1. © 2005 West Legal Studies in Business A Division of Thomson Learning CHAPTER 13 Warranties, Product Liability and Consumer Law

2. © 2005 West Legal Studies in Business A Division of Thomson Learning 2 What factors determine whether a Seller’s statement constitutes an express warranty or mere “puffing”?What factors determine whether a Seller’s statement constitutes an express warranty or mere “puffing”? What implied warranties under the UCC?What implied warranties under the UCC? Can a manufacturer be held liable by a person injured by a manufacturer’s negligently made product?Can a manufacturer be held liable by a person injured by a manufacturer’s negligently made product? What defenses can be raised in a product liability lawsuit?What defenses can be raised in a product liability lawsuit? What are the major federal statutes providing for consumer protection?What are the major federal statutes providing for consumer protection? Learning Objectives

3. © 2005 West Legal Studies in Business A Division of Thomson Learning 3 Warranties Warranties of Title – automatic in most sales contracts:Warranties of Title – automatic in most sales contracts: –Good Title. –No Liens. –No Infringements. –Disclaimer of Title Warranty.

4. © 2005 West Legal Studies in Business A Division of Thomson Learning 4 Express Warranties Express Warranties Representations of fact about quality, condition, description or performance.Representations of fact about quality, condition, description or performance. Goods must conform to model or sample.Goods must conform to model or sample. –Henley v. Philip Morris, Inc. (2004). Warranty must be “Basis of the Bargain.”Warranty must be “Basis of the Bargain.” Statements of Opinion do not create express warranties.Statements of Opinion do not create express warranties.

5. © 2005 West Legal Studies in Business A Division of Thomson Learning 5 Implied Warranties UCC/Law derives from implication or inference of circumstances.UCC/Law derives from implication or inference of circumstances. Implied Warranty of Merchantability:Implied Warranty of Merchantability: –Merchantable Goods. –Merchantable Food. Webster v. Blue Ship Tea Room, Inc. (1964).Webster v. Blue Ship Tea Room, Inc. (1964). Implied Warranty of Fitness for a Particular Purpose.Implied Warranty of Fitness for a Particular Purpose.

6. © 2005 West Legal Studies in Business A Division of Thomson Learning 6 Warranty Disclaimers Express Warranty:Express Warranty: –Courts view unfavorably. –Must be conspicuous. –Buyer must be aware of disclaimer at time of sale. Implied Warranty of Fitness:Implied Warranty of Fitness: –“As Is” or “With All Faults”. Buyer’s Refusal to Inspect.Buyer’s Refusal to Inspect. Unconscionability.Unconscionability.

7. © 2005 West Legal Studies in Business A Division of Thomson Learning 7 Magnuson-Moss Warranty Act Federal law to prevent deception in warranties by making them easier to understand.Federal law to prevent deception in warranties by making them easier to understand. Enforced by Federal Trade Commission.Enforced by Federal Trade Commission. –Full Warranty (free repair/replacement). –Limited Warranty. –Implied Warranties arise under UCC -- not Magnuson-Moss.

8. © 2005 West Legal Studies in Business A Division of Thomson Learning 8 Negligence Product Liability Manufacturers, sellers and lessors of goods can be liable for a defective good that causes injury.Manufacturers, sellers and lessors of goods can be liable for a defective good that causes injury. Negligence:Negligence: –Due care in designing the product. –Selecting materials. –Production Process. –Assembly. –Adequate warning label for ordinary person. –Privity of Contract Not Required.

9. © 2005 West Legal Studies in Business A Division of Thomson Learning 9 Strict Product Liability Liability without regard to fault or standard of care.Liability without regard to fault or standard of care. Injured party can be 3 rd party (not the buyer).Injured party can be 3 rd party (not the buyer). Assumption that:Assumption that: –Consumers should be protected against unsafe products. –Manufacturers and distributors should not escape liability for defective products, and –Manufacturers and sellers are in a better position to bear the costs of injury.

10. © 2005 West Legal Studies in Business A Division of Thomson Learning 10 Requirements for Strict Liability Product must be in a defective condition when soldProduct must be in a defective condition when sold Defendant must be engaged in selling that productDefendant must be engaged in selling that product Product must be “unreasonably dangerous”: product is dangerous beyond ordinary expectation or less dangerous alternative not used.Product must be “unreasonably dangerous”: product is dangerous beyond ordinary expectation or less dangerous alternative not used. Plaintiff must incur injury to self or property by use or consumption of the productPlaintiff must incur injury to self or property by use or consumption of the product Defective condition must be causeDefective condition must be cause Goods have not be substantially changed from time of sale.Goods have not be substantially changed from time of sale.

