State Unfair and Deceptive Trade Practices Laws: An Economic and Empirical Analysis
34 Pages Posted: 18 Jan 2017 Last revised: 24 Jan 2018
Date Written: January 13, 2017
Consumer protection acts (CPAs) developed with the goal to protect American consumers from fraudulent, deceptive and unfair business practices. Initially, Congress, through the FTC Act, sought to define and deter conduct that the existing legal system largely failed to remedy. Subsequently, states localized and individualized these rights while maintaining a careful balance between protecting consumers and preventing the proliferation of lawsuits that harm both consumers and businesses. But in recent decades, this thoughtful balance has yielded to damaging legislative and judicial overcorrections at the state level with a common theoretical mistake: the assumption that more CPA litigation automatically yields more consumer protection. The result has been an explosion in consumer protection litigation, which serves no social function and for which consumers pay indirectly through higher prices and reduced innovation. Using data on state and federal CPA litigation from 2000-2013, we find substantial increases in CPA litigation in both, with federal litigation growing almost twice as fast in federal than state courts (a cumulative average growth rate of 6.1 percent vs. 3.4 percent). We also find that the financial crisis appears to have played a large role in the recent growth in CPA litigation — the financial services industry is the most common target for private CPA actions in a set of cases we sample, and a large proportion of these cases involve debt collection or federal lending or housing statutes. We conclude that although the entire suite of expansive provisions in CPAs — enhanced damages, class actions, attorneys fees, and eliminating the need to show harm — are responsible for the explosion in private CPA litigation, from a social standpoint, requiring consumers to show cognizable harm would be the most efficient reform.
Keywords: Consumer Protection, CPAs, Deceptive Trade Practices, Federal Trade Commission, Fraud, FTC, Litigation, Unfair Trade Practices
JEL Classification: D18, K20
Suggested Citation: Suggested Citation