Chapter 11 : Consumer Protection
Teel Gordon , Ashley Legg , Iliyana Kuneva , Natalie Graf and Angela Suit , Katy Maestas , Joe Stock , Courtney Drummond , Bryce Jones
I. History
The United States government first began its efforts at consumer protection early in the 20th century. In 1906, the noted author Upton Sinclair published a book titled The Jungle, which described the unhygienic and dangerous conditions of the meat-packing industry in Chicago, Illinois. After publication, President Roosevelt sent a commission to Chicago to determine the validity of the book’s claims. Discovering that the conditions of the meat-packing plants were actually worse than the conditions exposed in The Jungle, the United States Congress passed the first federal consumer protection acts, the Pure Food and Drug Act and the Meat Inspection Act.
The two acts were the first federal regulations designed to protect consumers from hazardous food and dangerous medicines and continue to regulate the food and drug industry today. Sinclair’s book sparked the beginning of numerous literary exposés of corruption and consumer abuses, including Lincoln Steffens’s Shame of the Cities and David Graham Phillip’s Treason of the State. These literary works were instrumental in the development of federal consumer protection regulations.
The next major milestone in consumer protection occurred in 1914 with the creation of the Federal Trade Commission, an important government agency that is responsible for consumer protection and competition jurisdiction. In the “New Deal” period of time during President Roosevelt’s presidency, many federal, state, and local regulatory agencies were also created. Since then, consumer protection has evolved to include regulations over concerns such as environmental pollution.
Consumer protection has continued to involve. Many federal, state, and local regulatory agencies have emerged to help protect consumers from corruption and abuses. In order to understand the subject fully, we must first further examine the concept of consumer protection.
II. Definition of a Consumer
A consumer is a person who buys goods or services for personal use or ownership rather than for commercial use. Commercial use includes buying items for the purpose of resale or production. For example, when a person goes to Wal-Mart to buy a camera, he or she is a consumer. However, businesses such as Wal-Mart, which buys goods for resale, would not be considered consumers.
III. Purpose of Consumer Protection Laws
Consumer protection laws exist with the main purposes of promoting fair competition and the distribution of accurate information within the consumer market. In addition, consumer protection laws exist to prohibit businesses that commit fraud or that practice unfair tactics from gaining an inequitable advantage over competitors. Also, the laws help protect the weak and those unable to defend themselves. Consumer protection laws are enacted with the view that consumers are entitled to certain rights in the process of acquiring goods or services for personal use or ownership.
IV . Agencies Protecting C onsumers
A. Federal Trade Commission (FTC)
The Federal Trade Commission (FTC) is an independent agency that reports to Congress on its actions. The FTC is responsible for both consumer protection and competition regulation. The FTC performs these duties using a number of methods. The FTC promotes aggressive and effectual law enforcement for consumer protection and competition regulation breaches, provides its expertise to federal and state governments, and creates policies and research resources for practical application.
The FTC consists of three bureaus which provide different services. The FTC’s three bureaus are: the Bureau of Consumer Protection, the Bureau of Competition, and the Bureau of Economics. The Bureau of Consumer Protection is responsible for the enforcement of consumer protection laws passed by Congress as well as regulation rules enacted by the Commission. The Bureau of Consumer Protection consists of seven divisions. These seven divisions provide services relating to advertising practices, consumer and business education, enforcement of federal injunctions, financial practices, marketing practices, planning and information regarding consumer protection, and enforcement of consumer privacy. The Bureau of Competition “champions the rights of American consumers by promoting and protecting free and vigorous competition.” The Bureau of Competition accomplishes this by 1) reviewing business mergers and acquisitions, 2) monitoring business practices in the marketplace to find anti-competition practices, 3) encouraging competition in high-consumer-impact markets, and 4) providing relevant competition information to lawmakers and users. The Bureau of Economics supplies economic data to antitrust and consumer protection investigations and regulations. The Bureau of Economics also evaluates the economic effects of regulation and provides relevant recommendations.