11. © 2005 West Legal Studies in Business A Division of Thomson Learning 11 Product Defects: Restatement (Third) of Torts Manufacturing Defects.Manufacturing Defects. Design Defects.Design Defects. Warning Defects.Warning Defects. –Manufacturer must warn if foreseeable misuse will cause injury. –Factors: user groups, content of message.

12. © 2005 West Legal Studies in Business A Division of Thomson Learning 12 Strict Product Liability Market Share Liability.Market Share Liability. –Multiple Defendants involved are liable based on the share of the market. Other Applications.Other Applications. –All courts extend liability of manufacturers and other sellers to injured bystanders.

13. © 2005 West Legal Studies in Business A Division of Thomson Learning 13 Defenses to Product Liability Assumption of Risk.Assumption of Risk. Product Misuse.Product Misuse. –Severely limited. Comparative Negligence.Comparative Negligence. Commonly Known Dangers.Commonly Known Dangers. –Sharp knives and guns. –Pelman v. McDonald’s Corp. (2003). Knowledgeable User Defense.Knowledgeable User Defense.

14. © 2005 West Legal Studies in Business A Division of Thomson Learning 14 Consumer Protection Laws Areas of Consumer Law Regulated by Statutes:Areas of Consumer Law Regulated by Statutes: –Deceptive Advertising. –Labeling and Packaging. –Sales. –Credit Protections. –Consumer Health and Safety. –State Consumer Protection.

15. © 2005 West Legal Studies in Business A Division of Thomson Learning 15 Puffing.Puffing. –Vague generalities and obvious exaggerations are permissible and not considered deceptive. Bait and Switch.Bait and Switch. –The advertising of a product at an attractively low price to lure customers in to buy more expensive items. Online Deceptive Advertising.Online Deceptive Advertising. –Same rules apply. –To satisfy the “clear and conspicuous” requirement, disclosures must be close (only hyperlink if lengthy). Deceptive Advertising

16. © 2005 West Legal Studies in Business A Division of Thomson Learning 16 FTC Actions Against Deceptive Advertising The FTC, charged with enforcing federal laws against deceptive advertising, can, in appropriate circumstances:The FTC, charged with enforcing federal laws against deceptive advertising, can, in appropriate circumstances: –Issue cease and desist orders. With respect to a particular product or advertisement.With respect to a particular product or advertisement. With regard to multiple product orders.With regard to multiple product orders. –Impose counter-advertising.

17. © 2005 West Legal Studies in Business A Division of Thomson Learning 17 Telemarketing and Electronic Advertising The Telephone Consumer Protection Act (TCPA) prohibits automated solicitation using automatic telephone dialing system or a prerecorded voice.The Telephone Consumer Protection Act (TCPA) prohibits automated solicitation using automatic telephone dialing system or a prerecorded voice. Consumers have a private civil cause of action and can recover $500 for each violation of actual damages. Court can treble damages if willful violation.Consumers have a private civil cause of action and can recover $500 for each violation of actual damages. Court can treble damages if willful violation. Telemarketer must remove a consumer’s name from its list of potential contacts if requested.Telemarketer must remove a consumer’s name from its list of potential contacts if requested.

18. © 2005 West Legal Studies in Business A Division of Thomson Learning 18 Labeling must be accurate, and must use words that are easily understood by the ordinary consumer.Labeling must be accurate, and must use words that are easily understood by the ordinary consumer. Product labeling and packaging are regulated by:Product labeling and packaging are regulated by: –Wool Products Labeling Act of 1939. –Fur Products Labeling Act of 1951. –Flammable Fabrics Act of 1953. –Fair Packaging and Labeling Act of 1966. –Smokeless Tobacco Health Education Act of 1986. –Nutrition Labeling and Education Act of of 1990. Labeling and Packaging

19. © 2005 West Legal Studies in Business A Division of Thomson Learning 19 Sales Forms of Sales :Forms of Sales : –Door-to-Door Sales. –Mail Order Sales. –Telephone and Mail-Order Sales. –Unsolicited Receipt of Merchandise.

