How Consumer Protection Laws Affect Businesses
Businesses must comply with a myriad of federal and state consumer protection laws. These laws are designed to protect consumers from unfair, deceptive or fraudulent practices by businesses. Businesses that violate consumer protection laws may be subject to lawsuits, financial penalties, and negative publicity. Thus, business owners must understand which laws apply to their company and which agencies enforce them.
Federal Consumer Protection Laws
Many federal consumer protection laws were created to promote fair trade or product safety. Federal fair trade laws are enforced by the Federal Trade Commission (FTC). Federal product safety laws are enforced by the Consumer Product Safety Commission (CPSC).
Fair Trade Laws
The Federal Trade Commission's mission is to promote competition and protect consumers from unfair, deceptive or fraudulent practices in the marketplace. The FTC develops policy, conducts investigations, and sues companies that violate the law.
Federal law prohibits the use of advertising that is untruthful or misleading to consumers. Here are some examples of acts by businesses that violate federal trade laws.
- A furniture manufacturer claims that all of its products are "made in America ." Actually, the company performs no manufacturing or assembly in the U.S. as all of its products are made in China.
- A company sells online courses, promising that students who complete its program will receive an "official" high school diploma. The diploma is worthless as it does not meet the requirements of any state.
- A manufacturer of dietary supplements advertises a weight loss product, stating that the product has been proven effective by rigorous testing. In reality, the product has never been tested.
If the FTC receives a complaint that a company has violated a trade law, it will conduct an investigation. If it determines a law has been broken, it may issue a consent order asking the company to voluntarily stop the unlawful behavior. If the company refuses, the FTC may request a formal proceeding before an administrative law judge. If a judge agrees with the FTC that a law has been broken, he or she may issue a cease and desist order. A business that violates an FTC order may be subject to a penalty or served with an injunction.
Product Safety Laws
Businesses that manufacture products sold to the public must follow rules and regulations created by the Consumer Product Safety Commission (CPSC). The CPSC establishes product safety requirements, issues product recalls, assesses the safety of products, and bans products it deems hazardous. The agency regulates all consumer products except guns, drugs, and certain other items that are regulated by another agency.
If the CPSC determines that a particular product poses a danger to the public, it may issue an enforcement action. The product manufacturer will be required to notify the public of the danger and withdraw the product from the market. It may also be subject to a penalty.
CPSC safety requirements can be confusing to small business owners. Thus, the agency has created a Small Business Ombudsman to help small companies understand which safety regulations apply to them.
State Consumer Protection Laws
Virtually all states have enacted laws that prohibit unfair and deceptive practices by businesses against consumers. These laws are often referred to as UDAP laws and are enforced by state attorneys general. An example of a UDAP law is an Unfair Claims Settlement Practices Act, which protects insurance buyers from unjust behavior by insurers in the claim settlement process.
Many UPAD laws allow consumers to sue a business if they have purchased, leased or rented goods or services from that business and been injured due to an unfair or deceptive practice. Claimants may sue the business for compensatory damages and attorneys fees. A state-by-state summary of UDAP laws is available at the National Consumer Law Center's website.
Examples of Acts That Violate UDAP Acts
Here are examples of acts committed by businesses that may violate state UDAP acts.
- A used car dealership tells a customer that a vehicle on its lot has never been in an accident and is in pristine condition. In reality, the auto is a salvage vehicle with a rusted frame.
- A contractor provides a homeowner his contractor's license number and policy information for his general liability and workers compensation insurance. All of the numbers are fake as the contractor has neither a license nor insurance.
- An employee of a computer repair business tells a customer that all of the files on his laptop are infected with a virus. He convinces the customer to pay $150 for "super" anti-viral software. The computer repair employee knows that the customer's laptop does not have a virus.
Most businesses that make products offer a warranty to buyers. The warranty is essentially a promise. It explains what the manufacturer will do if the product is faulty. Warranties may be express (written or oral) or implied. Federal law governs written warranties while state laws govern implied warranties.
Federal law does not require manufacturers to provide a written warranty. However, if manufacturers choose to offer one, the warranty must meet federal requirements. First, the scope of the warranty (full or limited) must be explained clearly. In addition, the warranty must be easy to understand and readily available at the time the product is purchased. Businesses may be sued by consumers for issuing false or misleading warranties or for failing to fulfill their obligations under a warranty.
When a manufacturer sells a product to a consumer, it generally provides two implied warranties:
- Merchantability. The manufacturer warrants that product is not defective and that it will do what it's supposed to do. For example, a hair dryer will blow hot air.
- Fitness For Particular Purpose. The manufacturer warrants that the product is fit for the particular purpose for which it was sold. For example, a customer buys a Model X vacuum cleaner because the seller assures her that it will suck up dog hair.
A manufacturer may be sued by a product buyer for breach of an implied warranty. Many states impose a relatively short (four-year) statute of limitations on lawsuits based on breach of a warranty (whether express or implied).