Chapter 23 consumer rights and responsibilities answers

Regulatory Risk, Investor Or Consumer Protection IRAC Case Brief

CHAPTER 23 Consumer Protection

Restaurant

Federal and state governments have enacted many statutes to protect consumers from unsafe food items.

Learning Objectives

After studying this chapter, you should be able to:

1. Describe government regulation of food and food additives.

2. Describe government regulation of drugs, cosmetics, and medicinal devices.

3. Identify and describe unfair and deceptive business practices.

4. Describe the United Nations Biosafety Protocol concerning genetically altered foods.

5. List and describe consumer financial protection laws.

Chapter Outline

1. Introduction to Consumer Protection

2. Food Safety

1. Case 23.1 • United States of America v. LaGrou Distribution Systems, Incorporated

3. Food, Drugs, and Cosmetics Safety

1. LANDMARK LAW • Food, Drug, and Cosmetic Act

2. ETHICS • Restaurants Required to Disclose Calories of Food Items

3. GLOBAL LAW • United Nations Biosafety Protocol for Genetically Altered Foods

4. Product and Automobile Safety

5. Medical and Health Care Protection

1. LANDMARK LAW • Health Care Reform Act of 2010

6. Unfair and Deceptive Practices

1. CONTEMPORARY ENVIRONMENT • Do-Not-Call Registry

7. Consumer Financial Protection

1. CONTEMPORARY ENVIRONMENT • Consumer Financial Protection Bureau

2. ETHICS • Credit CARD Act

3. BUSINESS ENVIRONMENT • Dodd-Frank Wall Street Reform and Consumer Protection Act

“ I should regret to find that the law was powerless to enforce the most elementary principles of commercial morality.”

—Lord Herschell Reddaway v. Banham (1896)

Introduction to Consumer Protection and Product Safety

Originally, sales transactions in this country were guided by the principle of caveat emptor (“let the buyer beware”). This led to abusive practices by businesses that sold adulterated food products and other unsafe products. In response, federal and state governments have enacted a variety of statutes that regulate the safety of food, drugs, cosmetics, toys, vehicles, and other products. In addition, governments have enacted consumer financial protection laws that protect consumer-debtors in credit transactions. These laws are collectively referred to as consumer protection laws .

consumer protection laws

Federal and state statutes and regulations that promote product safety and prohibit abusive, unfair, and deceptive business practices.

This chapter covers consumer protection and product safety laws.

Food Safety

The safety of food is an important concern in the United States and worldwide. In the United States, the U.S. Department of Agriculture (USDA) is the federal administrative agency that is responsible primarily for regulating meat, poultry, and other food products. The USDA conducts inspections of food-processing and storage facilities. The USDA can initiate legal proceedings against violators.

U.S. Department of Agriculture (USDA)

A federal administrative agency that is responsible for regulating the safety of meat, poultry, and other food products.

The following case involves a USDA action against a food storage company.

CASE 23.1 FEDERAL COURT CASE Adulterated Food United States v. LaGrou Distribution Systems, Incorporated

466 F.3d 585, 2006 U.S. App. Lexis 25986 (2006) United States Court of Appeals for the Seventh Circuit

“The conditions at LaGrou’s cold storage warehouse at 2101 Pershing Road in Chicago were enough to turn even the most enthusiastic meat-loving carnivore into a vegetarian.”

—Bauer, Judge

Facts

LaGrou Distribution Systems, Incorporated, operated a cold storage warehouse and distribution center in Chicago, Illinois. The warehouse stored raw, fresh, and frozen meat, poultry, and other food products that were owned by customers who paid LaGrou to do so. More than 2 million pounds of food went into and out of the warehouse each day.

The warehouse had a rat problem for a considerable period of time. LaGrou workers consistently found rodent droppings and rodent-gnawed products, and they caught rats in traps throughout the warehouse on a daily basis. The manager of the warehouse and the president of LaGrou were aware of this problem and discussed it weekly. The problem became so bad that workers were assigned to “rat patrols” to search for rats and to put out traps to catch rats. At one point, the rat patrols were trapping as many as 50 rats per day. LaGrou did not inform its customers of the rodent infestation. LaGrou would throw out products that had been gnawed by rats.

