Appendix — American Financial Services Ass'n v. Federal Trade Commission

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BS i vf 96 ‘a Supreme Court, U.S,

FILED

No. 85- NOVY g (985

JOSEPH F. SPANMOL, JR.

IN THE CLERK

Supreme Court of the United States

OCTOBER TERM, 1985

AMERICAN FINANCIAL SERVICES ASSOCIATION,

y. Petitioner,

FEDERAL TRADE COMMISSION, et al.,

Respondents.

PETITIONER’S APPENDIX

On Petition for a Writ of Certiorari to

the United States Court of Appeals

for the District of Columbia Circuit

ROBERT B. EVANS WILLIAM H. ALLEN*

FRANK M. SALINGER DAVID H. REMES

American Financial Covington & Burling

Services Association 1201 Pennsylvania Ave., N.W.

1101 Fourteenth St., N.W. P.O. Box 7566

Washington, D.C. 20005 Washington, D.C. 20044

(202) 662-6000

Attorneys for American Financial

Services Association

November 8, 1985 *Counsel of Record

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TABLE OF CONTENTS

APPENDIX A —

Opinion of Court of Appeals:

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ENE NI ee cee Ge RUN EA TR ETT

APPENDIX B —

Credit Practices Rule, 16 C.F.R. Part 444 ............

APPENDIX C —

Statement of Basis and Purpose of Credit

Practices Rule, 49 Fed. Reg. 7740 (1984)!...........

APPENDIX D —

Letter from FTC to Senators Ford and Danferth,

Dec. 17, 1980 (1980 Policy Statement)?...............

APPENDIX E —

Letter from FTC to Senators Packwood and

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Page

66a

82a

87a

! Obvious typographical errors have been corrected. Citations to the

corresponding pages in the Federal Register are provided in brackets.

Citations to the corresponding pages in the original letter are provided in

brackets.

APPENDIX A

Notice: This opinion is subject to formal revision before publication

in the Federal Reporter or U.S.App.D.C. Reports. Users are requested

to notify the Clerk of any formal errors in order that corrections may be

made before the bound volumes go to press.

United States Cot of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

No. 84-1081

AMERICAN FINANCIAL SERVICES ASSOCIATION, PETITIONER

Vv.

FEDERAL TRADE COMMISSION, RESPONDENT

SILAS BROWN, et al.,

AMERICAN CONFERENCE OF

UNIFORM CONSUMER CREDIT CODE STATES, INTERVENORS

No. 84-1167

THE SOUTH CAROLINA DEPARTMENT OF

CONSUMER AFFAIRS, PETITIONER

Vv.

FEDERAL TRADE COMMISSION, RESPONDENT

AMERICAN CONFERENCE OF

UNIFORM CONSUMER CREDIT CODE STATES,

AMERICAN FINANCIAL SERVICES ASSOCIATION,

DEPARTMENT OF COMMERCE OF THE STATE OF MONTANA,

INTERVENORS

Petitions for Review of an Order of the

Federal Trade Commission

Bills of costs must be filed within 14 days after entry of judgment. The

court looks with disfavor upon motions to file bills of costs out of time.

Argued February 22, 1985

Decided July 12, 1985

David H. Remes, with whom William H. Allen was on

the brief, for petitioner/intervenor American Financial

Services Association in Nos. 84-1081 and 84-1167.

Steven W. Hamm, with whom Philip S. Porter and

J.M. Edouard Mille were on the brief, for petitioner

South Carolina Department of Consumer Affairs in No.

84-1167. Philip S. Porter and J.M. Edouard Mille were

also on the brief for intervenor American Conference of

Uniform Consumer Credit Code States in Nos. 84-1081

and 84-1167.

Ernest J. isenstadt, Assistant General Counsel, Fed-

eral Trade Commission, with whom Howard E. Shapiro,

Deputy General Counsel, Federal Trade Commission was

on the brief, for respondent in Nos. 84-1081 and 84-1167.

J. Alan Galbraith, for intervenors Silas Brown, et ai.

in No. 84-1081. Charles Hill entered an appearance for

intervenors.

Francis X. Bellotti was on the brief, for Commonwealth

of Massachusetts, et al., amicus curiae, in Nos. 84-1081

and 84-1167. Rex Butler entered an appearance for

amicus curiae in No. 84-1081.

Edwin Lloyd Pittman was on the brief for the Com-

missioner of Banking and Consumer Finance of the State

of Mississippi, amicus curiae, in Nos. 84-1081 and 84-

1167.

R. Stuart Broom was on the brief for National Asso-

ciation of Consumer Credit Administrators, amicus

curiae, in Nos. 84-1081 and 84-1167.

Before: TAMM, WALD and EDWARDS, Circuit Judges.

Opinion for the Court filed by Circuit Judge Waxp.

Dissenting opinion filed by Circuit Judge TAMM.

WALD, Circuit Judge: In these consolidated cases, the

petitioners, American Financial Services Association

(AFSA) and South Carolina Department of Consumer

Affairs (SCDCA) seek review of the Federal Trade Com-

mission’s (“the FTC” or “the Commission”) Trade Regu-

lation Rule on Credit Practices (“the Credit Practices

Rule” or “the Rule”), pursuant to section 18(e) of the

Federal Trade Commission Act (“the FTC Act”), 15

U.S.C. § 57a(e)(1)(A).1 After thorough consideration

of the record, we find the promulgation of the Credit

Practices Rule was within the Commission’s authority

wnder sections 5(a)(1) and 18(a)(1)(B) of the FTC

Act, that the Rule is supported by substantial evidence

in the record, and that the Rule does not effect an un-

lawful preemption of state law.

I. THE RULEMAKING AND PETITIONERS’ CHALLENGE

The “Sommission’s rulemaking on creditor remedies

originated as a result of two national studies of consumer

credit transactions. As part of the Consumer Credit Pro-

tection Act of 1968, Congress established the National

Commission on Consumer Finance and charged it with

conducting a study of consumer credit transactions in-

cluding an assessment of existing regulatory measures to

protect against unfair practices and to ensure the in-

formed use of consumer credit. The National Commis-

1 Petitioner AFSA is an association of over 550 consumer

finance and small-loan companies. Additional briefs in sup-

port of the petitioners were filed by intervenor Ameri-

can Conference of Uniform Consumer Credit Code States

(ACUCCS) and amici the National Association of Consunier

Credit Administrators and the Commissioner of Banking and

Consumer Finance of the State of Mississippi. Additional briefs

in support of the respondent were filed by intervenors Silas

Brown, Community Thrift Clubs, Inc. and the National Con-

sumer Law Center and amici the Attorneys General of Arkan-

sas, Illinois, Kentucky, Maine, Massachusetts, Michigan, Min-

nesota, New Mexico, New York, North Carolina, Ohio, Okla-

homa, Oregon, Rhode Island, Tennessee and Wisconsin.

sion on Consumer Finance’s final report, based on an

extensive survey, identified a number of abusive prac-

tices and recommended curtailment of a variety of boiler-

plate provisions commonly found in consumer credit con-

tracts. See Consumer Credit in the United States, Re

port of the National Commission on Consumer Finance

(1972), Joint Appendix (“J.A.”) at 3 [hereinafter cited

as NCCF study]. Between 1972 and 1974, the FTC’s

Bureau of Consumer Protection also conducted an inves-

tigation of the consumer finance inaustry to determine

whether the use of certain collection remedies was an un-

fair practice within the meaning of section 5 of the FTC

Act. As a result of this investigation, the Bureau of Con-

sumer Protection recommended that the FTC propose a

trade regulation rule branding certain creditor remedies

as unfair trade practices. See Memorandum to Commis-

sion from Division of Special Projects, Bureau of Con-

sumer Protection, Creditor Remedies Project (April

1974), J.A. at 74 [hereinafter cited as Creditor Reme-

dies Project].

On April 11, 1975, the Commission published its initial

notice of rulemaking on consumer credit practices.

Credit Practices Rule, 40 Fed. Reg. 16,347 (1975). The

initial notice of rulemaking proposed a rule proscribing

or restricting the use of eleven creditor practices or rem-

edies: confessions of judgment; waivers of exemptivn;

wage assignments; security interests in household goods;

cross-collateralization; blanket security interests; resale

of repossessed collateral; imposition of attorneys’ fees in

connection with debt collection; pyramiding of late

charges; third party contacts; and co-signer liability.

Following the comment and hearing stages of the rule-

making,? reports were prepared and submitted to the

2 Numerous written comments were received through Au-

gust 5, 1977. Included among the commenters were banks,

finance companies, retailers, credit unions, savings and loan

associations, various trade associations, legal aid attorneys,

Commission by the Presiding Officer, see Report of the

Presiding Offcer on Proposed Trade Regulation Rule:

Credit Practices (August 1978), J.A. at 330 [herein-

after cited as P.O. Report], and by the Commission staff,

see Credit Practices: Staff Report and Recommendation

on Proposed Trade Regulation Rule (August 1980), J.A.

at 704 [hereinafter cited as Staff Report}. The publica-

tion of the Staff Report triggered a 60-day comment

period, see 16 C.F.R. §1.18(h) (1985), which was ex-

tended until January 16, 1981. On April 14, 1983, the

rulemaking staff’s memorandum recommending a final

modified proposed rule and memoranda from the Com-

mission’s Bureau of Economics and Bureau of Consumer

Protection were placed on the public record.* Prior rule-

consumer groups, governmental entities, and consumers.

Banks and saving and loan institutions while not subject to

the FTC’s regulatory jurisdiction, nonetheless submitted com-

ments because they are affected by the Credit Practices Rule.

The Federal Reserve Beard and the Federal Home Loan Bank

Board are required to promulgate rules applicable to banks

and saving and loan associations that are “substantially

similar” to the FTC’s rule within 60 days after the FTC’s rule

takes effect unless the Boards affirmatively find that the

covered practices are not unfair or deceptive, or find that the

rule would “seriously conflict with essential monetary and

payments systems policies.” See 15 U.S.C. § 57a(f) (1). The

Federal Reserve Board published a “substantially similar”

credit practices rule on May 8, 1985. See 50 Fed. Reg. 19,325

(1985) (to be codified at 12 C.F.R. pt 535).

A final notice of rulemaking was published on June 24, 1977,

42 Fed. Reg. 32,259 (1977), setting forth a schedule of public

hearings and enumerating 14 issues for consideration desig-

nated by the Presiding Officer pursuant to 16 C.F.R. § 1.138

(d) (1) (1985). The hearings were conducted between Sep-

tember 12, 1977, and January 30, 1978, in Dallas, Texas,

Chicago, Illinois, San Francisco, California, and Washington,

D.C. Rebuttal submissions were then received until May 1,

1978.

’ See Memorandum to the Commission from Division of

Credit Practices (July 20, 1981) (Staff’s Final Recommenda-

tions on the Proposed Credit Practices Trade Regulation Rule),

alse

making participants were invited to present their views

orally directly to the Commission on June 6 and 7, 1983.

On June 13, 1983, the Commission met to consider

whether to promulgate a rule and what form the rule

should take. The Commission rejected several provisions

of the rule and modified others.* On July 20, 1983, the

Commission tentatively adopted, by unanimous vote, the

revised proposed rule. The final rule was published on

March 1, 1984, to become effective March 1, 1985. Credit

Practices Rule, 49 Fed. Reg. 7740 (1984) (codified at 16

J.A. at 1581 [hereinafter cited as Staff’s Final Recommenda-

tions]; Memorandum to Commission from Timothy Muris,

Director of Bureau of Consumer Protection (April 4, 1983)

(“Muris Memorandum’), J.A. at 1823; Memorandum to Com-

mission from Richard Higgins, Deputy Director of Bureau of

Economics (April 5, 1983) (“Higgins Memorandum’), J.A.

at 1876; Memorandum to Commission from Division of Con-

sumer Protection, Bureau of Economics (April 7, 1983), J.A.

at 1892 [hereinafter cited as Bureau of Economics Finai

Recommendations] ; Memorandum to Commission from Wendy

Lee Gramm, Director of Bureau of Economics (April 7, 1983)

(“Gramm Memorandum”’), J.A. at 1932.

* The Commission rejected draft provisions governing the

resale of repossessed collateral, the imposition of attorneys’

fees in connection with debt coilection, a practice known as

cross collateralization, and creditor contacts with third parties.

See 40 Fed. Reg. 16,347 (April 11, 1975) (originally proposed

rule, relevant sections to be codified at 16 C.F.R. § 444.2(a) (5),

(7), (8), (10) ); see also 49 Fed. Reg. at 7783-87 (explaining

rejection of provisions relating to resale of repossessed col-

lateral and third party contacts) ; Staff Report, J.A. at 965-

1182, 1195-1237 (discussing objections tc proposed provisions

ultimately rejected). The household goods provision was

substantially modified to provide a narrow definition of house-

hold goods covering only “common household necessities’ and

to make clear that the provision only applied to non-possessory

security interests. See 49 Fed. Reg. at 7767-68. The scope of

the original wage assignment provision was similarly nar-

rowed to exclude from its coverage revocable wage assign-

ments, preauthorized payroll deduction plans, and already

earned wages. In addition a definition of “earnings” was

added. See 49 Fed. Reg. at 7760-61.

C.F.R. pt 444). In sum, the Credit Practices Rule was

painstakingly considered and significantly modified in re-

sponse to the extensive comments and recommendations

received during this long rulemaking proceeding.

The Credit Practices Rule as finally promulgated con-

tains provisions relating to the following creditor rem-

edies: confessions of judgment; wage assignments; secu-

rity interests in household goods; waivers of exemption;

pyramiding of late charges; and cosigner liability. Peti-

tioners, as a whole, specifically challenge the provisions

relating to wage assignments and security interests in

household goods. The challenged provisions read in perti-

nent part:

(a) In connection with the extension of credit to

consumers in or affecting commerce, as commerce is

defined in the Federal Trade Commission Act, it is

an unfair act or practice within the meaning of Sec-

tion 5 of that Act for a lender or retail installment

seller directly or indirectly to take or receive from

a consumer an obligation that:

(3) Constitutes or contains an assignment of

wages or other earnings unless:

(i) The assignment by its terms is revocable at

the will of the debtor, or

(ii) The assignment is a payroll deduction plan

or preauthorized payment plan, commencing at the

time of the transaction, in which the consumer au-

thorizes a series of wage deductions as a method

of making each payment, or

(iii) The assignment applies only to wages or

other earnings already earned at the time of the

assignment.

(4) Constitutes or contains a nonpossessory se-

curity interest in household goods other than a pur-

chase money security interest.

16 C.F.R. §$ 444.2(a) (3)-(4). Household goods are de

fined as:

(i) ... Clothing, furniture, appliances, one radio

and one television, linens, china, crockery, kitchen-

ware, and personal effects (including wedding rings)

of the consumer and his or her dependents, provided

that the following are not included within the scope

of the term “household goods”:

(1) Works of art;

(2) Electronic entertainment equipment (except

one television and one radio) ;

(3) Items acquired as antiques; and

(4) Jewelry (except wedding rings).

(j) Antique. Any item over one hundred years

of age, including such items that have been re

paired or renovated without changing their original

form or character.

16 C.F.R. § 444.1 (i)-(j).

A non-purchase, non-possessory security interest in

household goods (“HHG security interest”) allows the

creditor to seize and sell the debtor’s household goods

upon default without a judgment or court order. Sim-

ilarly, a wage assignment allows the creditor to file the

assignment with the debtor’s employer and receive all

or part of the debtor’s wages until the debt is satisfied

without first obtaining a court judgment. The Commis-

sion found that both these creditor remedies were “un-

fair’ because they cause substantial and unavoidable

injury to consumers which is not outweighed by counter-

vailing benefits to consumers or competition. Petitioners

argue that the Rule is beyond the Commission’s section

5 authority to proscribe unfair practices because in the

absence of seller overreaching in the form of deceit,

coercion or nondisclosure of material information, the

FTC may not intercede in the market as an “invisible

hand” to obtain “better bargains” for consumers.

