Chapter 39: Consumer and Environmental Law 1

Chapter 39: Consumer and Environmental Law 1

Chapter 39

Consumer and Environmental Law

Introduction

Many federal and state administrative agencies are focused on what has become a vast area of government regulation—consumer protection. Consumer transactions broadly include transactions that involve an exchange of value for the purpose of acquiring goods, services, land, or credit for personal or family use. Federal and state laws protect consumers from unfair trade practices, unsafe products, discriminatory or unreasonable credit requirements, and other problems related to consumer transactions. This chapter focuses primarily on federal legislation.

Fifty years ago, there were only a handful of statutes and regulations, plus old common law concepts, governing the environment. Regulation was initially aimed at cleaning up damage to the environment. At the end of the 1970s, there was a shift toward preventive regulation, on the theory that preventing injury to the environment is less expensive than cleaning up damage after it has occurred. Controlling waste is not without a price, however. For many businesses, the costs are high, and for some they are too high. There is a constant tension between the desirability of increasing profits and productivity and the need to attain quality in the environment. This chapter considers some of the major federal environmental laws.

Chapter Outline

I.Advertising, Marketing, and Sales

Sources of consumer protection include federal and state laws, private organizations, and so on. Courts and other mechanisms (free legal services, small claims courts, recovery of attorneys’ fees in class actions, and others) encourage consumer action.

A.Deceptive Advertising

•Deceptive advertising is generally defined as advertising that may be interpreted as false or misleading.

•Deceptive advertising occurs if a reasonable consumer would be misled by the ad. Puffery—vague generalities and obvious exaggerations—is permissible.

1.Claims That Appear to Be Based on Factual Evidence

Ads that appear to be based on factual evidence but in fact are not are deemed deceptive.

Case Synopsis—
Case 39.1: POM Wonderful, LLC v. Federal Trade Commission
POM Wonderful, LLC makes and sells pomegranate-based products. In ads, POM touted medical studies claiming to show that daily consumption of its products could treat, prevent, or reduce the risk of heart disease, prostate cancer, and erectile dysfunction. These ads mischaracterized the scientific evidence. The Federal Trade Commission (FTC) charged POM with, and held POM liable for, making false, misleading, and unsubstantiated representations in violation of the FTC Act. POM was barred from running future ads asserting that its products treat or prevent any disease unless armed with “randomized, controlled, human clinical trials demonstrating statistically significant results.”POM appealed.
The U.S. Court of Appeals for the District of Columbia Circuit affirmed. “An advertiser who makes express representations about the level of support for a particular claim must possess the level of proof claimed in the ad and must convey that information to consumers in a non-misleading way.”
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Notes and Questions
Isn’t false information so transparent that there is no need for a government agency or court to intervene? Doesn’t the marketplace effectively weed out such deception? False information and ad claims may seem transparent to most of us, but many persons fall victim to such claims, no matter how false. Undoubtedly, products that do not do what is claimed on their behalf would eventually disappear from the marketplace, but without some form of policing, others would quickly take their place, and the truth would be more difficult to distinguish from the noisy barrage of lies.
Additional Cases Addressing this Issue —
Deceptive Advertising
Cases considering claims of deceptive advertisinginclude the following.
•Waldman v. New Chapter, Inc.,714 F.Supp.2d 398 (E.D.N.Y. 2010) (food product manufacturer's packaging was misleading, in that it gave false impression that consumers were buying more than they actually received, and purchaser alleged that, had she understood true amount of product, she would not have purchased it).
•Buetow v. A.L.S. Enterprises, Inc.,713 F.Supp.2d 832 (D.Minn. 2010) (ads for carbon-embedded hunting clothing including statements such as “complete scent elimination,” “scentfree,” “works on 100% of your scent (100% of the time),” “all human scent,” “odor is eradicated,” and graphics showing that human odor cannot escape carbon-embedded fabric were literally false).
•Lima v. Gateway, Inc.,710 F.Supp.2d 1000 (C.D.Cal. 2010) (allegations that computer monitor manufacturer stated monitor could attain a resolution of 2,560 by 1,600 pixels and provide “visually intense” gaming experience, but did not state an additional purchase was required to attain that resolution were sufficient to plead members of the public were likely to be deceived).
•Transamerica Corp. v. Moniker Online Services, LLC, 672 F.Supp.2d 1353 (S.D.Fla. 2009) (service mark owner's allegations—that defendants used well-known service mark to lead consumers to Web sites offering services similar to those offered by mark owner, and that consumers believed they were accessing mark owner's services when they were not—fell under false and misleading ad statutes).
•Smith v. William Wrigley Jr. Co., 663 F.Supp.2d 1336 (S.D.Fla. 2009) (consumer's allegations that chewing gum company advertised brand of gum as “scientifically proven to help kill the germs that cause bad breath,” that there was no scientific proof to substantiate the ad, that consumer bought the gum in reliance on the ad, and that the company charged a premium based on the ad, adequately stated a claim for unfair and deceptive trade practices).
•Brewer v. Indymac Bank, 609 F.Supp.2d 1104 (E.D.Cal. 2009) (borrowers' allegation that lender's explanation of the adjustable rate mortgage offered to borrowers was intentionally misleading, deceptive, and ambiguous was sufficient to state claim for false advertising).

