Consumer Protection

Chapter 19

FDA: Food and Drug Administration

• Food Safety– Food Drug and Cosmetic

Act (FDCA) 1938– Safety in commercial

food, drink, drugs and cosmetics

– Expanded FDA reach to false advertising of drugs

– Expanded enforcement and inspection systems and set safe levels of additives in foods

• FDA Works w/Other Agencies– Dept. of Agriculture

deals with meat, poultry & eggs

– Centers for Disease Control (CDC) and EPA on food safety issues

• Food Quality Protection– Food Additives

Amendment (Delaney Clause) added to FDCA in 1958 more authority (very strict) on additives

– Replaced by flexible Food Quality Protection Act of 1996

– “Reasonable certainty of no harm”

• Enforcement – FDA can force existing

products--food, cosmetics, medical devices--removed from the market

U.S. v. LaGrou Distribution Systems

• LaGrou’s cold storage warehouse in Chicago kept raw, fresh & frozen meat, poultry and other food products.

• LaGrou stored products for customers.• Manager knew of rats – talked to company

president, Stewart, about the problem.• Rats were caught daily; food the rats chewed on

thrown away.• Customers not told of rats – rather told that the

food had been damaged in shipment and destroyed.

• Expert said structural changes in the building needed to eliminate holes for rats. Stewart said that was too expensive.

• Two USDA inspectors saw rodent droppings, etc.• Next day 14 USDA inspectors came along with

inspectors from FDA and Illinois Dept. of Public Health

U.S. v. LaGrou Distribution Systems

• Night before the inspectors came, LaGrou threw away lots of food and did big cleaning. Employees told inspectors.

• Huge number of violations found. Warehouse ordered to closed; 22 million lbs. of food destroyed.

• LaGrou convicted of 3 felonies; on probation for 5 years; ordered to pay $8.2 million restitution and $2 million in fines.

• President and manager of company were also convicted. LaGrou appealed.

• HELD: Affirmed as consistent with federal law.• Situation at the warehouse was dire.• Inspector said “worst case” she had seen in her 28

years with the USDA.• Poor ventilation system – pathogens and viruses

could have become airborne. Also leaking roofs and dripping pipes carried food-borne pathogens all over.

Nutrition Labeling and Education Act 1990

• Required new regs in 1994– apply to more than

250,000 products– prevent misleading

product claims– help consumers make

informed decisions• Nutrients by serving

size– labels must show

certain components in foods by realistic serving size

• Standards for health claims– words must

have certain meanings• fresh--can’t

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

Food, Drug and Cosmetic Act of 1938• Prohibits sale of any drug until FDA approves application

submitted by manufacturer• Drug must be safe for its intended use• Designation of Prescription Drugs

– Some drugs sold by pharmacies only with a physician’s permission

• Drug Effectiveness – Kefauver Amendment of 1962 requires FDA to approve drugs

based on their proven effectiveness, not just their safety.• FDA has strict regulations concerning testing and adoption of

new drugs.• FDA has responsibility for oversight of medical devices, surgical

equipment, power wheelchairs, artificial hearts, pacemakers, etc.• FDA approval is evidence of safety, not a shield against liability

of drug companies.• If claims are misleading or safety is an issue, FDA can force

removal of product from the market• Costly for drug companies for research and development

International Perspective: “Drug Controls and Uncontrols”

• In many ways U.S. sets international standard for drugs.• FDA standards are generally tougher than Europe or Japan.• Foreign producers selling in the U.S. must meet FDA standards and

inspections of facilities.• Development costs are high – so costs of drugs high to cover

investment.• People in low income countries cannot pay U.S. prices.• Canada buys all drugs for their market; bargaining keep prices

lower.• Drug market becoming more fragmented.• U.S. drug firms are selling more overseas (because of high costs

and approval in U.S.) – drugs sold overseas often do not meet U.S. standards.

• Foreigners expect drugs that carry U.S. maker to be high quality.• Forgery is common. Over 50 people died in Panama from cough

syrup from China that contained chemical like anti-freeze.• Wasted money and injuries to health from taking worthless drugs

people think are real. Some drug makers in China sent the Chinese FDA real U.S. drugs, claiming they represent another product.

• FDA knows of huge problems--difficult to control 170,000 drugs around world.

• FDA known to take bribes to grant approval for products that enter U.S.

Nutraceutical Corp. v. Von Eschenbach

• Nutraceutical makes Ephedra, a product containing ephedrine-alkaloid-dietary supplements (EDS).