The petitioners’ challenges to the household goods and

wage assignment provisions of the Credit Practices Rule

raise the following issues °:

5 Petitioner AFSA argues that even if the challenged pro-

visions of the Rule are found ’» be valid exercises of, FTC

authority, the court should still remand the Rule for further

consideration in light of changes which have occurred in the

consumer credit market since the bulk of the rulemaking

record was compiled. AFSA Brief at 71-74 (citing the enact-

ment of the Bankruptcy Reform Act of 1978; the increase

in use of second mortgages for ncn-housing related loans; the

emergence of banks as a stronger competitor in the consumer

credit market; and the deregulation of state interest rate

ceilings). Courts generally are reluctant to base a remand on

the ground that the evidence has grown stale. American

Optometric Ass’n v. FTC, 626 F.2d 896, 906-07 (D.C. Cir.

1980) (remand warranted due to intervening Supreme Court

decision while judicial review of rule was pending). In Ameri-

can Optometric, this court recognized that the equities of a

situation may militate in favor of a remand “ ‘where there

has been a change in circumstances .. . that is not merely

“material” but rises to the level of a change in “‘core” circum-

stances, the kind of change that goes to the very heart of the

case.’” 626 F.2d at 907 (quoting Greater Boston Television

Corp. v. FCC, 463 F.2d 268, 283 (D.C. Cir. 1971), cert. denied,

406 U.S. 950 (1972)). AFSA has cited no “core” change in

circumstances which go to “the very heart of the case.” In

fact, AFSA acknowledges that none of the intervening develop-

ments cited provide any “decisive answers” to the Commis-

sion’s stated justifications for the Rule. ‘FSA Brief at 73.

AFSA merely asserts that if the purporteu effects of the new

developments were confirmed as true then certain portions of

the FTC’s reasoning may be undercut. On the other hand,

the effects of the new developments cited may bolster the Com-

mission’s reasoning. See FTC Brief at 70-71. Moreover, th<

staff’s final recommendations on the Rule included a discussion

of the impact of developments in the credit market since the

completion of the hearings. See Staff’s Final Recommenda-

tions, J.A. at 1601-08. Thus subsequent developments were

not completely overlooked by the Commission. AFSA has not

carried the heavy burden of showing a change in “core” cir-

cumstances necessitating a remand. Cf. ICC v. Jersey City,

322 U.S. 503, 514 (1944) (“If upon the coming down of the

10a

(1) Has the FTC exceeded its statutory authority to

define unfair acts or practices under section 5(a) (1)

of the FTC Act?

(2) Has the FTC exceeded its rulemaking authority

under section 18(a)(1)(B) of the FTC Act by failing

to define with specificity the acts or practices deemed

unfair?

(3) Are the Commission’s unfair practice determina-

tions supported by substantial evidence in the rulemak-

ing record?

(4) Has the Commission exceeded its authority by pro-

viding an overly broad remedy for preventing the iden-

tified unfair practice?

(5) Has the Commission exceeded its authority by pre-

empting state laws and regulations governing consumer

credit transactions? °

II. SCOPE OF FTC AUTHORITY UNDER THE

UNFAIRNESS DOCTRINE

Petitioners claim that in promulgating the challenged

provisions of the Credit Practices Rule, the FTC acted

beyond its statutory authority to define unfair acts and

practices and to promulgate rules proscribing those acts

or practices under sections 5 and 18 of the FTC Act.

order litigants might demand rehearings as a matter of law

because some new circumstance has arisen, some new trend has

been observed, or some new fact discovered, there would be

little hope that the administrative process could ever be con-

summated in an order that would not be subject to reopen-

ing.”’).

* While only specifically challenging the household goods

provision of the Rule, petitioner SCDCA appears to make a

broader preemption challenge claiming that the Credit Prac-

tices Rule as a whole gratuitously supplants South Carolina’s

comprehensive consumer credit laws. The preemption chal-

lenge is addressed infra at Part IV.

lla

In order to evaluate petitioners’ claims within the proper

perspective, the development and current status of the

FTC’s unfairness authority must be recounted. As this

court stated in National Petrolewm Refiners Ass’n V.

FTC, 482 F.2d 672, 674 (D.C. Cir. 1973), cert. denied, 415

U.S. 951 (1974): “The Federal Trade Commission is a

creation of Congress, not a creation of judges’ contem-

porary notions of what is wise policy. The extent of its

powers can be decided only by considering the powers

Congress specifically granted it in the light of the

statutory language and background.” (citations omitted).

A. Evolution of the FTC’s Authority to Identify and

Proscribe Unfair Practices

Congress created the FTC in 1914 and delegated to

it the power to determine and prevent “unfair methods

of competition” in commerce. Federal Trade Commis-

sion Act, ch. 311, § 5, 38 Stat. 719 (1914) (current ver-

sion at 15 U.S.C. § 45(a)(1)). At the time of this

original delegation, Congress explicitly rejected enacting

a statutory definition of the term “unfair methods of

competition.” See S. Rep. No. 597, 63d Cong., 2d Sess.

13 (1914) (“The committee gave careful consideration

to... whether it would attempt to define the many and

variable unfair practices which preva: in commerce...

or whether it would . . . leave it to the commission to

determine what practices were unfair. It concluded that

the latter course would be better ... .”). Congress’

rationale is clearly articulated in the House Conference

Report:

It is impossible to frame definitions which em-

brace all unfair practices. There is no limit to hu-

man inventiveness in this field. Even if all known

unfair practices were specifically defined and pro-

hibited, it would be at once necessary to begin over

again. If Congress were to adopt the method of

definition, it would undertake an endless task. It is

also practically impossible to define unfair practices

12a

so that the definition will fit business of every sort

in every part of this country. Whether competition

is unfair or not generally depends upon the sur-

rounding circumstances of the particular case. What

is harmful under certain circumstances may be bene-

ficial under different circumstances.

H.R. Conf. Rep. No. 1142, 68d Cong., 2d Sess. 19 (1914).

This broad grant of discretionary authority led to

two early judicial attempts to cabin the FTC’s authority

to define unfair practices by limiting the covered praciices

to those which unduly hinder competition or tend to

create monopolies. See, e.g., FTC v. Raladam Co., 283

U.S. 648 (1981); FTC v. Gratz, 253 U.S. 421 (1920).

Subsequent judicial and congressional action, however,

overturned these attempts to narrowly circumscribe the

FTC’s authority.

In FTC v. R.F. Keppel & Bro., Inc., 291 U.S. 304

(1934), the FTC issued a cease and desist order under

section 5 to prevent a manufacturer from selling candy

using a marketing method which tempted children to

gamble even though the marketing scheme involved no

fraud or deception and could be adopted by competing

manufacturers. In finding the practice contrary to public

policy and thus unfair within the meaning of section 5,

the Supreme Court stated:

[W]e cannot say that the Commission’s jurisdiction

extends only to those types of practices which hap-

pen to have been litigated before this court.

Neither the language nor the history of the Act

suggests that Congress intended to confine the for-

bidden methods to fixed and unyielding categories.

Id. at 309-10.

Congress confirmed the Supreme Court’s view of the

FTC’s authority by enacting the Wheeler-Lee Amend-

ment in 19388. Ch. 49, § 3, 52 Stat. 111 (1988) (codified

l3a

at 15 U.S.C. §$ 45(a)). This amendment broadened the

language of section 5 to read:

The Commission is empowered and directed to pre-

vent persons, partnerships, or corporations . . . from

using unfair methods of competition in commerce

and unfair or deceptive acts or practices in com-

merce,

15 U.S.C. §$45(a)(6) (emphasis added to indicate

amended language). One of the primary purposes of this

amendment was “to broaden the powers of the Federal

Trade Commission over unfair methods of competition

by extending its jurisdiction to cover unfair or deceptive

acts or practices in commerce.” H.R. Rep. No. 1613,

75th Cong., lst Sess. 1 (1987). The amendment was

engendered in large measure by judicial decisions limit-

ing the FTC’s authority to practices unfairly inhibiting

competition. 7d. at 3 (discussing Raladam decision) ; 83

Cong. Rec. 395 (1938) (“The trouble arises, and is con-

tinually increasing from court decisions construing the

language of the existing law. These accumulated deci-

sions over a period of years have so hedged in the Com-

mission that there is great need for amendments of an

enlarging character if the full effectiveness of the objects

sought are to be attained.”). Congress’ intent was af-

firmatively to grant the Commission authority to protect

consumers as well as competitors.

By the proposed amendment to section 5, the Com-

mission can prevent such acts or practices which in-

juriously affect the general public as well as those

which are unfair to competitors. In other words,

this amendment makes the consumer, who may be

injured by an unfair trade practice, of equal con-

cern, before the law, with the merchant or manufac-

turer injured by the unfair methods of a dishonest

competitor.

H.R. Rep. No. 1618, 75th Cong., 1st Sess. 3 (1937).

l4a

Despite the passage of the Wheeler-Lee Amendment

in 1988, Congress found that “the FTC continued to be

hampered as an effective force in promoting fair and

free competition and safeguarding the consumer public

against unfair or deceptive acts or practices by the scope

of its authority being limited to matters ‘in commerce’

and by being made to rely solely on the cease and desist

order procedure for enforcement.” H.R. Rep. No. 1107,

938d Cong., 2d Sess. 29 (1974). House Report No. 1107

noted the growing consumer consciousness which had

developed during the sixties and cited two oversight stud-

ies of the FTC which were extremely critical of the

FTC’s lack of effectiveness in carrying out its consumer

protection responsibilities. Jd. at 33-34 (citing American

Bar Association, Report of the Commission to Study the

Federal Trade Commission (1969); E. Cox, R. Feli-

muth & J. Schulz, “The Nader Report” on the Federal

Trade Commission (1969)). “Both reports noted the

need for additional statutory authority to permit the

FTC to carry out its consumer protection responsibil-

ities.” Id, at 34. Congress thus enacted the Magnuson-

Moss Warranty—Federal Trade Commission Improve-

ment Act “to codify the Commission’s authority to make

substantive rules for unfair or deceptive acts or prac-

tices in or affecting commerce.”* H.R. Conf. Rep. No.

1606, 98d Cong., 2d Sess 31 (1974). The conferees re-

garded this “as an important power by which the Com-

mission can fairly and efficiently pursue its important

statutory mission.” /d. The Magnuson-Moss Act added

section 18 to the FTC Act, 15 U.S.C. § 57a, which pro-

vides:

(1) ... [T]he Commission may prescribe—

7 This court in National Petroleum Refiners Ass’n, 482 F.2d

672, had construed section 6(g) of the FTC Act, 15 U.S.C.

§ 46(g), as conferring upon the Commission the authority

to promulgate substantive trade regulation rules.

; |

15a

(A) interpretive rules and general statements of

policy with respect to unfair or deceptive acts or

practices in or affecting commerce (within the mean-

ing of section 45(a) (1) of this title), and

(B) rules which define with specificity acts or

practices which are unfair or deceptive acts or prac-

tices in or affecting commerce (within the meaning

of section 45(a) (1) of this title). ... Rules under

this subparagraph may iuclude requirements pre

scribed for the purpose of preventing such acts or

practices.°

15 U.S.C. § 57a(a) (1) (A), (B).

B. Discerning Limits on the FTC’s Authority to Define

Unfair Practices

While both the Wheeler-Lee Amendment and the

Magnuson-Moss Act legitimized and facilitated the Com-

mission’s consumer protection activities, neither shed much

light on the standards to be used in identifying unfair

acts or practices. Congress has not at any time with-

drawn the broad discretionary authority originally

granted the Commission in 1914 to define unfair practices

on a flexible, incremental basis. Courts have accordingly

8 The Magnuson-Moss Act also amended section 5, 15 U.S.C.

§ 45(a) (1), to include the term “or affecting commerce.”

Section 5(a) (1) currently reads:

Unfair methods of competition in or affecting commerce,

and unfair or deceptive acts or practices in or affecting

commerce, are declared unlawful.

® The most Congress has done to constrict the FTC’s au-

thority to make unfairness determinations is to impose special

procedural requirements. For example, the Magnuson-Moss

Act granted the Commission rulemaking authority but im-

posed upon the Commission rulemaking procedures and ju-

dicial review provisions stricter than those contained in the

Administrative Procedure Act. The House Committee wrote:

Your committee believes these [APA] rulemaking

procedures and. this scope of judicial review may be in-

l6a

adopted a malleable view of the Commission’s authority.

See, e.g., FTC v. Sperry & Hutchinson Co., 405 U.S. 233,

244 (1972) (comparing FTC to a court of equity in

carrying out implementation of the “elusive, but congres-

sionally mandated standard of fairness’); Atlantic Re-

fining Co. v. FTC, 381 U.S. 357, 367 (1965) (Congress

intentionally left the development of the term “unfair”

to the Commission); RF’. Keppel & Bro., 291 U.S. at

310 (Congress did not intend to confine forbidden prac-

tices to “fixed and unyielding categories’). Nonetheless

as this court has stated: “The Commission is hardly

free to write its own law of consumer protection... .”

National Petroleum Refiners Ass’n, 482 F.2d at 693.

The Commission’s exercise of its unfairness authority

in any particular instance is subject to judicial review

and may be affirmed or set aside by the corrt. See

Sperry & Hutchinson, 405 U.S. at 249; RF. Keppel &

Bro., 291 U.S. at 314.

The judiciary remains the final authority with respect

to questions of statutory construction and must reject

administrative agency actions which exceed the agency’s

statutory mandate or frustrate congressional intent.

See, eg., FEC v. Democratic Senatorial Campaign

Comm., 454 U.S. 27, 32 (1981); Volkswagenwerk Vv.

FMC, 390 U.S. 261, 272 (1968); NLRB v. Brown, 380

U.S. 278, 291 (1965); FTC v. Colgate-Palmolive Co.,

adequate in some cases where fundamental factual pre-

mises of a rule are at issue. Because of the potentially per-

vasive and deep effect of rules defining what constitutes

unfair or deceptive acts or practices and the broad stand-

ards which are set by the words “unfair or deceptive acts

or practices”, the committee believes greater procedural

safeguards are necessary. Accordingly, it has fashioned

the rulemaking procedures and judicial review provisions

described below which we believe to be more appropriate

in this context than merely relying upon the provisions

of sections 553 and 706 of title 5.

H.R. Rep. No. 1107, 98d Cong., 2d Sess. 45-46 (1974).

17a

380 U.S. 374, 385 (1965). The Supreme Court has made

clear, however, that in reviewing an agency’s construc-

tion of a statute which it administers, courts must give

deference to the agency’s interpretation:

If Congress has explicitly left a gap for the agency

to fill, there is an express delegation of authority to

the agency to elucidate a specific provision of the

statute by regulation. Such legislative regulations

are given controlling weight unless they are arbi-

trary, capricious, or manifestly contrary to the stat-

ute.

Chevron, U.S.A., Inc. v. Natural Resources Defense Coun-

cu, Ine., 104 S. Ct. 2778, 2782 (1984) ; see also Colgate-

Palmolive Co., 380 U.S. at 385 (“This Court has fre

quently stated that the [FTC’s] judgment is to be given

great weight by reviewing courts.”). Thus we must

perform our “quintessential” judicial function of deter-

mining whether the Commission has acted within the

bounds of its statutory authority while at the same time

according due deference to the Commission’s judgment

as to what constitutes an unfair practice. We do not

understand the dissent to disagree with the foregoing

principles of judicial review. See Dissent at 1-2. We

are consequently taken aback by its characterization of

our performance as being “anesthetized” by deference to

the Commission. See Dissent at 15-16. In our view, it is

the dissent that would stray outside the established

bounds of judicial review and effectively usurp the role

of the FTC. The dissent presents its own selective review

of the Commission’s stated rationale while disregarding

the totality of the Commission’s reasoning, and ulti-

mately supplants the final judgment of all five Commis-

sioners with respect to the wisdom of their determination

that the taking of HHG security interests and wage

assignments are unfair creditor practices. We decline

to view our role so broadly. See Atlantic Refining Co.,

381 U.S. at 367 (“[O]ur function is limited to determin-

ing whether the Commission’s decision ‘has “warrant in

18a

the record” and a reasonable basis in law.’) (quoting

NLRB v. Hearst Publications, Inc., 322 U.S. 111, 131

(1944) ).

