The upshot, for busy people:
- On October 18, 2022, the Federal Trade Commission (“FTC” or “Commission”) announced a settlement with auto dealer Passport Automotive Group (“Passport”), alleging that Passport charged customers for “junk fees” and discriminated against Black and Latino customers by charging them higher interest-rate markups (not tied to creditworthiness) and “junk fees” more often. As part of the settlement, the FTC alleged that Passport’s discriminatory conduct violated the “unfairness” prong of Section 5 of the FTC Act, the first enforcement action to use this new theory.
- The FTC’s action here is part of a recent line of agency actions and statements aimed at expanding broad “unfairness” authority to police discrimination that might not be covered by more specific antidiscrimination statutes. Individual FTC commissioners have previously expressed a desire to embrace this theory, as we have discussed in a prior Legal Update. And the Consumer Financial Protection Bureau (“CFPB”) announced earlier this year that its UDAAP examinations would include a review for “unfair” discrimination outside of the credit context.
- This analytical development could have important ramifications, but it is too soon to say. The CFPB’s announcement is the subject of litigation that could derail this movement, and it remains to be seen whether and how agencies intend to use this authority in circumstances where more specific antidiscrimination statutes would not apply. But if the FTC, CFPB and other agencies with similar authorities embrace this idea, it could dramatically expand federal antidiscrimination enforcement in unpredictable ways.
The FTC and other agencies have authority to prosecute discrimination under several statutes, including the Equal Credit Opportunity Act (“ECOA”), which prohibits discrimination in connection with any aspect of a credit transaction. “Unfair” discrimination theory does not rely on any of those specific statutes. Rather, it relies on the FTC’s overarching authority to prohibit unfair acts and practices. To establish that a business practice is unfair, the FTC (and other agencies with similar unfairness authority) must make a three-part showing: (1) that the practice causes, or is likely to cause, substantial injury to consumers; (2) that the injury is not reasonably avoidable by consumers; and (3) that the benefits of the practice to consumers or to competition do not outweigh the substantial injury.
The FTC used its then-undefined unfairness authority aggressively in the 1960s and 1970s but then faced congressional backlash, resulting in codification of this three-part test. Today, the agency has used unfairness authority to prosecute business practices that harm consumers even though there might not be deception involved. Common unfairness claims have been based on unauthorized fees, poor data security practices, and loan servicing errors.
The push by regulators to plead discrimination as unfairness is a recent phenomenon.
- To our knowledge, the idea of “unfair” discrimination was first articulated in a 2020 FTC enforcement action against an auto dealer where the FTC alleged that the dealer had violated ECOA by discriminating against Black and Latino auto purchasers in connection with interest-rate markups. In a concurring statement, then-FTC Commissioner Rohit Chopra argued that the FTC also could have pled that the dealer’s conduct was unfair under the FTC Act.
- Then in March 2022, Chopra, now the director of the CFPB, issued an update to the CFPB’s UDAAP examination manual, explaining that the CFPB would henceforth examine institutions for discrimination in the offering or provision of all consumer financial products or services (and not just credit products) through the unfairness lens, as explained in a prior Legal Update. (Several industry groups have since sued the CFPB under the Administrative Procedure Act, seeking a declaration that the exam manual updates are unlawful and an injunction against their implementation; the lawsuit is still pending.)
- And most recently, in an April 2022 FTC settlement with another auto dealer related to discriminatory lending, the two Democratic commissioners at the time (Chair Lina Khan and Commissioner Rebecca Slaughter) argued in a separate statement that they would have alleged that the discriminatory practices at issue in the case also were unfair. (We covered this matter in this Legal Update.) That view did not carry a majority because, at the time, the Commission was evenly split between Democrats and Republicans.
Facts and allegations in this case
Passport operated a series of dealerships in the Washington DC metro region. No stranger to the FTC, Passport was the subject of a 2018 enforcement action in connection with deceptive marketing—alleging that the company sent tens of thousands of fake “urgent recall” notices to entice consumers to visit its dealerships. The allegations in the present case did not relate to that prior enforcement action, and the FTC did not allege that Passport violated the prior court order.
The FTC’s claims here involved three core allegations:
- First, the FTC alleged that Passport added deceptive “junk fees” to auto purchases. According to the complaint, when Passport advertised purchase prices for specific vehicles that had been “certified,” the dealership slipped in additional fees that were not warranted because they already had been baked into the price of the vehicle. For example, the complaint alleges that Passport charged fees in connection with “reconditioning, inspection, preparation, and certification” even though these actions were necessary to market the cars as “certified” and Passport had agreed with manufacturers that it would not separately charge fees in connection with these activities.