• In 2004, FDA banned EDS sales.• Nutraceutical sued FDA claiming ban was

unlawful.• District court found risk-benefit analysis

used by FDA contrary to intent of Congress• Said FDA failed to prove EDA posed

unreasonable risk of injury at 10 mg or less per day.

• Lower court held for Nutraceutical. • FDA appealed.

Nutraceutical Corp. v. Von Eschenbach

• HELD: Summary judgment for FDA should have been entered.

• FDA determined EDS posed an “unreasonable risk of illness or injury”.

• Weight loss and other health benefits dwarfed by the potential long-term harm to a user’s cardiovascular system.

• Reversed and remanded for entry of judgment in favor of FDA.

Federal Trade Commission (FTC)

• To enforce antitrust laws

• But also devotes resources to the Bureau of Consumer Protection– protect against

“unfair and deceptive acts or practices in or affecting commerce” (Section 5 of FTC Act)

Federal Trade Commission (FTC)

• Complaint begins legal process• Many complaints settled by consent

decree - terms of settlement frequently include– prohibition of practices– redress for consumers– payment of civil penalties

• A few cases get administrative trials at FTC– may appeal to commissioners for

review– may next appeal to Federal Court

of Appeals

Unfair and Deceptive Acts and Practices

• FTC has considerable leeway• Deception:

– 1) misrepresentation or omission of information

– 2) likely to mislead reasonable consumer– 3) deception is material

• Clarifying the elements:– 1) not all omissions are deceptive– 2) look at entire content– 3) reasonable consumer is ordinary person -

ads for very young or sick have tougher standard

– 4) must be likely to affect consumer’s product choice

– 5) no proof of injury to consumer is needed

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• Examples of Deception

– Telemarketing Fraud– Oil-and-Gas-Well

“Investments”– Work-at-Home

Opportunities– Invention-Promotion

Scams

Federal Trade Commission v. Cyberspace.com LLC

• Cyberspace.com run by EPV. Mailings were sent to 4.4 milllion individuals and businesses offering internet access.

• In the mailing, a check for $3.50. On the back in fine print said if you cashed the check, you subscribed to access service and agreed to be billed monthly by a charge added to phone bill.

• One-quarter million people cashed the check. Less than 1% logged on to access service. Most did not read the fine print.

• FTC sued for unfair and deceptive trade practices.

• District court issued a permanent injunction against EPV and its owners and ordered consumer redress of $17.7 million.

• EPV appealed.

Federal Trade Commission v. Cyberspace.com LLC

• HELD: Affirmed.• Fine print notices did not prelude liability

of owners.• Nearly 225,000 individuals and small

business were deceived.• Summary judgment of FTCA Section 5

violation upheld.• Owner is individually liable if he

“participated directly in acts. . . or had authority to control them . . . had actual knowledge of material misrepresentation, was recklessly indifferent to the truth . . . or had an awareness of a high probability of fraud”.

• Court owner’s individual liability upheld as well.

Regulating Advertising Claims

• Advertising substantiation program• 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

• Note regarding telemarketers– Subject to Telephone Consumer Protection Act and

Telemarketing and Consumer Fraud and Abuse Prevention Act

– The result is the FTC’s Telemarketing Sales Rule– Consumers can sue telemarketers for damages if they

violate consumers’ instructions to be removed from call lists.

False Advertising and the Lanham Act

• Private parties can bring civil actions under the Lanham Act

• Usually similar to FTC cases, but can also get damages

• States play similar roles as FTC, bringing suit against those involved in scams and dubious business practices.

• Issue Spotter: “How Aggressive Can You Be in Advertising ?”

Telebrands Corp. v. Federal Trade Commission

• Telebrands direct markets Audobon Singing Bird Clock, the Magic Hanger, Ambervision Sunglasses, Better Pasta Pot AND Ab Force. Advertise products cost less than others on the market.

• Ab Force is an electronic muscle stimulation abdominal (EMS) belt. Sends small electric current into abdominal muscles.

• Careful to say “the latest fitness craze to sweep the country” and “promise to get your abs into great shape fast—without exercise”, with well-muscled models used on TV to demonstrate product.

• FTC sued for false and misleading advertising claims re: loss of weight, inches of fat, causing well-defined abs and an effective alternative to exercise.

