By LCA Fellow Carmen D. Caruso
Congress directed the Federal Trade Commission (FTC) to combat “unfair or deceptive acts or practices in or affecting commerce” but the federal courts have consistently refused to imply a private right of action to enforce the FTCA, even though some courts acknowledge it might be “desirable or logical” to do so. Copeland v. Newfield Nat'l Bank, No. CV 17-17 (NLH/KMW), 2017 WL 6638202, at *2 (D.N.J. Dec. 29, 2017).
To fill this void, 49 states have enacted, in one form or another, a deceptive trade practices act often called a “Little FTC Act” – but lack of uniformity frequently creates outcome-determinative choice-of-law issues.[1]
We discuss here three types of cases where Little FTC Acts have been used to carve new trails that can greatly expand a plaintiff’s leverage in cases as diverse as civil rights, antitrust and more routine breach of contract cases.
- Challenging an organization’s public statements as deceptive
Little FTC Act claims are often pled alongside claims of common law fraud or breach of contract. Less common is to plead a claim for deceptive trade practices alongside a claim of racial discrimination in violation of the Civil Rights Act of 1870, 42 U.S.C.§1981, but we recently did so in North Carolina, in representing an African American lawyer who alleged she joined her law firm in substantial reliance on the firm’s public touting of its progressive diversity and inclusion policies. She claimed she was led to believe, on the firm’s web page and in interviews, that she would be welcomed and supported, but instead, she found herself treated as a “diversity prop” useful to the firm in attracting corporate clients that increasingly demand diverse legal teams.
The defendant law firm vigorously denied wrongdoing and the case settled while a Rule 12(b) challenge to the Little FTC Act claim was briefed, awaiting decision. There is no precedent and we will respect the litigants’ privacy. That being said, we believe we stated an actionable claim for relief because we alleged (1) an unfair or deceptive act or practice (and this is noteworthy in that “unfair” and “deceptive” practices provide alternative paths to victory), (2) in or affecting commerce, (3) that proximately injured plaintiff. See N.C.Gen.Stat.§75-1.1. Under the North Carolina act:
‘[w]hat constitutes an unfair or deceptive trade practice is a somewhat nebulous concept,’ and … ‘North Carolina courts base their determinations on the circumstances of each case.’ … Thus, whether a particular practice violates the UDTPA is both a question of law and a highly fact-specific inquiry.
- Atl. Ltd. P'ship of Tennessee, L.P. v. Riese, 284 F.3d 518, 534-5 (4th Cir. 2002) (citation omitted). On a cautionary note, “only practices that involve “[s]ome type of egregious or aggravating circumstances” are sufficient to violate the UDTPA.” Id. (citation omitted); see also Canady v. Mann, 107 N.C. App. 252, 260, 419 S.E.2d 597, 602 (1992):
The Act does not precisely define the term unfair or deceptive trade practices, and neither is such a definition possible. Rather the surrounding facts of the transaction and the impact on the marketplace determine if the transaction is unfair or deceptive, and this determination is a question of law for the court.
Id.
In our case, we alleged that as a matter of law, a civil rights violation is an “unfair” trade practice under the North Carolina statute, which defines “unfair” as “immoral, unethical, unscrupulous [and/or] substantially injurious to consumers.” However, to merely bootstrap the civil rights claim into the Little FTC Act count would not expand our case significantly. From the standpoint of the defendant law firm, our additional allegation that the law firm’s marketing of its diversity and inclusion program had been “deceptive” threatened to greatly expand the scope of our case, beyond the “typical” discrimination claim (if there is such a thing).
