The Unfair Trade Practices Act—Is It Time for a Change?, 0513 SCBJ, SC Lawyer, May 2013, #1

Author:Robert L. Reibold.
 
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The Unfair Trade Practices Act—Is It Time for a Change?

Vol. 24 Issue 6 Pg. 16

South Carolina BAR Journal

May 2013

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0 Robert L. Reibold.

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0The South Carolina Unfair Trade Practices Act (UTPA)1 has become a frequent player in business litigation. It is attractive to the plaintiff’s bar for a number of reasons. It authorizes recovery of both attorney’s fees and treble damages. Additionally, South Carolina courts employ an expansive definition of what constitutes an unfair or deceptive practice. An act is considered to be “unfair” when it is offensive to public policy or when it is immoral, unethical or oppressive.2 An act is “deceptive” when it has a tendency to deceive, 3 but even a truthful statement may be deceptive so long as it has the capacity to deceive.4 A plaintiff need only show the “potential of deception” to prevail in a UTPA case.5

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0South Carolina is not alone in using these definitions. As discussed below, these definitions were originally borrowed from definitions used in Federal Trade Commission (FTC) policy statements and case law.

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0However, over the past decade a growing number of states have considered whether it is appropriate to continue using these definitions. States that have ceased using these definitions include Connecticut, Florida, Hawaii, Maine, Maryland and Vermont.6 States that declined to change the traditional definitions for these terms include Alaska and Montana.[7] Idaho has noted the issue, but has not yet reached a decision.[8]

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Many states are moving away from the traditional definitions of “unfair” and “deceptive” because the FTC, which provided the original definitions, has adopted new and, in some respects, materially different constructions of these terms. Use of these definitions would restrict the type of conduct on which a UTPA claim can be based. States must decide if they will continue to follow the lead of the FTC or forge their own path in regulating unfair and deceptive trade practices. South Carolina appellate courts have yet to confront this issue.

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0This article will examine the question of whether it is appropriate for South Carolina to continue using its traditional definitions of “unfair” and “deceptive.”

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Background

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Congress enacted the Federal Trade Commission Act, 15 U.S.C. § 45(a)(1) (FTC Act), in 1914, creating the FTC. The FTC’s original mission was to attack business actions that could be c onsidered monopolistic.[9] In 1938, Congress passed the Wheeler-Lea Act, [10] which, for the first time, gave the FTC authority to regulate practices that were unfair to consumers.

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0The FTC Act still left much to be desired. It did not define what constituted unfair or deceptive trade practices.[11] It could not reach improper business practices that did not implicate interstate commerce, and it contained no private right of action.

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0These shortcomings prompted many to seek state regulation of improper business practices. States began to enact their own versions of the FTC Act in the 1960s and 1970s. Criticism of the FTC reached its peak in 1968 with the publication of the Nader Report, a critical review of the FTC compiled by then attorney and future presidential candidate Ralph Nader and his team of seven law students, called Nader’s Raiders.

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0South Carolina enacted the UTPA in 1971. It adopted Alternative Form 1 of the Unfair Trade Practices and Consumer Protection Act, developed, in part, by the FTC.[12] South Carolina’s UTPA is identical to Section 5 of the FTC Act and is often called the “Little FTC Act.”[13]

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0History of South Carolina definitions

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0No published South Carolina opinion attempted to specifically define the terms “unfair” or “deceptive” until the Court of Appeals’ 1989 decision in Young v. Century Lincoln Mercury.14In Young, the Court of Appeals borrowed definitions for these terms from Harris v. NCNB, 15a North Carolina case. Another 10 years would pass before the S.C. Supreme Court addressed the appropriate definitions for these terms, and it too adopted the definitions used in Harris.16

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Harris cites a N.C. Supreme Court decision, Johnson v. Phoenix Mutual Life Ins. Co.17Johnson looked to Section 5 of the FTC Act to determine appropriate definitions for the terms unfair and deceptive. For the term “unfair, ” Johnson relies primarily upon FTC v. Sperry Hutchinson, 18a 1972 U.S. Supreme Court case that affirmed a definition used by the FTC in its 1964 Statement of Basis and Purpose of Trade Regulation Rule 408 Unfair or Deceptive Advertising and Labeling of Cigarettes in Relation to Health Hazards or Smoking, 19sometimes called the “cigarette rule.” At that time, the factors the FTC used to determine whether a practice was unfair were: (1) whether the practice, without necessarily having been previously considered unlawful, offends public policy; (2) whether it is immoral, unethical, oppressive or unscrupulous; and (3) whether it causes substantial injury to consumers (or competitors or other businessmen). For the definition of “deceptive, ” Johnson refers to a string citation of FTC cases going as far back as 1935.

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0The definitions adopted by South Carolina originate from an FTC interpretation issued in 1964 and federal case law from the 1930s and 1940s.

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Changes in FTC definitions

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0In 1980, the FTC issued a new definition of “unfair.”[20]This new definition was codified at 15 U.S.C. § 45(n) in 1994. Today, a practice or act is unfair if it “causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition.”21

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0The FTC also changed its standard for deceptive act or practice.22The current FTC standard is that: (1) there must be a representation, omission or practice; (2) that is likely to mislead consumers who are acting reasonably under the circumstances; and (3) the representation, omission or practice must be material.23A representation or practice is considered to be material if it involves information that is important to consumers and therefore likely to affect their choice of, or conduct regarding, a product.24

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Statutory basis for adoption of FTC definitions

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Like South Carolina’s statute, the unfair or deceptive trade practice statutes in place in many jurisdictions were modeled after the FTC Act. These statutes often contain an express legislative direction that courts give “due consideration” or “great weight” to definitions and interpretations of the FTC. This statutory directive to defer to the FTC has prompted a number of states to adopt the new FTC definitions.25A few states have rejected the new FTC definitions.26These decisions reason that while a statute may provide...

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