The broad delegation of discretionary authority to the

FTC to define unfair practices makes our task particu-

larly difficult in this case. In ascertaining whether the

FTC has exceeded the limits of its statutory authority

by defining HHG security interests and wage assignments

as unfair creditor practices we would be materially aided

by a particularization of the congressionally intended

legal standard for assessing the fairness of particular

acts or practices. Yet, Congress has expressly declined to

delineate such a legal standard claiming that the stand-

ard must be stated in broad terms to allow the Commis-

sion to respond to evolving market conditions and prac-

tices. If that_were Congress’ last word, the court would

be left with two equally unattractive alternatives: arti-

culating a legal standard of unfairness which Congress

has expressly refused, on policy grounds, to articulate or

deciding the reasonableness of the Commission’s unfair-

ness determination based on our own views of what

should be deemed an unfair practice without benefit of

any concrete standards for judgment. Fortunately recent

interactions between Congress and the Commission pro-

vide the court with some tangible guideposts for review.

Considerable controversy developed during the mid to

late seventies over the FTC’s exercise of its consumer

unfairness regulatory authority. Spurred on by the criti-

cisms in the late sixties of the Commission’s lack of effec-

tiveness in the realm of consumer protection, the prodding

of congressional committees, and the passage of the

Magnuson-Moss Act, the Commission vigorously stepped

up its consumer protection activities under its unfair-

ness regulatory authority. See supra p. 14; H.R. Rep.

No. 809, Pt. 1, 97th Cong., 2d Sess. 10-11 (1982). The

Commission’s new activism engendered commentators’

criticism of the vagueness and breadth of the unfairness

19a

doctrine.*® The controversy over the Commission’s con-

sumer protection activities peaked in the late-1970’s with

the Commission’s particularly controversial foray into

regulation of television advertising directed at children;

the proposed rule would have completely prohibited the

advertising of certain products during “children’s pro-

gramming.” **

In response to this controversy, Congress enacted the

Federal Trade Commission Improvements Act of 1980,

1 See, e.g., Erxieben, The FTC’s Kaleidoscopic Unfairness

Statute: Section 5, 10 Gonz. L. Rev. 333 (1975): Nelson, The

Politicization of FTC Rulemaking, 8 Conn. L. Rev. 413 (1976) ;

Schwartz, Regulating Unfair Practices Under the FTC Act:

The Need for a Legal Standard of Unfairness, 11 Akron L.

Rev. 1 (1977).

11 See Children’s Advertising, Notice of Proposed Rulemak-

ing, 43 Fed. Reg. 17,967 (1978). The trade regulation rule

proposed by the FTC staff was an attempt to deal compre-

hensively with the entire area of television advertising to

children. The proposed rule included three elements:

(a) Ban all televised advertising for any product which

is directed to, or seen by, audiences composed of a sig-

nificant proportion of children who are too young to

understand the selling purpose of or otherwise compre-

hend or evaluate the advertising:

(b) Ban televised advertising for sugared food prod-

ucts directed to, or seen by, audiences composed of a sig-

nificant proportion of older children, the consumption of

which products poses the most serious dental health risks;

products not included in Paragraph (b), which is directed

to, or seen by, audiences composed of a significant pro-

portion of older children, to be balanced by nutritional

and/or health disclosures funded by advertisers.

Id. at 17,969. In addition, the Commission requesced comments

on a number of broad remedial measures, including requiring

advertisers of highly carciogenic products to fund separate

advertisements disclosing the products risks and nutritional!

value. /d.

20a

Pub. L. No. 96-252, 94 Stat. 374 (codified as amended in

scattered sections of 15 U.S.C.) which suspended the

Commission’s controversial rulemaking on children’s ad-

vertising and placed a moratorium on the initiation of

any new rulemakings aimed at regulating commercial ad-

vertising as an unfair practice pending congressional

oversight hearings.* Although Congress has_ subse-

quently solicited statements and held oversight hearings

on the question of whether the FTC’s unfairness author-

ity should be eliminated or permanently restricted,’* it

12 Congress’ limitation of the Commission’s unfairness au-

thority with respect to commercial advertising was motivated

by the threat the FTC’s broad industry-wide rulemaking au-

thority posed to first amendment interests in the area of com-

mercial speech. See H.R. Conf. Rep. 917, 96th Cong., 2d Sess.

32 (1980) (“The conference made these amendments r2gard-

ing the children’s advertising proceeding because of their

concern that it raises fundamental issues of free speech and

due process. The conferees expect the Commission to seriously

weigh these concerns in further proceedings, if any.”).

The FTC Improvements Act of 1980 also provided for a

two house legislative veto, whereby a FTC trade regulation

rule could be overturned by adoption within 90 days of a con-

current resolution disapproving the rule. This veto provision

was subsequently declared unconstitutional by this court. See

Consumers Union, Inc. v. FTC, 691 F.2d 575 (D.C. Cir. 1982).

13 See Senate Comm. on Commerce, Science, and Tran.por-

tation, 96th Cong., 2d Sess., Unfairness: Views on Unfair

Acts and Practices in Violation of the Federal Trade Com-

mission Act (Comm. Print 1980) (collection of public com-

ments); Federal Trade Commission Reauthorization, Hear-

ings Before the Subcomm. on Commerce, Transportation, and

Tourism of the House Comm. on Energy and Commerce, 97th

Cong., 2d Sess. (1982) ; Reauthorization of the Federal Trade

Commission, Hearings Before the Senate Comm. on Com-

merce, Science, and Transportation, 97th Cong., 2d Sess.

(1982); Federal Trade Commission Reauthorization—1983,

Hearings Before the Subcomm. on Commerce, Transportation

and Tourism of the House Comm. on Energy and Commerce,

98th Cong., lst Sess. (1983) ; Federal Trade Commission Re-

authorization, Hear igs Before the Senate Comm. on Com-

2la

has taken no definitive legislative action to define the

limits of that authority. Bills were introduced in both

the 97th and 98th Congresses which would have amended

section 5 to provide a definition of unfair acts or prac-

tices.'* The definition proposed in these bills was the

definition supplied by the Commission at the request of

Congress in a 1980 policy statement. See Letter from

Federal Trade Commission to Senators Ford and Dan-

forth (Dee. 17, 1980), reprinted in H.R. Rep. No. 156,

Pt. 1, 98th Cong., 1st Sess. 33-40 (1983) [hereinafter

merce, Science, and Transportation, 98th Cong., 1st Sess.

(1983).

14 See S. 1714, 89th Cong., 2d Sess. (1983) (reprinted and

discussed in S. Rep. No. 215, 98th Cong., 1st Sess. (1983) ) ;

H.R. 2970, 98th Cong., 2d Sess. (1983) (reprinted and dis-

cussed in H.R. Rep. No. 156, Pts I-III, 98th Cong., 2d Sess.

(1983) ); S. 2449, 97th Cong., 2d Sess. (1982) (reprinted and

discussed in S. Rep. No. 451, 97th Cong., 2d Sess. (1982) ) ;

H.R. 6995, 97th Cong., 2d Sess. (1982) (discussed in H.R.

Rep. No. 809, Pts. 1-2, 97th Cong., 2d Sess. (1982)). These

proposed bills sought to codify Commission policy and to pro-

vide added procedural safeguards to parties subject to FTC

jurisdiction. The bills were not aimed at diminishing the

Commission’s authority to vigorously protect consumers. For

example, House Report 809, Pt. 1 states:

It would be a mistake, however, to interpret the pro-

visions of the bill as designed to hobble the Commission

or transform it back into the timid agency that was

pilloried for its caution in the 1960’s. The Committee has

carefully considered all views from a wide range of busi-

ness and consumer groups submitted in connection with

this reauthorization. While the Committee seeks to codify

certain current Commission policies and perfect the pro-

cedural safeguards available to those who are subject to

Commission jurisdiction, the Committee is aware of no

evidence that the need for vigorous protection of competi-

tion and consumer rights has diminished. On the con-

trary, the record is replete with indications from con-

sumers, business, labor and state attorneys general, of the

need for continued vigorous FTC enforcement.

H.R. Rep. No. 809, Pt. 1, $7th Cong., 2d Sess. 11 (1982).

22a

cited as Policy Statement with page references to H.R.

Rep. No. 156].

In its Policy Statement, subscribed to by all five Com-

missioners, the FTC responded to the criticism levelled

at the Commission’s implementation of its unfairne$s au-

thority by delineating a concrete framework for the fu-

ture application of that authority. See Policy Statement

at 34 (“This letter thus delineates the Commission’s view

of the boundaries of its consumer unfairness jurisdiction

and is subscribed to by each Commissioner.”). The Com-

mission noted that Congress by framing section 5 in gen-

eral terms expected the underlying criteria to evolve and

develop over time, thus, “[{t]he present understanding of

the unfairness standard is the result of an evolutionary |

process.” See Policy Statement at 35. The Commission’s

Policy Statement was basically a refinement of an earlier

three-part standard of unfairness it had set out in 1964.

In 1964 the Commission determined that enough cases

had been decided to enabie the Commission to identify

three criteria used in determining whether a practice,

which is neither anticompetitive nor deceptive, is none-

theless unfair to consumers.

(1) whether the practice, without necessarily hav-

ing been previously conside:.. unlawful, offends

public policy as it has been established by statutes,

the common law, or otherwise—whether, in other

words, it is within at least the penumbra of some

commonlaw, statutory, or other established concept

of unfairness; (2) whether it is immoral, unethical,

oppressive, or unscrupulous; (3) whether it causes

substantial injury to consumers (or competitors or

other businessmen).

Unfair or Deceptive Advertising and Labeling of Ciga-

rettes in Relation to the Health Hazards of Smoking,

Statement of Basis and Purpose, 29 Fed. Reg. 8355

(1964). The Commission noted that the Supreme Court

23a

cited these criteria with apparent approval in Sperry &

Hutchinson, 405 U.S. at 244-45 n.d. See Policy State-

ment at 36 & n.9 (citing Spiegel, Inc. v. FTC, 540 F.2d

287, 293 n.8 (7th Cir. 1976); Heater v. FTC, 503 F.2d

321, 323 (9th Cir. 1974)). The Supreme Court ap-

pended footnote 5, citing what have come to be termed

the “S & H criteria,” to the following statement com-

paring the FTC to a court of equity:

[T]he Federal Trade Commission does not arrogate

excessive power to itself if, in measuring a practice

against the elusive, but congressionally mandated

standard of fairness, it, like a court of equity, con-

siders public values beyond simply those enshrined

in the letter or encompassed in the spirit of the

antitrust laws.

Sperry & Hutchinson, 405 U.S. at 244. In Sperry &

Hutchinson, the Supreme Court thus put its stamp of

approval on the Commission’s evolving use of a consumer

unfairness doctrine not moored in the traditional ration-

ales of anticompetitiveness or deception.”

In its 1980 policy statement addressed to Congress, the

Commission stated that since Sperry & Hutchinson, “the

Commission has continued to refine the standard of un-

fairness in its cases and rules, and it has now reached a

more detailed sense of both the definition and the limits

of these criteria.” Policy Statement at 36. The Commis-

sion set forth the following standard for identifying prac-

tices which are unfair to consumers:

15 The Commission’s reliance on a consumer unfairness

rationale as an independent basis for its actions is of com-

paratively recent origin. More often the Commission’s actions

have been based on alternate theories of deception and unfair-

ness. See generally Averitt, The Meaning of “Unfair Acts or

Practices” in Section 5 of the Federal Trade Commission Act,

70 Geo. L.J. 225 (1981) ; Craswell, The Identification of Unfair

Acts and Practices By the Federai Trade Commission, 1981

Wis. L. Rev. 107.

24a

To justify a finding of unfairness the injury musi

satisfy three tests. It must be substantial; it must

not be outweighed by any countervailing benefits to

consumers or competition that the practice produces;

and it must be an injury that consumers themselves

could not reasonably have avoided.

Id. It was this standard that the Commission relied on

in determining that the taking of HHG security interests

and wage assignments were unfair practices. See Credit

Practices Rule, 49 Fed. Reg. at 7743.

While the Commission’s three-part unfairness standard

sets forth an abstract definition of unfairness focusing

on “unjustified consumer injury,” it does little towards

delineating the specific “kinds” of practices or zonsumer

injuries which it encompasses.’* Yet petitioners’ challenge

16 This deficiency has been noted by commentators. Two

members of the Commission’s Office of Planning have written

articles attempting to clarify the implementation of the

standard. See Averitt, supra note 15 (suggesting that the

Commission’s unfairness jurisdiction is best viewed in terms

of consumer sovereignty—actionable injury arises from prac-

tices which undermine a consumer’s ability to choose freely

from a range of options); Craswell, supra note 15 (cata-

loguing the “kinds” of commercial practices which have been

determined to be unfair in past Commission decisions).

Other commentators have disparaged the Policy Statement

precisely for its failure to provide an adequately workable

“legal standard” to guide the FTC or the courts. See, e.g.,

Gellhorn, Trading Stamps, S & H, and the FTC’s Unfairness

Doctrine, 1983 Duke L. J. 903, 957 (“Without a more explicit

economic focus, however, this modification still allows the FTC

and the courts to roam freely in applying the unfairness doc-

trine.”) ; Rice, Consumer Unfairness at the FTC: Misad-

ventures in Law and Economics, 52 Geo. Wash. L. Rev. 1, 56

(1984) (providing an economic perspective on the proposed

consumer-injury test and suggesting that it provides “no

guidance for the identification of factors that focus and aid

the reasoned determination of the issue of legality in specific

situations’”’).

25a

in this case raises the exact question left open by the

Commission’s standard—what specific types of unfair

practices and resultant consumer injuries are cognizable?

Petitioners’ claim that the Commission has exceeded its

statutory authority to proscribe unfair practices is predi-

cated on their arguments that the FTC has no authority

to proscribe the “kinds” of practices or prevent the

“kinds” of consumer injury at issue in this case. Thus

despite the Policy Statement’s purpose of providing

greater certainty in application of the unfairness doc-

trine, it fails short of providing any concrete guidance to

the court in resolving the issues raised by petitioners in

this case. To date, however, the consumer injury test is

the most precise definition of unfairness articulated by

either the Commission or Congress.'? Thus we determine

the validity of the Commission’s actions by reviewing the

reasonableness of the Commission’s application of the con-

sumer injury test to the facts of this case, and the con-

sistency of that application with congressional policy and

prior Commission precedent. See Atlantic Refining Co.,

381 U.S. at 367 (“Where the Congress has provided that

an administrative agency initially apply a broad statutory

term to a particular situation, our function is limited to

determining whether the Commission’s decision ‘has

“warrant in the record” and a reasonable basis in law.’)

(quoting NLRB v. Hearst Publications, Inc., 322 U.S.

111, 131 (1944) ).

17 The Fourth Circuit appears to be the only appellate court

to date which has reviewed an FTC unfairness rulemaking

undertaken pursuant to the Policy Statement’s three-part con-

sumer injury standard. See Harry & Bryant Co. v. FTC, 726

F.2d 998, 999-1000 (4th Cir.) (upholding FTC unfairness

determination), cert. denied, 105 S. Ct. 91 (1984). Contrary

to the dissent’s assertion, see Dissent at note 1, we are en-

tirely consistent in our stated views regarding the Policy

Statement. While the Policy Statement does provide “some

tangible guideposts for review,” supra p. 18, upon which we

rely, see infra pp. 26-37, it nonetheless falls short of pro-

viding definitive answers to the issues raised by petitioners

in this case.