One day, a food inspector for the U.S. Department of Agriculture (USDA) went to the LaGrou warehouse and discovered the rat problem. The following morning, 14 USDA inspectors and representatives of the federal Food and Drug Administration (FDA) arrived at the warehouse to begin an extensive investigation. The inspectors found the widespread rat infestation and the contaminated meat. The contaminated meat could transmit bacterial, viral, parasitic, and fungal pathogens, including E. coli and Salmonella, which could cause severe illness in human beings.

The USDA ordered the warehouse shut down. Of the 22 million pounds of meat, poultry, and other food products stored at the warehouse, 8 million pounds were found to be adulterated and were destroyed. The remaining product had to be treated with strict decontamination procedures. The U.S. government brought charges against LaGrou for violating federal food safety laws. The U.S. district court ordered LaGrou to pay restitution of $8.2 million to customers who lost product and to pay a $2 million fine. In addition, it sentenced LaGrou to a five-year term of probation. LaGrou appealed.

Issue

Has LaGrou knowingly engaged in the improper storage of meat, poultry, and other food products, in violation of federal food safety laws?

Language of the Court

The conditions at LaGrou’s cold storage warehouse at 2101 Pershing Road in Chicago were enough to turn even the most enthusiastic meat-loving carnivore into a vegetarian. According to Dr. Bonnie Rose, the USDA microbiologist who testified, LaGrou’s warehouse was the “worst case” she had seen in her 28 years with the USDA. The instructions in this case explained that in order to convict LaGrou, the jury had to find that an authorized agent or employee of LaGrou knowingly stored products under unsanitary conditions. LaGrou’s President, managers, and several employees were aware of the unsanitary conditions in the Pershing Road warehouse.

Decision

The U.S. court of appeals upheld the U.S. district court’s finding that LaGrou had knowingly engaged in the improper storage of meat, poultry, and other food products, in violation of federal food safety laws. The court of appeals affirmed the judgment of the district court, except that it reduced the fine from $2 million to $1.5 million.

Ethics Questions

1. Did LaGrou management knowingly engage in improper storage of food products? Do you think that the penalties imposed on LaGrou were sufficient?

Food, Drugs, and Cosmetics Safety

The Food, Drug, and Cosmetic Act (FDCA or FDC Act) 1 is a federal statute that regulates the safety of foods, drugs, cosmetics, and medicinal devices. The specific areas regulated by the FDCA are discusse in the following paragraphs.

Food, Drug, and Cosmetic Act (FDCA or FDC Act)

A federal statute that provides the basis for the regulation of much of the testing, manufacture, distribution, and sale of foods, drugs, cosmetics, and medicinal products.

The following feature discusses the Federal Food, Drug, and Cosmetic Act.

Landmark Law Food, Drug, and Cosmetic Act

The Food, Drug, and Cosmetic Act (FDCA or FDC Act) was enacted in 1938. This federal statute, as amended, regulates the testing, manufacture, distribution, and sale of foods, drugs, cosmetics, and medicinal devices in the United States. The Food and Drug Administration (FDA) is the federal administrative agency empowered to enforce the FDCA.

Food and Drug Administration (FDA)

The federal administrative agency that administers and enforces the federal Food, Drug, and Cosmetic Act and other federal consumer protection laws.

Before certain food additives, drugs, cosmetics, and medicinal devices can be sold to the public, they must receive FDA approval. An applicant must submit to the FDA an application that contains relevant information about the safety and uses of the product. The FDA, after considering the evidence, will either approve or deny the application.

The FDA can seek search warrants and conduct inspections; obtain orders for the seizure, recall, and condemnation of products; seek injunctions; and turn over suspected criminal violations to the U.S. Department of Justice for prosecution.

Critical Legal Thinking

1. What public purpose does the Food and Drug Administration serve? If it were not for federal food protection laws, do you think that companies would voluntarily implement food safety rules comparable to those of federal laws? Why or why not?

Regulation of Food

The FDCA prohibits the shipment, distribution, or sale of adulterated food . Food is deemed adulterated if it consists in whole or in part of any “filthy, putrid, or decomposed substance” or if it is otherwise “unfit for food.” Note that food does not have to be entirely pure to be distributed or sold; it only has to be unadulterated.

