Chapter 14. Consumer Individual who acquires goods that are intended primarily for personal, family, or household use Protected in the marketplace.

Consumer ProtectionChapter 14

Governmental Protection in Today’s Marketplace

Consumer Individual who acquires goods that are

intended primarily for personal, family, or household use

Protected in the marketplace through actions they may take on their own as well as through actions of the government


Consumer Caveats Caveat emptor—”let the buyer beware”▪ Consumers were thought to be adequately

protected by their own ability to judge a product’s safety and utility▪ Forces of supply and demand in a competitive

marketplace were to keep product makers and sellers committed to producing the best product for the money▪ Can seek advice from:▪ Better Business Bureau▪ Attorney General’s office▪ Customer service department of store


Caveat Venditor—”let the seller beware” Local, state, and federal governments have

passed legislation to help put consumers on the same level as sellers in the marketplace▪ Difficult for consumers to judge products properly

for quality or advantages/disadvantages▪ Laws fund agencies that add to the common-law

based contract, tort, and criminal protection against such abuses

▪ Sellers may be sued by the individual consumer as well as be subject to charges by a government agency


Class Actions Allows one or several persons to sue not

only on behalf of themselves, but also on behalf of the many others similarly wronged▪ The law has recognized that if the product in

question costs little or the potential damages are low, court action is expensive and time consuming▪ The ability to combine individual causes of

action into one suit provides incentive for law firms to handle such cases


Governmental Procedure Cease-and-desist order▪ Requires a company to stop the specified conduct▪ If the defendant violates the order, heavy civil

penalties may be imposed Consent Order▪ Voluntary, court-enforceable agreement to stop an

illegal or questionable practice▪ Eliminates a long court battle

Restitution▪ The return to customers of money wrongfully

obtained


Licensing Protection of consumers begins with

licensing suppliers of consumer services Certain businesses and institutions must

pass inspection before receiving operating licenses

Written estimates and detailed bills must be submitted for all work performed

States regulate special sales by retail businesses▪ Going out of business; bankruptcy


Unsafe Products Consumer Product and Safety Act (1972)▪ Created the Consumer Product and Safety

Commission▪ Issues and enforces safety standards for most

consumer products▪ Requires any manufacturer, distributor, or retailer

discovering the failure of its product to comply with safety regulations to report that fact to the commission▪ Receives reports from the nation’s hospitals on

product-caused injuries If a product is substantially dangerous, it will be

recalled and repaired, replaced, or the purchase price will be refunded


Adulterated Food, Drugs, and Cosmetics Federal Food and Drug Administration (FDA)▪ Requires that the production facilities for cosmetics,

food, and drugs be clean▪ Requires that the products be prepared from

ingredients fit for human use or consumption▪ If a product does not meet the minimum standards for purity

and quality set by the FDA, it is called adulterated Such products may be confiscated, or seized, by the

government

▪ Requires that labels on regulated products give the name and address of the manufacturer, packager, or distributor, and reveal the quantity and nutritional information


Adulterated Food, Drugs, and Cosmetics United States Department of Agriculture

(USDA)▪ Inspects canners, packers, and processors of

poultry and meat entering interstate commerce▪ Ensures that products are free of disease and

are processed under sanitary conditions


Improper Weights and Measures The U.S. Constitution gives Congress the

power to set standards for weights and measures▪ Currently, the Weights and Measures Division

of the National Institute of Standards and Technology promotes uniformity in U.S. weights and measures laws, regulations, and standards▪ Inspect, test, and enforce at the state and federal

levels Gallon of gasoline, pound of bananas, foot of rope is

uniform

Protection Against Unfair Trade Practices

Unfair Trade Practice Any method of business that is dishonest

or fraudulent or that illegally limits free competition

Anti-trust Laws Federal Trade Commission Act (FTC)▪ Designed to prevent unfair trade practices in

interstate commerce


Agreement to Control or Fix Prices Competition is the force that drives

efficient business to create new and better products and services

Competition drives inefficient firms out of business

Some individuals and companies enter into agreements to control or fix prices to try and eliminate competition▪ Illegal and unenforceable▪ Violators are subject to criminal penalties


False and Misleading Advertising Intentionally deceives, makes untrue claims

of quality or effectiveness, or fails to reveal critically important facts

Bait and Switch▪ Using understocked, low-priced items as a “come

on” to lure prospective buyers into the store; once there customers find out that the item is sold out and are redirected to a more expensive item

▪ Not illegal if quantity is stated or “supply is limited”

