Business 105 Consumer Protection BUS 105 Power Points

Business 105 Consumer Protection BUS 105 Power. Points by Rick Manzano is licensed under CC-BY 4. 0

Introduction • All statutes, agency rules and common laws that protect the interests of consumers are classified as consumer law. • Today, federal and state laws govern consumer law. • This focus is on federal law.

§ 1: Deceptive Advertising • Advertising is deceptive if a consumer would be misled by the advertising claims. • Puffing: Vague generalities and obvious exaggerations are permissible and not considered deceptive. • Bait and Switch: The advertising of a product at an attractively low price to lure customers in to buy more expensive items.

FTC Actions Against Deceptive Advertising • The FTC, charged with enforcing federal laws against deceptive advertising, can, in appropriate circumstances: – Issue cease and desist orders. • With respect to a particular product or advertisement • With regard to multiple product orders. – Impose counteradvertising.

Telemarketing • Telemarketing and Electronic Advertising: The Telephone Consumer Protection Act (TCPA) prohibits automated solicitation using automatic telephone dialing system or a prerecorded voice.

§ 2: Labeling and Packaging Laws • Labeling must be accurate, and must use words that are easily understood by the ordinary consumer. • Product labeling and packaging are regulated by: – Wool Products Labeling Act of 1939. – Fur Products Labeling Act of 1951. – Flammable Fabrics Act of 1953. – Fair Packaging and Labeling Act of 1966. – Smokeless Tobacco Health Education Act of 1986. – Nutrition Labeling and Education Act of of 1990.

§ 3: Sales • Forms of Sales: – Door-to-Door Sales. – Mail Order Sales. – Telephone and Mail-Order Sales. – Unsolicited Receipt of Merchandise.

Door-to-Door Sales • Most states requires that, for door-todoor sales, consumers have a post-sale “cooling-off” period during which they cancel their purchase without obligation. • Consumers are given the most favorable benefits of the FTC rule and their own state statutes.

Telephone and Mail-Order Sales • Telephone and mail order sellers can be subject to federal mail and wire fraud statutes. • FTC requires mail and telephone merchants to ship orders within the time promised in their catalogues and advertisements, to notify consumers when orders cannot be shipped on time, and to issue timely refunds when orders cannot be shipped. • The Postal Reorganization Act of 1970 provides that unsolicited merchandise sent by U. S. mail may be retained, used, discarded, or disposed of in any manner deemed appropriate, without the recipient’s incurring any obligation to the sender.

Online Sales • Federal trade commission is enforcing actions against internet marketing scams. • Some states (e. g. , California) have enacted state law to enforce fraudulent online marketing and sales practices.

§ 4: Credit Protection • Consumer Credit is protected by: – Truth in Lending Act: Protects credit card holders. – Equal Credit Opportunity Act. – Fair Credit Reporting Act.

Credit Protection • Fair Debt Collection Practices Act. Curb abuses by collection agencies. Creditors cannot: – Contact debtors at work. – Contact debtors at odd hours. – Harass or intimidate debtor. – Contact the debtor after debtor informs the creditor the debtor is refusing to pay the debt.

Garnishment of Wages • Legal procedure by which a creditor may collect on a debt by directly attaching, or seizing, a portion of the debtor’s assets (such as wages that are in the possession of a third party. • Debtor is entitled to notice and an opportunity to be heard in a process of garnishment. • Wages cannot be garnished beyond 25% of the debtor’s after-tax earnings up to a maximum amount designed to leave the debtor a specified minimum income.

§ 5: Consumer Health and Safety • Federal Food, Drug, and Cosmetic Act. – This statute protects consumers against adulterated and misbranded foods and drugs. • Consumer Product Safety Act. – This act created the Consumer Product Safety Commission which has broad regulatory authority over the safety of consumer products.

§ 6: State Consumer Protection Laws • UCC provides some protection. • Magnuson-Moss Warranty Act. • Uniform Consumer Credit Code (not adopted in many states). • State “deceptive trade practice” acts.

Chapter 24 Environmental Law

Introduction • Concern over protecting the environment has prompted laws that regulate the use of property to protect natural resources and endangered species. • Compliance with environmental law can be very expensive. • The principal sources of environmental law are: – Common Law Actions. – State and Local Regulation. – Federal Regulation.

§ 1: Common Law Actions • Nuisance. – Person liable if they use their property in a manner that unreasonably interferes with others’ rights to use or enjoy their own property. • Negligence and Strict Liability. – Business or person alleged failure to use reasonable care toward a party whose injury was foreseeable and, or course, caused by the lack of reasonable care.

