Status of Procedures For Consumer Recourse

Citation:

Helen F. McHugh (1971) ,"Status of Procedures For Consumer Recourse", in SV - Proceedings of the Second Annual Conference of the Association for Consumer Research, eds. David M. Gardner, College Park, MD : Association for Consumer Research, Pages: 157-163.

Proceedings of the Second Annual Conference of the Association for Consumer Research, 1971     Pages 157-163

STATUS OF PROCEDURES FOR CONSUMER RECOURSE

Helen F. McHugh, Oregon State University

[The author, who is associate professor and head of the Home Management Department at Oregon State University's School of Home Economics, gratefully acknowledges the review and criticism by Dr. Martha A. Plonk.]

As the concerns of the consumer have gained political favor, we find reference made increasingly to the cause of consumer protection or an even more powerful action -- consumer recourse. The implication is that the consumer has avenues to protection open to him through the market system and/or through governmental agencies. The President's message to Congress on February 24, 1971 proposed additional measures. [Buyer's bill of rights. House of Representatives Document 92-52, 92nd Congress, First Session, February 25, 1971.] State legislatures cannot afford to ignore the cause. But before laws are passed or business policies adopted, it behooves us to take account of the existing situation. Unless we understand what now can be done on behalf of the consumer, it is difficult to judge the feasibility of various proposals.

The discussion to follow will include two major elements: (1) a review of consumer protection afforded by existing federal agencies, and (2) suggested approach for the development of effective recourse for the consumer. First, let us state what we mean by protection.

Protection may be defined as safety from injury or harm. Several types of harm or injury may come to consumers, one of which is economic injury. One might wish to term it more explicitly as monetary injury. Protective action may function to avoid injury which casts the appropriate action in preventive role, or the action may involve seeking remedies for injuries sustained. We shall attempt to identify either type of protection -- preventive or remedial -- as it may be provided by various federal agencies.

PROTECTION AFFORDED BY FEDERAL AGENCIES

A few months ago the Congressional Quarterly studied federal agencies for their consumer responsibilities. [Federal Consumer responsibility is fragmented. Congressional Quarterly, 1969, 2349-2359.] Thirty-nine agencies and departments have scattered among them a variety of activities that relate to consumer affairs. Many of the functions relate to the consumer and his welfare only indirectly. The list of 39 agencies was screened for functions that might be construed as relating to consumer protection of either the remedial or the preventive type. By employing a liberal interpretation for protection as the accepting of consumer complaints and any purported efforts on the part of the agency to do something about them, the list is narrowed to five agencies. If we consider consumer protection from the standpoint of providing relief from monetary harm, we find that no federal agency offers such protection.

The five agencies which acknowledge consumer complaints and around which my remarks will center are:

a) the Federal Communications Commission

b) the Federal Housing Administration

c) the Federal Trade Commission

d) the Food and Drug Administration

e) the Post Office Department

A few other agencies may receive attention in passing as the discussion develops. The protection afforded by the agencies falls within rather narrow limits. Let us look at each, individually.

Post Office Department. The Post Office Department carries out one of the oldest laws to protect the consumer. That law pertains to the use of the mails for criminal fraud -- a statute which was adopted in 1872. [United States Code, 4, 1964. Title 18, Chapter 47, Section 1001; Chapter 83, Section 1691.] A second facet of the postal regulations which assist consumers is the false representation statute which denies receipt of remittances for products or services by those who are using the mails to misrepresent their product or service. [United States Code, 8, 1964. Title 39, Chapter 9, Sections 903-906.] The department is active in the prosecution of those entering into fraudulent activities and using the mails to promote these activities.

We find, further, that the postal reorganization act is designed to treat the problem of unsolicited merchandise. Probably each one of us has at sometime or other received such merchandise through the mails. Section 3009 of the Postal Reorganization Act provides that unsolicited merchandise may be treated as a gift by the recipient to whom it is mailed. [Federal Trade Commission News Summary, October 1, 1970 (25).] The sender of such merchandise should attach to it a clear and conspicuous statement informing the recipient that he may treat the merchandise as a gift, that he has the right to retain it, use, discard or dispose of it in any manner that he sees fit without any obligation whatsoever to the sender. Because of this particular section in the Postal Reorganization Act, the Federal Trade Commission decided to drop its proposed Trade Regulation Rule on this same class of merchandise. [New postal law gives unsolicited merchandise gift status. Women's Wear Daily, September 14, 1970.]

Notice, however, that none of these activities is designed to restore value lost by anyone falling victim to any of these practices.

