From the Nolo eCommerce Center
Business owners should familiarize themselves with consumer protection laws, including rules against deceptive advertising and pricing.
Remember “caveat emptor” – let the buyer beware? That used to be the law of the marketplace. Not anymore. Today, consumers have clout.
State consumer protection statutes are meant to protect consumers from unfair or deceptive practices and often go beyond the traditional legal remedies available for breach of warranty. Laws like these are on the books in nearly every state, although the details vary.
Case 1. In Florida, a Chevrolet dealer promised a “free four-day, three-night vacation to Acapulco” to anyone who bought a car or van. Relying on this special promotion, Peter bought a van from the dealer. When the vacation voucher arrived, Peter found that the so-called free vacation was really a time-share sales promotion. The vacation trip was loaded down with conditions, restrictions and obligations. Believing he’d been cheated, Peter sued the dealer. The jury awarded Peter $1,768 in compensatory damages (the value of the trip) plus $667,000 in punitive damages.
Case 2. In New Jersey, Kenneth ordered some furniture from a store. When it arrived, Kenneth noticed numerous defects. He rejected the order and demanded a return of his deposit. The furniture store refused, and Kenneth sued. The jury awarded him three times the amount of his deposit and ordered the furniture store to pay his attorney fees.
Both cases were brought under state consumer protection statutes.
Consumer protection laws place a potent weapon in the hands of buyers. In an ordinary lawsuit, a plaintiff can recover only his or her actual losses. For example, without the benefit of a consumer protection law, the man who sued to get back his furniture deposit would be entitled to no more than his $600 deposit. But under the statute in his state, he received triple damages plus attorney fees. Similarly, the man who sued the car dealer about the free vacation won punitive damages amounting to many times the value of his trip. The potential for large verdicts gives buyers and their lawyers an incentive to sue if it looks like a law has been violated.
“Big deal,” you may say. “I’m an honest and ethical business person. None of this affects me.” Well, that may not be so. For one thing, you need to know the details of your state’s consumer protection laws so that you can tell your employees about practices that could get you in trouble. Furthermore, these state laws often allow a customer to sue even if the violation was not intentional. If you sell a product manufactured by a U.S.-based company (say, a Schwinn bike) and mistakenly advertise that the product was made in the U.S. when in fact it was made in Taiwan, you may be liable under the statute.
Hundreds of cases have been brought under consumer protection laws, including these:
- A man sued a department store that ran out of an advertised waffle iron and didn’t give him a rain check – a violation of the consumer protection law in his state.
- A homeowner sued a roofing contractor who falsely advertised that it could arrange financing for roof repair jobs.
- A woman sued a health spa that reneged on its promise to return her deposit and cancel her contract if she changed her mind within three days.
Health spas, incidentally, have been singled out for special regulation; if you’re going to start one, get the FTC pamphlet on this subject.
Most consumer protection laws contain a broad prohibition on “unfair or deceptive practices.” In addition, many statutes list specific practices that are forbidden, such as deceptive advertising and pricing, discussed below.
Under both federal and state law, an ad is unlawful if it tends to mislead or deceive, even if it doesn’t actually fool anyone. Your intentions don’t matter either. If your ad is deceptive, you’ll face legal problems even if you have the best intentions in the world. What counts is the overall impression created by the ad – not the technical truthfulness of the individual parts.
Over the years, the Federal Trade Commission (FTC) has taken action against many businesses accused of engaging in false and deceptive advertising. If FTC investigators are convinced that an ad violates the law, they usually try to bring the violator into voluntary compliance. If that doesn’t work, the FTC can issue a cease-and-desist order and bring a civil lawsuit on behalf of people who have been harmed, seek a court order (injunction) to stop a questionable ad while an investigation is in progress and require an advertiser to run corrective ads admitting that an earlier ad was deceptive.
Consumers often have the right to sue advertisers under state consumer protection laws. For example, someone who buys a product in reliance on a deceptive ad might sue in small claims court for a refund or join others (sometimes tens of thousands of others) to sue for a huge sum in another court.
The two pricing practices most likely to get your business into trouble are: making incorrect price comparisons with other merchants or with your own “regular” prices, or offering something that is supposedly “free” but in fact has a cost.
Offering a reduction from your usual selling price is a common sales technique. But unless the former price is the actual, bona fide price at which you offered the article, the pricing is misleading. For example, if you announce a new product for $129, but sell it to wholesalers as if it were a $79 product and similarly discount it to direct customers, the $129 price never really existed – and you have broken the law. It misleads customers into thinking they are receiving a discount.
It’s even more blatant to buy a special batch of merchandise especially for a sale and create a fictional “regular” price or one you adhered to for only a day or two. Some merchants are tempted to do this when they buy seconds or discontinued product lines at a deep discount and want to pretend customers are getting a bargain.
If your ad compares your price with what other merchants are charging for the same product, be sure of two things:
- the other merchants are selling the identical product, and
- the other merchants sold enough sales at the higher price in your area so that you’re offering a legitimate bargain.
In other words, make sure that the higher comparison price isn’t an isolated or unrepresentative price.
Regarding offers of “free” products or services, you can offer gifts only if there are no strings attached. For example, if you offer a free paintbrush to anyone who buys a can of paint for $14.95, the brush really isn’t free if you:
- Usually charge less than $14.95 for this kind of paint.
- Usually provide a service (such as free delivery) with a paint purchase, but don’t when the customer gets a”free” brush.