2.Claims Based on Half-Truths

Ads that appear to be based on factual evidence but in fact are not are deemed deceptive.

3.Bait-and-Switch Advertising

This section highlights Federal Trade Commission (FTC) rules defining and prohibiting bait-and-switch advertising (refusing to show an advertised item, failing to have in stock a reasonable quantity of the item, failing to promise to deliver the advertised item within a reasonable time, or discouraging employees from selling the item).

4.Online Deceptive Advertising

The FTC Advertising and Marketing on the Internet: Rules of the Road guidelines of 2000 describe how existing laws apply to online ads. Generally—

•Ads must be truthful and not misleading).

•Claims must be substantiated.

•Ads must not be unfair (causing a substantial injury that a consumer cannot avoid and that is not outweighed by a benefit to consumers or competition.

•Ads must disclose relevant limitations and qualifying information underlying claims

•Theremust be “clear and conspicuous” disclosure of qualifying or limiting information. Burying this information on an internal Web page and linking to it is not recommended.

5.Federal Trade Commission Actions

a.Formal Complaint

An FTC action against those who are accused of deceptive advertising begins with an investigation, often after a consumer complaint. The investigation may lead to a formal complaint. If the alleged offender does not agree to settle, a hearing is held before an administrative law judge.

b.FTC Orders and Remedies

A cease-and-desist order, an order requiring counteradvertising, or a multiple-product order may be sought.

c.Damages When Consumers Are Injured

The FTC may seek restitution if an ad involves wrongful charges to consumers.

B.False Advertising Claims under the Lanham Act

Under the Lanham Act, to state a successful claim, for false advertising a business must establish—

•An injury to a commercial interest in reputation or sales.

•Direct causation of the injury by false or deceptive advertising.

•A loss of business from consumers or other buyers who were deceived by the advertising.

Case Synopsis—
Case 39.2: Lexmark International, Inc. v. Static Control Components, Inc.
Lexmark International, Inc., sells the only style of toner cartridges that work with the company's laser printers. Other businesses—remanufacturers—acquire and refurbish used Lexmark cartridges to sell in competition with the cartridges sold by Lexmark. Static Control Components, Inc., makes and sells components for the remanufactured cartridges, including microchips that mimic the chips in Lexmark’s cartridges. Lexmark released ads that claimed Static Control’s microchips illegally infringed Lexmark’s patents. Lexmark then filed a suit in a federal district court against Static Control, alleging violations of intellectual property law. Static Control counterclaimed, alleging that Lexmark engaged in false advertising in violation of the Lanham Act. The court dismissed the counterclaim. On Static Control’s appeal, the U.S. Court of Appeals for the Sixth Circuit reversed the dismissal. Lexmark appealed.
The United States Supreme Court affirmed the lower court’s ruling. The Supreme Court’s decision clarified that businesses do not need to be direct competitors to bring an action for false advertising under the act. A cause of action for false advertising under the Lanham Act extends to plaintiffs whose interests “fall within the zone of interests protected by the law.”To establish a claim, a plaintiff must allege an injury to a commercial interest in reputation or sales proximately caused by a violation of the statute. Static Control met this test.
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Notes and Questions
Under the Court’s ruling in this case, is Static Control now entitled to relief? No—based on a careful reading of the Court’s ruling in this case, Static Control is not yet entitled to relief. To invoke the Lanham Act's cause of action for false advertising, a plaintiff must plead and prove an injury to a commercial interest in sales or business reputation proximately caused by the defendant's misrepresentations. In this case, the Court ruled that Static Control alleged an adequate basis to proceed in its counterclaim against Lexmark for false advertising under the Lanham Act. But Static Control cannot obtain relief without evidence of an injury proximately caused by Lexmark's alleged misrepresentations. The Court held here only that Static Control is entitled to a chance to prove its case, not that it has already proved it.
Two rival carmakers purchase airbags for their cars from different third-party manufacturers. The first carmaker, hoping to divert sales from the second, falsely proclaims that the airbags used by the second carmaker are defective. Who among these parties can successfully allege proximate cause as part of a false advertising claim brought under the Lanham Act? Under these facts, both the second carmaker and its airbag supplier could suffer injury to their business reputations, and their sales could decline as a result. Each would be directly and independently harmed by the attack on its merchandise. Consequently, either or both of them could establish the element of proximate cause to support a claim for false advertising brought under the Lanham Act.

C.Marketing

1.Telephone Solicitation

The Telephone Consumer Protection Act (TCPA) of 1991 prohibits phone solicitation using an automatic phone dialing system or a prerecorded voice and the transmission of ads via fax without the recipient’s permission. Junk fax fines can be $11,000 per day.