B. U nited States Food and Drug Administration (FDA)
The Food and Drug Administration (FDA) is an agency within the Department of Health and Human Services. The FDA regulates food, medical devices (pacemakers), biological products, medicines, vaccines, veterinary drugs, products emitting radiation, tobacco products, and cosmetics. The FDA reviews the safety and effectiveness of new products before they reach the market. After a product is on the market, the agency oversees its manufacturing and handling. The FDA also develops the standards and regulations that companies must follow to make safe and effective products. In addition, the FDA supports litigations for breaches of FDA standards and regulations.
New warning labels for tobacco products are going to be required in 2012. The change is from mere words to a different set of graphics pictures and language.
C . United States Food and Safety Inspection Service (FSIS)
The United States Department of Agriculture’s (USDA’s) consumer protection body is the United States Food and Safety Inspection Service (FSIS). The FSIS regulates the safety of meat, poultry, and egg products and the labeling and packaging of these products. The FSIS’s responsibilities are summarized below.
D. U nited States Consumer Protection Safety Commission (CPSC)
The Consumer Protection Safety Commission (CPSC) regulates more than 15,000 products which are divided into six major categories: child products, toys, household products, outdoor products, sports and recreational products, and specialty products. The CPSC issues standards with which industries must comply and also does research on potential product hazards. Companies are responsible for conducting primary research before their goods are offered for sale to the public. Though the CPSC does not test products before they go on the market, the agency does recall items that are either unreasonably dangerous to the public or violate one of its issued standards. The CPSC can also ban products and/or require them to install extra safety features if deemed necessary.
E. National Highway Safety Traffic Administration (NHTSA)
The National Highway Safety Traffic Administration (NHTSA) is part of the Department of Transportation. The NHTSA is responsible for carrying out highway safety and consumer programs previously carried out by the National Highway Safety Bureau. The NHTSA regulates motor vehicles, child seats, tires, air bags, and brakes. The NHTSA develops and enforces safety standards for motor vehicles, tests motor vehicles for safety, and licenses vehicle manufacturers. The agency is also responsible for enforcing the Corporate Average Fuel Economy Act (CAFé), whose purpose is to encourage the production of fuel-efficient vehicles.
F. Consumer Protection Financial Bureau
This new agency will enforce rules involving consumer finances. These include consumer loans, mortgages, credit and debit cards, truth in lending (see below).
G . State Attorney General
The Attorney General’s Office provides consumers with assistance for filing complaints against businesses that have committed fraud against the consumer. The assistance includes providing relevant information to consumers and directing them to the pertinent agencies. The Attorney General, however, does not provide legal services. Missouri’s 2010 Attorney General is Chris Koster.
H . Local Prosecutors
Local prosecutors take legal action against criminally negligent scams on consumers. Local prosecutors also act against fraudulent use and procurement of debit or credit devices and identity theft. In addition, local prosecutors also fight against exploitation of the elderly and disabled among many other issues regarding consumer protection at the local level.
I . Small Claims Courts
Small claims courts are judicial institutions at the state level that protect consumers by hearing civil claims cases under a dollar maximum. Small claims courts hear simple cases where the civil claim does not exceed $5,000 (for Missouri). The $5,000 limit does not include the court costs and interest rate on the $5,000 that may be awarded by the judge. (See Chapter 2 on courts.)
V . Consumer Protection in Advertising
A. Deceptive Advertising
There are three standards that determine what defines a “deceptive” advertisement. First, there must be a misrepresentation that is likely to mislead consumers. If the product does not fit the purposes for which it is sold, then the advertising is considered deceptive. Also, either the misrepresentation or the omission of fact must cause customers to form false beliefs for a product’s intended use. In addition, if services promised under a warranty or contract are not performed by the company, the advertisement can also be considered as misrepresenting the product.
The second standard is that a reasonable number of consumers must be misled. The Commission considers numerous questions in deciding whether or not a significant amount of consumers have been misled. The Commission considers issues such as how clear the representation is, how conspicuous the information is, and how familiar the public is with the service or product.
