EXPOSING THE FAULT LINES UNDER STATE UDAP STATUTES

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1 EXPOSING THE FAULT LINES UNDER STATE UDAP STATUTES MATTHEW W. SAWCHAK TROY D. SHELTON* State statutes on unfair and deceptive acts and practices (UDAP statutes) have been on the books for half a century now. UDAP statutes are meant to supplement the enforcement of Section 5 of the Federal Trade Commission Act, which prohibits unfair or deceptive acts or practices. 1 Although only the FTC can sue under Section 5, 2 UDAP statutes allow state attorneys general and private litigants to sue under similar, if not broader, legal theories. If widespread use is a measure of success, UDAP statutes are a smash hit. As Professors James Cooper and Joanna Shepherd show in this symposium, the volume of UDAP claims nationwide has increased over time. 3 This increased enforcement is not welcome news to everyone. In recent years, a number of articles have criticized the broad scope of UDAP statutes. 4 These and criticisms have spurred legislative action. * Mr. Sawchak is the Solicitor General of North Carolina and a member of the North Carolina State Bar. Mr. Shelton is a member of the North Carolina State Bar. Mr. Sawchak s remarks here are his own views, not positions of the North Carolina Department of Justice. Mr. Shelton s remarks here are his own views, not necessarily those of Ellis & Winters LLP or of any client. Mr. Sawchak thanks the outstanding authors in this Symposium. He also thanks his fellow Symposium editor, Bruce Hoffman, and his fellow editors of the Antitrust Law Journal U.S.C. 45(a)(1) (2012). 2 Id. 45(a)(2), (b). 3 James Cooper & Joanna Shepherd, State Unfair and Deceptive Trade Practices Laws: An Economic and Empirical Analysis, infra this issue, 81 ANTITRUST L.J. 947, (2017). 4 See, e.g., Henry N. Butler & Jason S. Johnston, Reforming State Consumer Protection Liability: An Economic Approach, 2010 COLUM. BUS. L. REV. 1, 89 90; Henry N. Butler & Joshua D. Wright, Are State Consumer Protection Acts Really Little-FTC Acts?, 63 FLA. L. REV. 163, 188 (2011); Prentiss Cox, Amy Widman & Mark Totten, Strategies of Public UDAP Enforcement, HARV. J. ON LEGIS. (forthcoming) (manuscript at 9 14), papers.ssrn.com/sol3/papers.cfm? abstract_id= ; Michael M. Greenfield, Unfairness Under Section 5 of the FTC Act and Its Impact on State Law, 46 WAYNE L. REV. 1869, (2000); Ryan P. O Quinn & Thomas Watterson, Fair Is Fair Reshaping Alaska s Unfair Trade Practices and Consumer Protection Act, 28 ALASKA L. REV. 295, 326 (2011); Victor E. Schwartz & Cary Silverman, Common-Sense Construction of Consumer Protection Acts, 54 U. KAN. L. REV. 1, 69 (2005); Cary Silverman & Antitrust Law Journal No. 3 (2017). Copyright 2017 American Bar Association. Reproduced by permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

2 904 ANTITRUST LAW JOURNAL [Vol. 81 For instance, Rhode Island has proposed amending its UDAP statute to exempt transactions and practices that are regulated by other federal and state agencies, such as the United States Securities and Exchange Commission. 5 In Louisiana, a legislative committee has been assigned to study whether the state s UDAP statute should require proof of reliance, whether the statute should limit damages to monetary losses, and whether the statute is straining the resources of the state s courts. 6 In contrast, however, South Carolina recently expanded the scope of its UDAP statute. 7 The articles in this Symposium address expanded UDAP enforcement with a mixture of critique and defense. These articles reveal some areas of agreement, but also areas of sharp disagreement, among scholars in this area. I. THE NATURE AND ROLE OF STATE UDAP STATUTES As all of the symposium authors agree, the story of UDAP enforcement begins with federal law. In 1914, Congress passed the FTC Act. 8 The Act, as amended in 1938, 9 gives the FTC (and only the FTC) the authority to sue to enjoin unfair or deceptive acts or practices in or affecting commerce. 10 In the latter half of the 20th century, all 50 states adopted UDAP statutes: enactments meant to mirror or supplement Section 5. As the symposium authors note, the states adopted these statutes with the encouragement of the FTC. 11 UDAP statutes follow a few different models. Some states have Little FTC Acts : statutes that track the text of Section Other states have adopted the Uniform Deceptive Trade Practices Act. 13 This model statute does not use Jonathan L. Wilson, State Attorney General Enforcement of Unfair or Deceptive Acts and Practices Laws: Emerging Concerns and Solutions, 65 U. KAN. L. REV. 209, (2016). 5 H.R. 5292, 2017 Leg. Sess. (R.I. 2017), webserver.rilin.state.ri.us/billtext17/housetext17/ h5292.htm. 6 H.R. Study Request No. 3, 2016 Reg. Sess. (La. 2016), ment.aspx?d= Act of June 5, 2016, 2016 S.C. Acts 244 (amending scattered parts of the S.C. Code). The Act expanded the South Carolina UDAP statute s definition of consumer credit transactions, expanded the statute to cover motor-vehicle sales, and expanded the jurisdiction of the South Carolina Commission on Consumer Affairs to take enforcement actions against businesses engaged in consumer loan businesses. 8 Federal Trade Commission Act, ch. 311, 38 Stat. 719 (1914). 9 Wheeler-Lea Amendment, Pub. L. No. 447, 52 Stat. 111 (1938) (amending 15 U.S.C. 41, 44, 45, 52 58). 10 See 15 U.S.C. 45(a)(2), (b). 11 See, e.g., Elise M. Nelson & Joshua D. Wright, Judicial Cost-Benefit Analysis Meets Economics: Evidence from State Unfair and Deceptive Trade Practices Laws, infra this issue, 81 ANTITRUST L.J. 997, 1003 & text accompanying note 32 (2017). 12 Cooper & Shepherd, supra note 3, at Id. at 954.