Federal Trade Commission. In addition to the trade regulation rule mentioned above, the Federal Trade Commission issued another such rule effective May 18 of last year. That Rule restricted the mailing of credit cards to individuals without first receiving an expressed written request from the party. [Title 16 -- Commercial practices, Chapter 1, Subchapter D, Part 421. Federal Register, 1970, 35(52), 4614-4621.] The Rule is intended to include the credit cards issued by banks as well as merchandisers. This facet of the rule has been challenged by other agencies (notably the Federal Reserve Board) and the FTC plans to attack ". . . bank and carrier card issuance on a case-by-case basis." [Kahn,E. Credit card legislation concern of many groups. Burroughs Clearing House, April 1970, 54, 37-38.] An example of the rule's effectiveness was manifest recently when ARCO (Atlantic Richfield) sent me a simple form on which to list only my name and address and that would constitute my request for their credit card.

The trade regulation rule was offered on the premise that the mailing of unsolicited cards constitutes an unfair method of competition which is in violation of Section 5 of the Federal Trade Commission Act (see Reference 8). This course of action is relatively simple and yet only came after lengthy hearings, numerous bills having been introduced into Congress and lost somewhere in committee and battle lines being drawn among several agencies. The rule was one of the positive steps taken during Chairman Weinberger's short six months as Chairman of the FTC.

In contrast to earlier stances by that organization, the FTC has made a new interpretation with respect to individual complaints -- or as the Commission refers to them "complaint applications." From the Commission's inception, individual consumer complaints served only in developing cases leading to cease-and-desist orders. Involvement in interstate commerce or significant public interest were the criteria for cases to which the commission responded until the Chairman directed that all complaints be referred to someone who could do something about the matter. [Williams, L. Telephone conversation, Federal Trade Commission Consumer Education Division, October 12, 1970.]

Another recent innovation of the FTC was the establishment of a position known as the consumer protection specialist. The main concern of these individuals will be to deal with complaints of consumers, with consumer education and consumer counselling (see Reference 10). The job description carries a promising note in that "[u]ltimately [the consumer protection specialist] will be working . . to resolve all types of consumer problems in their incipiency [p.2]." [Federal Trade Commission. Consumer protection specialist. Job description, no date.]

For anyone who has read the rather discouraging report on the Federal Trade Commission by "Nader's Raiders," the actions just mentioned represent a distinct change of heart. [The Consumer and the Federal Trade Commission. Congressional Record, January 22, 1969, 115(14), E380-E400.] The Chief of the FTC Consumer Protection Bureau has stated publicly that the agency should act aggressively and use the powers it already has. He feels that new laws are unnecessary to make the agency effective. [New consumer protection chief attacks "buyer beware" concept. Corvallis (Oregon) Gazette-Times, October 1, 1970, A-8.] In its pamphlet entitled "Fight Back!! The Ungentle Art of Self Defense," the Federal Trade Commission is indicated as your fourth line of defense if you have been gypped. [Federal Trade Commission. Fight Back: The ungentle art of self defense. Washington, D.C.: United States Government Printing Office, 1969.] Hopefully, the new stance of the FTC will reduce the steps in the process.

Food and Drug Administration. A third agency assigned to follow up consumer complaints is the Food and Drug Administration. Such complaints are used in the investigations carried on by that particular agency against manufacturers, processors, etc. If violations of its regulations are found, then cases are referred to the Justice Department for prosecution or for injunctions (see Reference 3). With this approach to complaints, we find some action of a preventive nature in that it may protect future consumers but which in no way alleviates the injury that has come to those earlier consumers.

Similar to an arrangement used by the FTC, the FDA has phone numbers available in at least eight cities for the registering of complaints. The agency uses a consumer phone service to offer recorded messages of interest to consumers (see Reference 3).

Federal Housing Administration. The Federal Housing Administration is expected to investigate any consumer complaints that come to it in addition to providing advice on prospective purchasers of houses or home improvements. The effectiveness of this approach to complaints may be reflected by the potential penalties that may be assessed to wrongdoers. If a complaint is found to be warranted, the FHA requests the builder to correct the situation. If he fails to do so, he may -- I repeat, may -- be denied future FHA assistance (see Reference 3). Here again, restitution is not required, but it is somewhat encouraged.

Federal Communications Commission. The Federal Communications Commissions listed as an independent agency, is responsible for holders of radio and television licenses operating in the public interest. The agency is asked to investigate complaints from the public with respect to whatever is aired by these media. The ineffectiveness of the FCC is described candidly in an 15 article in Harper's entitled "American Radio Today: The Listener be Damned." [Smith, D. American radio today: The listener be damned. Harper's Magazine, 1964, 229(1372), 58-64.] Many of the complaints that were registered against radio and television in the early 60's remain valid today. The FCC is responsive to the communications media which, as rightfully criticized by Leland J. Gordon [Gordon, L J. Recent developments in consumer economics. Paper presented at the twelfth annual conference of the Council on Consumer Information, St. Louis, Missouri, April 20, 1966.], turns out to be a handful of very powerful men.

