Chapter 15 Consumer Protection McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.

Ch. 15: Key Learning Objectives Analyzing the reasons for consumer advocacy and the methods consumer organizations use to advance their interests Knowing the five major rights of consumers Assessing the ways in which government regulatory agencies protect consumers and what kinds of products are most likely to be regulated Determining how consumer privacy online can best be protected Examining how the courts protect consumers and efforts by businesses to change product liability laws Evaluating how socially responsible corporations can proactively respond to consumer needs 15-2

Advocacy for Consumer Interests As long as business has existed—consumers have tried to protect their interests when they go to the marketplace to buy goods and services Consumerism/consumer movement – the organized group activates collective efforts by consumers in many countries to safeguard their own rights Examples of U.S. advocacy organizations include Consumer Federation of America, National Consumers League, and the American Association for Retired People 15-3

Reasons for Consumer Movement Complex products have enormously complicated the choices consumers need to make when they go shopping Services, as well as products, have become more specialized and difficult to judge When businesses try to sell both products and services through advertising, claims may be inflated or they may appeal to emotions Technology has permitted businesses to learn more than ever about their customers—potentially violating their privacy Some businesses have ignored product safety 15-4

Rights of Consumers The right to be informed The right to safety Protection against misleading advertising, labeling; given the facts to make an informed purchasing decision The right to safety Protection against the marketing of good that are hazardous to health or life The right to choose Assurance of access to a variety of products and services at competitive prices The right to be heard Assurance that consumer interests will receive fair consideration in government policy and courts The right to privacy Assurance that information disclosed in a commercial transaction is not shared with others 15-5

How Government Protects Consumers Taken together the consumer protection laws are safeguards that reflect the goals of government policymakers and regulators in the context of the 5 rights of consumers The role of government protecting consumers is extensive in the United States as well as many other nations 15-6

Goals of Consumer Laws To provide consumers with better information when making purchases To protect consumers against possible hazards To promote competitive pricing To promote consumer choice To protect privacy. 15-7

Figure 15.2 Major Federal Consumer Protection Agencies and their Main Responsibilities 15-8

Consumer Privacy in the Digital Age Rapidly evolving information technologies in the early 21st century have given new urgency to the issue of consumer privacy New technologies have increasingly enabled businesses to collect and use vast amounts of personal data about their customers and potential customers The danger is not only that this information might rarely be used fraudulently, but also that its collection represents an unwarranted incursion into personal privacy 15-9

Consumer Protection in the Digital Age Dilemma: how to protect consumer privacy while fostering internet commerce Proposed solutions: Consumer self-help Internet users should use technologies that enable them to protect their own privacy Industry self-regulation Internet-related businesses advocate being allowed to regulate themselves Advantage is they have the best technology to do so, critics feel industry rules may be too weak Privacy legislation Favor new government regulations protecting consumer privacy online 15-10

Product Liability The legal responsibility of a firm for injuries caused by something it made or sold In U.S. and some other countries, consumers have right to sue and collect damages if harmed by unsafe products Consumer advocates and trial attorneys have supported these legal protections By contrast, some in the business community have argued courts and juries have unfairly favored plaintiffs and have called for reform 15-11

Product Liability Strict liability – doctrine under which the U.S. courts have held that manufacturers are responsible for injuries resulting from use of their products, whether or not they were negligent or breached a warranty Well-publicized case of McDonald’s and coffee spill where jury award was $2.9M: McDonald’s was held liable even though it provided warning and customer’s actions contributed to her burns Huge settlements, like the McDonald’s case, are the exception. Statistics show plaintiffs win about 34% of the cases filed for an average $201,000 award 15-12

Product Liability Product liability systems of other nations differ significantly from that of the United States In Europe, judges (rather than juries) hear cases, punitive damages are not allowed, and victims’ health expenses are not an issue as they are covered by national health insurance Historically, product liability cases have been exceedingly rare in China. But, that began to change in 2009, in the wake of China’s tainted-milk scandal 15-13

Product Liability Reform and Alternative Dispute Resolution In 2005, Congress passed the Class Action Fairness Act, the first significant product liability reform in many years. The two key elements of this legislation were: Most class-action lawsuits moved from state to federal courts Attorneys in some kinds of cases were paid based on how much plaintiffs actually received, or how much time the attorney spent on the case 15-14

Alternative Dispute Resolution One approach to settling disagreements between companies and consumers, other than going to court Can take the form of: Mediation: a voluntary process to settle disputes using a third party neutral Arbitration: the use of an impartial individual to hear and decide a case outside of the judicial system Proponents of ADR argue that it is a faster and less expensive way to resolve company-consumer disputes and does not tie up the judicial system with minor issues A controversial aspect of consumer ADR is the use of mandatory arbitration clauses 15-15

Positive Business Responses to Consumerism Managing for quality Quality management refers to refers to “all the measures an organization takes to assure quality” Taking steps at all stages of the production process to ensure consistently high quality has many benefits Managing for product and service quality is an attempt by business to address its customers’ needs Complex issue of what to do when business produces safe, high quality product but that is used by others in dangerous ways 15-16

Positive Business Responses to Consumerism Voluntary industry codes of conduct Businesses in some industries have banned together to agree on voluntary codes of conduct, spelling out how they will treat their customers Consumer affairs departments These centralized departments normally handle consumer inquiries and complaints about a company’s products and services, some have consumer hot lines or interactive web sites Product recalls Occurs when a company, either voluntarily or under an agreement with a government agency, takes back all items found to be dangerously defective 15-17