The third standard is that the representation, omission, or practice must be material. A material representation or practice is one which is likely to affect the choice or conduct of an average prudent consumer. Claims involving health, safety, or other areas with which consumers are concerned are considered material.
B. Statistics
When claims such as “nine out of ten consumers prefer this product,” “studies show,” “tests prove,” and etc. appear in an advertisement, then the Commission expects the company to have at least the advertised level of substantiation in the form of research. If the advertisement contains claims implying to consumers that the company has some level of support, the company must have the amount and type of support that it actually conveys to consumers. Consumer surveys and expert testimony may be used to determine the level of substantiation consumers expect.
C. Endorsements
The FTC uses the terms endorsements and testimonials interchangeably. The FTC defines endorsement as “any advertising message (including verbal statements, demonstrations, or depictions of the name, signature, likeness or other identifying personal characteristics of an individual or the name or seal of an organization) which consumers are likely to believe reflects the opinions, beliefs, findings, or experience of a party other than the sponsoring advertiser.” There are three types of endorsements. The first one is consumer endorsements, i.e. endorsements featuring users of the product or service being sold. Another type is expert endorsements or the opinions of acknowledged experts qualified in the relevant field of study. For these types of endorsements, supporting evidence, such as tests, must be provided. The last type of testimonial is that by an organization. These endorsements represent the opinions of a group whose collective experience exceeds that of any individual member.
D. Retroactive Advertising
If a false advertisement runs long enough to become ingrained into the society, the FTC can order retroactive advertising. Retroactive advertising means that the company has to correct the mistaken beliefs it has created, or take back what they have said in a new advertisement.
V I . Consumer Protection in Labeling
Some sort of labeling is required on almost everything in today’s market. Labeling is required on food, clothes, cigarette warnings, new automobile stickers, EPA fuel ratings, and used car warranties. The required label on food, for example, is the nutrition facts. The requirement information on the nutrition facts includes the serving size, servings per container, and the amount of food per serving. For clothing the labeling is different. Clothing labels require a listing of what the clothes are made of, cleaning instructions, and where the clothes are made.
Cigarette warning labels are different than food and clothing labels. Cigarette packages must list the Surgeon General’s warnings. In 1981, Congress passed the Comprehensive Smoking Education Act. This act required four specific health warnings on all cigarette packaging and advertisements. These four warnings are 1) Smoking Causes Lung Cancer, Heart Disease, Emphysema, and May Harm Pregnancies, 2) Quitting Smoking Now Greatly Reduces Serious Risks to your Health, 3) Smoking by Pregnant Women May Result in Fetal Injury, Premature Birth, and Low Birth Weight, and 4) Cigarette Smoke Contains Carbon Monoxide. As mentioned, new more graphic warnings will be required in 2012.
WARNING: Smoking can kill you.
More than 1,200 people a day are killed by cigarettes in the United States alone, and 50 percent of all long-term smokers are killed by smoking-related diseases. Tobacco use is the cause of death for nearly one out of every five people in the United States, which adds up to about 443,000 deaths annually.
New automobiles have a required sticker label as well. This sticker has the suggested list prices for the base, the options and the delivery costs. It also states the gas mileage. The labeling for the EPA fuel ratings must display a car’s estimated mileage on city streets as well as highways. Used automobiles also have a required label, which indicates to a buyer whether or not the car has a warranty. If no warranty is listed, it signifies that the buyer is taking the car as is, or without a warranty of any kind.
VII. Consumer Protection in Sales
A. Bait and Switch
A bait and switch occurs when a company advertises a product at a low price to attract customers in the store. The company then claims that they are out of the product while trying to convince a customer to buy a different product at a higher price. This practice is regulated by the FTC or the state attorney general.
B. Home Solicitation Sales
Consumers have a three-day cooling off period to cancel transactions made with door-to-door sellers. This regulation extends to phone and internet sales as well.
C. Mail , Phone, or Internet Order R ule
Companies must deliver the product sold within 30 days or the customer has the right to cancel the order. An exception to this is when the customer is informed at the time of purchase that the transaction will take longer than 30 days.