§ 2: Federal, State and Local Regulation • States regulate the degree to which the environment may be polluted. • City, county, and other local governments control some aspects of the environment. – Local zoning laws. – Methods of waste and garbage removal. – Location and conditions of parks, streets and other public areas.

Federal Regulation • Federal environmental policy is achieved through: – Environmental Protection Agency (EPA). – Department of the Interior. – Regulatory agencies must take environmental factors into consideration when making significant decisions.

Federal Regulation • National Environmental Policy Act (NEPA). – Does not directly deal with pollution control. – Require preparation of an environmental impact statement (EIS) when major federal action in the environment is to be undertaken. • Media Specific Pollution Control Legislation.

Environmental Impact Statement • An EIS must analyze: – The impact of the proposed action on the environment. – Any adverse effects of the action and alternatives to the action. – Any irreversible effects the action might generate.

§ 3: Air Pollution • Clean Air Act. – This act provides the basis for issuing regulations to control pollution coming primarily from mobile sources and stationary sources. – Violations: up to $25, 000 per day. Persons who provide information about violators may be paid up to $10, 000. Willful violation carry criminal penalties and fines.

§ 4: Water Pollution • Clean Water Act goals: safe swimming, protection of fish and wildlife; and elimination of the discharge of pollutants into waterways. • Pollution control is largely achieved through the use of the best available control technology. • Wetlands: permit from Army Corps of Engineers • Drinking Water (Safe Drinking Water Act). • Ocean Dumping Act.

§ 5: Toxic Chemicals • Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA). – Regulates the use of pest control chemicals in the process of food growth to food packaging, to minimize their presence in foods consumed. • Toxic Substances Control Act. – Requires anyone planning to use chemicals first determine their effect on human health and the environment. – Require special labeling, limit the use of substance, set production quotas, or prohibit the use of a substance altogether.

§ 6: Hazardous Wastes • Resource Conservation and Recovery Act. – Authorizes the EPA to issue regulations for the monitoring, transporting, storage, treatment, and disposal of hazardous substances.

Superfund • CERCLA. – Designed to ensure the clean-up of hazardous waste sites and to assign liability for the costs of the cleanup operations. – Liability for cleanup costs can be assigned to any potentially responsible party (PRP)

Antitrust and Monopoly Investor Protection 28

Introduction • Generally, the law encourages innovation and competition among businesses to develop and sell more appealing products to consumers. • The law regulates conduct that leads to or tends to produce monopoly power or conduct that is a restraint of trade.

§ 1: Market Power • “Market power” is the power of company to control the market for its product. • The law does allow for market monopolies when a patent is issued. During the “monopoly” the patent owner is protected from competition in the market to manufacture and sell its patented product or service.

Goals of Antitrust Law • Market power per se is not “bad. ” • What is bad or illegal is how the market power is acquired and what firms do once they have that power. • Antitrust laws regulate the market power of companies to promote competition.

Restraint of Trade • Restraint of trade is any agreement between firms that has the effect of reducing competition in the marketplace.

§ 6: U. S. Antitrust Laws in a Global Context • Foreign “persons” may sue U. S. companies for antitrust violations in U. S. courts, even if the violations occur outside of the U. S. . • These violations occur in the export, trade or commerce with foreign nations.

§ 8: Monopolies • Section 2 of the Sherman Antitrust Act deals with: – Monopolization or attempts to monopolize; and – Predatory pricing which is an attempt by a firm to drive its competitor from the market by selling its product at prices substantially below the normal costs of production.

Monopolization • Monopolization in violation of the Sherman Act requires two elements: – The possession of monopoly power; and – The willful acquisition and maintenance of the power. – The U. S. Supreme Court has defined monopolization as “the power to control prices or exclude competition. ”

Monopoly Power • Exists when one firm has sufficient market power to control prices and exclude competition.

Anticompetitive Behavior • Anticompetitive behavior must be “willful acquisition of power. ” • Anticompetitive intent to monopolize is difficult to prove. • Intent may be inferred from evidence that the firm had monopoly power and engaged in anticompetitive behavior.

Predatory Pricing • Predatory Pricing is the sale of products below cost. – Remember Microsoft giving away its browser? • Predatory pricing is condemned because ultimately it leads to monopoly by driving competitors out of business.

Overview • Federal antitrust legislation is directed towards anticompetitive agreements between rival firms, involving, e. g. , price fixing, restriction of output and division of markets.

§ 2: Horizontal Restraints • Horizontal restraints are agreements among Sellers (or Buyers) that restrain competition between rival firms competing in the same market. Seller Buyer

§ 3: Vertical Restraints Vertical restraints are per se anticompetitive agreements imposed by Sellers upon Buyers (or vice versa) that may include affiliates in the entire supply chain of production. Seller Buyer

Refusals to Deal • Generally, firms have freedom to contract which allows them to refuse to deal with other firms. • Refusals to deal violate antitrust laws when: – The firm refusing to deal has, or is likely to acquire, monopoly power; and – The refusal is likely to have an anticompetitive effect on a particular market.

