Section 5 of the FTC Act, Unfair or Deceptive Practices

As advances in banking technology and lending organization structure since the passing of the Gramm-Leach-Bliley Act have allowed businesses and companies within the last 20 years to sell and market financial products and services to consumers in complex ways that have not been seen before. As such, the Federal Trade Commission passed the Federal Trade Commission Act in 2004, with Section 5 specifically dealing with unfair, deceptive, or illegal practices in relation to commerce. In relation to Section 5 of the Federal Trade Commission Act, the Federal Deposit Insurance Corporation or FDIC and Federal Reserve System or FRB issued additional guidance relating to unfair or deceptive acts or practices or UDAPs. Following the release of this guidance, the FTC issued the following examination procedures regarding UDAPs:

• Standards that can be used to assess whether a business act or practice is considered unfair or deceptive.
• The interplay between the FTC Act and other applicable consumer protection statutes such as the Gramm-Leach-Bliley Act.
• Examination procedures for determining compliance in accordance with FTC standards, including risk assessment procedures that should be followed to determine whether transaction testing is warranted.
• Best practices for documenting an FTC Act violation case.
• Corrective actions that should be considered for violations of Federal Trade Commission Act Section 5.
• Lists of further resources related to unfair or deceptive business acts or practices.

What are the standards for determining whether a business practice is unfair or deceptive?

The legal standard for what is considered deceptive is independent of the legal standard for unfairness, despite the fact that both these terms are often used interchangeably in terms of FTC regulations and guidelines. Depending on the facts and circumstances of a particular case, an act could be considered deceptive, unfair, both, or neither. In determining whether or not a business practice is unfair, the FDIC considers whether the said practice “causes or is likely to cause substantial injury to consumers which cannot be reasonably avoided by consumers themselves and are not outweighed by countervailing benefits to consumers or to competition.” As such, the FDIC lays out the following three elements in establishing whether a business practice is considered to be unfair:

• The business act or practice must cause or be likely to cause substantial injury to consumers – In the context of Section 5 of the Federal Trade Commission Act, “substantial injury” is taken to mean both monetary harm as well as reputational harm. Any business act or practice that causes a small amount of harm to a large number of American consumers may be deemed to have caused substantial injury to said consumers. An injury may also be considered substantial if it raises a significant risk in terms of concrete harm. Alternatively, trivial harms or other forms of harm that are merely speculative are typically deemed as being inefficient for constituting substantial harm to consumers, while more subjective forms of harm such as emotional impact will not typically warrant a business practice as being considered unfair either.
• Consumers must not be reasonably able to avoid the injury in relation to the business practice – An act or practice is not considered to be unfair if consumers may reasonably avoid injury when engaging with such practices. Consumers cannot reasonably avoid injury from an act or practice if it interferes with their ability to effectively make decisions regarding the business practice, or to take action to avoid injury. This may occur if pertinent material information about a service or product, such as pricing, is modified or withheld until after the consumer has committed to purchasing said service or product, so that the consumer cannot reasonably avoid injury. It also may occur where testing reveals that a business’s disclosures do not effectively explain a particular act or business practice to consumers. A practice may also be unfair in instances where consumers are subject to undue influence or are otherwise coerced into purchasing unwanted products or services due to the sway of said practice.
• The injury must not be outweighed by countervailing benefits to consumers or to competition – For a business practice to be considered unfair, the act or practice must also be injurious in its net effects, meaning that the injury must not be outweighed by any offsetting consumer or competitive benefit that may also be produced by the business act or practice. For example, the offsetting of competitive or consumer benefits can include wider availability of services or products, as well as reduced prices. Furthermore, any costs that may be incurred as a result of remedies or measures to prevent the injury of consumers are also taken into account in determining whether a business act or practice is deemed to be unfair.