Again, these allegations were contested, but we were confident the court would find actionable (as misrepresentations of fact, not merely statements of aspiration or opinion) the firm’s written statements, among others, it had “engaged in significant efforts to recruit, train, and retain diverse attorneys [and has made a] genuine attempt to make a meaningful impact on the legal profession” making it a “leader …for many years” among law firms in its community. We argued further these statements did not merely have a “tendency or capacity to deceive,” which is all that would be needed in that state, but that “actual deception” had harmed the public at multiple levels, including the deception of prospective employees like our client; the deception of actual and prospective clients that gave legal business to this law firm; the deception of the legal profession, in which this law firm enjoyed a great reputation it might not deserve; and deception of the general public. In sum, we alleged the North Carolina Little FTC Act was “precisely the right law to bring [the defendant law firm] to justice for its ongoing, systematic effort to mislead a wide audience on a very important social issue … and that “[in] every possible way, a law firm … that publicly misrepresents its commitment to diversity and inclusion to gain business, subjecting unsuspecting minority or female lawyers to disparate treatment, hostile work environment and retaliation, violates” the state law.
There were more nuances we had to overcome, as there invariably are under the Little FTC Act in most states, but these major issues attracted substantial interest from the American Bar Association and media. For our client, we were pleased the case settled, as going to trial as a discrimination plaintiff is never a picnic; and we gave the legal community, and other employers rushing to join the diversity and inclusion bandwagon, an important reminder that truth matters. But yes, this would have been a great case to try, and you can just imagine what our discovery requests would have included.
- Proving unfair or deceptive practices in during contract performance
Trial lawyers are frequently accused of alchemy when we try to convert claims for breach of contract into common law or statutory tort claims with enhanced remedies. But in representing business clients (like franchisees or dealers) with ongoing contractual relationships, we risk thinking too narrowly when we explore possible fraud claims only in the inducement or renewal of the contractual relationship; and limit ourselves to claims for breach of contract if there was a failure to perform after the contracts are signed.
Too often overlooked, in states where franchisees or other business clients have standing under a Little FTC Act, those statutes may protect against bad faith, predatory or “unfair” conduct in performance that may, or may not, breach the parties’ contracts. See Century 21 Real Estate Corp. v. Hometown Real Estate Co., 890 S.W.2d 118, 127 (Tex. App. 1994), writ denied (Sept. 14, 1995), where an appellate court affirmed a franchisor’s statutory liability for committing a deceptive trade practice by engaging in an “unconscionable action or course of action” [defined as] an act or practice that, to a person's detriment, takes advantage of the person's lack of knowledge, ability, experience, or capacity to a grossly unfair degree, or that results in a gross disparity between the value received and consideration paid, in a transaction involving the transfer of consideration. …” The court held Century 21 committed a deceptive trade practice, in performance, because it violated the company’s established “unwritten policy” to not allow the opening of a nearby competing agency if the existing franchisee had sufficient market share.[2]
This holding is important to anyone representing a franchisee or a dealer, as your client’s express contractual protections are likely lacking (a topic for another day). It is especially welcome coming from Texas, where (in another deferred topic), the courts decline to recognize the implied covenant of good faith and fair dealing, to regulate a contracting party’s discretion in performance, to anywhere near the extent most other states recognize that common law doctrine. Cf. Interim Health Care of N. Illinois, Inc. v. Interim Health Care, Inc., 225 F.3d 876, 884 (7th Cir. 2000) (holding that in Illinois, like most states, “[w]hen one party to a contract is vested with contractual discretion, it must exercise that discretion reasonably and with proper motive, and may not do so arbitrarily, capriciously or in a manner inconsistent with the reasonable expectations of the parties.”); and Cole v. Hall, 864 S.W.2d 563, 568 (Tex. App. 1993), writ dismissed w.o.j. (June 22, 1994) (“Texas law does not recognize an implied duty of good faith and fair dealing in every contract or business transaction.”)
We frequently cite this Texas appellate decision for the proposition that abusive contractual performance violates a Little FTC Act whether or not it also breaches the contract. This argument is enhanced when we can plausibly show a discrepancy between how a deal was represented versus how it turned out; and we seek advantage with an easier burden of proof than common law “promissory fraud”, where the requirements of proving intent to defraud, and reasonable reliance, can be daunting. See Shah v. Racetrac Petroleum Co., 338 F.3d 557, 567 (6th Cir. 2003) (“To make a showing of promissory fraud [under Tennessee law], a plaintiff must demonstrate that “a promise or representation was made with the intent not to perform.”[3] The Sixth Circuit in Shah observed that “Plaintiffs who successfully press allegations of promissory fraud often have [Little FTC Act] claims as well” (Id., at 569) – but the converse would not likely be true.