‘.

26a

C. The FTC’s Exercise of Unfairness Authority Under

Section 5(a)

Applying the three-part consumer unfairness standard,

the Commission found that HHG security interests and

wage assignments were unfair creditor remedies because

they caused substantial, unjustified consumer injury. Our

analysis begins with a review of the Commission’s reason-

ing with respect to each of the three criteria set out in

the consumer unfairness standard.

1. Substantial Injury

In elaborating the term “substantial injury” in its Pol-

icy Statement, the Commission stated that in most cases

substantial injury would involve monetary harm and that

“ordinarily” “emotional impact and other more subjective

types of harm” would not make a practice unfair. See

Policy Statement at 36. The Commission further clarified

that it “is not concerned with trivial or merely specula-

tive harms.” Jd. “An injury may be sufficiently sub-

stantial, however, if it does a small harm to a large num-

ber of people, or if it raises a significant risk of concrete

harm.” Jd. at n.12. With these guidelines * in mind, we

turn to the specific injuries found to result from HHG

security interests and wage assignments.

In a 1982 letter to Senators Packwood and Kasten, FTC

Chairman Miller reiterated the Commission’s view on what

constitutes a substantial injury:

As a federal body the Commission believes its concerns

should be with substantial injuries; its resources should

not be used for trivial or speculative harm. As a general

proposition, substantial injury involves economic or mone-

tary harm ana ‘oes not cover subjective examples of

harm such as emotional distress or offenses to taste or

social belief.

See Letter from FTC Chairman J.C. Miller, III to Senator

Packwood and Senator Kasten (March 5, 1982), reprinted in

H.R. Rep. No. 156, Pt. 1, 98th Cong., lst Sess. 27, 32 (1983)

(hereinafter cited at 1982 Policy Letter with page references

to H.R. Rep. No. 156].

27a

(a) Security interests in household goods. In return

for credit, consumers may be required to give a non-

possessory security interest in their household goods and

personal effects. These goods may be seized by the credi-

tor in the event of a default. See Credit Practices Rule,

49 Fed. Reg. at 7761. Such non-possessory security in-

terests were not recognized at common law and are of

comparatively recent origin. Jd. Based on the rulemaking

record, the Commission found the practice of securing

loans with non-purchase, non-possessory security inter-

ests in household goods to be widespread, with finance

companies being the preeminent users. Jd. at 7762. HHG

security interests may be created by simply checking a

box labelled “chattel mortgage” or by other general pro-

visions in the text of standard form contracts, thus, giv-

ing consumers little notice of the nature and extent of

the collateral they are pledging. /d.

Based on evidence in the record, including the testi-

mony of a large majority of industry witnesses, the Com-

mission found that HHG security interests have little, if

any, economic value to creditors. The creditors cannot

' ordinarily recover their loss on default by seizing and

selling the goods. Consequently actual seizure of house-

hold goods by creditors is rare. The Commission sum-

marized its findings as follows:

The record reflects the fact that creditors rarely

engage in actual repossession of household goods.

When it does occur, the furniture and other items

seized frequently have little or no economic value;

occasionally, the act of seizure appears to be under-

taken for punitive or psychological deterrent effect.

Id. at 7763 (footnotes omitted) .

Although the household goods are of little value to

creditors and are rarely seized, when seizure does occur

the Commission found that it can have severe economic

consequences for the consumer. The consumer, most likely

already enmeshed in a financial crisis, loses the possession

28a

and use of household necessities such as furniture, appli-

ances, linens and kitchenware. While the monetary gain

realized by the creditor upon seizure and sale of goods is

minimal to nonexistent, the replacement cost to the con-

sumer is substantial, not to mention the sentimental value

of the possessions and psychological impact of the loss on

the consumer. “Thus seizure often imposes a cost on the

consumer which is seriously disproportionate to any bene-

fit the creditor obtains.” Jd.

The Commission further found that even in the absence

of actual seizure, HHG security interests still resulted in

injury to consumers. Creditors rely on HHG security in-

terests primarily as a “psychological lever to seek pay-

ment and to persuade consumers to take other actions the

creditors may deem appropriate... .” Jd. The Commis-

sion recognized that not all creditors use threats of seizure

to coerce consumer response but concluded that “the pre-

ponderance of evidence supports a conclusion that such

threats are commonplace.” Jd. at 7764. Because the

loss occasioned by the seizure of household goods is so

profound, threats of seizure in themselves are uniquely

harmful and disruptive to the consumer anc the family.”

Id. The injury resulting from “threats” or “suggestions”

19 For example, the Commission found that some finance

company training manuals contain instruction on psychological

tactics such as “chase and recheck” whereby an office repre-

sentative visits the consumer’s home to “check” the security

and arouse the consumer’s anxiety. 49 Fed. Reg. at 7764.

Ledger card entries in files of debtors were found to include

directives to apply pressure to family members, such as “work

HHG on wife,” by threatening irreparable loss of intimate

possessions. /d.

20 Specifically, the Commission found that “the threat to

seize household possessions causes ‘great emotional suffering,

humiliation, anxiety, and deep feelings of guilt, and this dis-

tress can lead to physical breakdowns or illness, disruption of

the family, and undue strain on family relationships.’” 49

Fed. Reg. at 7765 (quoting P.O. Report at 136, citing testi-

mony from legal assistance attorney).

29a

of seizure, is not limited to psychological harm. Consum-

ers threatened with the loss of their most basic possessions

become desperate and peculiarly vulnerable to any sug-

gested “ways out.” As a result, “creditors are in a prime

position to urge debtors to take steps which may worsen

their financial circumstances.” Jd. The consumer may

default on other debts or agree to enter refinancing agree-

ments which may reduce or defer monthly payments on

a short-term basis but at the cost of increasing the con-

sumer’s total long-term debt obligation. Consumers may

also forego assertion of valid defenses, set-offs or counter-

claims in their haste to reach acceptable repayment agree-

ments so as to avoid the perceived imminent seizure of

their property. Jd. at 7764-65. In sum, consumers at risk

of losing their household necessities will take steps which

substantially worsen their overall financial condition.

(b) Wage assignments. A wage assignment allows the

creditor, upon filing with the debtor’s employer, to re

ceive all or a portion of the debtor’s wages directly from

the employer. Wage assignments, unlike wage garnish-

ments, do not require a judgment and can be filed with-

out any judicial review of the creditor’s claim. The Com-

mission found that wage assignments were used primarily

by small loan and finance companies in California, IIli-

nois, Michigan and New York. Jd. at 7757. Although

estimates varied, the Commission concluded that wage as-

signments are prevalent in states where they are per-

mitted and are used in a significant number of consumer

transactions. Jd.

The Commission found wage assignments particularly

harmful to consumers because they can ‘be invoked with-

out the due process safeguards of a hearing and op-

portunity to present defenses.** Jd. Although some states

21 Whereas pre-judgment garnishment has been found to

deprive the debtor of constitutional due process rights, see

Sniadach v. Family Finance Corp., 395 U.S. 387 (1969), pre-

judgment wage assignments have survived constitutional chal-

30a

provide debtors some statutory procedural protections al-

lowing them to prevent effectuation of a wage assignment

by serving a notice of defense on the employer and credi-

tor, the Commission found such protective schemes gen-

erally ineffective, due to lack of awareness and under-

standing on the part of the debtor. “[DJespite the ex-

istence of state statutes, many wage assignments result

in collection by creditors even when there have [sic]!

been a breach of warranty, fraud, or other violation of

law that may constitute a defense to payment.” Jd. at

7758.

The rulemaking record further established that wage

assignments injure consumers by detrimentally injecting

the creditor into the employment relationship. Employers

are hostile to wage assignments due to added administra-

tive costs and burdens and the fear that the employee’s

job motivation and performance will suffer as a result of

the reduction in wages. Jd. Moreover, employers tend to

view the consumer’s failure to repay the debt as a sign of

irresponsibility. As a consequence many lose their jobs

after wage assignments are filed.** Even if the consumer

retains the job, promotions, raises, and job assignments

may be adversely affected. Jd.

Wage assignments are usually invoked at a time when

the debtor is already experiencing severe financial hard-

ship. Loss of a substantial portion of wages tends to

cause further disruption of family finances and may even

put at risk the wage earner’s ability to provide necessi-

ties for the family. Jd. at 7758-59. Even when wage as-

signments are not actually invoked, consumer injury may

lenge because they lack the requisite state action. See, e.g.,

Bond v. Dentzer, 494 F.2d 302 (2d Cir.), cert. denied, 419

U.S. 887 (1974).

* The Commission noted that the Consumer Credit Pro-

tection Act, 15 U.S.C. § 1674(a), prohibits employers from

firing employees whose wages have been garnished. The Act

does not, however, apply to wage assignments.

3la

still result. As with HHG security interests, the Commis-

sion found that creditors use wage assignments as in

terrorem devices to coerce consumers to pay. The invoca-

tion of a wage assignment or just simply the threat of

invocation may lead a debtor to enter into costly re

financing, to improvidently default on other obligations,

or to forego valid defenses. Thus consumers will act

against their own best economic interests to avoid the

greater potential injury of having creditors contact their

employers and risk losing their jobs. “(C]reditors exploit

that fear despite the fact that job loss would be economi-

cally counterproductive to the creditor.” Jd. at 7758.

The Commission, thus, concluded:

In the absence of procedural safeguards, the po-

tential for severe, substantial disruption of employ-

ment, the pressure that results from threats to file

wage assignments, and the disruption of family fi-

nances constitute significant consumer injury. State

law is inconsistent and does not offer sufficient pro-

tection to prevent this consumer injury.

Id. at 7759.

The harms to consumers resulting from the use of

HHG security interests and wage assignments identified

by the Commission on the basis of the rulemaking record

are neither trivial or speculative nor based merely on

notions of subjective distress or offenses to taste. The

use of HHG security interests and wage assignments re-

sult in or create a significant risk of substantial economic

and monetary harm to the consumer as well as notential

deprivations of their legai rights. Hence the Commission

clearly met its first criterion of establishing substantial

consumer injury.

2. Countervailing Benefits

The Commission recognizes that most business prac-

tices entail a balancing of costs and benefits to the con-

32a

sumer. Therefore the Commission “will not find that a

practice unfairly injures consumers unless it is injurious

in its net effects.” Policy Statement at 37. To make this

cost-benefit determination, the Commission examines the

potential costs that the proposed remedy would impose

on the parties and society in general. In the present

case, the Commission made the following assessment:

The potential costs of most significance in this

proceeding include increased collection costs, in-

creased screening costs, larger legal costs and in-

creases in bad debt losses or reserves. Inareased

creditor costs generally would be reflected i) ‘gher

interests to borrowers, reduced cre‘it av*.inSmiy,

or other restrictions such as increased coilateral or

down payment requirements.

49 Fed. Reg. at 7744 (footnotes omitted).

In weighing the costs and benefits of the Credit Prac-

tices Rule to consumers and the credit industry, the Com-

mission first noted that the potential cost of eliminating

HHG security interests and wage assignments is dimin-

ished by the presence of other remedies retained by

creditors under the Rule. Creditor remedies unaffected

by the Rule include the right to take purchase-money se-

curity interests which allow for repossession of the par-

ticular item purchased, to obtain a deficiency judgment

or bring a suit directly on the debt, and to garnish the

debtor’s wages.** Thus, “[t]he remedies subject to the

rule must be evaluated in light of their more incremental

contribution to deterring default or reducing other cred-

* Unlike HHG security interests and wage assignments,

these remaining remedies do not result in the immediate

seizure, without legal process, of the debtor’s household

necessities or wages. Though debtors may find the threat of a

lawsuit disturbing, the threatened consequences are not im-

mediate. The debtor has time to consider the options and to

seek legal counsel. Moreover, the debtor’s legitimate legal

interests will presumably be protected through the legal

process.

33a

itor costs given remedies that remain available.” Jd. at

7744-45 (emphasis added).

Of course, to the extent HHG security interests and

wage assignments actually reduce creditor costs, con-

sumers will theoretically benefit by the greater avail-

ability of credit at a lower cost. In sort, the crucial

issue before the Commission was \ nether prohibiting

HHG security interests and wage assignments would de-

crease availability and increase the cost of credit to con-

sumers and, if so, whether this cost was outweighed by

the benefits of the Rule to the same consumers (the bene-

fits being the avoidance of the harms incurred by con-

sumers as a result of the use of HHG security interests

and wage assignments). Based on record evidence, the

Commission concluded that the Rule would have only a

marginal impact on the cost or availability of credit, and

that this marginal cost was clearly overshadowed by the

much greater risks to consumers resulting from the use

of HHG security interests and wage assignments. See

infra pp. 54-59. Thus we find that the Commission satis-

fied the second prong of the three-part consumer injury

test set out in its Policy Statement.

3. Injury is Not Reasonably Avoidable

The requirement that the injury cannot be reasonably

avoided by the consumers stems from the Commission’s

general reliance on free and informed consumer choice

as the best regulator of the market. “Normally we ex-

pect the marketplace to be self-correcting, and we rely on

consumer choice—the ability of individual consumers to

make their own private purchasing decisions without

regulatory intervention—to govern the market.” Policy

Statement at 37. As long recognized, however, certain

types of seller conduct or market imperfections may un-

justifiably hinder consumers’ free market decisions and

prevent the forces of supply and demand from maximiz-

ing benefits and minimizing costs. In such instances of

34a

market failure, the Commission may be required to take

corrective action. Such corrective action is taken “not to

second-guess the wisdom of particular consumer deci-

sions, but rather to halt some form of seller behavior that

unreasonably creates or takes advantage of an obstacle

to the free exercise of consumer decisionmaking.” Jd. at

37.

The Commission found that the injuries occasioned by the

use of HHG security interests and wage assignments are

not ressonably avoidable by consumers for two interre-

lated reasons: (1) consumers are not, as a practical

matter, able to shop and bargs:n over alternative reme-

dial provisions; and (2) default is ordinarily the prod-

uct of forces beyond a debtor’s control. 49 Fed. Reg. at

7744. The Commission identified a confluence of factors

which create “an obstacle to the free exercise of con-

sumer decisionmaking” and which creditors are able to

use to their advantage.

First, the Commission found that most creditors rely

on standardized form contracts with boilerplate provi-

sions defining the rights and duties of the parties. Jd. at

7745-47. The Presiding Officer’s Report concludes:

Creditors universally make use of standardized

forms in extending credit to consumers. These forms

are prepared for creditors or obtained by them, and

the completed contract is presented to the prospec-

tive borrower on a “take it or leave it’ basis. The

primary reason for this is simply that it is not

feasible to conduct the transaction in any other wev.

P.O. Report, J.A. at 395. The Commission acknowledges

that standard form contracts are a business necessity for

small-loan creditors. 49 Fed. Reg. at 7744. The Commis-

sion further found, however, that due to certain char-

acteristics of the consumer credit market, it could not

reasonably conclude that the mix of remedies included in

the contracts reflects consumer preferences. Jd. at 7744,

7746. Whereas consumers may bargain over terms such

35a

as interest rates, and the amount or number of payments,

their ability and incentive to bargain over the boilerplate

remedial provisions is substantially limited. Jd. at 7746-

47.

Several aspects of the credit transaction combine to

prevent consumers from making meaningful efforts to

search, compare, and bargain over remedial provisions.

As noted, standard form contracts are presented on a

take it or leave it basis. While there are differences in

the kinds of contracts offered by different creditors, cer-

tain creditors, namely finance companies serving higher-

risk borrowers, are most likely to include HHG security

interests and wage assignments. Furthermore while the

incidence of use of these provisions may differ across dif-

ferent regions of the country, contracts offered by credi-

tors of a given class in local areas are ofte:. substantially

identical. Jd. at 7746. Given the substantial similarity

of contracts, consumers have little ability or incentive to

shop for a better contract.