The FDCA also prohibits false and misleading labeling of food products. In addition, it mandates affirmative disclosure of information on food labels, including the name of the food, the name and place of the manufacturer, a statement of ingredients, and nutrition content. A manufacturer may be held liable for deceptive labeling or packaging.

Food Labeling

In 1990, Congress passed a sweeping truth-in-labeling law called the Nutrition Labeling and Education Act (NLEA) . 2 This act requires food manufacturers and processors to provide nutrition information on many foods and prohibits them from making scientifically unsubstantiated health claims.

Nutrition Labeling and Education Act (NLEA)

A federal statute that requires food manufacturers to disclose on food labels nutritional information about the food.

The NLEA applies to packaged foods and other foods regulated by the Food and Drug Administration. The law requires food labels to disclose the number of calories derived from fat and the amount of dietary fiber, saturated fat, trans fat, cholesterol, and a variety of other substances contained in the food. The law also requires the disclosure of uniform information about serving sizes and nutrients, and it establishes standard definitions for light (or lite), low fat, fat free, cholesterol free, lean, natural, organic, and other terms routinely bandied about by food processors.

The Department of Agriculture adopted consistent labeling requirements for the meat and poultry products it regulates. Nutrition labeling for raw fruits and vegetables and raw seafood is voluntary. Many sellers of these products provide point-of-purchase nutrition information.

The following ethics feature discusses food labeling at restaurants.

Ethics Restaurants Required to Disclose Calories of Food Items

Did you know that a Big Mac contains 540 calories, a Domino’s medium pepperoni pizza 1,660 calories, a hot fudge with Snickers sundae from Baskin-Robbins 1,000 calories, a blueberry muffin from Starbucks 450 calories, and a medium-size bucket of buttered popcorn at the movie theater approximately 1,000 calories? Well, you will now.

Section 4205 of the Patient Protection and Affordable Health Care Act of 2010 requires restaurants and retail food establishments with 20 or more locations to disclose calorie counts of their food items and supply information on how many calories a healthy person should eat in a day. The disclosures are required to be made on menus and menu boards, including drive-through menu boards. The law also applies to vending machine operators with 20 or more vending machines. The law is administered by the U.S. Food and Drug Administration, a federal government agency that is empowered to adopt rules and regulations to enforce the law.

Ethics Questions 

1. Why was this federal law enacted? Do you think that the required disclosures will change consumer habits?

The following feature discusses an important issue regarding food processing and safety.

Global Law United Nations Biosafety Protocol for Genetically Altered Foods

United Nations, New York City

In many countries, the food is not genetically altered. However, many food processors in the United States and elsewhere around the world genetically modify some foods by adding genes from other organisms to help crops grow faster or ward off pests. Although the companies insist that genetically altered foods are safe, consumers and many countries began to demand that such foods be clearly labeled so that buyers could decide for themselves.

More than 165 countries, including the United States, have agreed to the United Nations Biosafety Protocol for Genetically Altered Foods (Biosafety Protocol) . The countries agreed that all genetically engineered foods would be clearly labeled with the phrase “May contain living modified organisms.” This allows consumers to decide whether to purchase such altered food products. The protocol permits countries to ban imports of genetically altered foods if they decide that there is not enough scientific evidence to ensure the product’s safety.

United Nations Biosafety Protocol for Genetically Altered Goods (Biosafety Protocol)

A United Nations–sponsored protocol that requires signatory countries to place the label “May contain living modified organisms” on all genetically engineered foods.

Regulation of Drugs

The FDCA gives the FDA the authority to regulate the testing, manufacture, distribution, and sale of drugs. The Drug Amendment to the FDCA , 3 enacted in 1962, gives the FDA broad powers to license new drugs in the United States. After a new drug application is filed, the FDA holds a hearing and investigates the merits of the application. This process can take many years. The FDA may withdraw approval of any previously licensed drug.

This law requires all users of prescription and nonprescription drugs to receive proper directions for use (including the method and duration of use) and adequate warnings about any related side effects. The manufacture, distribution, or sale of adulterated or misbranded drugs is prohibited.