- Closing the antitrust gap
In Continental T. V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 97 S.Ct. 2549, 53 L.Ed.2d 568 (1977), the Supreme Court changed the course of antitrust law by holding that in most Section 1 cases, challenging an unreasonable “restraint of trade” (such as a tying arrangement) is probably not unlawful unless the defendant has “market power” “to force a purchaser to do something that he would not do in a competitive market.” Eastman Kodak Co. v. Image Tech. Servs., Inc., 504 U.S. 451, 464, 112 S. Ct. 2072, 2080–81, 119 L. Ed. 2d 265 (1992) (citations omitted).
The wisdom of the Supreme Court’s antitrust jurisprudence in an era where companies “too big to fail” have damaged our economy is also a topic for another day. Suffice it to say, if there is an argument that economic conduct violates the Sherman Act, or would have violate it pre-Sylvania, it is worth considering a Little FTC claim, as the plaintiffs have done in these cases: Sergeants Benevolent Ass'n Health & Welfare Fund v. Actavis, plc, No. 15 CIV. 6549 (CM), 2018 WL 7197233, at *35–36 (S.D.N.Y. Dec. 26, 2018); and In re Packaged Seafood Prod. Antitrust Litig., 242 F. Supp. 3d 1033, 1072 (S.D. Cal. 2017). This area of law is likely to develop.
- Conclusion
We think about Little FTC claims in most cases we file. More often than not, if we can establish that our client qualifies for protection under the particular act, these claims become very potent weapons.
[1] For a fifty state survey, see http://www.nclc.org/images/pdf/udap/udap-report.pdf (but be sure to verify the survey is up to date in your jurisdiction).
[2] In Century 21 v. Hometown, the franchisor waived its contention the franchisee lacked as a “consumer” under the Texas DPTA. Id. at 124. Subsequent “Texas courts have held that a franchise may be a good or service under the DTPA.” Carroll v. Farooqi, 486 B.R. 718, 726 (N.D. Tex. 2013).
[3] In Tennessee, like North Carolina, “[t]he concept of unfairness is even broader than the concept of deceptiveness, and it applies to various abusive business practices that are not necessarily deceptive.” Tucker v. Sierra Builders, 180 S.W.3d 109, 116–17 (Tenn. Ct. App. 2005).
Carmen D. Caruso is a sought-after trial lawyer for high stakes cases throughout the United States. His trial practice is concentrated in major commercial, civil rights, and professional liability cases.
Nationally recognized for his success in franchise and dealership litigation, Carmen’s cases have expanded legal protections for franchisees and dealers against anticompetitive, abusive, and bad faith conduct and he has represented franchisees and dealers from almost every state and many foreign countries.
Carmen thrives in challenging cases that confront serious misconduct. He was victorious in the United States Court of Appeals striking a blow against glass ceiling discrimination of women in c-suites and was part of a New York City trial team that recovered substantial money from Fox News for sexual harassment and retaliation against a female Fox News Reporter. He has fought to expand the protection of minority franchises under federal civil rights laws and to protect underserved communities from racial steering. In addition, Carmen persuaded a federal judge to require a Monsanto subsidiary to clean up its PCB contamination in the Milwaukee River in Wisconsin and he prevailed upon the U.S. Customs Service to return property wrongfully seized from U.S. citizens traveling abroad. Carmen has also won criminal trials including a state court murder trial.
In both 2019 and 2020, at request of the Illinois Supreme Court Commission on Civility in the Profession, Carmen has served as a “guest speaker” to incoming law school students in Illinois law schools conducting their introduction to ethics, diversity, and inclusion.
Carmen has been named to many prestigious lists of lawyers but particularly appreciates the honor of being named an LCA Fellow due to the collegiality and professionalism in this organization.
