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Consumer Protection
St. Johns University School of Law
Sovern, Jeffery

 
Consumer Protection Outline
Prof Sovern
Spring 2015
 
 
 
Introduction and Review of Common Law Fraud
 
Consumer Law
·         Landlord-Tenant
·         Credit
·         Product Liability
·         Deception and Abuses
 
Fraud
·         Common Law of Fraud (Deceit)
·         Federal Law
·         State Statutory Law
 
Product Liability Doctrines
·         Warranty (express and implied)
·         Negligence
·         Strict Liability
·         Recession based on mistake
 
What’s so great about fraud claims?
·         Punitive Damages
·         Compensatory Damages can be higher
·         More likely to generate a settlement
 
Fraud Elements
·         False Representation
·         Scienter (state of mind – knowingly, w/o belief in its truth or recklessly)
·         Made w/ the intention that it be acted on
·         Justifiable Reliance
·         …Plaintiff doesn’t know
·         Materiality (whether or not the statement matters)
·         Damages
 
Note 3 pg 25
·         Old common law rule was that opinions could not be the basis for a fraud claim
 
Fischer v Division West Chinchilla Ranch
·         Seller predicted that chinchilla pelts would sell for $20 to $40 and that chinchilla ranchers w/o any previous experience could expect $5,000 annual profit after 5 years
·         Seller liable because seller had a greater knowledge and buyers inexperienced
 
Problem 1-1 pg 26 Takeaways
·         Half Truth – not a cause for common law fraud
·         Can’t justifiably rely on statements an ordinary person would know are not true
 
Johnson v Davis pg 28
·         D’s knew the roof leaked but affirmatively represented to P’s that there was no problems w/ the roof
·         D’s fraudulent concealment of a material fact entitled the P’s to a return of their deposit
·         Full disclosure of all material facts must be made whenever elementary fair conduct demands it (ie house sale)
 
Layman v Binns pg 32
·         Recovery was barred by caveat emptor (let the buyer beware)
o   Viable rule of real estate sales
·         3 conditions: 1) the defect must be open to observation or discoverable on reasonable inspection 2) the purchaser must have an unimpeded opportunity to examine the property 3) the vendor may not engage in fraud
 
Stambovsky v Ackley pg 37 (New York Case)
·         Where a condition which has been created by the seller materially impairs the value of the contract and is peculiarly within the knowledge of the seller or unlikely to be discovered by a prudent purchaser exercising due care w/ respect to the sale, nondisclosure constitutes a basis for recession as a matter of equity
·         Even an express disclaimer (ex “as is”) will not be given effect where the facts are peculiarly within the knowledge of the party invoking it
 
Problem 1-2 pg 45 Takeaways
·         NY – if you don’t speak to something, it is not deceit (unusual)
·         Cts treat the act of concealing a defect as making a fraudulent statement
·         Absence of privity protects liability
 
Hanberry
·         “1 who endorses a product for his own economic gain, and for the purpose of encouraging and inducing the public to buy it, may be liable to a purchaser who, relying on the endorsement, buys the product and is injured because it is defective and not as represented in the endorsement.”
 
Hypo on who can sue
·         Ralph Nader was bumped from overbooked Allegheny flight though he had “confirmed reservation.”
·         Nader was on his way to speak at a CCAG rally
·         Nader recovered in fraud
·         Allegheny knew that someone had called to see if Nader had a confirmed reservation, but they didn’t know the caller was from CCAG or why he was calling
·         Ct rulled it was to remote that someone other than Nader could recover (CCAG)
 
Restatement 2nd of Torts
·         “Only people the speaker intends or has reason to act in reliance on the misrepresentation can recover.”
 
 
Problem 1-3 pg 45 Takeaways
·         NY would justify rescission
·         Most cts say that a disclaimer in a contract is not enough to overlook the fraud
 
Traditional Product Liability Theories
·         Deceit
·         Express Warranty : 2-313
·         Implied Warranty of Fitness for Particular Purpose: 2-315: “Where the seller at the time of contracting ahs reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller’s skill or judgment to select or furnish suitable goods, there is unless excluded or modified…an implied warranty that the goods shall be fit for such purpose.”
·         Implied Warranty of Merchantability: 2-314
·         Rescission based on Mistake
 
Vokes v Murray Supp pg 2
·         Dance School case, P had a valid cause of action
·         Multiple misrepresentations and known by D to be false
·         Take Away: common law gave consumers some options but they were limited
 
NY General Business Law Sec 394-b. Limitations on certain contracts for instruction or use of physical or social training facilities Supp pg 5
 
Federal Odometer Act – Selected Sections pgs 7-11
 
NY GBL Sec 392-e. Using false statements or altering mileage registering devices pgs 12-14
·         Disclosure Rule
 
Statutory Controls on Disclosure of Information
 
FTC Act
·         Prohibits deceptive and unfair practices
·         Central purpose of the provisions of the FTC Act are in effect to abolish the rule of caveat emptor
·         Consumer has the right to rely upon representations of facts as the truth
·         Consider the advertisement in the entirety
·         Ordinary purchaser is dumb
·         2 methods of employing a true statement to convey a false impression: 1) Half-truth 2) Ambiguity
·         Sec 45 Unfair methods of competition unlawful; prevention by Commission pg 3
o   (a) Declaration of unlawfulness; power to prohibit unfair practices; inapplicability to foreign trade
§  (1) Unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce, are hereby declared unlawful
·         Sec 52 Dissemination of false ad

a “reasonable basis” for all material claims made in their advertisements
Type of Claim
Substantiation
Most claims, the “default standard”
Reasonable basis, flexible standard
Claims of scientific establishment ex – “tests prove”, “studies show” especially for “cure” claims
2 well-controlled clinical studies, or “competent and reliable scientific evidence”
Limited Claims
Specific substantiation
Puffing
No substantiation
 
Sterling Drug Inc v FTC pg 67
·         3 distinct types of advertising claims: 1) establishment claims – suggest that a products superiority has been scientifically established 2) a representation that suggests the product is superior w/o claiming that superiority has been scientifically established 3) Puffing
 
Endorsements and Testimonials
·         Guides on this type of advertising, not force of law
·         Must have adequate substantiation
·         Endorsers may be liable for their statements
·         “any advertising message that consumers are likely to believe reflects the opinions, beliefs, findings, or experiences of a party other than the sponsoring advertiser must at least reflect the honest opinions, findings, beliefs or experience of the endorser.”
·         Must have disclosure of any unexpected material connection b/w the advertiser and endorser
 
 
FTC Unfairness Doctrine
·         Sec 45 “Unfair or Deceptive Conduct” pg 3
o   Criteria for determining whether a practice was unfair consisted of 3 prongs: 1) whether the practice, w/o necessarily having been previously considered unlawful, offends public policy as it has been established by statutes, the common law or otherwise – whether, in other words, it is within at least the penumbra of some common-law, statutory, or other established concept of unfairness 2) whether it is immoral, unethical, oppressive or unscrupulous 3) whether it causes substantial injury to consumers
 
In re International Harvester Company pg 82
·         An actionable consumer injury must be: 1) substantial 2) not outweighed by any off-setting consumer or competitive benefits that the practice produces 3) 1 which consumers could not reasonably have avoided
·         Can be unfair even though it is not deceptive
·         Unfairness has 3 criteria: 1) whether the practice creates a serious consumer injury 2) whether this injury exceeds any offsetting consumer benefits 3) whether the injury was 1 that consumers could not reasonably have avoided