3 2017] EXPOSING THE FAULT LINES 905 broad terms; instead, it condemns a list of specific practices. 14 Finally, the FTC itself has proposed a different model statute, one that combines a list of specific banned practices with a broad ban on other unfair or deceptive practices. 15 Most notably, all of these UDAP statutes allow enforcement by state attorneys general and by private plaintiffs. 16 However, states enforcement strategies vary widely. 17 II. THE FAULT LINES IN UDAP ENFORCEMENT This Symposium illustrates ongoing debates over UDAP enforcement. The articles in the Symposium diverge on two sets of issues: the conduct standards under UDAP statutes and the procedures for enforcing these statutes. A. DEBATING THE CONDUCT STANDARDS UNDER UDAP STATUTES Although UDAP statutes stem from Section 5 of the FTC Act, the tests that courts apply in UDAP lawsuits often reach far beyond Section 5 doctrine. The symposium authors differ on whether this added scope is a blessing or a curse. Most states seek to construe their UDAP statutes in harmony with the FTC s interpretation of Section In practice, however, this harmony seems elusive. The scope of unfairness under UDAP statutes illustrates the continuing dissonance between federal and state law. For many years, the FTC relied on an open-ended standard, called the Cigarette Rule, as the agency s interpretation of unfairness under Section In 1980, however, the FTC rejected the Cigarette Rule in favor of a new policy statement that asks, among other questions, 14 Id. 15 Id. 16 See, e.g., Dee Pridgen, The Dynamic Duo of Consumer Protection: State and Private Enforcement of Unfair and Deceptive Trade Practices Laws, infra this issue, 81 ANTITRUST L.J. 911, (2017). 17 Cox, supra note 4 (manuscript at 39 51); see also Silverman & Wilson, supra note 4, at (describing how some state attorneys general have used no-bid contracts to hire private lawyers to litigate state claims). 18 Nelson & Wright, supra note 11, at Unfair or Deceptive Advertising and Labeling of Cigarettes in Relation to the Health Hazards of Smoking, Statement of Basis and Purpose, 29 Fed. Reg. 8324, 8325 (July 2, 1964). The Cigarette Rule identified three factors to guide the Commission when it decided whether a defendant s conduct was unfair under the FTC Act: (1) whether the conduct offends public policy that falls within at least the penumbra of some common-law, statutory, or other established concept of unfairness ; whether the conduct is immoral, unethical, oppressive, or unscrupulous ; and whether the conduct causes substantial injury to consumers (or competitors or other businessmen). Id. at 8355; see also FTC v. Sperry & Hutchinson Co., 405 U.S. 233, 244 n.5 (1972) (reciting the factors from the FTC s Cigarette Rule); Nelson & Wright, supra note 11, at (describing the Cigarette Rule s genesis and enforcement).