▪ Many stores give rain checks


False and Misleading Advertising The Federal Trade Commission (FTC) has

the main responsibility for preventing false and misleading advertising▪ Can order an advertisement terminated▪ May order corrective advertising▪ Advertiser must admit wrongdoing and state the

truth in a prescribed number of future advertisements


Illegal Lotteries and Confidence Games Lottery/Game Requirements:▪ Payment of money or something else of value to

participate▪ Winner(s) determined by chance rather than skill▪ Prize to be won▪ Illegal to hold or participate in a gambling scheme▪ Regulated by states—religious organizations, state

lotteries▪ Use of lotteries to promote business is unfair competition▪ Confidence game—victim is persuaded to trust the

swindler with the victim’s money or other valuables in hopes of a quick gain Pyramid schemes


Unfair Pricing and Service Common unfair pricing methods:▪ Intentionally misrepresenting that goods are

being sold at a considerable discount▪ Stating that the price charged for goods is a

wholesale price▪ Both illegal

▪ Representing goods or services as being free with purchase of another good that is sold at an inflated price

▪ Estimate for repair far lower than actual price▪ Repairs that are not authorized


Mislabeled Goods Mislabeling a good to make it more

marketable Selling used goods as if new or in better

condition than the really are Law requires that certain products contain

warning labels▪ Poisons and insecticides must have appropriate

“danger” labels▪ Cigarette packaging and advertisements must

carry warnings indicating the dangers of smoking


Other Unfair Trade Practices Using a brand name or trademark so similar to a competitor’s

that it’s hard to know the difference Sending unordered merchandise and demanding payment for it

or its return Giving a corporation’s purchasing agent money “under the

counter” in exchange for ordering from the supplier or paying retail salespeople “push money” for promoting a certain product

Conducting “industrial espionage” to find out trade secrets Conducting fraudulent telemarketing and internet schemes Figuring finance charges improperly Failing to provide written warranties when required In door-to-door home solicitation sales, failing to notify

purchasers that they have three days to cancel contracts for purchases of $25 or more

What is Product Liability? Product Liability

The affixing of responsibility to compensate buyers, users, and even those standing nearby for injuries caused by a defective product

Product liability suits may be based on:▪ Fraud▪ Negligence▪ Strict liability▪ Breach of warranty—assurance that the seller makes

about the product’s quality and performance▪ Governed by the UCC

Expansion of Product Liability Privity of Contract

The relationship that exists between or among the contracting parties as a result of their legally binding agreement

The UCC broadens common law rule so that all injured persons who are the buyer’s family, household, or guests may sue

Courts in most states permit the injured party, even a nonuser, to sue retailers, intermediate sellers, and manufacturers▪ Can be a result of misleading or inaccurate

advertising, or defective goods

Expansion of Product Liability

Recovering Damages A product liability suit may be based on

a breach of warranty, or on torts of fraud, negligence, or strict liability

Damages may be difficult to obtain▪ No warranty, warranty is not applicable, or

warranty expired▪ Negligence is hard to prove because the

defective product may have been designed and made months or years prior to purchase

Expansion of Product Liability Recovering Damages

Most likely to recover damages by relying on strict liability▪ Many states hold the manufacturer, wholesaler, and

retailer strictly liable if someone is injured by a defective product

▪ Liability is imposed without reliance on warranties or on the presence or absence of fraudulent intent or negligence

▪ NO LIABILITY:▪ Using a product for something other than its intended use▪ Using the product for a purpose that could not be reasonably

foreseen▪ Altered product▪ Improper conduct▪ Improper use

How Important are Warranties? Express Warranty

Assurance of quality or a promise of performance explicitly made by the seller

May be oral or written▪ If the contract is written, the warranty must be

included in the writing▪ If the warranty is given after the sale, it may be

oral A warranty or any other term may be

added to a sales contract later by mutual agreement without additional consideration

How Important are Warranties?