Price Discrimination • Whenever a Seller charges different Buyers different prices for the same goods. • This is a per se violation when it injures competition. – What about “negligible” differences such as labeling or branding that result in customer preferences? – What about time and cost considerations?

Exclusionary Practices • Exclusive-Dealing contracts: Seller forbids the Buyer from purchasing products from the Seller’s competitors. • Tying Arrangements: Seller conditions the sale of a product on the Buyer’s agreeing to purchase another product produced or distributed by the same Seller.

Mergers • Horizontal Mergers are mergers between firms that compete with each other in the same market. • Vertical Mergers occur when a company at one stage of production acquires a company at a higher or lower stage of production. • Crucial consideration in mergers is the market concentration after the merger.

Investor Protection

§ 1: The Securities and Exchange Commission • SEC is an independent federal agency created by the 1934 Act. • Responsibilities: administer the 1933 and 1934 Acts: – Make rules to implement the 1933 -34 Acts. – Investigate and enforce SEC laws against those who violate rules. – Adjudicates offenses with appeal into the court system.

§ 2: The Sarbanes-Oxley Act of 2002 • Attempts to increase corporate accountability: – Imposes stricter disclosures. – Harsher penalties for violations. – Requires CEO’s to take responsibility for accuracy of financial statements filed with SEC. – Creates new private civil actions. • Creates Public Company Accounting Oversight Board regulates public accounting firms.

The Sarbanes-Oxley Act of 2002 • Key Provisions: – Certification Requirements. – Loans to Officers and Directors. – Protections for Whistleblowers. – Enhanced Penalties. – Statute of Limitations for Securities Fraud.

§ 3: The Securities Act of 1933 • SEA of 1933 designed to prohibit fraud and require certain essential information so that investors can make informed business decisions. • In SEC v. Howey (1946), the U. S. Supreme Court held that a “security” exists in any transaction in which a person: (1) invests (2) in a common enterprise (3) reasonably expecting profits (4) derived primarily from others’ managerial or entrepreneurial efforts.

Registration Statement • If a security does not qualify for an exemption under § 5 of the Securities Act of 1933, the security must be registered with the SEC and state securities agencies before offered to the public. • Corporation must file a registration statement and prospectus with the SEC. Prospectus is later distributed to investors.

Defenses & Penalties • Defenses: Statement left out was not material; Plaintiff knew about fraud and purchased stock; Registrant believed statements were true. • Penalties: – Criminal: up to 5 years in prison and $10, 000 fine. – Civil: damages, refund of investment, injunction.

Insider Trading: Section 10(b) and Rule 10 b-5

Insider Trading: Section 10(b) and Rule 10 b-5 • Section 10(b) prohibits the use of any manipulative or deceptive device or contrivance in contravention of rules and regulations of SEC. • Rule 10 b(5) prohibits the commission of fraud in the connection with the purchase or sale of any security.

Insider Trading: Section 10(b) and Rule 10 b-5 • Section 10 b(5) “Insiders”. • Rule 10 b(5) “Outsiders”. – Tipper/Tippee theory--insider’s fiduciary duty must be breached – Misappropriation theory -- one wrongfully obtains inside info and trades on it. Courts still require fiduciary duty be breached, e. g. , to employer.

Violations of the 1934 Act • Scienter or intent is required to prove civil or criminal penalties under 10(b) and Rule 10 b-5. – Violator must have had intent to defraud (false statements or wrongfully failed to disclose material facts).

Violations of the 1934 Act • Criminal Penalties: – 10(b) and Rule 10 b-5, a person faces $5 million and 20 years in prison, $25 million for partnership or corporation. – Sarbanes-Oxley provides for 25 years in prison.

Violations of the 1934 Act • Civil Sanctions: – Both SEC and Private Parties Can Bring Actions Against Violators under the Insider Trading and Securities Fraud Enforcement Act. – Private Actions for violations of 10(b) and Rule 10 b-5.

§ 5: Regulation of Investment Companies • Act on behalf of many smaller shareholders by buying stock and professionally managing the “portfolio. ” (MUTUAL FUNDS. ) • To safeguard company assets, all securities must be held by a bank or stock exchange member. • No dividends paid except from undistributed net income.

§ 8: Online Securities Fraud • The SEC is aggressively prosecuting internet fraud using traditional laws. • Investment Scams. • Using Chat Rooms to Manipulate Stock Prices. – Pumping and Dumping.