Drug Amendment to the FDCA

A federal law that gives the FDA broad powers to license new drugs in the United States.

Regulation of Cosmetics

The FDA’s definition of cosmetics includes substances and preparations for cleansing, altering the appearance of, and promoting the attractiveness of a person. Eye shadow and other facial makeup products are examples of cosmetics subject to FDA regulation. Ordinary household soap is expressly exempted from this definition.

The FDA has issued regulations that require cosmetics to be labeled, to disclose ingredients, and to contain warnings if they are carcinogenic (i.e., cancer causing) or otherwise dangerous to a person’s health. The manufacture, distribution, or sale of adulterated or misbranded cosmetics is prohibited. The FDA may remove from commerce any cosmetics that contain unsubstantiated claims of preserving youth, increasing virility, growing hair, and so on.

Regulation of Medicinal Devices

In 1976, Congress enacted the Medicinal Device Amendment 4 to the FDCA. This amendment gives the FDA authority to regulate medicinal devices such as heart pacemakers; kidney dialysis machines; defibrillators; surgical equipment; and other diagnostic, therapeutic, and health devices. The mislabeling of such devices is prohibited. The FDA is empowered to remove “quack” devices from the market.

Product and Automobile Safety

In 1972, Congress enacted the Consumer Product Safety Act (CPSA) 5 and created the Consumer Product Safety Commission (CPSC) . The CPSC is an independent federal administrative agency empowered to (1) adopt rules and regulations to interpret and enforce the CPSA, (2) conduct research on the safety of consumer products, and (3) collect data regarding injuries caused by consumer products.

Consumer Product Safety Act (CPSA)

A federal statute that regulates potentially dangerous consumer products and that created the Consumer Product Safety Commission.

Consumer Product Safety Commission (CPSC)

A federal administrative agency empowered to adopt rules and regulations to interpret and enforce the Consumer Product Safety Act.

Health Care Reform Act

A federal statute that increases the number of persons who have health care insurance in the United States and provides new protections for insured persons from abusive practices of insurance companies.

WEB EXERCISE

Visit the website of the Food and Drug Administration, at www.fda.gov . Click on “Cosmetics.” Then click on “Quiz Yourself: How Smart Are You About Cosmetics?” Take the quiz.

Because the CPSC regulates potentially dangerous consumer products, it issues product safety standards for consumer products that pose unreasonable risk of injury. If a consumer product is found to be imminently hazardous—that is, if its use causes an unreasonable risk of death or serious injury or illness—the manufacturer can be required to recall, repair, or replace the product or take other corrective action. Alternatively, the CPSC can seek injunctions, bring actions to seize hazardous consumer products, seek civil penalties for intentional violations of the act or of CPSC rules, and seek criminal penalties for knowing and willful violations of the act or of CPSC rules. A private party can sue for an injunction to prevent violations of the act or of CPSC rules and regulations.

Certain consumer products, including motor vehicles, boats, aircraft, and firearms, are regulated by other government agencies.

Medical and Health Care Protection

Many employees and their dependents are covered by health insurance that is provided by their employers. This makes up a large proportion of the persons who are covered by health insurance. Under these insurance programs, the employer may pay all of the health insurance premiums or part of the insurance premiums. If the employer pays part of the insurance premium, the employee pays the remainder. This insurance covers medical bills, hospital costs, doctors’ fees, the cost of medicine, and other medical costs. However, many small employers do not provide health care insurance for their employees. In 2010, more than 55 million people in the United States were still left without health insurance.

The following feature discusses the landmark Health Care Reform Act, a federal statute that was enacted by the U.S. Congress and signed by the president in 2010.

Landmark Law Health Care Reform Act of 2010

After much public debate, in 2010, Congress enacted the Patient Protection and Affordable Care Act (PPACA) . 6 This act was immediately amended by the Health Care and Education Reconciliation Act . 7 The amended act is commonly referred to as the Health Care Reform Act . The goal of this act was to increase the number of persons who have health care insurance in the United States.

