. Pyramid schemes are illegal in most states because the plans inevitably collapse when no new distributors can be recruited. When a plan collapses, most people other those at the top of the pyramid lose money. Lawful MLMs should pay commissions for the retail sales of goods or services, not for recruiting new distributors. MLMs that involve the sale of business opportunities or franchises, as defined by the Franchise Rule, must comply with the Rule’s requirements about disclosing the number and percentage of existing franchisees who have achieved the claimed results, as well as cautionary language.
Disclosure of Transaction Terms in Consumer Transactions:
Contract on Two Sides
To be sure that the consumer sees disclosures required by federal law, special provision is made for the case when the terms of the transaction are printed on both the front and back of a sheet or contract. In such a situation, both sides of the sheet must carry the warning: NOTICE: see other side for important information. Also, the page must be signed at the end of the second side.
Particular Sales and Leases
The Motor Vehicle Information and Cost Savings Act requires a dealer to disclose to the buyer various elements in the cost of an automobile. The act prohibits selling an automobile without informing the buyer that the odometer has been reset below the true mileage. A buyer who is caused actual loss by odometer fraud may recover from the seller three times the actual loss or $1,500, whichever is greater. There is a breach of this statute when the seller has knowledge that the odometer has turned at 100,000 miles but the seller then states that the mileage is 20,000 miles instead of 120,000. The Consumer Leasing Act of 1976 requires that persons leasing automobiles and other durable goods to consumers make a full disclosure to the consumer of the details of the transaction.
Although the statute imposes liability only when the seller knowingly violates the statute, it is not necessary to prove actual knowledge. For example, an experienced auto dealer cannot claim lack of knowledge that the odometer was false when that conclusion was reasonably apparent from the condition of the car.
The technique of giving the buyer a price reduction for customers referred to the seller is theoretically lawful. In effect, it is merely paying the buyer a commission for the promotion of other sales. In actual practice, however, the referral sales technique may be accompanied by fraud or by exorbitant pricing. Therefore, consumer protection laws in various states restrict or condemn referral selling in various ways. As a result, the referral system of selling has been condemned as unconscionable under the Uniform Commercial Code (UCC), and is expressly prohibited by the Uniform Consumer Credit Code (UCCC) which has been adopted by a number of states.
Practicalities-How to Afford Protecting Your Rights:
Typically, FTC investigations are non-public to protect both the investigation and the companies involved. If the FTC believes that a person or company has violated the law, the agency may attempt to obtain voluntary compliance by entering into a consent order with the company. A company that signs a consent order need not admit that it violated the law, but it must agree to stop the disputed practices outlined in an accompanying complaint. If a consent agreement cannot be reached, the FTC may issue an administrative complaint or seek injunctive relief in the federal courts. The FTC’s administrative complaints initiate a formal proceeding that is much like a federal court trial but before an administrative law judge; evidence is submitted, testimony is heard, and witnesses are examined and cross-examined. If a law violation is found, a cease and desist order may be issued. Initial decisions by administrative law judges may be appealed to the full Commission. Final decisions issued by the Commission may be appealed to the U.S. Court of Appeals and, ultimately, to the U.S. Supreme Court.
In some circumstances, the FTC can go directly to civil court to obtain an injunction, civil penalties, or consumer redress. The injunction seeks to preserve the market’s competitive status quo. The FTC seeks federal court injunctions in consumer protection matters typically in cases of ongoing consumer fraud.
Each state also has a consumer affairs department and most have the same authority for intra state enforcement of the consumer protection laws as the FTC has for interstate enforcement. Some states have relatively aggressive departments (California; Illinois; Massachusetts; New York) while others are less inclined to go to court or hearing predicated on complaints from consumers. And due to various cut backs on state services that financial hard times can cause, some states once aggressive are now backlogged and incapable of taking prompt and effective action.
License bureaus can also be a source of relief if the provider of the product or service was licensed. That is typical for contractors; beauty shop owners; doctors and lawyers. Most license bureaus have their own enforcement division which will investigate claims. These are often extremely effective but you should calendar follow up calls and communications with them to assure they are progressing.
At times overburdened with past complaints, many departments will encourage the consumer to consider going to the Better Business Bureau, the Chamber of Commerce, the local media, or seeking some type of civil relief by a personal action in a court of law. If this is suggested, try to ensure the particular governmental department will continue to conduct their own investigation in tandem with yours. And be sure to follow up with calls and e mails to the department to determine if they are actually proceeding with the investigation. This can be both frustrating and seemingly futile but without such efforts, your complaint may end up ignored.
As for civil action, this can work well, but the economics of the situation can get in the way of practical relief on that front. This is discussed further in the section below.
State-Private Actions; Publicity
As discussed in our articles on civil litigation, one can bring legal action for consumer fraud or breach of contract and breach of warranty. Further, if the amount is small enough, a small claims action may be possible. But it all comes down to cost benefit which is an analysis that is vital for any decision to seek relief in Court. Our system grants tremendous power to the litigant and if you are willing to spend the time and money, you can cause a great deal of trouble and even get relief. The problem is that the process takes months or years and can cost many thousands of dollars in attorney fees and court costs.
Anger and disappointment is normally the initial motivation of those seeking relief for consumer fraud and the reason a complaint is made. Sadly, the time in litigation required, not to mention the court costs and attorney fees, often erode the determination of even the angriest plaintiff and we normally advise our clients who were victims of relatively inexpensive consumer fraud to make requisite complaint to the state or federal agencies and then wait a month before electing to bring any civil suit. If they are still angry enough to sue at that time, then a careful explanation of the costs and fees inevitable in our legal system must be presented so that an informed decision can be made.
If the fraud is widespread enough to gather other plaintiffs to help support the fees and costs (and interest the government in enforcement, perhaps) or if the fraud caused significant damages, then civil ligation may make good sense and has the added advantage of keeping you in control of your own case. You just have to decide if it is worth it to you. See also our article on grudge fights in litigation.
Once, perhaps a decade ago, a friend and client was so outraged by an exercise machine that he purchased from a late night television commercial that he determined to bring his own action in addition to his complaint to the FTC and over the next two years spent in excess of fifty thousand dollars in bitter litigation. He was relatively well off, angry, and felt the satisfaction he gained from watching the culprits squirm was well worth it. When they finally met his demands perhaps a week before trial, he did receive compensation for the machine and most of his fees…but not for the hundred hours of his time that the case had required. He didn’t care, as he told the writer with grim happiness. “Someone has to take these fellows on and show them that we are not all victims. I don’t trust the government to protect me, here. It’s up to me. And it’s worth it.”
Was it? That is a personal decision each of us must make, but a good first step is to contact the entities below before jumping into court:
The Council of Better Business Bureaus
4200 Wilson Blvd., Suite 800
Arlington, VA 22203-1838 USA
Phone: (703) 276-0100
Fax: (703) 525-8277
Federal Trade Commission
600 Pennsylvania Avenue, NW
Washington, DC 20580 USA
Phone: (877) FTC-HELP
And if you are a business receiving the complaint, get legal advice immediately. Yes, the amount in dispute may be relatively small, but the governmental authorities do not care about the price necessarily and fighting a governmental inquire is an expensive and often frustrating experience. Further, your reputation is vital for success and in this day of internet communications, you may find your on line reputation has been irreversibly damaged. It is important to remedy situations that are your own fault as soon as you can and if the complaint is unjustified, explain why fully and with substantiation and be sure to protect your online reputation.