- Second, the FTC alleged that Passport discriminated against Black and Latino customers in connection with interest-rate markups. According to the complaint, Passport offered indirect loans to customers with a default 2% (200 basis point) increase over the buy-rate from the indirect lenders but allowed individual sales people to make downward departures for certain specific reasons, which required documentation. But staff allegedly did not comply with these procedural requirements, and the FTC found that Passport charged Black and Latino consumers, on average, 28 and 26 basis points, respectively, more than non-Hispanic white consumers.
- Third, the FTC alleged that Passport also discriminated against Black and Latino customers by charging at least one extra fee 24% more frequently for Black customers and 42% more frequently for Latino customers compared to non-Hispanic white customers. Notably, there is no specific allegation that these fees were incorporated into the credit extended to consumers.
The complaint’s legal theories are, for the most part, straightforward: counts under Section 5 of the FTC act for deceptive advertising and for unfair unauthorized fees, and for violations of the ECOA.
But Count III was the real bombshell. Titled “Unfair Discrimination,” the FTC alleged that Passport had violated Section 5 of the FTC Act because “in numerous instances, … Defendants impose higher costs on Black and Latino consumers than on similarly situated non-Latino White consumers.” To our knowledge, this is the first use of a UDAP authority to prosecute a claim of discrimination.
Unsurprisingly, the five commissioners had quite a bit to say about this unfair discrimination count. In a joint statement by Chair Khan and Commissioners Rebecca Slaughter and Alvaro Bedoya, the three Democratic commissioners described unfair discrimination as a “straightforward application of Section 5.” Purporting to apply the three-part test for unfairness, these commissioners explained their reasoning: “Black and Latino consumers suffered substantial economic injury in the form of higher fees for the same products and services. These consumers could not reasonably avoid this injury, because they typically had no way of knowing they were being charged more than their White counterparts. And Passport’s pricing practices did not yield countervailing benefits.”
The two Republican commissioners, Christine Wilson and (now-former Commissioner) Noah Phillips each dissented from the unfair discrimination count, with Commissioner Phillips articulating the joint position that Section 5 could not support a discrimination claim. Among other things, Commissioner Phillips explained that:
- In this case, the unfair discrimination claim was wholly superfluous because the relevant discrimination was encompassed by the ECOA violation.
- Section 5 lacks the specificity of other antidiscrimination laws, which target specific economic activities and protected classes. As a result, Section 5 provides no guidance whatsoever in assessing what sort of “discrimination” is prohibited.
- The use of Section 5 in this case was based on disparate impacts, which in his view is inconsistent with the Supreme Court’s guidance as to when disparate impact is available as a theory of liability under antidiscrimination statutes.
- Whereas antidiscrimination laws with disparate impact tests end up assessing whether there were less restrictive alternatives and the business’s legitimate needs, Section 5 unfairness only balances the benefits of the practice with the injuries it allegedly imposes. In other words, according to Commissioner Phillips, a practice could violate Section 5 even if that race-neutral policy was the least restrictive means to achieve the business’s legitimate needs.
- Unfair discrimination as pled in this case does not satisfy the three-part test for unfairness because, in balancing the costs and benefits, the agency is not actually looking at the business’s conduct to assess the benefits but rather focused solely on the alleged discriminatory impact in assessing both the injury and (lack of) benefits to consumers.
What does this mean?
Frankly, it is too early to say for sure. If the Commission intends to plead unfair discrimination merely as a matter of double pleading—in other words, where the agency also has pled a violation of ECOA or another specific antidiscrimination statute—then the impact within the FTC may be minimal.
But the Commission may be laying the groundwork for a more expansive use of this theory where it asserts claims based on discrimination not explicitly tied to vehicle financing or other extensions of credit. In a next case where the Commission finds discrimination but there is no credit connection, it could use this case against Passport as a precedent to file a stand-alone unfair discrimination claim.
Moreover, because many states have their own prohibition against unfair practices, this case could become a model that state attorneys general could follow in their own law enforcement practices.
Looming behind the scenes of this enforcement action is the lawsuit brought against the CFPB by industry groups alleging that the CFPB’s parallel effort to include unfair discrimination in its exam processes exceeded its authority. A CFPB loss in that lawsuit (depending on the nature of the decision) likely will curtail future unfair discrimination efforts by the FTC, as both agencies share identically worded unfairness authority. Companies should watch this space.
Note: Two of our authors have particular knowledge of how the CFPB and FTC approach issues: Ori Lev served as a CFPB deputy enforcement director, and Christopher Leach was an attorney in the FTC’s Division of Financial Practices.