Telebrands Corp. v. Federal Trade Commission

• FTC included a “fencing-in” provision against the same strategy for any other Telebrands products associated with weight, exercise, etc. (i.e. dietary supplements or another other devices).

• Entered an order against Telebrands. Telebrands appealed.

• HELD: Order enforced.• There was no substantiation that Ab Force

could deliver advertised results. Telebrands admitted results were “beyond the device’s capabilities,” and “does not cause loss of weight, inches or fat. . . .”

• Telebrands was calculating in its fostering of beliefs about the product through visual images in their advertisements.

• Violations were serious – 747,000 units with sales over $19 million.

“Foreign Advertising Regulation”

– In Europe ad regulations are tightest in northern Europe and loosest in the Mediterranean countries

– Britain: Standard is that an ad is illegal if it misrepresents a product

– U.S.: Ad is illegal if it simply misleads

– Japan: Beer ads promote “extra strong” alcohol content -- illegal in the U.S. under Bureau of Alcohol, Tobacco & Firearms rules

“Regulating Cyberspace Advertising”

• FTC prosecutes dozens of on-line scams and false advertising.

• Fortuna Alliance collected over $6 million from “investors” in a pyramid scheme.

• A company had to pay $195,000 to consumers re: “self-improvement” products

• FTC pushed Congress to pass the Children’s On-line Privacy Protection Act that helps protect on-line users under 13 years of age

Trade Regulation Rules(Setting Boundaries for Practices)

• R-Value rule– standardize measures and terminology

re: home insulation• 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• Used car rule

– dealers must give clear information on who pays for repairs after sale

– Buyer’s Guide must be put in the car window

Schuchmann v. Air Services Heating & Air Conditioning

• Schuchmann bought heating and air conditioning unit 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. . . .”

• State law is to preserve “honesty, fair play and right dealings in public transactions. . . .”

Consumer Credit Protection Act (CCPA) Major Elements

• Truth-in-Lending Act– Consumer Leasing Act– Fair Credit Billing Act

• Restrictions on Garnishments• Fair Credit Reporting Act• Equal Credit Opportunity Act• Fair Debt Collection Practices

Act• Electronic Funds Transfer Act

Consumer Credit Protection Requirements on Creditors

• Disclose all relevant terms • Provide procedures for correcting

inaccurate bill and charges• Provide accurate information in

consumer reports• Not use race or sex in determining

creditworthiness• Abusive debt collection techniques

prohibited

Truth-in-Lending Act (TILA)

• Encourage consumers to shop around for credit• Standardize loan forms and terms to help

consumers understand finance charges• Must disclose cost of credit in dollars and

interest rate • 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

Consumer Leasing Act

• Does for leases what TILA does for consumer credit

• Applies to personal transactions, not for business use

• Lease must be longer than 4 months and less than $25,000

• Must disclose:– 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

Fair Credit Billing Act• Protect consumers

from inaccurate charges

• FCBA provides:– procedure to dispute

billing errors– prohibits mailing of

unsolicited credit cards

– procedures to report lost/stolen credit cards

• Can also sue for civil penalties

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 have asked for their credit history

– provide toll free service number– get permission before giving report to

employer or that contains medical info

Fair and Accurate Credit Transactions Act (FACT Act)

• FACT Act amended Fair Credit Reporting Act in 2003

• Requires major credit reporting services (Experian, TransUnion and Equifax) to allow consumers to see their credit reports annually for free

• Allows consumers to correct bad information• Helps to deal with identity theft• Has numerous requirements• FTC followed with Disposal Rule

– requires consumer information to be disposed of properly to protect against unauthorized access

– Also governs electronically stored information

– Particular care given to hard drives that are difficult to erase

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)

ECOA Notification Requirements

• Credit denied or less-favorable, creditor must provide written:– basic provisions of

ECOA– name and address of

agency regulating compliance by creditor

– statement of specific reasons for action taken or disclosure of right to get a statement of reasons

Fair Debt Collection Practices Act

• Eliminate 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

Info Debt Collector Must Send

• 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

• See Issue Spotter: “How Should You Handle Unpaid Accounts?”

Chuway v. National Action Financial Services

• National Action, a debt collector, mailed Chuway a letter which 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.

Chuway v. National Action Financial Services

• HELD: Reversed and remanded. Chuway wins.• 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.

• Credit card company (not debt collector) may charge interest until the debt is finally paid. Communications must be clear.

• For the debt collector to collect running interest or other charges, must use specific 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.