Consumer Transactions Outline

Consumer Transactions- Fall 2013

Professor Prince

I. COMMON LAW APPROACH TO FRAUD:

a. EXPRESS MISREPRESENTATION BY SELLERS

i. ACTUAL FRAUD [deceit]

1. ELEMENTS

a. (1) false representation of material fact

i. must be one of fact rather than opinion

1. opinion = statement which either indicates some doubt as to the speaker’s belief in the existence of a state of facts or when the speaker merely expresses his judgment connected w/the facts, such as quality, value, authenticity

ii. A material fact is that which a reasonable man would attach importance to

1.

b. (2) knowledge of falsity or ignorance of the truth

i. including lacking sufficient information to make such a claim

c. (3) intent by seller to cause the buyer to act in reliance on advertisement

d. (4) justifiable or reasonable reliance by buyer

i. look at individual characteristics of buyer such as:

1. educational background, sophistication, level of bargaining power

ii. standard is always that of a reasonable person.

iii. reliance may be inferred from the circumstances of the case

e. (5) damages caused by buyers reliance

ii. EXPRESS WARRANTY:

1. Elements:

a. There’s an express warranty that goods will conform to the representation made if:

i. As part of the basis of the bargain

1. Seller makes affirmation of fact/promise to the buyer

a. Which relates to the goods

ii. OR there is a description of the goods

iii. OR there is a sample or mode of the goods

1. Sample: unit drawn from the bulk of goods which is the subject matter of the sale

2. Model: a unit offered for inspection when subject matter not at hand, NOT drawn from the bulk of goods

2. Don’t have to say words like “warranty or guarantee”

3. Don’t have to intend to make warranty

4. Puffing does not create warranty

5. Buyer doesn’t have to rely on express warranty

b. FAILURE TO DISCLOSE OF FRAUD BY OMISSION

i. Duty to Disclose: Latent Facts

1. Sellers have a duty to disclose facts materially affecting the value of the property, which are not readily observable [i.e. latent facts] and not known to the buyer.

ii. Exception – Caveat Emptor

1. The defect must be open to observation or discoverable upon reasonable inspection

2. The purchaser must have unimpeded opportunity to examine property

3. The vendor may not engage in fraud [i.e. cannot actively conceal]

iii. Concealment:

1. Active Concealment: when seller actively conceals a defect, there will be fraud

c. ECONOMIC LOSS RULE

i. Tort: You must have some sort of physical injury or property damage to get a tort remedy; otherwise you’ll just get contractual remedies

d. ALTERNATIVES TO COMMON LAW FRAUD

i.

II. THE STATUTORY APPROACH – THE FTC

a. Jurisdiction over all US entities except banks, savings and loan institutions, federal credit unions, common carriers and nonprofits [§46(a)

b. Statutory Mandate [§45]:

i. Unfair methods of competition in or affecting commerce, and

ii. Unfair or deception acts or practices in or affecting commerce, are herby declared unlawful

c. DECEPTIVE ACTS OR PRACTICES

i. (3) Elements:

1. There is a representation, omission, or practice that

2. Is likely to mislead consumers acting reasonably under the circumstances; and

3. The representation, omission or practice is material.

4. NOTES:

a. Has a tendency or capacity to mislead

i. Actual deception is not needed to find likely to mislead.

ii. Good faith and good intentions of the actor are irrelevant factors in determining whether the deception standard has been violated.

b. Material:

i. Information that is important to consumers

ii. Likely to affect their choice or conduct regarding a product

ii. Types of Unfair & Deceptive Advertising claim:

1. False/Misleading advertisement:

a. Dissemination of any false advertisement likely to induce the purchase of food, drugs, devices or cosmetics [§12]

2. False Advertising: an advertisement which is misleading in a material respect

3. Advertising need not be literally false in order to fall within the proscription of the act

a. Advertisements as a whole may be completely misleading although every sentence separately considered is literally true.

b. 2 methods of employing a true statement as to convey a false impression:

i. Half-Truth- the statement is removed from the context and the nondisclosure of its context renders the statement misleading

ii. Ambiguity- where the statement in context has 2 or more commonly understood meanings, one of which is deceptive.

iii. Analysis of False Advertising Claim:

1. (1) What type of claim is being made:

a. Three types of Advertising claims: [Advertising Substantiation Rules]

i. Superiority Claim

1. The product is superior without claiming that superiority has been scientifically established

2. Level of Substantiation: A reasonable basis is needed for making the claim

ii. Puffing Claim

1. Vague or highly subjective advertisement

2. No substantiation needed

iii. Scientific (Establishment Claims)

1. That a products superiority has been scientifically established

2. If an advertisement claims that a product is “scientifically proven” to be better, stronger, faster, than other, it must have two well-controlled clinical studies behind the assertion

2. (2) Are claims false or likely to mislead

3. (3) are those claims material to prospective consumers:

4. Interpreting the Meaning of the Advertisements:

5. STANDARD FOR REVIEW: overall net impression of an ad and engages in a three-part inquiry:

a. The FTC will consider the “net impression” of the ad, including visual elements, implied claims and omissions, based on the FTC’s own internal expertise.

b. Courts are very deferential to FTC as to what is deceptive

c. FTC will not pursue advertising that involves obviously exaggerated claims that the ordinary consumer will not take seriously and will be remedied through market forces (Puffing)

6. Express v. Implied Claims of Deception

a. When the advertisement contains an express claim, the representation itself establishes its meaning

b. Wh