Alternatively, the FDIC also makes use of a three-step process in determining whether a business practice, representation, or omission is considered to be deceptive. The FDIC makes this determination based on the following steps:

• There must be a representation, omission, or practice that misleads or is likely to mislead the consumer – A business act or practice may be found to be deceptive if said practice, representation, or omission misleads or is likely to mislead American consumers. To this end, deceptive practices are not solely limited to situations in which a consumer has already been misled. Business acts or practices that have the potential to be deceptive include making misleading price or cost claims, using bait-and-switch tactics or techniques, offering to provide consumers with a product or service that is not in fact exist or is available, omitting material limitations or conditions from an offer in relation to the selling of a product or service, selling a product unfit for the purposes for which said product is sold, and failing to provide promised services in relation to a product or service.
• The act or practice must be considered from the perspective of the reasonable consumer – In determining whether a business act or practice is misleading, a consumer’s interpretation of a reaction to the representation, omission, or practice must be reasonable under the circumstances that said representation, omission, or practice was conducted. As such, whether a business act or practice is deceptive depends on how a reasonable member of the target audience would interpret the marketing material related to such businesses acts or practices. For example, when representations or marketing practices are targeted toward a specific audience, such as the elderly, the communication is reviewed from the point of view of a reasonable member of that particular target group. If a representation conveys two or more meanings to reasonable consumers and one meaning is misleading, the representation may then be deemed as being deceptive.
• Practices, representations, or omissions on the part of businesses must be material – A business’s representations, omissions, or practices are considered to be material if they are likely to have some effect on a consumer’s decision to purchase or use a particular product or service. Generally speaking, information about costs, benefits, or restrictions on the use or availability of a specific product or service is considered to be material. When express claims are made in regards to a particular financial service or product, such claims will also be presumed to be material claims. On the contrary, while intent to deceive is not a required element when seeking to prove that a business act or practice is deceptive, the materiality of an implied claim will be presumed if it can be shown that the institution intended for the consumer to draw certain conclusions based upon the claim.

What are the penalties for violating Section 5 of the FTC Act?

As of 2021, The Supreme Court has decided that the FTC can no longer seek monetary penalties in relation to violations of Section 5 of the FTC Act. For comparison, FTC fines and penalties related to Section 5 of the FTC Act have garnered $11.2 billion in relief being returned to American consumers in the last 5 years alone. However, the FTC is still permitted to take advantage of the following mechanisms in relation to violations of Section 5 of the FTC Act:

• Use Section 13(b) of the FTC Act- Section 13(b) allows for the FTC to obtain injunctions related to the enforcement of Section 5 of the FTC Act. Section 13(b) of the FTC Act states that the FTC has the ability to enforce injunctive relief against both individuals and financial institutions if the FTC “has reason to believe that any person, partnership, or corporation is violating, or is about to violate, any provision of law enforced by the
• Federal Trade Commission… in proper cases the Commission may seek, and after proper proof, the court may issue, a permanent injunction.”
• Seek monetary fines and penalties through Section 19 of the FTC Act- Section 19 of the FTC Act requires the FTC to bring action against any applicable parties within a 3 year period, and only applies in instances where “a reasonable man would have known under the circumstances was dishonest or fraudulent.”
• Collect civil penalties- The FTC can still collect civil penalties from parties and entities who are deemed to have violated Section 5 of the FTC Act. These penalties can be as high as $43,792 per violation in instances where “where a defendant violates an order or knowingly violates an existing rule.”
• Seek monetary settlements when negotiating consent orders- While the FTC still has the ability to seek monetary settlements in the context of negotiating consent orders, recent decisions made by the Supreme Court have greatly reduced the FTC’s ability to successfully complete such actions.

Section 5 of the FTC Act was designed to deter unfair or deceptive business practices on the part of businesses and individuals in commerce and financial relationships with American consumers. While this has historically been implemented through the use of steep fines and financial penalties, recent changes levied against the FTC on the part of the Supreme Court have done away with many such punishments. As a result, the FTC will have to develop and establish new means to thwart businesses and individuals looking to take advantage of American consumers. Nevertheless, Section 5 of the FTC Act continues to provide American consumers with some modicum of protection when engaging in financial transactions.