How Consumer Protection Laws Affect Businesses
It's Important to Know Which Laws Apply to Your Business
A myriad of federal and state laws have been enacted to protect consumers from unfair, deceptive or fraudulent practices by businesses. Businesses that violate these laws may be subject to lawsuits or financial penalties. Thus, business owners must know which laws apply to their company and what they must do to comply with 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) while federal product safety laws are administered by the Consumer Product Safety Commission (CPSC).
Fair Trade Laws
The Federal Trade Commission was created to promote competition and to protect consumers from unfair, deceptive or fraudulent practices in the marketplace. The FTC develops policy, conducts investigations, and sues companies that violate the law.
The FTC responds to complaints filed by businesses and consumers regarding unfair, deceptive or fraudulent business practices.
Federal law prohibits advertising that is untruthful or misleads consumers. Here are some examples of acts that violate federal trade laws.
- A manufacturer of water filtration systems claims its products are "proudly designed and made in America ." In reality, all of the company's products are designed and manufactured in China.
- A charity solicits donations from consumers via robocalls, promising that all donations will help disabled veterans. The "charity" is a fraud that spends no money on veterans and its robocalls violate the TCPA.
- A baby food manufacturer claims its products are FDA-approved and that they prevent babies from developing allergies. The products are not FDA-approved and there is no evidence they prevent allergies.
The FTC investigates complaints of trade law violations. If it determines a law has been broken, it may issue a consent order asking the violator 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 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
Manufacturers of products sold to the public must follow rules and regulations created by the Consumer Product Safety Commission. The CPSC regulates all consumer products except those (such as guns and drugs) that are overseen by another agency. It establishes product safety requirements, issues recalls, evaluates product hazards, and bans products it deems dangerous.
If the CPSC determines a particular product poses a danger to the public, it sends a letter to the manufacturer explaining the violation and the corrective action required. The manufacturer may be required to notify the public of the danger, fix the product hazard, stop selling the product, recall the product, or any combination of these.
The CPSC has created a Small Business Ombudsman to help small business owners 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 statutes, called UDAP laws, are enforced by state attorneys general. An example of an UDAP law is an Unfair Claims Settlement Practices Act, which requires insurers to follow certain procedures when settling claims.
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 representative of loan consolidation company tells college students that the company is registered on the New York Stock Exchange, it is an expert in student loans, and that all fees charged will reduce loan balances. None of these statements is true.
- A contractor provides a homeowner his contractor's license number and details about his general liability and workers compensation policies. The information is false as the contractor has neither a license nor insurance.
- An employee of a car rental agency tells customers that an administrative fee is required by the state, the collision damage waiver is free of charge, and no taxes will be charged. All of these statements are false.
Most businesses that make products offer a warranty, which is a promise to buyers. A warranty 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 doesn't require manufacturers to provide a written warranty but if they choose to provide one, it must meet federal requirements. For instance, the warranty must clearly explain its scope (full or limited), be easy to understand, and be readily available when the product is purchased. Consumers may sue businesses that issue false or misleading warranties or that fail 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 the product is not defective and that it will do what it's supposed to do. For example, a hairdryer 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 Vac-U-Fur brand vacuum cleaner sold at pet shops should 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 an express or implied warranty.