1. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 1 Warranties, Product Liability, and Consumer Law Chapter 13 BUSINESS LAW TODAY Essentials 9 th Ed. Roger LeRoy Miller - Institute for University Studies, Arlington, Texas Gaylord A. Jentz - University of Texas at Austin, Emeritus

2. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2 Learning Objectives  What factors determine whether a seller or lessor’s statement constitutes an express warranty or mere puffery?  What implied warranties arise under the UCC?  What are the elements of a cause of action in strict product liability?  What defenses to liability can be raised in a product liability lawsuit?  What are the major federal statutes providing for consumer protection in credit transactions?

3. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3 Warranties of Title  Warranties of Title – automatic in most sales contracts: Good Title. Good Title. No Liens. No Liens. No Infringements. No Infringements. Disclaimer of Title Warranty. Disclaimer of Title Warranty.

4. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4 Express Warranties Express Warranties  Representations of fact about quality, condition, description or performance.  Goods must conform to model or sample.  Warranty must be “basis of the bargain”.  Statements of opinion or value do not create express warranties.

5. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5 Implied Warranty of Merchantability  Merchantable Goods: reasonably fit for ordinary purposes for which goods are used.  Merchantable Food: fit to eat, based on reasonable consumer expectations. CASE 13.1 Webster v. Blue Ship Tea Room, Inc. (1964). Fish chowder with bones is NOT a breach of warranty because the bones did not render the food unfit to eat. CASE 13.1 Webster v. Blue Ship Tea Room, Inc. (1964). Fish chowder with bones is NOT a breach of warranty because the bones did not render the food unfit to eat.

6. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 6  Arises when a seller (merchant or nonmerchant): Knows the particular purpose for which the buyer will use the good, and Knows the particular purpose for which the buyer will use the good, and Knows that the buyer is relying on the seller’s skill and judgment. Knows that the buyer is relying on the seller’s skill and judgment.  Implied warranties can also rise (or be excluded or modified) based on previous dealings or trade usage. Implied Warranty of Fitness for a Particular Purpose

7. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 7  When two or more warranties are made in a single transaction: UCC rule holds warranties as cumulative. UCC rule holds warranties as cumulative. If warranties are in conflict, courts determine which warranty is most important as follows: If warranties are in conflict, courts determine which warranty is most important as follows: Express warranties displace inconsistent implied warranties (except for particular purpose).Express warranties displace inconsistent implied warranties (except for particular purpose). Samples take precedence over general descriptions.Samples take precedence over general descriptions. Exact or technical specifications displace inconsistent samples.Exact or technical specifications displace inconsistent samples. Overlapping Warranties

8. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 8 Warranty Disclaimers  Disclaimer of Express Warranties: Courts view unfavorably. Courts view unfavorably. Must be conspicuous. Must be conspicuous. Buyer must be aware of disclaimer at time of sale. Buyer must be aware of disclaimer at time of sale.  Implied Warranties: Disclaimer of Implied Warranty of Merchantability. Disclaimer of Implied Warranty of Merchantability. Disclaimer of the Implied Warranty of Fitness. (“As Is” or “With All Faults”). Disclaimer of the Implied Warranty of Fitness. (“As Is” or “With All Faults”).  Buyer’s Refusal to Inspect.  Unconscionability.

9. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 9 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). Full Warranty (free repair/replacement). Limited Warranty. Limited Warranty. Implied Warranties arise under UCC -- not Magnuson-Moss. Implied Warranties arise under UCC -- not Magnuson-Moss.

10. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 10 Lemon Laws  Cars that are “lemons” and cannot be repaired properly. Lemon Laws: Provide remedies to consumers whose automobiles under warranty fail to meet value or performance. Provide remedies to consumers whose automobiles under warranty fail to meet value or performance. Seller has reasonable attempts to fix the defect (usually 4). If not, buyer has remedy of a new car, replacement of defective parts, or return of all consideration paid. Seller has reasonable attempts to fix the defect (usually 4). If not, buyer has remedy of a new car, replacement of defective parts, or return of all consideration paid.  Arbitration is usual process.

11. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 11 Product Liability  NEGLIGENCE: Manufacturers, sellers and lessors of goods can be liable for a defective good that causes injury. Privity of contract not required. Manufacturers must exercise due care in: designing the product, selecting materials, production process, assembly, providing adequate warning labels. Adequate warning label for ordinary person. Manufacturers must exercise due care in: designing the product, selecting materials, production process, assembly, providing adequate warning labels. Adequate warning label for ordinary person.  Misrepresentation. Intentional mislabeling or concealment. Intentional mislabeling or concealment.

12. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 12 Strict Product Liability and Public Policy  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. Consumers should be protected against unsafe products. Manufacturers and distributors should not escape liability for defective products, and 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. Manufacturers and sellers are in a better position to bear the costs of injury.

13. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 13 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 substantially changed from time of sale.

14. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 14 Requirements for Strict Liability  Proving a Defective Condition. Plaintiff does not need to show how product became defective, but only prove that when it left the seller it was “unreasonably dangerous” and that condition hasn’t changed. Plaintiff does not need to show how product became defective, but only prove that when it left the seller it was “unreasonably dangerous” and that condition hasn’t changed.  ‘Unreasonably Dangerous’ Products. Products cannot be absolutely safe but courts may determine product is unreasonably dangerous if: Products cannot be absolutely safe but courts may determine product is unreasonably dangerous if: Product is dangerous beyond ordinary consumer expectations.Product is dangerous beyond ordinary consumer expectations. Less dangerous alternative was economically feasible for manufacturer who failed to produce it.Less dangerous alternative was economically feasible for manufacturer who failed to produce it.

15. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 15  Manufacturing Defects.  Design Defects. Plaintiff must show a reasonable alternative design was available. Plaintiff must show a reasonable alternative design was available.  Inadequate Warnings. Manufacturer must warn if foreseeable misuse will cause injury. Manufacturer must warn if foreseeable misuse will cause injury. Factors: user groups, content of message. Factors: user groups, content of message. CASE 13.2 Wyeth v. Levine (2009). Injured party can bring state-action product liability claim based on inadequate warning approved by FDA. CASE 13.2 Wyeth v. Levine (2009). Injured party can bring state-action product liability claim based on inadequate warning approved by FDA. Product Defects--Restatement (Third) of Torts

16. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 16 Strict Product Liability  Market Share Liability. Multiple Defendants involved are liable based on the share of the market. 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. All courts extend liability of manufacturers and other sellers to injured bystanders.

17. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 17 Defenses to Product Liability  Assumption of Risk.  Product Misuse. Severely limited. Severely limited.  Comparative Negligence (Fault).  Commonly Known Dangers. Sharp knives and guns. Sharp knives and guns.  Knowledgeable User Defense.

18. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 18 Consumer Law

19. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 19 Consumer Law  Areas of Consumer Law Regulated by Statutes: Deceptive Advertising. Deceptive Advertising. Labeling and Packaging. Labeling and Packaging. Sales. Sales. Credit Protections. Credit Protections. Consumer Health and Safety. Consumer Health and Safety. State Consumer Protection. State Consumer Protection. Consumer Law

20. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 20  Puffery. Vague generalities and obvious exaggerations are permissible and not considered deceptive. Vague generalities and obvious exaggerations are permissible and not considered deceptive. CASE 13.3 Federal Trade Commission v. QT, Inc. (2008). Claims of the Ionized Bracelet were deceptive and QT was ordered to create a $16 million fund for customer refunds. CASE 13.3 Federal Trade Commission v. QT, Inc. (2008). Claims of the Ionized Bracelet were deceptive and QT was ordered to create a $16 million fund for customer refunds.  Bait and Switch Ads. The advertising of a product at an attractively low price to lure customers in to buy more expensive items. The advertising of a product at an attractively low price to lure customers in to buy more expensive items. Deceptive Advertising

21. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 21 Deceptive Advertising  Online Deceptive Advertising. Same rules apply. Same rules apply. To satisfy the “clear and conspicuous” requirement, disclosures must be close (only hyperlink if lengthy). To satisfy the “clear and conspicuous” requirement, disclosures must be close (only hyperlink if lengthy).

22. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 22  The FTC, charged with enforcing federal laws against deceptive advertising, can, in appropriate circumstances: Issue cease and desist orders. 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. Impose counter-advertising. FTC Actions Against Deceptive Ads

23. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 23  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. Telemarketing and Fax Advertising

24. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 24 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. Wool Products Labeling Act of 1939. Fur Products Labeling Act of 1951. Fur Products Labeling Act of 1951. Flammable Fabrics Act of 1953. Flammable Fabrics Act of 1953. Fair Packaging and Labeling Act of 1966. Fair Packaging and Labeling Act of 1966. Smokeless Tobacco Health Education Act of 1986. Smokeless Tobacco Health Education Act of 1986. Nutrition Labeling and Education Act of 1990. Nutrition Labeling and Education Act of 1990.

25. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 25  Forms of Sales : Door-to-Door Sales.  Door-to-Door Sales.  Mail Order Sales.  Mail Order Sales.  Telephone and Mail-Order Sales.  Telephone and Mail-Order Sales.  Unsolicited Receipt of Merchandise.  Unsolicited Receipt of Merchandise.  Sales

26. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 26  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. Door-to-Door Sales

27. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 27  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, shipment orders within the time promised in their catalogues and advertisements, to notify consumers when orders cannot be shipped on time, and to notify consumers when orders cannot be shipped on time, and to issue timely refunds when orders cannot be shipped. 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. Telephone and Mail Order Sales

28. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 28 Health and Safety  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 Act 1972. Consumer Product Safety Commission. Consumer Product Safety Commission. Notification by distributors. Notification by distributors.

29. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 29  Consumer Credit is protected by: Truth in Lending Act. Truth in Lending Act. Fair Credit Reporting Act. Fair Credit Reporting Act. Fair Debt Collection Practices Act. Fair Debt Collection Practices Act. Wage Garnishment. Wage Garnishment. Credit Protection

30. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 30  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. Truth in Lending Act

31. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 31  Credit Card Rules: limits consumer liability to $50 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. Truth in Lending Act

32. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 32  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. Fair Credit Reporting

33. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 33 Fair and Accurate Credit Transactions Act  To combat identity theft.  FACT: Created the National Fraud Alert system so that consumers can place fraud alert in their credit files. Created the National Fraud Alert system so that consumers can place fraud alert in their credit files. Requires credit companies to give customers free credit reports each year. Requires credit companies to give customers free credit reports each year. Gives victims of identify theft some assistance. Gives victims of identify theft some assistance.

34. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 34  Prohibits Collection Agencies from the following: Type, times, and places that debt collectors can contact debtors. Type, times, and places that debt collectors can contact debtors. Contacting third parties about payments. Contacting third parties about payments. Using harassment or intimidation or employing false misleading information. Using harassment or intimidation or employing false misleading information. Contact debtor after notice of payment refusal. Contact debtor after notice of payment refusal.  Requires that collectors provide validation notice to the debtor, at the time of first contact. Fair Debt Collection Practices Act