Opinion ID: 455766
Heading Depth: 2
Heading Rank: 4

Heading: Challenge to the FTC's Exercise of Unfairness Authority Under Section 5(a)

Text: 95 Although the Commission has identified a substantial consumer injury, which is not offset by countervailing benefits, and which cannot be reasonably avoided by consumers, petitioners nonetheless challenge the ban on HHG security interests and wage assignments as outside the scope of the Commission's unfairness authority. Petitioners claim that the FTC's description of what constitutes a substantial, unjustified, and unavoidable injury in this proceeding exceeds the bounds the Commission itself has previously erected for channeling its discretion to proscribe unfair practices. See AFSA Brief at 17. With respect to injury, petitioners assert that section 5 does not encompass consumer harms resulting from the consumer's own choice of action unless that choice is improperly manipulated by seller overreaching (i.e., deception, coercion, or withholding of material information). Relatedly petitioners argue that the requirement of unavoidability is not met unless the seller's overreaching interferes with the consumer's ability to make an informed uncoerced choice. Finding no creditor overreaching in the present case, petitioners assert that the FTC is attempting to play national nanny by protecting consumers against the hardships of their own miscalculations in pledging HHG security interests and wage assignments. See AFSA Brief at 62. In petitioners' view the FTC is gratuitously intervening in the market to provide the optimal mix of options for consumers. This exceeds the FTC's authority, in petitioners' view, because the FTC must first identify some overreaching creditor or seller practice which is distorting the proper functioning of the market. 96 In essence, petitioners ask the court to limit the FTC's exercise of its unfairness authority to situations involving deception, coercion, or withholding of material information. As noted earlier, despite considerable controversy over the bounds of the FTC's authority, neither Congress nor the FTC has seen fit to delineate the specific kinds of practices which will be deemed unfair within the meaning of section 5. Instead the FTC has adhered to its established convention, envisioned by Congress, of developing and refining its unfair practice criteria on a progressive, incremental basis. Nevertheless, petitioners seek to support their claim that the FTC has exceeded its statutory authority by arguing that the Commission has never before asserted the scope of authority exercised in this rulemaking. Thus, in addressing petitioners' challenge, we look first to past Commission unfairness decisions to determine if a basis in precedent exists for the Commission's present rulemaking. 97 Our task of reviewing Commission unfairness precedent is hindered by the Commission's cautious use of its unfairness authority as an independent basis for decision--most frequently the Commission has relied on alternate theories of deception and unfairness. See supra note 15. The Credit Practices Rule is a rare example of the Commission proceeding solely on unfairness grounds. We are aided, initially, by a fairly recent article authored by a member of the Commission's Office of Planning cataloguing the kinds of commercial practices which the Commission has determined to be unfair. Specifically this article identifies four primary categories of practices which have been prohibited as unfair: (1) withholding material information; (2) making unsubstantiated advertising claims; (3) using high-pressure sales techniques; and (4) depriving consumers of various post-purchase remedies. See Craswell, supra note 15, at 109. 98 It is true that many, but not all, of the Commission's unfairness decisions have involved the kind of overreaching seller conduct pinpointed by petitioners. 27 But of particular relevance to this case are those Commission decisions dealing with the allocation of post-purchase rights. The majority of consumer transactions involve not only the purchase of a product but also the allocation, between the buyer and seller, of a number of contractual and noncontractual rights and duties with respect to the product purchased (e.g., remedies available to the buyer if the product is defective or to the seller if the buyer defaults). The Commission, in the post-purchase right cases, has stepped in to correct allocations of post-purchase remedies determined to be unfair to consumers. 99 A prime example is the Commission's rule preventing sellers from taking advantage of the holder-in-due-course doctrine. See Preservation of Consumers' Claims and Defenses, Statement of Basis and Purpose, 40 Fed.Reg. 53,506 (1975) (codified at 16 C.F.R. pt. 433 (1984)). The holder-in-due-course doctrine immunizes the subsequent holder of a negotiable instrument from the claims or defenses which the consumer could have asserted against the original holder, if the subsequent holder took the instrument for value, in good faith, and without notice of any claims or defenses against it. Thus, under the holder-in-due-course doctrine, the seller could discount the consumer's note to a third party making the consumer unconditionally liable to the third party with no recourse even if the product turned out to be totally defective. The Commission determined that the use of the holder-in-due-course doctrine in consumer credit transactions was an unfair practice. See id. at 53,524 ([I]t constitutes an unfair and deceptive practice to use contractual boilerplate to separate a buyer's duty to pay from a seller's duty to perform.). The Holder-in-Due-Course Rule abrogated the use of the holder-in-due-course doctrine in consumer credit transactions by requiring sellers to include a notice in all consumer sales instruments stating that any subsequent holder is subject to all claims and defenses that could be asserted against the seller. 