20. © 2005 West Legal Studies in Business A Division of Thomson Learning 20 Most states requires that, for door-to-door sales, consumers have a post-sale “cooling-off” period during which they can cancel their purchase without obligation.Most states requires that, for door-to-door sales, consumers have a post-sale “cooling-off” period during which they can cancel their purchase without obligation. Consumers are given the most favorable benefits of the FTC rule and their own state statutes.Consumers are given the most favorable benefits of the FTC rule and their own state statutes. Door-to-Door Sales

21. © 2005 West Legal Studies in Business A Division of Thomson Learning 21 Sellers can be subject to federal mail and wire fraud statutes.Sellers can be subject to federal mail and wire fraud statutes. FTC Rules require:FTC Rules require: –shipment orders within the time promised in their catalogues and advertisements, –to notify consumers when orders cannot be shipped on time, and –to issue timely refunds when orders cannot be shipped. The Postal Reorganization Act of 1970 provides that unsolicited merchandise sent by U.S. mail may be retained, used, discarded, or disposed of in any manner deemed appropriate, without the recipient’s incurring any obligation to the sender.The Postal Reorganization Act of 1970 provides that unsolicited merchandise sent by U.S. mail may be retained, used, discarded, or disposed of in any manner deemed appropriate, without the recipient’s incurring any obligation to the sender. Telephone and Mail Order Sales

22. © 2005 West Legal Studies in Business A Division of Thomson Learning 22 Health and Safety Protection Pure Food and Drugs Act (1906), then Federal Food, Drug and Cosmetic Act (1938).Pure Food and Drugs Act (1906), then Federal Food, Drug and Cosmetic Act (1938). Enforced by Food and Drug Administration.Enforced by Food and Drug Administration. Consumer Product Safety.Consumer Product Safety. –Consumer Product Safety Act 1972. –Consumer Product Safety Commission. –Notification by distributors.

23. © 2005 West Legal Studies in Business A Division of Thomson Learning 23 Credit Protection Consumer Credit is protected by:Consumer Credit is protected by: –Truth in Lending Act. –Fair Credit Reporting Act. –Fair Debt Collection Practices Act. –Wage Garnishment.

24. © 2005 West Legal Studies in Business A Division of Thomson Learning 24 TILA is basically a disclosure law. Requires all consumer lenders to compute the cost of a loan the same way and to advertise it as an Annual Percentage Rate (APR).TILA is basically a disclosure law. Requires all consumer lenders to compute the cost of a loan the same way and to advertise it as an Annual Percentage Rate (APR). Equal Credit Opportunity: requires that credit be extended without regard to race, sex, color, national origin, age, or marital status.Equal Credit Opportunity: requires that credit be extended without regard to race, sex, color, national origin, age, or marital status. Credit Card Rules: limits consumer liability for credit card debt in cases of stolen cards.Credit Card Rules: limits consumer liability for credit card debt in cases of stolen cards. Consumer Leasing Act: requires that leasors of consumer items valued at less than $25,000 make certain disclosures.Consumer Leasing Act: requires that leasors of consumer items valued at less than $25,000 make certain disclosures. Truth in Lending Act

25. © 2005 West Legal Studies in Business A Division of Thomson Learning 25 Fair Credit Reporting Act Limits the activities of credit reporting agencies.Limits the activities of credit reporting agencies. Consumers have the right to access information contained about them in a credit reporting agency’s files and to require credit reporting agencies to delete unverifiable information in a consumer’s credit record.Consumers have the right to access information contained about them in a credit reporting agency’s files and to require credit reporting agencies to delete unverifiable information in a consumer’s credit record.

26. © 2005 West Legal Studies in Business A Division of Thomson Learning 26 Fair Debt Collection Practices Act Prohibits Collection Agencies from the following:Prohibits Collection Agencies from the following: –Type, times, and places that debt collectors can contact debtors. –Contacting third parties about payments. –Using harassment or intimidation or employing false misleading information. –Contact debtor after notice of payment refusal. Requires that collectors provide validation notice to the debtor, at the time of first contact.Requires that collectors provide validation notice to the debtor, at the time of first contact. Johnson v. MBNA America Bank, N.A. (2004).Johnson v. MBNA America Bank, N.A. (2004).