The 2010 Health Care Reform Act mandates that most U.S. citizens and legal residents purchase “minimal essential” health care insurance coverage. This can be done through an employer if a person is employed. However, if an employer does not offer health insurance, or if a person does not work, then the person can purchase health insurance from new insurance marketplaces called exchanges. Persons who do not obtain coverage are required to pay a tax penalty to the federal government.

Pursuant to the act, the federal government subsidizes health care premiums for individuals with income up to 400 percent of the poverty line. The act also creates a tax credit for small-business employers for contributions made to purchase health insurance for employees.

The Health Care Reform Act covers more than 30 million people who were not previously covered by health insurance. The new health care program is funded through a number of taxes, assessment of fees, and cuts in government spending for existing health care programs. The Health Care Reform Act provides a number of new protections for insured persons. These protections do the following:

· Prevent insurance companies from denying health care insurance to individuals with preexisting health conditions

· Prohibit health insurance companies from terminating health insurance coverage when a person gets sick

· Prohibit insurers from establishing an annual spending cap for payment of benefits

· Prohibit insurers from imposing lifetime limits on the payment of benefits

· Require health plans that provide dependent coverage to continue coverage for a dependent child until the child turns 26 years of age

In 2012, the U.S. Supreme Court held that the mandate that requires persons to purchase insurance or pay a fine is lawful under the Taxing Clause of the U.S. Constitution. National Federation of Independent Business v. Sebelius, Secretary of Health and Human Services, 132 S.Ct. 2566, 2012 U.S. Lexis 4876 (Supreme Court of the United States, 2012)

WEB EXERCISE

Go to the website of the Federal Trade Commission, at www.ftc.gov . Click on “Consumer Protection” and then read “Today’s Tip.”

Unfair and Deceptive Practices

The Federal Trade Commission Act (FTC Act) was enacted in 1914. 8 The Federal Trade Commission (FTC) was created the following year to enforce the FTC Act as well as other federal consumer protection statutes.

Federal Trade Commission (FTC)

A federal administrative agency empowered to enforce the Federal Trade Commission Act and other federal consumer protection statutes.

Section 5 of the FTC Act , as amended, prohibits unfair and deceptive practices . It has been used extensively to regulate business conduct. This section gives the FTC the authority to bring an administrative proceeding to attack a deceptive or unfair practice. If, after a public administrative hearing, the FTC finds a violation of Section 5, it may issue a cease-and-desist order, an affirmative disclosure to consumers, corrective advertising, or the like. The FTC may sue in state or federal court to obtain compensation on behalf of consumers. A decision of the FTC may be appealed to federal court.

Section 5 of the FTC Act

A provision in the FTC Act that prohibits unfair and deceptive practices.

False and Deceptive Advertising

Advertising is false and deceptive advertising under Section 5 of the FTC Act if it (1) contains misinformation or omits important information that is likely to mislead a “reasonable consumer” or (2) makes an unsubstantiated claim (e.g., “This product is 33 percent better than our competitor’s”). Proof of actual deception is not required. Statements of opinion and sales talk (e.g., “This is a great car”) do not constitute false and deceptive advertising.

Example

Kentucky Fried Chicken entered into an agreement with the FTC whereby KFC withdrew television commercials in which it claimed that its “fried chicken can, in fact, be part of a healthy diet.”

Section 5 of the FTC Act can be used to prohibit unfair and deceptive business practices. The following feature discusses an important law that was passed to protect consumers from unwanted telemarketing phone calls.

Contemporary Environment Do-Not-Call Registry

“The Do-Not-Call Registry lets consumers avoid unwanted sales pitches that invade the home via telephone.”

—Ebel, Cicuit Judge

In 2003, Congress enacted the Do-Not-Call Implementation Act , 9 which required the Federal Trade Commission (FTC) to create and administer the National Do-Not-Call Registry . Consumers can place their telephone numbers on this registry and free themselves from most unsolicited telemarketing and commercial telephone calls. Both wire-connected phones and wireless phones such as cell phones can be registered. The registry applies only to residential phones and not to business phones. The FTC can remove telephone numbers that have been disconnected and reassigned.

Do-Not-Call Registry

A register created by federal law where consumers can add their phone numbers and free themselves from most unsolicited telemarketing and commercial telephone calls.

