State Attorney General Consumer And Antitrust Leadership Conference March 1, 2007

Consumer Protection Law Overview

Each state has a UDAP (Unfair and Deceptive Acts and Practices) statute. The statues vary from state to state in important ways, both substantively and procedurally. Unlike the antitrust laws enforced by the states, there is no general federal consumer protection statute that all the states share in common.

Despite their individually unique features, there are some fundamental principles of consumer protection law that are common to all the statutes. These statutes are firmly rooted in the public interest and are generally liberally construed by the courts.

Deception:
All state consumer protection statutes prohibit deceptive practices. These statutes are generally patterned after Sec. 5 of the Federal Trade Commission Act, which prohibits unfair or deceptive acts or practices.

1. Defined: In general, an act or practice is deceptive if it has a tendency or capacity to mislead consumers. The AG does not have to prove actual deception. Some UDAP statutes outlaw fraudulent acts or practices. This language does not refer to common law fraud but rather to misleading or deceptive acts or practices.

2. Common law fraud distinguished: Deception is a broader (and easier to prove) concept than common law fraud. Most common law fraud actions require:

• A false representation
• Intended by the defendant
• Relied on by the consumer
• Who is damaged as a result.
• The defendant must have had scienter, i.e., knowledge that the representation was false.

In contrast, under state UDAP statutes,

• Intent is not an element of deception; there is no requirement
  that an evil motive or intent to deceive be shown.
• Scienter is not required; the AG need not demonstrate that the defendant knew that the representations were false or the acts or practices misleading.
• Reliance is not a part of a deception case and does not have to be proved as a separate element in the pleadings (although there are important state variations in this regard).

3. Examples of deception:

• “Used 1998 Olds Cutlass – no damage” (vehicle was once in a major wreck)
• “I have a great track record of getting jobs done on time.” (scofflaw contractor)
• “50% off” (of a fictitious comparison price)
• “Guaranteed to cure all cancers”
• Guaranteed to lose 80 lbs. in 2 weeks”

4. Deceptive advertising: Claims in advertising may be made expressly (express claims) or by implication (implied claims). A claim about a product or service is made by implication where consumers would interpret the advertising as containing that message. False or misleading advertising is clearly actionable. Advertisements can be deceptive even if literally true, if their overall net impression is false. If an advertising representation can be interpreted in a lawful or in a misleading way, the representation will be construed against the person making it.

5. Failure to disclose material facts: Deception includes not only misrepresentations (falsity), but also may result from a seller’s failure to disclose material facts. Facts are generally held to be material if they would influence a consumer’s purchasing decision.

6. Deceptive to whom? In many states the courts look to the least sophisticated members of the public to determine whether a representation has a tendency or capacity to deceive. Although particular conduct may not deceive or mislead a sophisticated consumer, it may be misleading to others who are less experienced or more vulnerable. Some state statutes or court interpretations include the idea of the “reasonable consumer” in their deception standard, requiring that to be deceptive the act or practice must mislead consumers acting reasonably in the circumstances to their detriment. (This is the deception standard adopted by the Federal Trade Commission.) As a practical matter, and certainly for our purposes here, these distinctions are not critical.

7. Unavailability of certain defenses in consumer protection cases:

• Good faith is not a defense in a deception case.
• Later disclosures do not cure earlier deceptive acts or practices (e.g. disclosures at point-of- sale do not cure misrepresentations made in advertising)
• Discontinuance of the deceptive practice is not a defense.
• Any form of an “everyone does it” defense is unavailable here. (Note – these may, however, bear on the scope of the remedy sought.)

8. Relationship to the Federal Trade Commission Act (“FTCA”): Many state UDAP statutes are called “Little FTC Acts” because the inspiration, and certainly the language for their creation, came from the FTCA. In recognition of this lineage, and to allay concerns of potential inconsistent state/federal enforcement of these broad concepts of deception (and unfairness, discussed below), some state statutes tie the legal standards in their UDAP statutes to the Federal Trade Commission’s enforcement under the FTCA. Other state statutes provide cpmpliance with FTC case law as an affirmative defense in some kinds of matters, and still other states may use the FTC standards as relevant but not dispositive.

Unfair Acts or Practices (“Unfairness”) Many states also prohibit unfair acts or practices. This language is also largely patterned after the Federal Trade Commission Act. As is the case with deception standards, in some states FTC enforcement policy dictates state interpretation and enforcement.

1. Defined: The states’ “unfairness jurisdiction” recognizes that certain business practices may not involve deception but are nevertheless injurious to consumers. Again, there is great variation among the states. Some core concepts include whether the practice a) offends public policy; b) is immoral, unethical, oppressive, or unscrupulous; c) causes substantial injury to consumers (some states require that the injury be unavoidable). Some states determine unfairness by weighing the impact of the practice on consumers compared with its business justification.

2. Concepts and examples:
Unfair acts or practices resulting from disproportionate bargaining power, including, e.g.

• High-pressure sales tactics, including intimidation, coercion, personal disparagement.
• Coercive conduct (e.g. conditioning return of a consumer’s down payment on his agreement to forfeit part of it).

Unfairness based on unequal knowledge between consumers and merchants.

• This is one justification for the requirement that advertisers have prior substantiation for advertising

Examples of unfair acts or practices:

• Selling defective merchandise
• Selling dangerous products – chocolate candy with ball inside that could easily choke small children
• Selling “health care” products with claims that cause consumers to forego legitimate cures.

Remedies
Most state statutes give the attorney general broad remedial authority to protect the public against further deceptive or unfair conduct.

1. Injunctions: Injunctive relief may be granted even where the defendant has gone out of business or changed its business.
2. Restitution: Virtually every state statute authorizes the attorney general to obtain restitution for injured consumers.
3. Imposition of civil penalties
4. Costs of the investigation

Administrative Rule-Making More than half of the state attorneys general have the authority to interpret their consumer protection statutes by way of rule making. The requirements for rule making generally follow the dictates of each state’s administrative procedures act. Some state statutes provide that the attorney general’s regulations have the force of law. In other states a violation of a regulation is prima facie evidence of a violation of the consumer protection statute.