4 906 ANTITRUST LAW JOURNAL [Vol. 81 whether condemning the defendant s conduct would satisfy a cost-benefit analysis. 20 Although most state UDAP decisions say that they seek to follow FTC doctrine, many states still follow the Cigarette Rule a doctrine that the FTC laid aside 37 years ago. 21 As of 2010, only five states were applying post-cigarette-rule unfairness criteria. 22 Similar dissonance marks the ways that Section 5 and state UDAP statutes are being enforced. Through empirical work, Elise Nelson and Professor Joshua Wright have found disparities between the types of facts that violate Section 5 and the types of facts that violate state UDAP statutes. Nelson and Wright asked five economists to review 50 hypothetical fact patterns and opine on how these fact patterns would turn out under the FTC s cost-benefit analysis. 23 Some of the hypotheticals were based on actual FTC enforcement proceedings; among those hypotheticals, the economists found that over 80 percent would satisfy the FTC s cost-benefit analysis. 24 By contrast, the shadow economists found that only 31 percent of the hypotheticals that were based on reported state UDAP cases would satisfy the FTC s cost-benefit analysis. 25 Nelson and Wright conclude that these figures show a fundamental divide between the enforcement of Section 5 and the enforcement of state UDAP statutes. 26 Based on this conclusion, the authors question whether state UDAP statutes are up to the task of protecting consumers in a well-tailored way. 27 Other studies have voiced similar doubts. 28 By contrast, Professor Dee Pridgen concludes that state UDAP enforcement has reached a level of maturity and strength that is quite impressive. 29 Professor Pridgen focuses on UDAP enforcement by state attorneys general and by private parties two forms of enforcement that do not exist under the FTC Act. Enforcers of state law, she argues, have used UDAP statutes to protect consumers during periods of less vigorous enforcement by federal agencies Nelson & Wright, supra note 11, at ; see also FTC Act 5(n), 15 U.S.C. 45(n) (enacted 1994) (codifying the standards in the FTC s 1980 policy statement on unfairness). 21 See, e.g., David L. Belt, Should the FTC s Current Criteria for Determining Unfair Acts or Practices Be Applied to State Little FTC Acts?, ANTITRUST SOURCE, at 1, 10 (Feb. 2010), dam.pdf. 22 Id. at Nelson & Wright, supra note 11, at Id. at Id. 26 Id. at Id. at See, e.g., Butler & Wright, supra note 4, at ; Greenfield, supra note 4, at Pridgen, supra note 16, at Id. at

5 2017] EXPOSING THE FAULT LINES 907 State-law enforcers have also used UDAP statutes to develop more innovative consumer protection theories than the theories applied by the FTC. 31 Similarly, Professor Pridgen sees private UDAP enforcement as helpfully pushing the frontiers of legal theories, although she acknowledges that sometimes appellate courts need to step in to adjust these frontiers. 32 The recent introduction of a new federal consumer protection agency, the Consumer Financial Protection Bureau, further complicates the relationship between federal enforcement norms and state-law norms. Thomas Brown and Dae Ho Lee discuss these complications in their article. 33 In the Dodd-Frank Act, 34 Congress gave the CFPB jurisdiction, concurrent with the FTC s jurisdiction, to prohibit unfair practices in the consumer financial services market. 35 Although the CFPB has so far said that it intends to follow the FTC s interpretation of unfairness, it has explicitly said that it is not bound to follow the FTC s interpretation. 36 Indeed, as other authors have shown, the current enforcement strategies of the CFPB and the FTC differ significantly. 37 Brown and Lee also suggest that federal consumer protection law could take some lessons from state courts experience under their UDAP statutes. For instance, a recent appeal in the Third Circuit asked whether merely negligent conduct can qualify as unfair under the FTC Act. 38 In the end, the court declined to decide this issue. 39 However, several state courts have already addressed this same question under UDAP statutes. 40 As this example shows, the 31 Id. at Id. at Thomas P. Brown & Dae Ho Lee, Unfair Practices in the Financial Services Industry: The New Boss Is the Same as the Old Boss, infra this issue, 81 ANTITRUST L.J. 981, 982 (2017). 34 Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No , 124 Stat (2010) (codified as amended in multiple titles of the U.S. Code). The CFPB faces an uncertain future. In October 2016, the D.C. Circuit held that the CFPB s structure was unconstitutional because the CFPB is an independent agency that is headed by a single director. PHH Corp. v. Consumer Fin. Prot. Bureau, 839 F.3d 1, 36 (D.C. Cir. 2016), reh g en banc granted and panel decision vacated, No , 2017 WL (D.C. Cir. Feb. 16, 2017). However, the D.C. Circuit has recently agreed to rehear the case en banc and has vacated the panel s opinion. PHH, 2017 WL , at *1. In any event, congressional Republicans have vowed to neuter the CFPB. Alan Rappeport, Consumer Watchdog Faces Attack by House Republicans, N.Y. TIMES (Feb. 9, 2017), U.S.C. 5531(c). 36 Brown & Lee, supra note 33, at Cox, supra note 4 (manuscript at 36 39). The CFPB has consistently sought large monetary penalties and refunds to consumers, but the relief sought by the FTC has been much more variable. Id. 38 Id. at 9 10 (discussing FTC v. Wyndham Worldwide Corp., 799 F.3d 236 (3d Cir. 2015)). 39 See FTC v. Wyndham Worldwide Corp., 799 F.3d 236, (3d Cir. 2015). 40 Brown & Lee, supra note 33, at