Requirements of Express Warranties Magnuson-Moss Warranty Act▪ Federal Trade Commission has established

certain minimum standards that must be met by sellers giving written warranties on products that cost more than $15▪ Sellers are not required to give warranties▪ If they do give warranties, they must make them

available to consumers prior to the sale in a single document, written in simple, understandable language

How Important are Warranties? Requirements of Express Warranties

The following information must be included:▪ To whom the warranty is extended▪ A description of the product and any excluded parts▪ What the warrantor will and will not do in the event of a breach of

warranty▪ When the warranty begins and when it ends▪ The step-by-step procedure to obtain performance of warranty

obligations▪ Availability of any informal methods of settling disputes▪ Any limitation on how long implied warranties last▪ Any exclusion or limitation on incidental or consequential

damages▪ The words “ This warranty gives you specific legal rights, and you

may also have other rights which will vary from state to state”


Requirements of Express Warranties Full Warranty—obligates the seller to

repair or replace a defective product without cost to the buyer and within a reasonable time

Limited Warranty—provides less protection than a full warranty▪ Seller must identify type of warranty


Opinions v. Warranties Positive statements about the value of

goods is an opinion If the buyer views the merchant as an

expert, a positive statement may be taken as a warranty▪ Example: Jeweler states that a diamond is

flawless


Express Warranties made by all Sellers Every seller is bound by any express

statement of fact or promise that is part of the bargain▪ It is desirable to have these statements in

writing▪ When a description of goods or a sample or a

model is made part of the contractual agreement, there is an express warranty that all the goods shall conform to the description, sample, or model used▪ True even if “warranty” or “guarantee” do not appear

in the contract▪ True even if the seller had no intention to give such

warranty


Implied Warranties given by all Sellers Law compels all sellers to honor certain

implicit, or unstated, warranties in order to ensure minimal standards of contractual performance

Implicit Warranty—obligation imposed by law on all sellers▪ Types:▪ Warranty of title▪ Warranty against encumbrances▪ Warranty of fitness for a particular purpose


Implied Warranties given by all Sellers Warranty of Title▪ Implicit in the act of selling, the seller

warrants that he or she has the title to the goods and right to transfer them▪ Implied by law▪ Exclusions:▪ Seller doesn’t have the title

Sheriff selling a debtor’s goods by court order to satisfy a judgment


Implied Warranties given by all Sellers Warranty Against Encumbrances▪ Implicit in the act of selling is the seller’s

warranty that goods shall be delivered of all encumbrances (claims of third parties) of which the buyer is not aware at the time of contracting▪ Does not ensure that the goods are free of

encumbrances at the time of the sale, but rather that they will be free at the time of delivery▪ Pay off third party claims before transferring

ownership


Warranty of Fitness for a Particular Purpose A buyer who needs goods for a specific purpose often tells

the seller about that purpose Buyer relies on the seller’s skill and judgment for a

selection of appropriate goods Seller makes an implied warranty that the goods delivered

are reasonably fit for the stated purpose If they are unfit, the buyer has a right of action for breach

of warranty Exceptions:▪ When the buyer personally selects the goods▪ When the buyer orders the goods according to his/her

specifications▪ When the buyer does not rely on the skill and judgment of the

seller because of independent testing or other reasons


Implied Warranties given by Merchants Warranty Against Infringement▪ A merchant makes an implied warranty that

the goods in which he/she normally deals shall be delivered to a buyer free of any third party claims for patent, copyright, or trademark infringement▪ This warranty may be excluded by agreement

between the parties If the buyer furnishes specifications to the seller

that lead to a claim of infringement against the seller, the buyer is obligated to compensate the seller for any loss suffered because of the infringements

How Important are Warranties? Implied Warranties given by Merchants

Warranty of Merchantability▪ Requires that the goods be fit for the ordinary purposes

for which the goods are used▪ All goods sold must pass without objection in the trade

under the sales contract description▪ Implied warranty of merchantability greatly increases

the merchant’s duties of care and performance beyond those of a casual seller

▪ Merchantability requires that any warranty protection that is customary in the trade be extended to all buyers

▪ May be expressly excluded by agreement of the parties


Exclusion of Warranties A seller may offer to sell goods without

any warranty▪ Most likely to occur if the goods are known to

have defects or if they are a new design or model▪ To sell without a warranty, the seller must

refrain from making any express warranties, and use appropriate language that will exclude any implied warranties▪ Must use a DISCLAIMER—notice of exclusion▪ Must be in writing and be easily noticed

How Important are Warranties? Lemon Laws

Laws protect consumers of vehicles but may extend to other consumer products in certain jurisdictions▪ Chronically defective vehicles are called “lemons”▪ How they work:▪ A consumer returns a vehicle with a major defect to an

authorized dealership for repair within the warranty period. If the dealership tries unsuccessfully to fix the vehicle several times, the consumer should then, in writing, request a refund or replacement vehicle. If the request is not met, the consumer should contact an attorney

Chapter 14. Consumer Individual who acquires goods that are intended primarily for personal, family, or household use Protected in the marketplace.

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