Skip to main content

Search

Unfair and Deceptive Acts and Practices: 4.3.2.3.5 Market forces can leave consumers with no meaningful choice

In many circumstances, market forces make meaningful consumer choice impossible. A classic example is contract clauses regarding the creditor’s remedies if the consumer defaults. The FTC has extensively documented the market dynamics that prevent consumers from avoiding contractual clauses that give creditors overly harsh remedies upon default. The prospect of adverse selection by borrowers creates a disincentive for lenders to promote more lenient default remedies.

Unfair and Deceptive Acts and Practices: 4.3.2.3.8 Consumers cannot reasonably avoid harm that they have no reason to anticipate

Whether consumers had reason to anticipate harm is a key touchstone in courts’ determination of whether consumers actually had a free and informed choice, and thus whether consumer injury is reasonably avoidable.780 In National Ass’n of Mortgage Brokers v. Board of Governors,781 a federal court upheld an FRB rule that it was it unfair for creditors to fund mortgage originators’ compensation through the consumer’s interest rate.

Unfair and Deceptive Acts and Practices: 4.3.2.3.9 Consumers cannot reasonably avoid acts undertaken without their consent

Some types of acts and practices are undertaken without the consumer’s consent, and sometimes even without the consumer’s knowledge. These practices are not reasonably avoidable by consumers.799 For example, unfair acts that are imposed on consumers through stealth or coercion cannot be reasonably avoided by consumers.800 Likewise, a consumer has no way at all of avoiding receiving at least the first junk fax sent without their consent.801

Unfair and Deceptive Acts and Practices: 4.3.2.3.11 Steps that mitigate harm that has already occurred do not make the injury reasonably avoidable

Often, defendants argue that consumer injuries were avoidable after the fact, and that even if consumers were substantially injured, they could later have taken reasonable steps to avoid the loss. This argument ignores transaction costs—both the transaction costs the consumer has already incurred to enter into the unfair transaction, and the transaction costs the consumer will have to incur to get out of the first transaction and then find and enter into a new one.

Unfair and Deceptive Acts and Practices: 4.3.2.3.12 Consumers cannot reasonably avoid abuses once the seller has obtained control of the transaction

Another circumstance in which consumers cannot reasonably avoid abuses occurs when the seller obtains control over the transaction. This can occur before any contract is signed. For example, an unscrupulous provider that takes possession of some item belonging to the consumer in order to provide a repair estimate has obtained great leverage. By making it difficult for the consumer to retake possession of the item, the provider may effectively deprive the consumer of free decision-making about whether to contract with that provider and on what terms.

Unfair and Deceptive Acts and Practices: 4.3.2.3.14 When a market does not correct itself, consumers cannot readily avoid injury

A perfect market corrects itself. However, the subprime mortgage meltdown that led to the Great Recession demonstrates how imperfect consumer markets—even major nationwide consumer markets—can be. Widespread consumer injury is evidence in and of itself that informed consumer choice is insufficient as a market force to correct abuses. A federal district court expressed this point well in a decision holding that a UDAP rule limiting mortgage interest rates and terms met the FTC’s unfairness standards:

Unfair and Deceptive Acts and Practices: 4.3.2.3.15 Consumers cannot avoid acts taken by others that affect the market

Another type of harm that consumers cannot reasonably avoid is market distortion that is caused by others’ acts. For example, a court held that a company committed an unfair practice by putting a gag order into its contracts, preventing consumers from disseminating negative views of the company’s services. Consumers who were considering entering into contracts with this company could not reasonably avoid the harm caused by the suppression of negative reviews.863

Unfair and Deceptive Acts and Practices: 4.3.2.5 Relation to Public Policy

The FTC Act specifies that, in determining if a practice is unfair, “the Commission may consider established public policies as evidence to be considered with all other evidence. Such public policy considerations may not serve as a primary basis for such determination.”881 In other words, Congress did not want the FTC to outlaw various practices simply as a matter of public policy—the practice must cause substantial harm that cannot be avoided.

Unfair and Deceptive Acts and Practices: 4.3.3.3.1 Description of the “S&H” standard

The “S&H” standard, which most state courts use in interpreting unfairness under their state UDAP statutes, is described in the landmark 1972 United States Supreme Court case, Federal Trade Comm’n v. Sperry and Hutchinson Company (S&H). There, the court found unfairness to be a broader standard than deception.904 The court noted with approval the FTC’s use905 of the following criteria for determining whether a practice is unfair:

Unfair and Deceptive Acts and Practices: 4.3.3.4 State UDAP Use of “S&H” Unfairness Definition in Lieu of the Current FTC Definition

At the time of the early development of state UDAP case law in the 1960s and 1970s, the FTC utilized the “S&H” definition of unfairness: whether the practice is within the penumbra of common law, statutory, or other established concepts of fairness; whether it is immoral, unethical, oppressive, or unscrupulous; and whether it causes substantial injury.914 In 1980, the FTC amended this definition to adopt the standard that is essentially codified now in the FTC Act.915 Nevertheless,

Unfair and Deceptive Acts and Practices: 4.3.4.1 FTC Credit Practices Rule

The most important application of the FTC’s current unfairness analysis to adhesion contracts is found in the Statement of Basis and Purpose of the FTC’s Credit Practices Rule.954 The FTC begins with its three-step analysis: an unfair practice is one that (1) causes substantial injury; (2) that is not outweighed by any countervailing benefits to consumers or competition; and (3) that consumers themselves could not reasonably have avoided.

Unfair and Deceptive Acts and Practices: 4.3.4.2 Other Creditor Practices

Applying its three-part test for determining if a practice is unfair (substantial injury, not outweighed by countervailing benefits, that consumers could not reasonably avoid), the Commission found a forfeiture clause in an adhesion contract, by which consumers who defaulted would lose all amounts paid, to be unfair.959 On the other hand, the Commission also found that, where there was no evidence that consumers were chilled from asserting their rights, an integration clause (excluding oral representations from being considered as part of the

Unfair and Deceptive Acts and Practices: 4.3.5 Systematic Breach of Contract As Unfair

The FTC has also utilized its current unfairness standard in challenging a company’s systematic breach of its consumer contracts. In Orkin Exterminating Co.,966 the FTC found it unfair for a seller to systematically breach its standard form contracts. Orkin’s contracts specified annual re-inspections at a fixed price, but, due to rising costs, Orkin raised its re-inspection fees.

Unfair and Deceptive Acts and Practices: 4.3.8 Taking Advantage of a Vulnerable Group

A 1933 United States Supreme Court case, interpreting “unfair methods of competition,”988 held unfair the sale of candy involving games of chance because the practice exploits a category of consumers—children—who are unable to protect themselves and because the amount of candy received for the purchase price depends on chance or a lottery, long deemed contrary to public policy.989 Thus, in determining unfairness, one should consider not only public policy, but the vulnerability of the consumers