Consumer Protection Laws and Your Business
Be aware of laws against deceptive advertising and pricing -- and when they apply.
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If you are a business owner, make sure you know about and follow the state consumer protection laws that apply to your business. These laws protect consumers from unfair or deceptive practices. They go beyond the traditional legal remedies available for breach of warranty to really help consumers. Laws like these are on the books in nearly every state, although the details vary.
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 that 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 have been singled out for special regulation; if you're going to start one, get the Federal Trade Commission pamphlet on this subject at www.ftc.gov.)
To avoid these types of lawsuits you need to know the details of your state's consumer protection laws and tell your employees about practices that could get you in trouble. These state laws often allow a customer to sue even if the violation was not intentional.
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. If your ad is deceptive, you'll face legal problems whether you intended to mislead the customer or not. What counts is the overall impression created by the ad -- not the technical truthfulness of the individual parts.
FTC Enforcement of Deceptive Advertising Laws
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 can do all of the following:
- convince the violator to voluntarily comply with the law
- 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' Right to Sue for False and Deceptive Advertising
Consumers often have the right to sue advertisers under state consumer protection laws. For example, someone who buys a product relying 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 the reduced price is misleading unless the former price is the actual, bona fide price at which you offered the article. 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 had 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.
Less-Than Free Offers
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, or
- usually provide a service (such as free delivery) with a paint purchase, but don't when the customer gets a "free" brush.
Consumer protection laws place a potent weapon in the hands of buyers -- punitive damages. In an ordinary lawsuit, a plaintiff can recover only his or her actual losses. But many consumer protection laws allow consumers to ask for additional penalties -- which can drastically increase the damage award, sometimes to triple or more of the amount of actual damage. In addition, these laws often require the defendant to pay for the consumer's attorneys' fees. The potential for large verdicts gives buyers and their lawyers an incentive to sue if it looks like a law has been violated.
More Information About Consumer Protection Laws
You can find out more about consumer protection laws by contacting the Federal Trade Commission (www.ftc.gov), 600 Pennsylvania Avenue NW, Washington, DC 20850, 877-FTC-HELP (382-4357), and by contacting your state's consumer protection agency.
To learn more about legal issues affecting your small business, see Legal Guide to Starting & Running a Small Business, by Fred S. Steingold (Nolo).