Consumers’ ability to shop and bargain is further con-

stricted by the fine print and technical language used in

the contracts. Jd. at 7747. Moreover, consumers are lim-

ited in their ability to seek explanations from lenders

since inquiries about remedies are likely to make credi-

tors wary and hesitant to grant a-loan. Finally, “[i]n

some cases, comparison is impossible because the creditor

refuses to give out the loan contract until the borrower

seems ready to sign it.” Jd.**

24 Contrary to the dissent’s assertion, discussion of the use

of standard form contracts and fine print is not “empty

rhetoric” simply because no deception is involved or because

the Commission found that additional information would not

alter the consumer’s choice. See Dissent at 6; see also infra

pp. 37, 60. As the discussion in the text illustrates, the

Commission relies on these attributes of the contracts as

contributing factors in its overall analysis of the character-

istics of the consumer credit market which limit consumers’

36a

Consumers’ limited ability and incentive to search out

better contracts is compounded by creditors’ lack of in-

centive to advertise or compete on the basis of remedies.

Id. Consumers’ Jack of understanding of contractual

terms is the first obstacle. Before competing on the basis

of exclusion or inclusion of particular contract terms,

creditors would have to educate the consumer as to the

ramifications of the inclusion of a particular clause and

why a contract excluding the clause is preferable. Such

an educational effort would entail substantial costs and

would tend to create a free-rider problem with competing

creditors reaping benefits from the advertising creditor’s

educational efforts. The second disincentive to creditors

is the problem of adverse selection. If a creditor adver-

tised less onerous remedies, the creditor is likely to at-

tract a disproportionately greater share of those debtors

who intend to or who are most likely to default.

The Commission also relied upon the fact that default

is a relatively infrequent occurrence and generally not

within consumers’ control. Jd. at 7747-48. Consumers

could avoid the injuries attendant on the use of HHG

security interests and wage assignments if they avoided

defaulting on their payments. Relying principally on two

large complementary survey studies** of the causes of

default, the Commission concluded that default is ordi-

narily the product of forces beyond the debtor’s control.

Default is usually precipitated by unforeseeable and un-

avoidable events that reduce income (e.g., job loss or

incentive and ability to bargain over remedial provisions and

creditors’ ability to compete on the basis of such terms.

25Qne study by the National Commission on Consumer

Finance, see NCCF Technical Study, Vol. V. (1972), relied on

survey data from creditors. The other study relied on survey

data from debtors. See D. Caplovitz, Consumers in Trouble:

A Study of Debtors in Default (1974). For a discussion of

the results of the two studies, see Staff Report, J.A. at 786-

802.

37a

pay reduction) or increase demands (e.g., incapacitation,

relocation, unplamned emergency expenses, marital sep-

aration or divoree). When these events, outside the

debtor’s immediate control, occur default is generally an

involuntary response.** Jd. at 7747. The unforeseeable

and unavoidable nature of default not only make the im-

plementation of the creditor remedies unavoidable but

also limit consumers’ incentive ‘to search for contracts

which do not include particular remedies. Since con-

sumers do not expect to default, the invocation of par-

ticular creditor remedies seems remote and speculative

at the time of contracting and thus is not a material ele-

ment in the consumer’s decision. Instead consumers quite

reasonably focus their attention on the more immediate

terms such as interest rates and! payments. Jd. at 7746.

On the basis of the foregoing analysis, the Commission

concluded that consumers cannot reasonably avoid the

inclusion of HHG security interests and wage assign-

ments in credit contracts or their implementation. We

conclude that the Commission’s; finding of unavoidable

injury comports with the criteria set out in the Commis-

sion’s Policy Statement.

26 Petitioner AFSA argues thatt default is an infrequent

occurrence and that not all debtorss experiencing these adver-

sities default, therefore, the debtors who default in such cir-

cumstances, could avoid default tmrough better planning and

the taking of precautionary measures. AFSA Brief at 40-41.

The Commission addressed this issiue and concluded that while

“Tp]recautions can reduce the rislk of default . . . no reason-

able level of precautions can elimimate the risk.” 49 Fed. Reg.

at 7748. Moreover, consumers ha:ve differential capacities to

take precautions and default in any individual situation is

likely to depend on the mix of circumstances at that point in

time (¢.g., the consumer’s level of debt, the number and type of

adverse events occurring at once,, benefits available, amount

of savings or other assets availablle, presence of support from

other family members). See FTC \Brief at 27. In light of these

considerations, we find petitioners’ argument unpersuasive.

38a

D. Challenge to the FTC’s Exercise of Unfairness Au-

thority Under Section 5(a)

Although the Commission has identified a substantial

consumer injury, which is not offset by countervailing

benefits, and which cannot be reasonably avoided by

consumers, petitioners nonetheless challenge the ban on

HHG security interests and wage assignments as outside

the scope of the Commission’s unfairness authority. Pe-

titioners claim that the FTC’s description of what con-

stitutes a substantial, unjustified, and unavoidable in-

jury in this proceeding exceeds the bounds the Commis-

sion itself has previously erected for channeling its dis-

cretion to proscribe unfair practices. See AFSA Brief

at 17. With respect to “injury,” petitioners assert that

section 5 dees not encompass consumer harms result-

ing from the consumer’s own choice of action unless that

choice is improperly manipulated by seller overreaching

(i.e., deception, coercion, or withholding of material in-

formation). Relatedly petitioners argue that the require-

ment of “unavoidability” is not met unless the seller’s

overreaching interferes with the consumer’s ability to

make an informed, uncoerced choice. Finding no creditor

overreaching in the present case, petitioners assert that

the FTC is attempting to play “national nanny” by pro-

tecting consumers against the hardships of their own

miscalculations in pledging HHG security interests and

wage assignments. See AFSA Brief at 62. In petitioners’

view the FTC is gratuitously intervening in the market

to provide the optimal mix of options for consumers.

This exceeds the FTC’s authority, in petitioners’ view,

because the FTC must first identify some overreaching

ereditor or seller practice which is distorting the proper

functioning of the market.

In essence, petitioners ask the court to limit the FTC’s

exercise of its unfairness authority to situations involv-

ing deception, coercion, or withholding of material infor-

mation. As noted earlier, despite considerable contro-

39a

versy over the bounds of the FTC’s authority, neither

Congress nor the FTC has seen fit to delineate the spe-

cific “kinds” of practices which will be deemed unfair

within the meaning of section 5. Instead the FTC has

adhered to its established convention, envisioned by Con-

gress, of developing and refining its unfair practice cri-

teria on a progressive, incremental basis. Nevertheless,

petitioners seek to support their claim that the FTC has

exceeded its statutory authority by arguing that the Com-

mission has never before asserted the scope of authority

exercised in this rulemaking. Thus, in addressing peti-

tioners’ challenge, we look first to past Commission un-

fairness decisions to determine if a basis in precedent

exists for “1e Commission’s present rulemaking.

Our task of reviewing Commission unfairness prece-

dent is hindered by the Commission’s cautious use of its

unfairness authority as an independent basis for deci-

sion—most frequently the Commission has relied on

alternate theories of deception and unfairnes. See supra

note 15. The Credit Practices Rule is a rare example

of the Commission proceeding solely on unfairness

grounds. We are aided, initially, by a fairly recent arti-

cle authored by a member of the Commission’s Office of

Planning cataloguing the “kinds” of commercial prac-

tices which the Commission has determined to be unfair.

Specifically this article identifies four primary categories

of practices which have been prohibited as unfair: (1)

withholding material information; (2) making unsubstan-

tiated advertising claims; (3) using high-pressure sales

techniques; and (4) depriving consumers of various post-

purchase remedies. See Craswell, supra note 15, at 109.

It is true that many, but not all, of the Commission’s

unfairness decisions have involved the kind of overreach-

ing seller conduct pinpointed by petitioners.**7 But of

27 “Sometimes consumer unfairness is found even without

coercion or denials of product information. A striking ex-

ample arose in the early 1970’s when a company began pro-

40a

particular relevanee te this case are those Commission

decisions dealing with the allocation of post-purchase

rights. The majority of consumer transactions involve

not only the purchase of a product but also the alloca-

moting razor blades in a way that risked serious injury to

small children. Free samples of the blades were included

indiscriminately in advertising supplements to home-delivered

newspapers .... The Commission was able to use its unfair-

ness jurisdiction to negotiate a consent decree barring this

unsafe marketing technique [, see Philip Morris, Inc., 82

F.T.C. 16 (1973)].” Companion Statement on the Commis-

sion’s Consumer Unfair Jurisdiction (accompanying 1980

Policy Statement), reprinted in H.R. Rep. No. 156, Pt. 1, 98th

Cong., 1st Sess. 41, 42 (1988); see also R.F. Keppel & Bro.,

291 U.S. 304 (unfair practice to use gambling a lottery mar-

keting technique to sell candy, see discussion swpra p. 12.

We note, moreover, that there is no bright line definition

of what constitutes a coercive practice. Coercive seller prac-

tices deemed unfair have generally involved situations where

the seller’s conduct prevents the consumer from making a free,

informed choice. See Arthur Murray Studio, Inc. v. FTC, 458

F.2d 622 (5th Cir. 1972) (unfair for dance studio to use “ca-

jolery” and other high pressure techniques aimed at enticing

elderly women to enter contracts for extended series of dance

lessons costing thousands of dollars) ; Holland Furnace Co. v.

FTC, 295 F.2d 302 (7th Cir. 1961) (unfair for salesman to dis-

mantle home furnaces for cleaning and inspection and then

refuse to reassemble them until customer agreed to buy addi-

tional parts and services.) ; see also Cooling-Off Period for

Door-to-Door Sales, 16 C.F.R. pt. 429 (1984) (providing for

3-day cooling-off period during which consumer can cancel

a contract entered with a door-to-door salesperson). The

present case may arguably entail an element of coercion. Con-

sumers in serious financial need of a loan are presented with

contracts containing HHG security interests and wage assign-

ments on a “take it or leave it” basis with no apparent alterna-

tives available. Cf. infra p. 49 (discussing FTC’s opinion

that the use of HHG security interests has many of the attri-

butes of economic duress).

Furthemore, petitioners overlook critical aspects of unfair-

ness decisions purportedly involving seller overreaching, which

4la

tion, between the buyer and seller, of a number of con-

tractual and noncontractual rights and duties with re-

spect to the product purchased (e.g., remedies available

to the buyer if the product is defective or to the seller

undercut their basic premises. For example, the petitioners

assert that there is no precedent for the Commission to inter-

vene in the market to produce a better mix of options in the

absence of some identified seller practice which is distorting

the proper functioning of the market. However, with respect

to finding the withholding of material information or unsub-

stantiation of advertising claims unfair one might ask why in

the absence of deception, should not the market be allowed to

determine the optimal level of information? Yet the Commis-

s.on has on a number of occasions promulgated rules requiring

sellers to disclose “‘essential’” information. See, e.g., Care

Labeling of Textile Weariry Apparel, 16 C.F.R. pt. 423 (1984)

(requiring clothes to ir .ie labels giving washing instruc-

tions); Labeling and A« ertising of Home Insulation, 16

C.F.R. pt. 460 (1984) (requiring disclosure of the R-value of

insulation) ; Octane Posting and Certification, 16 C.F.R. pt.

306 (1984) (requiring the posting of octane levels). Peti-

tioners’ argument fails to distinguish between unfair practices

and deceptive practices. A comparative review of various

types of unfairness cases is complicated by the fact that most

were brought on a deception theory and found to be deceptive

as well as unfair. Hence the distinction between the deception

rationale and the unfairness rationale tends to become obfus-

cated. Nonetheless the two rationales are distinct: A prac-

tice is deceptive when the consumer is forced to bear a larger

risk than expected (e.g., the consumer is misled) whereas a

practice is unfair when the consumer is forced to bear a larger

risk than an efficient market would require. See generally

Craswell, supra note 15, at 125. The substantiation of ad-

vertising claim cases are illustrative. The FTC has determined

that advertisers must have a “reasonableness basis’? for mak-

ing a claim and that making unsubstantiated advertising

claims may be both an unfair and a deceptive practice. Un-

substantiated claims are unfair because consumers are forced

to bear the risk that the claim will turn out to be false (and

verification of the claim by the consumer would generally en-

tail disproportionate costs to verification by the advertiser) ;

unsubstantiated claims are deceptive because consumers ex-

pect that the advertiser has some basis for making the claim.

See, e.g., In re Pfizer, Inc., 81 F.T.C. 23, 58-65 (1972) ; Jn re

42a

if the buyer defaults). The Commission, in the post-

purchase right cases, has stepped in to correct alloca-

tions of post-purchase remedies determined to be unfair

to consumers.

A prime example is the Commission’s rule preventing

sellers from taking advantage of the holder-in-due-course

doctrine. See Preservation of Consumers’ Claims and

Defenses, Statement of Basis and Purpose, 40 Fed. Reg.

53,506 (1975) (codified at 16 C.F.R. pt. 483 (1984)). The

holder-in-due-course doctrine immunizes the subsequent

holder of a negotiable instrument from the claims or

defenses which the consumer could have asserted against

the original holder, if the subsequent holder took the in-

strument for value, in good faith, and without notice of

any claims or defenses against it. Thus, under the holder-

in-due-course doctrine, the seller could discount the con-

sumer’s note to a third party making the consumer uncon-

ditionally liable to the third party with no recourse even

if the product turned out to be totally defective. The

Commission determined that the use of the holder-in-due-

course doctrine in consumer credit transactions was an

unfair practice. See id. at 53,524 (“[I]t constitutes an

unfair and deceptive practice to use contractual boiler-

plate to separate a buyer’s duty to pay from a seller’s

duty to perform.”). The MHolder-in-Due-Course Rule

abrogated the use of the holder-in-due-course doctrine in

consumer credit transactions by requiring sellers to in-

clude a notice in all consumer sales instruments stating

that any subsequent holder is subject to all claims and

defenses that could be asserted against the seller.

Firestone Tire & Rubber Co., 81 F.T.C. 398, 451 (1972),

aff'd, 481 F.2d 246 (6th Cir.), cert. denied, 414 U.S. 1112

(1973). See also In re Porter & Dietsch, Inc., 90 F.T.C. 770,

866 & n.11 (1977) (the “reasonable basis” standard for evalu-

ating the substantiating material is the same whether adver-

tisement is analyzed under a theory of deception or a theory

of unfairness ), aff’d in relevant part, 605 F.2d 294 (7th Cir.

1979), cert. denied, 445 U.S. 950 (1980); Jn re National

Dynamics Corp., 82 F.T.C. 488, 550 n.10 (1973) (same).

43a

Petitioners distinguish the Holder-in-Due-Course Rule,

by asserting that there the Commission intervened “to

prevent consumers from being victimized by a. counter-

intuitive legal doctrine.” AFSA Brief at 31 n.3. Peti-

tioners thus attempt to characterize the rationale under-

lying the Holder-in-Due-Course Rule solely in terms of

deception. We find this argument unpersuasive in light

of the Commission’s stated rationale. Prior to promul-

gating the Holder-in-Due-Course Rule, the Commission

had already held a seller’s practice of routinely assign-

ing purchasers’ notes to third parties inherently unfair

and deceptive because consumers were unaware and did

not intuitively expect that a seller could deprive them

of valid claims and defenses to the obligation by dis-

counting their notes to third parties. Disclosure was

determined to be the proper remedy. See In re All-State

Industries, Inc., 75 F.T.C. 465, 489-94 (1969), aff'd

423 F.2d 423 (4th Cir.), cert. denied, 400 U.S. 828

(1970). The Commission, however, adopted a more eco-

onmically oriented rationale focusing on the effect of

the seller’s post-purchase conduct on the consumer’s eco-

nomic welfare when it later adopted the Holder-in-Due-

Course Rule which completely prevented sellers from

taking advantage of the holder-in-due course doctrine.

See Preservation of Consumers’ Claims and Defenses,

Statement of Basis and Purpose, 40 Fed. Reg. at

53,522-24.

