Judicial Cost-Benefit Analysis Meets Economics: Evidence from State Unfair and Deceptive Practices Laws

Abstract

Section 5 of the Federal Trade Commission Act (FTC Act) prohibits "unfair or deceptive acts or practices in or affecting commerce." State statutes prohibiting unfair and deceptive acts and practices (UDAPs) often mirror Section 5 of the FTC or include harmonization provisions instructing courts to interpret and apply the state UDAP in a manner consistent with the FTC Act. It is well documented that courts applying state UDAPs have nevertheless frequently interpreted them in a manner inconsistent with the FTC Act. We highlight a different schism in unfairness analysis: the role of economic analysis. Specifically, we identify and examine differences between the application of the simple cost-benefit approach adopted by the FTC in the Unfairness Policy Statement and codified by Congress in Section 5(n) of the FTC Act, and the approach used by courts to resolve state UDAP claims. We assigned expert consumer protection economists to a "Shadow Commission" to evaluate a sample of state UDAP unfairness claims applying the simple FTC cost-benefit standard. Our results suggest there is little or no economic analysis at work in evaluating state UDAP claims, raise important questions about the efficacy of state UDAP unfairness enforcement, and identify a potential role for the FTC in guiding improved state UDAP enforcement.

Keywords: FTC, consumer protection, benefit-cost analysis, cost-benefit analysis, Section 5, privacy, CPA

JEL Classification: K10, K21, K23, L51