One may wonder why the concern with what comes over the air waves, When we recognize that a substantial number of messages received over radio and television relate to our consumption activities, the concern is understandable. Claims of advertisers may be drawn under closer scrutiny in the future. [Admen set up their own watchdog. Business Week, June 12, 1970, (2150), 56.]

Other agencies are worthy of mention, not so much for what they do, but more for what they fail to do. One of these is the Interstate Commerce Commission. Anyone who has moved in the last half century can testify to the many difficulties encountered by the householder who moves with a commercial mover. The Interstate Commerce Commission's charge is to assure reasonable transportation charges and efficient service. But when we check on how the agency is to perform that charge, we find that: (1) ". . . it requires motor carriers to maintain insurance to cover. . . damage to goods, and (2) under the Truth-in-Lending Act of 1968, requires that ICC supervised carriers, when acting as creditors, inform their customers of all conditions of a credit arrangement [p.2356]," (see Reference 3). It is difficult to equate these two elements -- providing insurance and information on credit particulars -- with efficient service. The irony of the latter requirement is that movers seldom grant credit to an individual being moved. The almost universal requirement to pay the bill in cash before the mover will unload the goods, in many instances, leaves the consumer without leverage for settling damage claims. The net effect is to diminish the value of the insurance covering such damages which the carrier is required to maintain.

One of the most recently designated agencies is the National Commission on Consumer Finance which was created by the Consumer Credit Protection Act of 1968 (Truth-in-lending). The Commission which was to study the credit situation and make recommendations for its governance was to have been composed of three members of the House, three members of the Senate, and three persons appointed by the President from private life. The Commission has not begun to function because neither President Johnson nor President Nixon appointed a chairman for the commission (see Reference 3). An important example of what a powerful force inaction can be.

Of the agencies reviewed, then, five receive complaints but none can assess penalties which will compensate the injured consumer. The sanctions which may be levied by the government against the business engaged in the injurious practice, often times, are so limited that the seller is in no way encouraged to reform. The current situation is void of concrete avenues for recourse. The governmental agencies have no power to act on behalf of individual consumers; business firms have sufficient power not to act if they so choose. This state of affairs requires adjustment. However, changes should not be made lightly. Although the discussion thus far has concentrated on federal agencies, the government -- and more particularly, the federal government -- is not the only avenue for protection of the consumer.

AN APPROACH TO EFFECTIVE CONSUMER RECOURSE

Most students of the subject agree that a system that truly protects consumer interests has three components: (1) an information and educational component, (2) channels in the market system through which restitution can be effected, and (3) market rules which encompass the legislative and regulatory aspects. [Carman, J. M. Research opportunities in consumer policy. In L. L. Mather (Ed.), Economics of consumer protection. Danville, Ill.: Interstate, 1971.] [Uhl, J. N. Consumer education and protection: A synergistic relationship. In L. L. Mather (Ed.), Economics of consumer protection. Danville, Ill.: Interstate, 1971. ] The last mentioned of these components -- market rules -- derives power from the government. Because of this fact, that component is unique in that the state (government), as so well set out by George Stigler, has ". . . the power to coerce [p.4]." [Stigler, G. J. The theory of economic regulation. The Bell Journal of Economics and Management Science, 1971, 2(1), 1-21.] This characteristic requires, therefore, that the power be used with discretion and fairness. Our preceding discussion intimates that some of the current rules give an advantage to the producers and/or marketers. Before changes are effected, however, we must have more accurate information than we now possess to adequately judge the direction that changes should take.

Within the last five years, each of the three persons who has served the President as Special Assistant for Consumer Affairs has illustrated public statements with complaints received -- and selected, seemingly, for their potential impact. [Furness, B. Address to the Consumer Education Conference, Indiana University, Bloomington, Indiana, October 16, 1967.] [Knauer, V. Remarks at the Southwestern Regional Conference on Consumer Affairs conducted by the Office of Consumer Affairs, Los Angeles, California, May 19, 1971.] [Peterson, E. Remarks before the Texas Consumer Conference at Southern Methodist University, Dallas, Texas, September 29, 1966.] None of these statements has included the frequency of the complaint or its economic magnitude. No other data have been encountered in our searches. Change should not be predicated solely on the presence or absence of complaints but rather on its potential benefit to the society as a whole. Although it is the consensus of many that a need for redress exists, the ". . .need is neither well identified nor clearly defined [p.136]." [Anderson, D. E. Policy implications for consumer action groups. In L. L. Mather (Ed.), Economics of consumer protection. Danville, Ill.. Interstate, 1971.] It is imperative that research into these matters precede proposals for change, especially as the proposals may pertain to legislative action. Studies of the economic gains and losses that could evolve from proposed changes should provide information useful also to the business community in establishing policies of a voluntary nature.