The Commission believes that relief under Sec-

tion five of the FTC Act is appropriate where sellers

or credi impose adhesive contracts upon con-

sumers, where such contracts contain terms which

injure consumers, and where consumer injury is not

off-set by a reasonable measure of value received in

return. In this connection, the Commission’s author-

ity to examine and prohibit unfair practices in or

affecting commerce in the manner of a commercial

equity court is appropriately applied to this prob-

lem. Where one party to a transaction enjoys sub-

44a

stantial advantages with respect to the consumers

with whom he deals, it is appropriate for the Com-

mission to conduct an inquiry to determine whether

the dominant party is using an overabundance of

market power, or commercial advantage, in an in-

equitable manner.

Id. at 53,524.

Thus the Commission in promulgating the Holder-in-

Due-Course Rule articulated an economic rationale for

its unfairness determination.

This theory (in effect) posits a market imperfection

which for some reason prevents the market from

arriving at the most efficient distribution of post-

purchase rights between buyers and sellers. Faced

with such an imperfection, the Commission steps in

to correct the market’s results by reassigning post-

purchase rights between the various parties until

the most efficient result is reached.

Craswell, supra note 15, at 131. This is basically the

same economic rationale exemplified in the Commission’s

Policy Statement and utilized in this case. See Policy

Statement at 37 (Commission’s actions are brought “to

halt some form of seller behavior that unreasonably

creates or takes advantage of an obstacle to the free exer-

cise of consumer decisionmaking”) (emphasis added).

Thus contrary to petitioners’ assertions, the Commission

has in the past sanctioned intervention not only where

the seller’s conduct affirmatively causes distortion of

proper market functioning but also where the seller takes

advantage of an existing obstacle which prevents free

consumer choice from effectuating a_ self-correcting

market.

In the present case, the Commission identified particu-

lar aspects of the credit transaction which substantially

limit the consumer’s ability and incentive to bargain

over credit remedies and which limit the creditor’s in-

centives to compete on the basis of remedies. See supra

45a

pp. 33-37. This market imperfection prevents consumer

choice from operating to effect the mix of remedies which

most reflects consumer preferences and leaves creditors

free to exploit this market failure by including an entire

litany of remedies as boilerplate provisions.“ Thus the

Commission concluded that by insisting on HHG security

interests and wage assignments, creditors are taking

advantage of an existing obstacle to the free exercise of

consumer decisionmaking and thereby engaging in an

unfair practice.

8 In the present case the contract terms in question are

buried in fine print and only become operative upon the con-

tingency of default. Analogously the Holder-in-Due Course

Rule involved an aspect of contract law which did not appear

on the face of the ccntract and which only became relevant if

the seller discounted the note to a third party. In other cases,

the Commission has found an unfair practice where the con-

tract did not prevent the seller from engaging in particular

conduct. See, e.g., Jn re Spiegel, Inc., 86 F.T.C. 425 (1975)

(unfair practice for Spiegel to bring lawsuits against out-of-

state mail order customers in Cook County, Illinois), aff'd in

relevant part, 540 F.2d 287 (7th Cir. 1976); /n re Beneficial

Finance Corp., 86 F.T.C. 119 (1975) (unfair practice for tax

preparation firm to use confidential tax information about

customers for commercial purposes without first obtaining

a signed consent), aff’d in relevant part, 542 F.2d 611 (3d Cir.

1976), cert. denied, 480 U.S. 983 (1977).

The Commission has also on occasion required the inclusion

of specific, substantive, noninformational terms in consumer

contracts. See Use of Negative Option Plans by Sellers in

Commerce, 16 C.F.R. pt. 425 (1984) (setting time limits with-

in which sellers must ship merchandise and consumers must

be allowed to return merchandise as well as requiring dis-

closure of how consumers can avoid acceptance of goods and

whether billing charges include postage). Somewhat analo-

gously the Commission’s rule requiring that consumers be

given a three day cooling-off period following a purchase from

a door-to-door salesman mandates that an additional sub-

stantive term be included in the agreement. See Cooling-Off

Period for Door-to-Door Sales, 16 C.F.R. pt. 429 (1984).

46a

While we agree with petitioners that the Commission

cannot be allowed to intervene at will whenever it be-

lieves the market is not producing the “best deal” for

consumers, we nonetheless believe that this court would

be overstepping its authority if we were to mandate,

as petitioners urge, that the Commission’s unfairness

authority is limited solely to the regulation of conduct

involving deception, coercion or the withholding of mate-

rial information. As previously discussed, the Commis-

sion’s consumer injury test, set forth in its Policy State-

ment, while not specifically defining the “kinds” of prac-

tices or injuries encompassed, is the most precise defini-

tion of unfairness articulated to date by either the Com-

mission or Congress. Upon reviewing it, Congress has

not seen fit to enact any more particularized definition of

unfairness to limit the Commission’s discretion. Indeed,

the most significant congressional response to the Policy

Statement has not been criticisms or rejection, but pro-

posals to enact the Commission’s three-part consumer

injury standard into law. See supra pp. 20-22 & n.14.

Thus, the Commission has, for all practical purposes, been

left to develop its unfairness doctrine on an incremental,

evolutionary basis. See supra p. 15. At this juncture, it is

not for this court to step in and confine, by judicial fiat,

the Commission’s unfairness authority to acts or prac-

tices found to be deceptive or coercive. Our role is sim-

ply to review the Commission’s exercise of its unfair-

ness authority in this case. See supra pp. 16-18. We find

that the Commission’s articulated rationale for its deter-

mination that the taking of HHG security interests and

wage assignments constitute unfair practices fully com-

ports with the criteria set out in the FTC’s Policy State-

ment. The Commission has sufficiently identified and

documented the factors resulting in an obstacle to free

consumer decisionmaking which is being exploited by

creditors to the detriment of consumers.** We cannot

* The dissent claims that the Commission cannot intervene

“when it does not know the ‘obstacle to free choice.’” See

47a

therefore say that the Commission has exceeded the

boundaries of its statutory authority to define unfair

practices in this case.

The Commission’s economic rationale for finding the

taking of HHG security interests and wage assignments

to be unfair practices is additionally bolstered by consid-

erations of equity and public policy. It is well established

that certain types of contracts or contractual provi-

sions may be prohibited simply because they violate ac-

cepted principles of fair play and equity, e.g., contracts

of adhesion. Cf. U.S.C. § 2-302 (1978) (unconscionable

contracts or clauses). And courts have recognized that

the Commission was never intended to disregard prin-

ciples of equity in reaching its decisions. See Sperry &

Hutchinson, 405 U.S. at 244 (FTC may “like a court

Dissent at 7. As the foregoing discussion illustrates, how-

ever, this is not a case where the Commission failed to articu-

late and document the factors resulting in an obstacle to free

consumer choice. The dissent simply chooses to disregard the

Commission’s comprehensive analysis of the confluence of

factors which create an obstacle to free consumer choice and

a self-correcting market. Instead, the dissent places principal

reliance on the fact that HHG security interests and wage

assignments are used primarily by finance companies dealing

with lower-income, higher risk borrowers, whereas higher-

income, creditworthy consumers may obtain credit without

these onerous provisions. Thus while the dissent acknowledges

that an obstacle to the free exercise of consumer decision-

making does exist for the lower-income, higher-risk consumer,

it finds this justified by the higher risk level of these borrowers

and consequently not evidence of a market failure. But the

fact that the Commission’s ‘ysis applies predominantly to

certain creditors dealing w: 1 certain class of consumers

(lower-income, higher-risk be.rowers) does not, as the dis-

sent suggests, undercut its validity. The Commission has

identified a market failure with respect to a particular cate-

gory of credit transactions which is being exploited by the

creditors involved to the detriment of the consumers involved,

and thus the dissent’s argument that higher-income, more

creditworthy consumers can obtain credit on better terms

from banks is unavailing.

48a

of equity” consider “public values beyond those en-

shrined in the letter or ... spirit of the aniitrust laws’’) ;

FTC v. Standard Educ. Soc’y, 86 F.2d 692, 696 (2d

Cir. 1986) (Hand, J.) (FTC’s “duty in part at any rate,

is to discover and make explicit those unexpressed stand-

ards of fair dealing which the conscience of the com-

munity may progressively develop’), rev’d on other

grounds, 302 U.S. 112 (1937) (reversing that part of

Second Circuit’s holding which modified and weakened

FTC’s cease and desist order); see also Spiegel, Inc. V.

FTC, 540 F.2d 287, 292 (7th Cir. 1976) (invoking a

public policy rationale and stating that FTC has “au-

thority to prohibit conduct that, although legally proper,

[is] unfair to the public’). In its Policy Statement, the

Commission states that considerations of public policy

are frequently used as confirmatory evidence of the un-

fairness of a particular practice but that “[s]ometimes

public policy will independently support a Commission

action.” Policy Statement at 38-39. See generally

Averitt, supra note 15, at 275-78 (discussing FTC’s

reliance on public policy considerations) ; Craswell, supra

note 15, at 135-39 (discusing F'TC’s reliance on consider-

ations of equity).

In the present case, the Commission found that wage

assignments are prohibited in Uniform Credit Code

states, several other states, and the District of Columbia.

49 Fed. Reg. at 7756. The substantial majority of states

permitting wage assignments impose restrictions on

their use. Jd. Similarly, several states prohibit the tak-

ing of non-possessory, non-purchase security interests in

household goods, and others place limitations on their use.

Id. at 7781-82 & n.10. Both the NCCF study and the

Creditor Remedies Project, which provided the impetus

for the Commission’s rulemaking, see supra pp. 3-4, de-

lineated the creditor abuses and concomitant consumer

injuries entailed in the use of HHG security interests

and wage assignments, and recommended that the use

of these creditor remedies be substantially restricted or

49a

eliminated. In addition, the Commission stated its opin-

ion that:

(T]he use of blanket security interests to extort an

overextended or unemployed consumer to make a

decision which may lead to increased financial diffi-

culties has many of the attributes of economic

duress. Threats to seize the personal possessions of

a consumer and his or her family clearly meet many

of the criteria for economic duress, especially given

the dire financial circumstances in which the con-

sumer finds himself. Although the Commission has

premised its findings regarding the unfairness of

threats to seize household goods on the resulting

psychological and economic injury to consumers, as

demonstrated by infcrmation contained in the rule-

making record, these common law doctrines provide

evidence of public policy supporting the Commi.-

sion’s findings.

49 Fed. Reg. at 7765 (footnotes omitted). Thus the

Commission’s exercise of its unfairness authority in pro-

scribing the use of HHG security interests and wage

assignments can be fairly viewed as falling within the

Commission’s authority to take into consideration prin-

ciples of equity and public policy and to proscribe acts

or practices found to violate those principles.

E. Challenge to FTC’s Rulemaking Authority Under

Section 18 (a)

Section 18(a)(1‘(B) of the FTC Act empowers the

Commission to prescribe “rules which define with specif-

icity acts or practices which are unfair or deceptive acts

or practices” and to “include requirements prescribed

for the purpose of preventing such acts or practices.”

Petitioners claim that by branding the very taking of a

security interest in household goods or an assignment

of future wages as unfair practices, the FTC has not

defined with specificity any unfair practice but has

merely prescribed a requirement for preventing unfair

50a

practices. See AFSA Brief at 55. The petitioners’ argu-

ment is predicated on the Second Circuit’s holding in

Katharine Gibbs School (Inc.) v. FTC, 612 F.2d 658

(2d Cir. 1979). In Katharine Gibbs, the Second Circuit

set aside the Commission’s “Vocational Schools Rule” be-

cause “[i]nstead of defining with specificity those acts

or practices which it found to be unfair or deceptive, the

Commission contented itself with treating violations of

its ‘requirements prescribed for the purpose of prevent-

ing’ unfair practices as themselves the unfair practices.”

Id. at 662. The court held that the rule must define

specific unfair practices; the unfair practices cannot

be defined in terms of future violations of the rule’s

remedial requirements. Even if this court were to adopt

the Second Circuit’s view of section 18(a) expressed in

Katharine Gibbs, we would still find it inapplicable to

the present case.*°

In promulgating the Vocational Schools Rule at issue

in Katharine Gibbs, the FTC was concerned about “un-

fair and deceptive advertising, sales, and enrollment

practices engaged in by some of the schools.” Jd. at 661.

However, rather than defining the specific advertising,

sales, and enrollment practices deemed unfair, the FTC

adopted a rule regulating tuition refund policies. The

rationale behind the rule was to alter the incentive struc-

ture for obtaining enrollments by making it financially

burdensome for a school to accept any student who was

unlikely to complete the course for any reason. Id. at

663. “Although the Commission did not fault existing

refund policies, it provided, nonetheless, that any failure

to comply with its newly prescribed refund obligations

30 We note that Katharine Gibbs was the first case to decide

the lawfulness of a rule promulgated under section 18 and the

decision was not without controversy. See Katharine Gibbs,

612 F.2d at 671-76 (Newman, J., dissenting); Katharine

Gibbs School (Inc.) v. FTC, 628 F.2d 755 (2d Cir. 1980)

(Oakes, J., dissenting from denial of petition for rehearing

en banc) (joined by Mansfield, J. and Newman, J.).

5la

would constitute an unfair or deceptive act or practice

in connection with the sale or promotion of a course.” /d.

The FTC’s rule, thus, penalized every vocational school

for every dropout regardless of cause, leading the Second

Circuit to conclude that there was no rational connec-

tion between the prescribed, universally applicable refund

provisions and the prevention of syec'fic unfair enroll-

ment practices.**

The provisions of the Credit Practices Rule at issue in

this case are clearly distinguishable from the provisions

of the Vocational Schools Rule set aside in Katharine

Gibbs. The prescribed refund requirements of the Voca-

tional Schools Rule were. designed t» prevent unrelated,

unspecified unfair enrollment advertising and sales prac-

tices. In contrast, the Credit Practices Rule identifies

specific practices, namely the taking of HHG security

interests and wage assignments as collateral, as per se

unfair and prohibits those practices.“ See 49 Fed. Reg.

at 7745 (“The rule defines the use of such clauses or

procedures, in se, to be an unfair practice.”). We agree

with the Commission that “[bjecause . .. the direct

relationship between the unfair practice and the pro-

scription of that practice is apparent on the face of each

. . . provision, there is no reason to set out the two

separately.” Jd. The Commission having defined with

31 The petitioners also rely on Katharine Gibbs to support

their argument that the ban on the use of HHG security inter-

ests and wage assignments as collateral is an overly broad

remedy lacking a rational connection to the practices deemed

unfair. This argument is addressed infra at Part III-C.

%2 Petitioner AFSA, in its Reply Brief, argues that the FTC

is attempting to circumvent the requirements set out in Kath-

arine Gibbs by characterizing the Rule as a restriction on

creditor remedies whereas really the Rule is a restriction on

consumers’ ability to give collateral. We tind this semantic

quibbling unpersuasive. The FTC has identified particular

contractual creditor remedies, however characterized, as un-

fair practices and thus prohibited their use.

52a

specificity the acts or practices deemed unfair has fully

complied with the statutory requirements of section

18(a) (1) (B).

III. SUBSTANTIAL EVIDENCE AND BREADTH OF REMEDY

Petitioners contend that even if the Credit Practices

Rule’s ban on HHG security interests and wage assign-

ments represents a permissible application of the three-

part consumer injury standard within the Commission’s

statutory authority, the challenged provisions must still

be set aside as arbitrary and capricious agency action.

Petitioners argue that the Commission’s conclusions are

not supported by substantial evidence in the record and

that the prohibition is an overly broad means of prevent-

ing the consumer injuries identified.