2.Fraudulent Telemarketing

Under the Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994, the FTC issued the Telemarketing Sales Rule of 1995 to ban misrepresentation and requires disclosure by telemarketers, including foreign firms. The FTC also set up the national Do Not Call Registry.

Enhancing Your Lecture—

Protecting U.S. Consumers

from Cross-Border Telemarketers

One of the problems that the Federal Trade Commission (FTC) faces in protecting consumers from scams is that those involved in the illegal operations frequently are located outside the United States. Nevertheless, the FTC has had some success in bringing cases under the Telemarketing Sales Rule (TSR) against telemarketers who violate the law from foreign locations. As discussed in the text, the TSR requires telemarketers to disclose all material facts about the goods or services being offered and prohibits the telemarketers from misrepresenting information. Significantly, the TSR applies to any offer made to consumers in the United States—even if the offer comes from a foreign firm.
A Telemarketing Scam That Originated in Canada
Oleg Oks and Aleksandr Oks, along with several other residents of Canada, set up a number of sham corporations in Ontario. Through these businesses, they placed unsolicited outbound telephone calls to consumers in the United States. The telemarketers offered pre-approved Visa or MasterCard credit cards to those consumers who agreed to permit their bank accounts to be electronically debited for an advance fee of $319.
The telemarketers frequently promised that the consumers would receive other items—such as a cell phone, satellite dish system, vacation package, or home security system—at no additional cost. In fact, no consumers who paid theadvance fee received either a credit card or any of the promised gifts. Instead, consumers received a “member benefits” package that included items such as a booklet on how to improve their creditworthiness or merchandise cards that could be used only to purchase goods from the catalogue provided.
The Canadian Government and the FTC
Cooperate to Prosecute the Telemarketers
The FTC, working in conjunction with the U.S. Postal Service and various Canadian government and law enforcement agencies, conducted an investigation that lasted several years. Ultimately, in 2007 Oleg and Aleksandr Oks pleaded guilty in Canada to criminal charges for deceptive advertising. They were barred from telemarketing for ten years.a
In addition, the FTC filed a civil lawsuit against the Okses and other Canadian defendants in a federal court in Illinois. The court found that the defendants had violated the FTC Act and the TSR and ordered them to pay nearly $5 million in damages.b
For Critical Analysis
Suppose this scam had originated in a country that is not as cooperative as Canada is with the United States. In that situation, how would the FTC obtain sufficient evidence to prosecute the foreign telemarketers? Is the testimony of U.S. consumers regarding phone calls they receive sufficient proof? Why or why not?
a. Oleg was also sentenced to a year in jail and two years’ probation.
b. Federal Trade Commission v. Oks, ___ F.Supp.2d ___, 2007 WL 3307009 (N.D.Ill. 2007). The court entered its final judgment on March 18, 2008.

D.Sales

•States’ “cooling-off” laws permit a buyer to rescind a purchase within a certain period of time. The FTC has mandated notice to consumers of this right (in Spanish, if the sale was conducted in Spanish).

•The FTC “Mail or Telephone Order Merchandise Rule” of 1993 covers sales in which orders are transmitted using computers, fax machines, or similar means over phone lines. The rule covers shipping, notice of delays, and refunds.

II.Labeling and Packaging Laws

Laws dealing with labels and packages require—

•Accurate information about products.

•Use of language easily understood by the ordinary consumer.

•Disclosure of a product’s ingredients—such as cotton in a garment—in some instances.

•Warningsof potential dangers in some instances.

A.Automobile Fuel Economy Labels

The Energy Policy and Conservation Act of 1975 requires automakers to include the Environmental Protection Agency’s fuel economy estimate on a label on every new car.

B.Food Labeling

Labels are required on, among other products, fresh meats, fruits, and vegetables to indicate where the food originated. The Fair Packaging and Labeling Act of 1966 requires that product labels identify—

•The product.

•The net quantity of contents; and the size of a serving if the number of servings is stated.

•The manufacturer.

•The packager or distributor.

1.Nutritional Content

Food products must bear labels detailing nutrition, including how much and what type of fat a product contains. The U.S. Food and Drug Administration and the U.S. Department of Agriculture are the chief agencies that issue regulations on food labeling.

2.Caloric Content of Restaurant Foods

Under federal law, a restaurant chain with twenty or more locations must post the caloric content of the foods on its menu, including food offered through vending machines. Exempt are condiments, daily specials, and food offered for less than sixty days. Guidelines on the number of calories an average person needs daily must also be posted.

III.Protection of Health and Safety

A.Food and Drugs

The Pure Food and Drug Act of 1906, as amended in 1938, is today’s Federal Food, Drug and Cosmetic Act (FDCPA).

1.Food Safety

Most of the enforcement of the FDCPA is by the Food and Drug Administration.The actsets out—

•Food standards.

•Safe levels of potentially hazardous additives.

•Classifications of advertising.

•A food registry.

•Record-keeping requirements.