When a person registers her or his phone, it is recorded in the Do-Not-Call Registry the next day. Telemarketers and other businesses then have 31 days to remove the customer’s phone number from their sales call list and cease calling the number. Registration of a telephone on the Do-Not-Call Registry is permanent. More than 70 percent of Americans have registered on the Do-Not-Call Registry.

Charitable organizations, political organizations, parties conducting surveys, and creditors and collection agencies are exempt from the registry. Also, an “established business relationship” exception allows businesses to call a customer for 18 months after they sell or lease goods or services to that person or conduct a financial transaction with that person. The Do-Not-Call Registry allows consumers to designate specific companies not to call them, including those that otherwise qualify for the established business relationship exemption.

The Do-Not-Call Registry has been found constitutional as a valid restriction on commercial speech. The court stated, “The Do-Not-Call Registry lets consumers avoid unwanted sales pitches that invade the home via telephone.” Mainstream Marketing Services, Inc. v. Federal Trade Commission, 358 F.3d 1228, 2004 U.S. App. Lexis t2564 (United States Court of Appeals for the Tenth Circuit)

Consumer Financial Protection

In many consumer credit transactions, the lender is an institution or party that has greater leverage than the borrower. In the past, this sometimes led to lenders taking advantage of debtors. To rectify this problem, the federal government has enacted many consumer financial protection statutes that protect debtors from abusive, deceptive, and unfair credit practices. Many of these consumer financial protection laws are discussed in the following paragraphs.

Contemporary Environment Consumer Financial Protection Bureau

In 2010, Congress created a new federal government agency called the Consumer Financial Protection Bureau (CFPB) . The bureau has authority to supervise all participants in the consumer finance and mortgage area including depository institutions such as commercial and savings banks and nondepository parties such as insurance companies, mortgage brokers, credit-counseling firms, debt collectors, and debt buyers. The bureau provides uniform model forms that covered parties can use to make required disclosures.

The bureau has authority to prohibit unfair, deceptive, or abusive acts or practices regarding consumer financial products and services. The bureau is a watchdog over credit cards, debit cards, mortgages, payday loans, and other consumer financial products and services. The automobile industry is exempt from bureau supervision and is subject to oversight by the Federal trade Commission (FTC).

The bureau has authority to enforce federal consumer financial protection laws. The bureau is authorized to adopt rules to interpret and enforce the provisions of the acts it administers. The bureau has investigative and subpoena powers and may refer matters to the U.S. Attorney General for criminal prosecution.

Truth-in-Lending Act

The Truth-in-Lending Act (TILA) 10 is one of the first federal consumer protection statutes enacted by Congress. The TILA, as amended, requires creditors to make certain disclosures to debtors in consumer transactions (e.g., retail installment sales, automobile loans) and real estate loans on the debtor’s principal dwelling. The TILA covers only creditors that regularly (1) extend credit for goods or services to consumers or (2) arrange such credit in the ordinary course of their business. Consumer credit is defined as credit extended to natural persons for personal, family, or household purposes.

WEB EXERCISE

Go to www.donotcall.gov to see how to register your telephone number in the Do-Not-Call Registry.

Consumer Financial Protection Bureau (CFPB)

A federal administrative agency that is responsible for enforcing federal consumer financial protection statutes.

Truth-in-Lending Act (TILA)

A federal statute that requires creditors to make certain disclosures to debtors in consumer transactions and real estate loans on the debtor’s principal dwelling.

Regulation Z

Regulation Z , an administrative agency regulation, sets forth detailed rules for compliance with the TILA. 11 The TILA and Regulation Z require the creditor to disclose the following information to the consumer-debtor:

Regulation Z

A regulation that sets forth detailed rules for compliance with the TILA.

· Cash price of the product or service

· Down payment and trade-in allowance

· Unpaid cash price

· Finance charge, including interest, points, and other fees paid for the extension of credit

· Annual percentage rate (APR) of the finance charges

· Charges not included in the finance charge (such as appraisal fees)

· Total dollar amount financed

· Date the finance charge begins to accrue

· Number, amounts, and due dates of payments

· Description of any security interest

· Penalties to be assessed for delinquent payments and late charges