# Unfair Trade Practices: Deceptive Methods and Examples Explained

![Unfair Trade Practice: Using deceptive, fraudulent, or otherwise unethical methods to obtain business.](https://www.investopedia.com/thmb/Gpq3Wz6eK5r0B--gvTa6iYNNjE8=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/unfair-trade-practice.asp-final-7ba81588e8904bc0a4f6711105ffdbc8.png)

*— Investopedia / Julie Bang*

## What Is an Unfair Trade Practice?

Unfair trade practices encompass deceptive and unethical methods used to gain business, often violating consumer protection laws. They include [misrepresentation](https://www.investopedia.com/terms/m/misrepresentation.asp), false advertising, and deceptive pricing, among others, prompting legal action and protective legislation. Consumers can [seek recourse under these laws](https://www.investopedia.com/articles/pf/10/know-your-consumer-protection-laws.asp) to combat unfair practices.

### Key Takeaways

*   Unfair trade practices involve using fraudulent or unethical methods to gain business advantages.  
    
*   Consumer Protection Law and Section 5(a) of the Federal Trade Commission Act protect consumers from unfair and deceptive practices.  
    
*   Unfair trade practices are prevalent in industries like consumer goods, insurance, and debt collection.  
    
*   An act is deemed unfair if it causes significant harm to consumers that cannot be avoided or justified.  
    
*   Deceptive practices involve misleading consumers with false information or representations.

## How Unfair Trade Practices Impact Consumers

Unfair trade practices often occur with goods and services, tenancy, insurance claims, and debt collection. Most states enacted unfair trade practice laws in the 1960s and 1970s. Many states now use these laws to prevent such practices. Consumers who have been victimized should examine the unfair trade practice statute in their state to determine whether they have a cause of action.  

> **Important**
>
> Unfair trade practices are commonly seen in the purchase of goods and services by consumers, tenancy, insurance claims and settlements, and debt collection.

In the U.S., [Section 5(a)](https://www.federalreserve.gov/boarddocs/supmanual/cch/ftca.pdf) of the Federal Trade Commission Act addresses unfair trade practices by prohibiting "unfair or deceptive acts or practices in or affecting commerce." It covers everyone in commerce, including banks, and sets the legal standards for these practices. Below are lists of unfair and deceptive practices as per the rule:

## Common Unfair Practices That Harm Consumers

An act is unfair when it meets the following criteria:

*   It causes or is likely to cause substantial injury to consumers.
*   It cannot be reasonably avoided by consumers.
*   It is not outweighed by [countervailing benefits](https://www.investopedia.com/terms/c/countervailingduties.asp) to consumers or to the competition.

## Identifying Deceptive Trade Practices

An act or practice is deceptive when it meets the following criteria:

*   A representation, omission, or practice misleads or is likely to mislead the consumer.
*   A consumer's understanding of the situation must be reasonable under the circumstances.
*   The misleading representation, omission, or practice is material.

## Uncovering Unfair Trade Practices in the Insurance Industry

Unfair trade practices can happen in any industry but are significant enough to prompt the [National Association of Insurance Commissioners (NAIC)](https://www.investopedia.com/terms/n/nainsurancec.asp) to issue [guidance related to the sale of insurance products](http://www.naic.org/store/free/MDL-880.pdf). The NAIC defines unfair trade practices in the following ways:

*   It misrepresents the benefits, advantages, conditions, or terms of any policy.
*   It misrepresents the dividends or share of the surplus to be received on any policy.
*   It makes a false or misleading statement as to the dividends or share of surplus previously paid on any policy.
*   It is misleading or is a misrepresentation as to the financial condition of any insurer, or as to the legal reserve system upon which any life insurer operates.
*   It misuses the name or title of a policy to misrepresent its true nature.
*   It is a misrepresentation, including any intentional misquote of the premium rate, for the purpose of inducing or tending to induce the purchase, lapse, forfeiture, exchange, conversion, or surrender of any policy.
*   It is a misrepresentation for the purpose of effecting a pledge or assignment of or effecting a loan against any policy.
*   It misrepresents any policy as being shares of stock.

The NAIC considers a deceptive trade practice to be any of the above acts coupled with the conditions below:

*   It is committed flagrantly and in conscious disregard of the act or of any rules promulgated hereunder.
*   It has been committed with such frequency to indicate a general business practice to engage in that type of conduct.

## The Bottom Line

Unfair trade practices utilize deceptive, fraudulent, or unethical methods to gain business at the expense of consumers. These practices include misrepresentation, false advertising, and deceptive pricing, and they are considered unlawful under Consumer Protection Law.

U.S. legislation, including the Federal Trade Commission Act, prohibits such acts, safeguarding consumers from substantial injury that cannot be reasonably avoided. In the insurance industry, these unfair practices may involve misleading policy terms or financial conditions. Understanding these practices helps consumers protect themselves and seek recourse when victimized.

> **Article Sources**
>
> 1.  U.S. Department of Justice. "[Consumer Actions Against Unfair or Deceptive Acts or Practices The Private Uses of Federal Trade Commission Jurisprudence](https://www.ojp.gov/ncjrs/virtual-library/abstracts/consumer-actions-against-unfair-or-deceptive-acts-or-practices)."