A. Scope of Judicial Review

This court may set aside the Commission’s action only

if it “is not supported by substantial evidence in the rule-

making record,” see 15 U.S.C. § 57a(e) (3),* or if it is

“arbitrary, capricious, an abuse of discretion, or other-

wise not in accordance with law ....” Jd. (incorporat-

ing 5 U.S.C. § 706(2) (A) standard). The legislative his-

tory of the Magnuson-Moss Act further provides that the

substantial evidence standard is to be applied only to the

Commission’s “factual determinations”; the arbitrary or

33 The statement of basis and purpose for a rule is defined

in the statute as part of the “rulemaking record” which is

subject to judicial review, see 15 U.S.C. § 57a(e) (1) (B), yet

15 U.S.C. § 57a(e) (5) (C) states that the contents and ade-

quacy of the statement of basis and purpose “shall not be

subject to judicial review in any respect.” This court resolved

this statutory anomaly in American Optometric Ass’n, 626

F.2d at 906, by stating that the court will consult the statement

of basis and purpose where it is “helpful in understanding

the Commission’s reasoning, but, nevertheless, being careful

not to impose upon the statement the unreasonable demands

about Which Congress was concerned [i.e., requiring volum-

inous and detailed statements].” Jd.

53a

capricious standard is to be applied to all other deter-

minations. See American Optometric Ass’n, 626 F.2d at

904 (setting forth scope of judicial review under FTC

Act of a trade regulation rule). A factual finding is

supported by substantial evidence if the record contains

“such relevant evidence as a reasonable mind might ac-

cept as adequate to support a conclusion.” American Tex-

tile Mfrs. Inst., Inc. v. Donovan, 452 U.S. 490, 522 (1981)

(quoting Universal Camera Corp. v. NLRB, 340 US.

474, 477 (1951)). To decide whether an agency’s action

is arbitrary or capricious, “the court must consider

whether the decision was based on a consideration of the

relevant factors and whether there has been a clear

error of judgment.” Citizens to Preserve Overton Park

v. Volpe, 401 U.S. 402, 416 (1971). “This ‘arbitrary

and capricious’ standard of review is a highly deferential

one, which presumes the agency’s actions to be valid.”

Environmental Defense Fund, Inc. v. Costle, 657 F.2d

275, 283 (D.C. Cir. 1981) (citations omitted). Contrary

to the dissent’s approach, this standard “forbids the

court’s substituting its judgment for that of the agency,

and requires affirmance if a rational basis exists for the

agency’s decision.” Ethyl Corp. v. EPA, 541 F.2d 1, 34

(D.C. Cir.) (en banc) (citations omitted), cert. denied,

426 U.S. 941 (1976).

B. Substantial Evidence

The Credit Practices Rule, as previously discussed, was

adopted after a nine-year rulemaking period in which an

extensive record was developed and each provision of the

Rule painstakingly considered. See supra pp. 4-7 & nn.

2-4. The Commission has presented detailed documenta-

tion of the record evidence relied upon to support each of

its conclusions. See 49 Fed. Reg. 7745-48, 7755-68. The

Commission’s documentation is amply sufficient and we

find no need to duplicate or supplement that documenta-

tion with our own recitation of the record evidence sup-

porting each of the Commission’s findings and conclu-

54a

sions.** Thus we address only the principal challenges to

the sufficiency of the evidence raised by petitioners.

First, petitioner AFSA questions the sufficiency and

reliability of the “anecdotal” evidence supplied by legal

aid attorneys or consumer legal specialists who attested

to the consumer injuries resulting from the use of HHG

security interests and wage assignments. See AFSA

Brief at 52-55. Specifically AFSA relies on “reserva-

tions” about the attorneys’ testimony expressed by the

Presiding Officer. See AFSA Brief at 53 n.2. AFSA, how-

ever, disregards the Presiding Officer’s final conclusion:

[The attorneys] testimony was truthful and pro-

vided credible evidence of the injuries suffered by

their clients in the consumer credit marketplace.

Indeed, it would be difficult to identify a better

source for sucl. evidence.

P.O. Report, Appendix at 687. Furthermore, as the FTC

points out, it relied on not only a large number of

“anecdotes” from consumer law specialists, but also on

other corroborating studies and materials. See FTC Brief

at 24 n.17; see also supra note 19.

Petitioners also contend that the record does not sup-

port the Commission’s conclusion that the injuries en-

tailed in the use of HHG security interests and wage

assignments outweigh any benefits the availability of

such clauses may provide consumers. Specifically, peti-

tioners argue that the FTC did not find, and could not

find on the basis of the record evidence, that the proscrip-

tion on the use of household goods and wage assignments

would not diminish the availability of credit or increase

its cost for those consumers whose access previously de-

pended on their ability to pledge household goods and

34 The court has already cited to various portions of the

record evidence in Part II-C discussing the Commission’s ap-

plication of its three-part consumer injury standard.

55a

wage assignments as collateral. See AFSA Brief at 42.

Petitioners fault the Commission for accepting the con-

clusions of the rulemaking staff that the Rule would only

marginally affect the cost and availability of credit over

the contrary views of the FTC’s Bureau of Economics

and Bureau of Consumer Protection. See AFSA Brief at

47. In sum, petitioners claim that the Commission’s cost-

benefit approach was inadequate and that this inade-

quacy had been brought to the Commission’s attention by

two of its own bureaus.*

Petitioners’ argument harbors a fundamental miscon-

ception about the nature of the Commission’s required

cost-benefit analysis. Petitioners would require that the

Commission’s predictions or conclusions be based on a

rigorous, quantitative economic analysis. There is, how-

ever, no basis for imposing such a requirement.

In its 1982 Policy Letter, the Commission stated its

view of the required cost-benefit analysis:

As to the element pertaining to the weighing of

benefits and costs, however, the Commission believes

there is an associated problem to consider, namely

the risk that the analysis might unnecessarily com-

plicate and delay an investigation or an ultimate

litigation. For this reason, the Commission believes

that a highly quantitative benefit/cost analysis may

not be appropriate in each and every individual case,

and that in some cases a far more subjective anal-

ysis would be the reasonable approach.

1982 Policy Letter, supra note 18, at 33.

Analogously the Magnuson-Moss Act, establishing the

Commission’s rulemaking authority, requires the Com-

mission to include a statement of a rule’s economic im-

35 Petitioners also cite the Presiding Officer’s observation

that the ban on the use of HHG security interests may have

“far-reaching” effects. The flaw in this argument is addressed

infra p. 60.

56a

pact in the statement of basis and purpose. 15 U.S.C.

57a(d)(1). Congress, however, explicitly expressed its

intent that this requirement not place excessively strict

burdens on the Commission.

In particular, the requirement that the statement

include statements as to the economic impact of the

rule does not require the Commission to undertake a

full scale economic investigation prior to promulga-

tion of the rule. To do this would inordinately de-

lay FTC proceedings and deny relief to the con-

suming public while indefinite questions of economic

prediction were resolved by the Commission. This

provision should be read to require that the Com-

mission consider the economic impact of the rule to

issues and summarize its best estimate of that im-

pact in the statement. Obviously, a full evaluation

of the economic impact of the rule would have to

await its implementation.

H.R. Rep. No. 1107, 93d Cang., 2d Sess. 47 (1974).

In addition to rejecting petitioners’ view of the stand-

ard to which the Commission’s cost-benefit analysis should

be held, we also find petitioners’ specific contentions of

error unpersuasive. Most of petitioners’ cost estimates

are based on their own self-serving predictions that

finance companies will restrict the availability and in-

crease the cost of credit as a result of the Commission’s

Rule’ Memoranda from the FTC’s Bureaus cf Economics

and Consumer Protection form the primary basis of sup-

port in the record for petitioners’ arguments. See Bu-

reau of Economics Final Recommendations, supra note 3;

see also Muris Memorandum, Higgins Memorandum, and

Gramm Memorandum, supra note 3.

The Bureau of Economics and Consumer Protection

focus their criticism on the rulemaking staff’s interpreta-

tion of the econometric evidence in the record.** However,

%¢ The econometric evidence in the record consisted of em-

pirical studies examining the relationship between various

57a

the econometric evidence in the record, by all accounts,

contains deficiencies which prevent definitive answers.

Thus it boils down to an issue of interpretation. The

Division of Credit Practices put forth a strong argument

supporting the staff’s analysis and countering the inter-

pretation proffered by the two Bureaus. See Memoran-

dum to Commission from Christopher Keller, et al. (May

24, 1983), J.A. at 1983 [hereinafter cited as Keller

Memorandum}.

The Keller Memorandum points out that the Bureaus’

counter-arguments are based primarily on abstract or

or theoretical arguments about the operation of credit

markets and the nature of consumer debtors which have

little or no factual support in the record.’ Keller Memo-

randum, J.A. at 1933. The Keller Memorandum also

notes the Bureaus’ exclusive focus on costs to the exclu-

restrictions on creditor remedies and the cost and availability

of credit by analyzing data from states which already have

laws restricting various creditor remedies.

3t The Bureau of Economics identified the three key func-

tions of collateral as: compensation of creditors upon default;

deterrence of default; and signalling. The Bureaus and peti-

tioners assert that the Commission has overlooked the value

of HHG security interests and wage assignments with respect

to these functions. The Keller Memorandum, however, argues

that evidence from other sources in the record refutes the

theoretical bases of these arguments, i.e., if default is invol-

untary then the theory of deterrence value is undercut; and if

household goods have no resale value or a defaulter is fired

when a wage assignment is exercised then the theory of com-

pensation value is undercut. See Keller Memorandum, J.A.

at 1934-35, 1949-51. With respect to signalling, whereby a

debtor indicates the intention to repay by submitting to oner-

ous creditor remedies in case of default, the Keller Memo-

randum points out that there is no empirical evidence in the

record to support the validity of signalling theory. J.A. at

1937-38. The Bureau of Consumer Protection expressly states

that signalling theory is new and not well established or re

searched with respect to its validity in consumer credit mar-

kets. See Muris Memorandum, supra note = J.A. at 1835.

sion of the Rule’s benefits which are both pecuniary and

non-pecuniary.* The non-pecuniary nature of many of

the benefits makes them difficult to measure and weigh in

cost-benefit terms. Keller Memorandum, J.A. at 1939-41.

On the basis of the record before us, we cannot say

that the Commission’s decision to reject the Bureaus’ in-

terpretations of the record evidence was unreasonable.

Nor do we find the dissent’s reassessment of the costs

and benefits entailed by proscribing the use of HHG se-

curity interests and wage assignments persuasive. The

dissent basically concludes, upon its own interpretation

of the record, that the Commission “grossly exaggerates

the beneficial impact of the Rule,” see Dissent at 11,

and underestimates the costs by failing to determine in

absolute terms the number of consumers who will be de-

nied credit as a result of the Rule. However, “the possi-

bility of drawing two inconsistent conclusions from the

evidence does not prevent an administrative agency’s find-

ing from being supported by substantial evidence.”

Consolo v. Federal Maritime Comm'n, 383 U.S. 607, 620

(1966). In our view, as indicated in our discussion of

the nature of the cost-benefit analysis required of the

Commission and the Commission’s specffte analysis in this

rulemaking, see supra pp. 54-58 & nn. 35-38, the con-

clusions reached by the Commission \.th respect to the

relative costs and benefits of proscribing the use of HHG

security interests and wage assignments are supported

%8 The pecuniary benefits cited include: fewer costly refi-

nancings ; fewer deficiency balances and in lower amounts; less

loss of equity in property; goods remaining in the hands of the

party where they have the most value; and fewer delinquencies

triggered by one creditor filing a wage assignment. The non-

pecuniary benefits cited include: procedural due process pro-

tections; the opportunity to assert valid claims and defenses;

less economic distress and disruption of family finances; less

embarrassment, humiliation, and anxiety; less interference in

employment relations; retention of personal and household

goods; and protection against coerced settlements. See Keller

Memorandum, J.A. at 1940.

59a

by substantial evidence in the rulemaking record. See

National Ass’n of Regulatory Util. Comm’rs v. FCC,

737 F2d 1095, 1140 (D.C. Cir. 1984) (“The fact that

an agency’s decision . . . rests on a set of evidentiary

facts less desirable or complete than one which would ex-

ist in some regulatory utopia does not alter our role.’’).

C. Breadth of Remedy

Petitioners claim that the challenged provisions of the

Credit Practices Rule sweep too broadly and that the

Commission could have chosen alternate means more nar-

rowly tailored to preventing the specific abuses identi-

fied.** Our review of the Commission’s chosen remedy is

quite limited.

The Commission is the expert body to determine

what remedy is necessary to eliminate the unfair or

deceptive trade practices which have been disclosed.

It has wide latitude for judgment and the courts will

not interfere except where the remedy selected has

no reasonable relation to the unlawful practices

found to exist.

Jacob Siegel Co. v. FTC, 327 U.S. 608, 612-13 (1946).

We find no abuse of discretion and no cause to interfere

in the present case. The Commission reasonably con-

cluded that the most effective way to eliminate the un-

fair practices of taking HHG security interests and wage

assignments was to proscribe their use.

%® AFSA relies on Katharine Gibbs to support its argument

that the Rule is invalid because it is not limited in scope to

preventing the specific abuses at which it is aimed. We have

already distinguished Katharine Gibbs, see supra p. 51;

whereas in Katharine Gibbs the universally applicable re-

medial refund provisions were unrelated to the abusive enroll-

ment techniques, here the unfair practice is the taking of

HHG security interests and wage assignments and the remedy

is a prohibition of their use.

60a

The Commission considered narrower, alternative rem-

edies but determixed that such alternatives failed to ad-

dress the fui ~.ge of problems found inherent in the

use of HHG security interests and wage assignments.

For example, the Commission rejected a suggested alter-

native provision requiring only that creditors disclose in

plain English the meaning of the contractual remedies.

The Commission reasoned:

[Disclosure alternatives would deal only partially

with limited seller incentives to promote alternative

remedies . . . and would not address at all con-

sumers’ limited incentives to search for information

about remedies.

49 Fed. Reg. at 7747. See id. at 7787-89 (discussing em-

pirical evidence on the eeets and benefits of the disclosure

alternative) .

Petitioner AFSA apparently seeks to bolster its over-

breadth argument (and its cost-benefit argument) by

citing to the Presiding Officer’s observation that the pro-

hibition of HHG security interests may have far-reaching

effects. The Presiding Officer’s observation, however, was

with respect to the household goods provision as it was

then drafted. The provision at that time did not contain

the narrow definition of household goods that it now

does. Thus the Presiding Officer found that “the rule

would prohibit the granting of security interests in such

broad categories of property as jewelry, expensive luxury

items, and, depending upon the purpose of the loan,

grants of security interests in real property and personal

property not within the commonly accepted definition of

household goods.” P.O. Report, J.A. at 644. The Com-

mission’s inclusion of a precise, narrowly tailored defini-

tion of household goods in 16 C.F.R. § 444.1(i) addressed

the concerns identified by the Presiding Officer.“ See 49

Fed. Reg. at 7767-68.

“ AFSA argues that even under the definition of household

goods adopted in 16 C.F.R. § 444.1(i), the Rule still prevents

6la

In sum, following a careful review of the Commission’s

analysis of the record evidence, we find petitioners’ chal-

lenges unpersuasive. The Commission’s decision to pro-

scribe the use of HHG security interests and wage as-

signments is supported by substantial evidence in the rec-

ord and the Commission has neither acted arbitrarily or

capriciously nor abused its discretion.

IV. PREEMPTION OF STATE LAW

Petitioners AFSA and, in particular, SCDCA, claim

that the FTC has exceeded its rulemaking authority by

“preempting” or “supplanting” the “carefully wrought

consumer protection statutes” of those states that either

allow or regulate the use of HHG security interests and

wage assignments. Although the Magnuson-Moss Act

contains no explicit preemption provision, “[{i]t has long

since been firmly established that state statutes and reg-

ulations may be superseded by validly enacted regula-

tions of federal agencies such as the FTC.” Katharine

Gibbs, 612 F.2d at 667 (citing Free v. Bland, 369 U.S.