6 908 ANTITRUST LAW JOURNAL [Vol. 81 connection between federal and state consumer protection standards could productively operate in both directions. B. EVALUATING THE PROCEDURAL LIMITS ON STATE UDAP ENFORCEMENT The Symposium authors also offer conflicting views on whether the procedures for UDAP enforcement are appropriately broad or inappropriately chaotic. Professor Pridgen views broad rights of action as crucial for the success of UDAP enforcement. She argues that it is especially important to allow plaintiffs to supplement government enforcement with private lawsuits. 41 New York, for example, has underscored the importance of private enforcement of its UDAP statute by allowing private plaintiffs to recover minimum statutory damages and attorney fees. 42 In the eyes of Professors Cooper and Shepherd, however, the procedural breadth of UDAP enforcement is a source of counterproductive chaos. Cooper and Shepherd develop this point by contrasting UDAP statutes with Section 5. Although Section 5 gives the FTC relatively broad substantive standards to apply, the statute blunts the impact of those standards by limiting the remedies available to the FTC. For example, the FTC is limited to seeking mostly equitable relief, and its enforcement proceedings must satisfy a public interest standard. 43 As Cooper and Shepherd explain, early state UDAP statutes likewise allowed only limited remedies. For example, some early statutes allowed private plaintiffs to pursue injunctions alone. 44 Today, however, most UDAP statutes offer much more extensive remedies. Nearly a third of today s UDAP statutes expressly allow class actions, even in the absence of concrete injuries; all UDAP statutes allow some private enforcement; and nearly all UDAP statutes allow private plaintiffs to recover enhanced damages and attorney fees. 45 Based on these remedies, as well as the broader substantive standards under today s UDAP statutes, Cooper and Shepherd argue that these statutes have drifted from consumer protection statutes to consumer litigation statutes Pridgen, supra note 16, at Id. at 933. It bears noting, however, that New York allows lawsuits under the state s UDAP statute only if the defendant s conduct was consumer-oriented. Oswego Laborers Local 214 Pension Fund v. Marine Midland Bank, N.A., 647 N.E.2d 741, 744 (N.Y. 1995). 43 Cooper & Shepherd, supra note 3, at 952, Id. at Id. at Id. at 958.

7 2017] EXPOSING THE FAULT LINES 909 Professor Pridgen responds to these concerns by proposing limited reforms to state UDAP doctrine. 47 She suggests that the states limit or eliminate the use of UDAP statutes in business-versus-business litigation, add a public interest requirement, and add an ascertainable loss requirement for private lawsuits. 48 III. CONCLUSION As Cooper and Shepherd show, the filing of UDAP lawsuits in state and federal courts is accelerating. 49 This trend is likely to sharpen the debate over the wisdom of current UDAP enforcement practices. It is not clear what the next phase of UDAP enforcement will look like. Perhaps current political trends will cause legislators or courts to dial back the substantive breadth and procedural liberality of UDAP statutes. On the other hand, it is unclear whether there is any institutional force, comparable to the FTC of the 1960s, to advocate for change in a single direction. Regardless of the direction of change, the articles in this Symposium offer valuable guidance for those who formulate state law in this sensitive area. 47 Pridgen, supra note 16, at Id. at Other writers, including one of the authors of this note, have made similar suggestions. See, e.g., Matthew W. Sawchak & Kip D. Nelson, Defining Unfairness in Unfair Trade Practices, 90 N.C. L. REV. 2033, (2012) (recommending that North Carolina require private plaintiffs to show that they suffered an injury that they could not have reasonably avoided). In fact, some states have already taken steps to limit the procedural liberality of their UDAP statutes. See, e.g., 2011 Tennessee Laws Pub. Ch. 510 (H.B. 2008) (eliminating class actions under the Tennessee CPA and limiting private rights of action to specifically enumerated categories of prohibited conduct). The American Legislative Exchange Council (ALEC) has proposed its own model act for state UDAP statutes a model act that would likewise reduce the current procedural liberality in private enforcement. See Model Act on Private Enforcement of Consumer Protection Statutes, AM. LEGISLATIVE EXCH. COUNCIL (last amended Jan. 9, 2014), But see Dee Pridgen, Wrecking Ball Disguised as Law Reform: ALEC s Model Act on Private Enforcement of Consumer Protection Statutes, 39 N.Y.U. REV. L. & SOC. CHANGE 279 (2015) (criticizing ALEC s model act). 49 Cooper & Shepherd, supra note 3, at

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