100 Petitioners distinguish the Holder-in-Due-Course Rule, by asserting that there the Commission intervened to prevent consumers from being victimized by a counter-intuitive legal doctrine. AFSA Brief at 31 n. 3. Petitioners thus attempt to characterize the rationale underlying the Holder-in-Due-Course Rule solely in terms of deception. We find this argument unpersuasive in light of the Commission's stated rationale. Prior to promulgating the Holder-in-Due-Course Rule, the Commission had already held a seller's practice of routinely assigning purchasers' notes to third parties inherently unfair and deceptive because consumers were unaware and did not intuitively expect that a seller could deprive them of valid claims and defenses to the obligation by discounting their notes to third parties. Disclosure was determined to be the proper remedy. See In re All-State Industries, Inc., 75 F.T.C. 465, 489-94 (1969), aff'd 423 F.2d 423 (4th Cir.), cert. denied, 400 U.S. 828, 91 S.Ct. 57, 27 L.Ed.2d 58 (1970). The Commission, however, adopted a more economically oriented rationale focusing on the effect of the seller's post-purchase conduct on the consumer's economic welfare when it later adopted the Holder-in-Due-Course Rule which completely prevented sellers from taking advantage of the holder-in-due course doctrine. See Preservation of Consumers' Claims and Defenses, Statement of Basis and Purpose, 40 Fed.Reg. at 53,522-24. 101 The Commission believes that relief under Section five of the FTC Act is appropriate where sellers or creditors impose adhesive contracts upon consumers, where such contracts contain terms which injure consumers, and where consumer injury is not off-set by a reasonable measure of value received in return. In this connection, the Commission's authority to examine and prohibit unfair practices in or affecting commerce in the manner of a commercial equity court is appropriately applied to this problem. Where one party to a transaction enjoys substantial advantages with respect to the consumers with whom he deals, it is appropriate for the Commission to conduct an inquiry to determine whether the dominant party is using an overabundance of market power, or commercial advantage, in an inequitable manner. 102 Id. at 53,524. 103 Thus the Commission in promulgating the Holder-in-Due-Course Rule articulated an economic rationale for its unfairness determination. 104 This theory (in effect) posits a market imperfection which for some reason prevents the market from arriving at the most efficient distribution of post-purchase rights between buyers and sellers. Faced with such an imperfection, the Commission steps in to correct the market's results by reassigning post-purchase rights between the various parties until the most efficient result is reached. 105 Craswell, supra note 15, at 131. This is basically the same economic rationale exemplified in the Commission's Policy Statement and utilized in this case. See Policy Statement at 37 (Commission's actions are brought to halt some form of seller behavior that unreasonably creates or takes advantage of an obstacle to the free exercise of consumer decisionmaking) (emphasis added). Thus contrary to petitioners' assertions, the Commission has in the past sanctioned intervention not only where the seller's conduct affirmatively causes distortion of proper market functioning but also where the seller takes advantage of an existing obstacle which prevents free consumer choice from effectuating a self-correcting market. 106 In the present case, the Commission identified particular aspects of the credit transaction which substantially limit the consumer's ability and incentive to bargain over credit remedies and which limit the creditor's incentives to compete on the basis of remedies. See supra pp. 976-978. This market imperfection prevents consumer choice from operating to effect the mix of remedies which most reflects consumer preferences and leaves creditors free to exploit this market failure by including an entire litany of remedies as boilerplate provisions. 28 Thus the Commission concluded that by insisting on HHG security interests and wage assignments, creditors are taking advantage of an existing obstacle to the free exercise of consumer decisionmaking and thereby engaging in an unfair practice. 