CHAPTER 13 Warranties Product Liability and Consumer Law

Learning Objectives • What factors determine whether a Seller’s statement constitutes an express warranty or mere “puffing”? • What implied warranties under the UCC? • 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 are the major federal statutes providing for consumer protection? © 2005 West Legal Studies in Business A Division of Thomson Learning 2

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

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

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

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

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

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

Strict Product Liability • Liability without regard to fault or standard of care. • Injured party can be 3 rd party (not the buyer). • 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. © 2005 West Legal Studies in Business A Division of Thomson Learning 9

Requirements for Strict Liability • Product must be in a defective condition when sold • Defendant must be engaged in selling that product • 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 product • Defective condition must be cause • Goods have not be substantially changed from time of sale. © 2005 West Legal Studies in Business A Division of Thomson Learning 10

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

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

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

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

Deceptive Advertising • Puffing. – Vague generalities and obvious exaggerations are permissible and not considered deceptive. • 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. – Same rules apply. – To satisfy the “clear and conspicuous” requirement, disclosures must be close (only hyperlink if lengthy). © 2005 West Legal Studies in Business A Division of Thomson Learning 15

FTC Actions Against Deceptive Advertising • 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 regard to multiple product orders. – Impose counter-advertising. © 2005 West Legal Studies in Business A Division of Thomson Learning 16

Telemarketing and Electronic Advertising • 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. • Telemarketer must remove a consumer’s name from its list of potential contacts if requested. © 2005 West Legal Studies in Business A Division of Thomson Learning 17

Labeling and Packaging • Labeling must be accurate, and must use words that are easily understood by the ordinary consumer. • 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. © 2005 West Legal Studies in Business A Division of Thomson Learning 18

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

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

Telephone and Mail Order Sales • Sellers can be subject to federal mail and wire fraud statutes. • 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. © 2005 West Legal Studies in Business A Division of Thomson Learning 21

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

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

Truth in Lending Act • 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. • 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. © 2005 West Legal Studies in Business A Division of Thomson Learning 24

Fair Credit Reporting Act • 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. © 2005 West Legal Studies in Business A Division of Thomson Learning 25

Fair Debt Collection Practices Act • 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. • Johnson v. MBNA America Bank, N. A. (2004). © 2005 West Legal Studies in Business A Division of Thomson Learning 26