In late September, we blogged about a lawsuit that the Chamber of Commerce and other business groups filed against the CFPB, challenging the CFPB's update to its Supervision and Examinations Manual. As updated, the manual now states that discrimination is an "unfair" practice under the Dodd-Frank Act, and that the agency plans to scrutinize it "across the board in consumer finance," "including in situations where fair lending laws may not apply." We noted in our blogpost that the FTC and the State AGs were also sending signals that they planned to challenge discrimination using their unfairness authority.
Well, the FTC just did. On October 18, it announced a settlement with Passport Automotive Group resolving allegations (among other charges) that Passport engaged in an unfair practice when it imposed higher costs on Black and Latino customers than on similarly situated non-Latino White customers. The vote was 4-1, with Commissioner Phillips dissenting and Commissioner Wilson concurring in part and dissenting in part.
Complaint and Order
The FTC's complaint alleges that the defendants (nine dealerships and two individuals) advertised cars at specific prices but then added fees (per the press release, "junk fees") to the purchase price, falsely claiming that the fees were required. It also alleges that, for years, Passport discriminated against Black and Latino consumers, in violation of the Equal Credit Opportunity Act and Section 5, by charging them hundreds of dollars in extra costs and fees.
According to the complaint, Passport was alerted to the problem by a finance company, but failed to take action. Passport also had policies in place that could have detected the issue, but didn't follow them. Finally, the complaint alleges that the individual defendants (Passport's president and vice president) both knew about these practices but failed to stop them.
Under the order, the company must establish a fair lending program requiring, among other things, that each dealership either charge no financing markup or charge the same markup to all consumers. The order also prohibits misrepresentations about costs and fees, and requires defendants to obtain consumers' express consent before adding any charges to the price of their cars. Additionally, defendants must pay $3.38 million in refunds to affected consumers.
The allegations here are compelling on their face, and include (besides unfairness) misrepresentations about prices and charges; evidence of a significant price difference based on race; and violations of the ECOA, under which the FTC has clearly authority to challenge racial discrimination. The defendants also chose to settle the case, rather than fight the allegations in court, where the FTC's legal theories might have been tested. Given these circumstances, the FTC majority likely viewed this case as an ideal opportunity to allege, as it had promised to do, that the racial discrimination here (the conduct that violated the ECOA) was also unfair under Section 5.
Commissioners' Statements
Commissioner Phillips, in a dissent released on his last day at the FTC, says that he would have voted for a complaint if it were limited to the deception and ECOA allegations. However, he argues vigorously against the unfairness allegation, stating that it is "gratuitous" (i.e., adds nothing beyond what is already addressed by the ECOA); exceeds the authority of the FTC (especially given the existence of numerous anti-discrimination laws); vague as to context or protected class; and a "gap filler" that usurps the role of Congress in determining public policy.
Using his characteristic flair, he concludes that "[o]ne obvious takeaway from all of this is that Section 5 is not an antidiscrimination statute. No beak, no feathers, no walk, no quack – Section 5 is a terrific consumer protection tool, but it is no duck." (He also explains why he believes that the FTC's disparate impact theory is an "odd duck.") Phillips also agrees with Commissioner Wilson that the individuals should not have been named.
In her statement, Commissioner Wilson agrees with Phillips on the merits but frames her vote as a partial concurrence/partial dissent. Most of Wilson's statement focuses on individual liability, arguing that there is insufficient evidence to support it.
Chair Khan and Commissioners Slaughter and Bedoya, in a joint statement, explain why they believe the unfairness count and individual liability are justified. They also stress the need for the FTC to use all available tools to protect consumers. Of note, they state that the unfairness allegation is a "straightforward application" of Section 5 (which might seem a bit flippant to some, given the complexities and nuances surrounding both the unfairness test and existing anti-discrimination laws and policies).
Lessons for Companies
The FTC, the CFPB, and some States have made clear that they plan to use one of their broadest legal tools – the prohibition against "unfair practices" – to tackle discrimination across multiple industries, not just in areas already covered by existing fair lending and civil rights laws. Regardless of how one views this legal theory, the agencies are moving forward – and, certainly, discrimination is a harmful practice to be avoided, regardless of the law.
Therefore, if you don't already have a program in place (i.e., policies and procedures) to help prevent and detect discrimination in your business, you should seriously consider implementing one now. As the FTC's case makes clear, the program shouldn't just consist of written policies that you put in a drawer, but should include steps to ensure that the policies are followed – for example, employee training, ongoing monitoring and oversight, consequences for non-compliance, and regular reviews of business records and practices to ensure that discrimination isn't occurring. While reasonable questions remain as to the scope of "unfair discrimination" (as we'll call it), companies can certainly take action now to avoid obvious problems, like charging different prices or providing a different level of service based on race, color, religion, or sex. Companies can also look to existing anti-discrimination and civil rights laws for guidance as to the types of practices that may be viewed as discriminatory in analogous contexts.
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