107 While we agree with petitioners that the Commission cannot be allowed to intervene at will whenever it believes the market is not producing the best deal for consumers, we nonetheless believe that this court would be overstepping its authority if we were to mandate, as petitioners urge, that the Commission's unfairness authority is limited solely to the regulation of conduct involving deception, coercion or the withholding of material information. As previously discussed, the Commission's consumer injury test, set forth in its Policy Statement, while not specifically defining the kinds of practices or injuries encompassed, is the most precise definition of unfairness articulated to date by either the Commission or Congress. Upon reviewing it, Congress has not seen fit to enact any more particularized definition of unfairness to limit the Commission's discretion. Indeed, the most significant congressional response to the Policy Statement has not been criticisms or rejection, but proposals to enact the Commission's three-part consumer injury standard into law. See supra pp. 970-971 & n. 14. Thus, the Commission has, for all practical purposes, been left to develop its unfairness doctrine on an incremental, evolutionary basis. See supra p. 967. At this juncture, it is not for this court to step in and confine, by judicial fiat, the Commission's unfairness authority to acts or practices found to be deceptive or coercive. Our role is simply to review the Commission's exercise of its unfairness authority in this case. See supra pp. 968-969. We find that the Commission's articulated rationale for its determination that the taking of HHG security interests and wage assignments constitute unfair practices fully comports with the criteria set out in the FTC's Policy Statement. The Commission has sufficiently identified and documented the factors resulting in an obstacle to free consumer decisionmaking which is being exploited by creditors to the detriment of consumers. 29 We cannot therefore say that the Commission has exceeded the boundaries of its statutory authority to define unfair practices in this case. 108 The Commission's economic rationale for finding the taking of HHG security interests and wage assignments to be unfair practices is additionally bolstered by considerations of equity and public policy. It is well established that certain types of contracts or contractual provisions may be prohibited simply because they violate accepted principles of fair play and equity, e.g., contracts of adhesion. Cf. U.C.C. Sec. 2-302 (1978) (unconscionable contracts or clauses). And courts have recognized that the Commission was never intended to disregard principles of equity in reaching its decisions. See Sperry & Hutchinson, 405 U.S. at 244, 92 S.Ct. at 905 (FTC may like a court of equity consider public values beyond those enshrined in the letter or ... spirit of the antitrust laws); FTC v. Standard Educ. Soc'y, 86 F.2d 692, 696 (2d Cir.1936) (Hand, J.) (FTC's duty in part at any rate, is to discover and make explicit those unexpressed standards of fair dealing which the conscience of the community may progressively develop), rev'd on other grounds, 302 U.S. 112, 58 S.Ct. 113, 82 L.Ed. 141 (1937) (reversing that part of Second Circuit's holding which modified and weakened FTC's cease and desist order); see also Spiegel, Inc. v. FTC, 540 F.2d 287, 292 (7th Cir.1976) (invoking a public policy rationale and stating that FTC has authority to prohibit conduct that, although legally proper, [is] unfair to the public). In its Policy Statement, the Commission states that considerations of public policy are frequently used as confirmatory evidence of the unfairness of a particular practice but that [s]ometimes public policy will independently support a Commission action. Policy Statement at 38-39. See generally Averitt, supra note 15, at 275-78 (discussing FTC's reliance on public policy considerations); Craswell, supra note 15, at 135-39 (discussing FTC's reliance on considerations of equity). 109 In the present case, the Commission found that wage assignments are prohibited in Uniform Credit Code states, several other states, and the District of Columbia. 49 Fed.Reg. at 7756. The substantial majority of states permitting wage assignments impose restrictions on their use. Id. Similarly, several states prohibit the taking of non-possessory, non-purchase security interests in household goods, and others place limitations on their use. Id. at 7781-82 & n. 10. Both the NCCF study and the Creditor Remedies Project, which provided the impetus for the Commission's rulemaking, see supra pp. 961-962, delineated the creditor abuses and concomitant consumer injuries entailed in the use of HHG security interests and wage assignments, and recommended that the use of these creditor remedies be substantially restricted or eliminated. In addition, the Commission stated its opinion that: 110 [T]he use of blanket security interests to exhort an overextended or unemployed consumer to make a decision which may lead to increased financial difficulties has many of the attributes of economic duress. Threats to seize the personal possessions of a consumer and his or her family clearly meet many of the criteria for economic duress, especially given the dire financial circumstances in which the consumer finds himself. Although the Commission has premised its findings regarding the unfairness of threats to seize household goods on the resulting psychological and economic injury to consumers, as demonstrated by information contained in the rulemaking record, these common law doctrines provide evidence of public policy supporting the Commission's findings. 111 49 Fed.Reg. at 7765 (footnotes omitted). Thus the Commission's exercise of its unfairness authority in proscribing the use of HHG security interests and wage assignments can be fairly viewed as falling within the Commission's authority to take into consideration principles of equity and public policy and to proscribe acts or practices found to violate those principles. 112