The need for action in the business community stems from the present imbalance of power in its favor. The traditional avenues of recourse through business and industry have diminished in effectiveness with the changing character of the economy. Urbanization, the increasing size of economic units and the complexity of the consumer goods market have contributed to a relative decline in the power of the consumer. The strength of competitive forces affects the degree of outside control that is necessary for an orderly market that assures economic justice. The present void of avenues for redress through the market system means that stronger controls are required to effect a balance between the consumer and producer. Therefore, the business community stands to gain from its own efforts to develop avenues for informal resolution of disputes and grievances. Such developments would reduce the need for legislative reform. Although no data are available to support the contention, the directness of an approach through the business system should have cost advantages over the more circuitous legislative route. Furthermore, a problem resolved in the market should have educational value and the longer-range impact associated therewith, whereas legislation has been likened to the shotgun approach (see Reference 19).

Since the educational component of the consumer protection process is deemed to be a long-range technique, we should recognize its contributions to the system. Education can be acknowledged as investment in the human agent. [Schultz, T. W. The economic value of education. New York: Columbia University Press, 1963.] Consumer education, therefore, becomes an investment in the individual for his role as a consumer. Rather than enumerate the traditional interpretations of consumer education, let us focus for a moment on an oft neglected aspect related to an understanding of economics and market processes and to the recognition that market structures can be affected by the consumer. The consumer can influence market procedures. The importance of such education and its use is related to the maintaining of a balance of power within the market system. The relationship between competition and regulation has been recognized. The theory of markets reveals that firms in the main are confronted with some form of imperfect competition -- something less than free competition and something more than monopoly. Literature, especially that for lay consumption, abounds with the term "free enterprise" ofttimes used in describing our market system as synonymous with free competition. Only when this misconception is corrected will we find consumers making full use of their market power.

Although investment in consumer education can have a social as well as a private return, no data have been generated to measure such returns. Measurement of returns on the investment would call, likewise, for a measure of the investments. Consumer education finds itself competing with the general and vocational education for the resources of the individual. Priorities assigned to these categories of education will differ among individuals, but consumer education traditionally has not fared as well as vocational education. Indeed, the 1968 amendments to the Vocational Education Act relegate consumer education to subcategory status. [Part F -- Consumer and homemaking education. Public Law 90-576, 90th Congress, 2nd Session, H.R. 18366, October 16, 1968, 22.] Before any significant policies related to education are undertaken, some input by the researchers is in order.

Another device which can figure in the protection of consumers is the small claims courts. The statutory provisions outlining the judicial process for small claims determine whether such departments assist or deter consumer protection. For example, the small claims departments in the State of Oregon are required to handle all claims of $20 or less. Controversies involving greater amounts up to $200 may be handled through the small claims department or at the time of the hearing, the defendant may elect to have the cause tried in the district court. [Oregon Revised Statutes. 1969, Chapter 46.] Although Oregon law does not permit attachments (before hearing action) to be issued for small claims. a judgment can be issued and serviced for the payment of $1 if the case is decided in the plaintiff's favor (see Reference 27). The relatively narrow dollar limits for cases to be tried in small claims courts as well as other provisions of the statues reduce the effectiveness of this mechanism. The Attorney Advisor for the Federal Trade Commission contends that under current provisions, many ". . . small claims courts are simply collection devices for the easy credit merchants [p.2]." [Dix, V. Personal communication, November 9, 1970.]

Small claims and other "consumer courts" can be devised whereby a nonprofessional will find it possible to go before such a tribunal for relief whenever his complaints have been substantiated. Such a device which would not require the services of an attorney would meet the criteria of economic feasibility. The small claims departments are created by legislative action as channels through which disputes may be mediated. So we find a blend of the second and third components of an effective system for consumer protection.

In recapping the recommendations for establishing effective recourse of the consumer, we find that the need for information to guide our actions is overwhelming. Empirical data are missing with respect to existing laws. We do not know exactly where changes are needed or what form they should take. Costs and benefits have been neither identified nor measured. These measurements would have merit not only for the drafting of legislative proposals but also for the development of policies in the business community. Research into the return on investment in consumer education should precede any substantial policy development with respect to educational programs.

In light of the consumer protection situation as it exists at the national level, we find that a future course of action for effective protection of the consumer should include the following elements:

a) proposed changes in market rules in light of research findings, including cost and benefit estimates,

b) establishment of channels for the informal resolution of disputes and grievances through the market system,

c) an expansion of educational efforts to include an understanding of the consumer's ability to influence the market structure by his economic actions,

d) modification of the judicial process so that the cost of adjudicating claims is economically feasible.

It is imperative that meaningful research be undertaken to generate data related to each of these items. Unless data are obtained, no basis exists for recommending change or for judging the feasibility of changes recommended by others. The challenge for improving the avenues for consumer protection is ours.

----------------------------------------