663 (1962) ; Spiegel, Inc. v. FTC, 540 F.2d 287, 293 (7th

Cir. 1976)). The legislative history of the Magnuson-

Moss Act and predecessor bills *' indicate that while

consumers from pledging goods which cannot reasonably be

deemed necessities such as Gucci shoes, furs, Edwardian break-

fronts and Art Nouveau curio cabinets. See AFSA Brief at

23-27. On a practical level, however, we find that the Commis-

sion’s definition is sufficiently narrow to apply principally to

household and personal necessities.

*! N: ,e of the House or Senate Reports accompanying the

Magnuson-Moss Act speak directly to the issue of the in-

tended preemptive effect of the Commission's trade regulation

rules. House Report 1107 does, however, speak to preemption

in its discussion of another provision of the amendment ex-

panding the language of section 5 to “in or affecting com-

merce” :

The amendments made by 201 will permit more effec-

tive regulation of the marketplace by the FTC by placing

62a

Congress did not intend the Commission’s regulations to

“occupy the field,” it did intend FTC rules to have that

preemptive effect which flows naturally from a repug-

nancy between the Commission’s valid enactments and

state laws. See id. at 667 (reaching the same conclu-

sion) ; Verkuil, supra note 40, at 247 (“While the Com-

mission was not given the authority to occupy the field

‘of state unfair competition in consumer protection law,

it was authorized to declare by rule preemption of state

activities that conflict with regulations.”).

within its reach unfair or deceptive acts or practices

‘ which, although local in character, affect interstate com-

merce. The expansion of the FTC’s jurisdiction made by

this section 201 is not intended to occupy the field or in

any way to preempt State or local agencies from carrying

out consumer protection or other activities within their

jurisdiction which are also within the expanded jurisdic-

tion of the Commission.

Where cases of consumer fraud of a local nature which

affect commerce are being effectively dealt with by State

or local government agencies, it is the Committee’s intent

that the Federal Trade Commission should not intrude.

H.R. Rep. No. 1107, 98d Cong., 2d Sess. 45 (1974). Congress

made clear that while it was expanding the FTC’s jurisdiction,

it did not intend for the FTC to occupy the field of consumer

protection or to gratuitously intrude on state or local enforce-

ment activities. Thus states’ regulations are only supplanted

when inadequate or counterproductive to the Commission’s

regulations.

Predecessor bills considered by Congress were more explicit

with respect to outlining the Commission’s intended preemp-

tion authority. See, e.g., S. 3201, 91st Cong., 2d Sess. § 106

(1969) (including specific preemption for repugnancy provi-

sion), reprinted in S. Rep. No. 1124, 91st Cong., 2d Sess.

(1970) ; S. Rep. No. 269, 92d Cong., Ist Sess. 28 (1971) (‘In

the course of the Committeee’s consideration of the Commis-

sion’s rulemaking power the issue of preemption was dis-

cussed. At the present time a Trade Regulation Rule would

preempt state legislation or regulation that conflicted.’”’). For

a complete review of the legislative history with respect to

preemption, see Verkuil, Preemption of State Law by the Fed-

eral Trade Commission, 1976 Duke L.J. 225.

63a

In Katharine Gibbs, the Second Circuit found the pre-

emption provisions of the Vocationai Schools Rule overly

broad and thus beyond the Commissicn’s power. 612

F.2d at 667. The preemption provision of the Vocational

Schools Rule decreed preemption of any state law or

regulation which frustrated the purpose of the Rule’s

“inadequately spelled out provisions,” see supra p. 50,

thereby potentially preempting “an indefinite variety of

state laws and regulations governing the contractual re-

lations between vocational schools and their students.”

Katherine Gibbs, 612 F.2d at 667. The court noted that

“fijf the Commission had defined with specificity the

acts or practices it deemed unfair or deceptive, questions

of preemption could be answered with relatively iittle

difficulty.” Jd. This court in American Optometric Ass’n,

found that the Commission had “at least approached the

outer boundaries of its authority where “the Commis-

sion’s proposed pre-emption of state law [was] almost

as thorough as human ingenuity could make it.” 626

F.2d at 910. In American Optometric, the Commission

proposed to preempt the whole field of ophthalmic ad-

vertising. These cases recognize only that Congress did

not intend for the Commission’s regulations “to occupy

the field.” Hemce they do not support petitioners’ chal-

lenge to preemption in this case, since the Commission

has made explic > that “the rule is not intended to occupy

the field of creuit regulation or to preempt state law in

the absence of requirements that are inconsistent with

the rule.” 49 Fed. Reg. at 7783.

In the Statement of Basis and Purpose for the Credit

Practices Rule the Commission states:

The rule has been drafted to be as consistent with

existing state laws as possible. Indeed, state laws

served as the model for several rule provisions. The

rule prohibits practices that are authorized by stat-

ute or common law in at least some states. However,

none of the rule provisions preempts state law by

creating an irreconcilable conflict. That is, creditors

64a

will be able to comply with both state law and this

rule.

Id. at 7782 (footnote omitted) (emphasis in original).

The Commission further included in the Rule an ex-

emption provision whereby states that offer protections

equal to or greater than the Rule can obtain an exemp-

tion from the Rule. See 16 C.F.R. § 444.5. With respect

to the weight to be given the exemption provision, the

Fourth Circuit, upholding the FTC’s authority to promul-

gate the Funeral Rule despite state regulation of funeral

homes, noted:

Furthermore, Congress explicitly considered this is-

sue, and provided in Section 19(d) of the Federal

Trade Commission Improvements Act of 1980...

that the existence of state regulation was no barrier

to a funeral rule as long as the rule allowed any

state to obtain an exemption for its funeral homes

by adopting laws that provide protection substan-

tially similar toe the federal rule.

Harry and Bryant Co., 726 F.2d at 999. Cf. Peerless

Products, Inc. v. FTC, 284 F.2d 825, 827 (7th Cir. 1960)

(FTC “can restrain unfair business practices in inter-

state commerce even if the activities or industries have

been the subject to legislation by a state or even if the

intrastate conduct is authorized by state law.’’), cert.

dented, 365 U.S. 844 (1961) ).

The Commission in this proceeding considered and

modified the Rule to be as consistent with state laws as

possible, ** explicitly expressed its intent not to occupy the

field, and included a provision which allows states pro-

viding equal or greater protections to obtain an exemp-

“2 For example, the prohibition on the taking of wages as-

signments was modified to exclude wages already earned at

the time of the assignment to eliminate a potential problem in

California where certain creditors must take assignments of

earned wages to qualify as personal property brokers under

state law or to qualify for higher interest rates. See 49 Fed.

Reg. at 7760; see also id. at 7756-57, 7761-62.

65a

tion. Under these circumstances, we cannot agree with

petiticn»rs that the Commission has exceeded its author-

ity.

V. CONCLUSION

After carefully considering each of petitioners’ chal-

lenges, we conclude that the FTC has not exceeded its

authority to promulgate rules proscribing unfair prac-

tices under sections 5(a) and 18(a) of the FTC Act.

We further find upon a thorough consideration of the

record that the Commission’s decision to proscribe the

taking of HHG security interests and wage assignments

is supported by substantial evidence and not arbitrary,

capricious or an abuse of discretion. All other arguments

advanced by the petitioners, intervenors, and amici were

given due consideration and found to be unpersuasive.

Accordingly, AFSA’s and SCDCA’s petitions for review

are

Denied.

66a

TaMM, Circuit Judge, dissenting: The Commission’s

decision to ban security interests in household goods and

future earnings is in excess of its statutory authority

to regulate unfair trade practices. Although rational-

ized in terms of “market imperfection” and “consumer

choice,” the Commission’s action reflects nothing more

than its paternalistic judgment that lenders should not

extend credit to low-income consumers. Such a judgment

not only violates the approach to consumer protection

outlined in the Policy Statement but also will have the

practical effect of forcing needy consumers out of the

credit market. I therefore dissent.

I. INTRODUCTION

Two venerable principles of administrative law con-

trol the determination of whether the Commission has

exceeded its authority in this case. First, the words

“unfair trade practice” set forth a legal standard and

must, therefore, gain their final meaning from judicial

construction. FTC v. R. F. Keppel & Bro., Inc., 291 U.S.

304, 314 (1934). See also Office of Communication of

the United Church of Christ v. FCC, T07 F.2d 1418,

1423 (D.C. Cir. 1983) (“it is the quintessential function

of the reviewing court to interpret legislative delega-

tions of power and to strike down those agency actions

that traverse the limits of statutory authority’). In-

formed judicial construction of the statutory language

depends, however, upon “enlightenment gained from ad-

ministrative experience.” FTC v. Colgate Palmolive Co.,

380 U.S. 374, 385 (1965). Courts therefore traditionally

accord respect to an interpretation of a statute by the

agency charged with its execution. Red Lion Broadcast-

ing Co. v. FCC, 395 U.S. 367, 381 (1969) (such a con-

struction “should be followed unless there are compelling

indications that it is wrong, especially when Congress

has refused to alter the administrative construction”).

Thus, while we “give great weight to the Commission’s

conclusion,” FTC v. Cement Institute, 383 U.S. 688, 720

67a

(1948), “the final word is left to the courts.” Atlantic

Refining Co. v. FTC, 381 U.S. 357, 368 (1965). Cf.

FTC v. Colgate Palmolive Co, 380 U.S. at 385

(“{Whhile informed judic’ \1 determination is dependent

upon enlightenment gained from administrative experi-

ence, in the last analysis the words ‘deceptive practices’

set forth a legal standard and they must get their final

meaning from judicial construction.’’).

Second, for a reviewing court to determine whether

the Commission’s exercise of authority has “warrant in

the record” and “a reasonable basis in law,” Atlantic Re-

fining Co. v. FTC, 381 U.S. at 368, 369, the Commission

must, of course, articulate the reasons for the choices

made. These reasons can be supplied by neither appeli-

late counsel nor the court itself. The Commission’s de

cisionmaking must be tested by the basis upon which it

purports to rest; if the decisions made do not reasonably

conform to the policies expressed, the court may not

affirm. See SEC v. Chenery Corp., 318 U.S. 80, 95

(1948) (“[A]n administrative order cannot be upheld

unless the grounds upon which the agency acted in exer-

cising its powers were those upon which its action can

be sustained.”’).

II. THE DEFINITION OF “UNFAIR” IN THE

PoLicy STATEMENT

Application of these basic principles to this case be

gins with the Commission’s 1980 Policy Statement. Is-

sued in response to congressional concern over the ex-

tent of the Commission’s authority to regulate commerce,

the Statement provides an authoritative interpretation of

what trade practices can properly be regulated as un-

fair. The Statement outlines a market-oriented, non-

paternalistic test, conditioning Commission intervention

in the marketplace upon a finding of a market failure

that prevents consumers’ purchasing decisions from regu-

lating the market. Once a market failure is identified,

68a

the Commission may proseribe practices resulting there-

from that are “injurious in their net effects.”

Contrary to the majority’s suggestion,’ the Statement

can guide the court in resolving the issues raised by pe-

titioners in this case. Although it does not identify what

specific conduct constitutes unfair trade practices, the

Statement does establish limits to the “Commission’s dis-

cretion under its unfairness jurisdiction.” Federal Trade

Commission, Companion Statement to the Commission’s

Consumer Unfairness Jurisdiction 6. As the majority

recognizes, the principle limitation placed upon Commis-

sion authority is that it cannot, consistent with the Pol-

icy Statement, intervene merely because “it believes the

market is not producing the ‘best deal’ for consumers.”

Majority opinion (Maj. op.) at 46. Determining what

“deal” is best for consumers presumes that consumers

are unable, without the benevolent guidance of the fed-

eral bureaucracy, to make purchasing decisions for them-

selves. Such a paternalistic approach to consumer pro-

tection is “fundamentally incompatible with the liberal

assumption that each person is the best judge of his or

her own needs.” R. Reich, Toward a New Consumer

Protection, 128 U. Pa. L. Rev. 1, 14 (1979). The Com-

mission instead must “rely on consumer choice—the abil-

ity of individual consumers to make their own private

purchasing decisions without regulatory intervention—

to govern the market.” Policy Statement at 7. At the

same time, “certain types of seller conduct or market

imperfections may unjustifiably hinder consumers’ free

1The majority displays a remarkable ambivalence toward

the Policy Statement. The Statement, the majority promises

at one point, provides “tangible guideposts for review.”” Ma-

jority opinion (Maj. op.) at 18. It chooses, however, to ignore

these guideposts, finding instead that the Policy Statement

“falls short of providing any concrete guidance to the court in

resolving the issues raised by petitioners in this case,” id.

at 25, and offers no more than “an abstract definition of un-

fairness.” Id. at 24.

69a

market decisions and prevent the forces of supply and

demand from maximizing benefits and minimizing costs.”

Maj. op. at 33. In such instances of market failure, the

Commission may take corrective action “to halt some

form of seller behavior that . . . takes advantage of an

obstacle to the free exercise of consumer decisionmak-

ing.” Policy Statement at 7.

Because no market responds perfectly to consumer

choice, any market could conceivably be subject to whole-

sale Commission regulation. The reviewing court’s first

task, therefore, is to ensure that the Commission’s inter-

vention is a genuine response to a market failure “which

prevents free consumer choice from effectuating a self-

correcting market,” Maj. op. at 44, and not a disguised

attempt to impose a paternalistic purchasing decision

upon consumers. To perform this task adequately, the

court must insist that the Commission sufficiently under-

stand and explain the dynamics of the marketplace.

Furthermore, unless the Commission manifests an under-

standing of how the market responds to consumer choice,

it cannot measure the costs and benefits of Commission

intervention.

If the Commission has identified with sufficient clarity

the impediment that blocks the market’s natural alloca-

tion, it may be appropriate for the Commission to inter-

vene. Whether intervention is appropriate, and if so,

what form it should take, can only be answered by

weighing the costs and benefits of the Commission’s ac-

tion.?

2In reality, two closely related balancing tests must be

made. First, the Commission must determine whether the

specific trade practice involved actually harms consumers,

that is, whether it is “injurious in its net effects.” If the

benefits of the trade practice to the consumer do not outweigh

its costs, the trade practice is unfair. Even the prevention of

an unfair practice, however, may not justify federal interven-

tion. Thus, a second, more general, cost-benefit analysis must

be made: whether the unfair trade practice can be profitably

70a

III. APPLICATION OF THE UNFAIRNESS TEST

A. Market Failure or “Reasonably Avoidable Injury”

The Commission discusses market failure in terms of

what the consumer can “reasonably avoid”; if the con-

sumer can “reasonably avoid” the practice, there is no

market imperfection and, hence, no justification for in-

tervention. The most common example of an injury con-

sumers cannot “reasonably avoid” occurs when a seller

has failed to disclose a risk involved in the exchange.

Although the Commission states that the consumer’s

ability to shop and bargain for credit remedies is con-

stricted by fine print and technical language, it found

not only that consumers generally understand the con-

sequences of default,* but that more information would

not lead to different consumer decisions. 49 Fed. Reg.

at 7746-47. Moreover, while it is true that creditors

present standard form credit contracts on a take-it-or-

leave-it basis, everyone in this proceeding recognizes that

such contracts are the only efficient method of conducting

loan transactions. Jd.; Presiding Officer’s Report at 76,

regulated by the federal government. As the Commission

states in its Policy Statement, this includes an assessment of

the “burdens on society in general in the form of increased

paperwork, increased regulatory burdens on the flow of infor-

mation, reduced incentives to innovation and capital forma-

tion, and similar matters.” Policy Statement at 7. Further-

more, as we stated in American Optometric Ass’n v. FTC,

626 F.2d 896, 910 (D.C. Cir. 1980), “principles of federalism”

dictate deference by the Commission to “states’ exercise of

their police powers.” In measuring the general regulatory

burden, therefore, the disruptive effect federal regulation

would have upon stste regulatory schemes must be considered.

3In almost ninety percent of the loan contracts, the house-

hold goods taken as collateral are listed or the loan contract.

Presiding Officer’s Report at 157, J.A. at 489. In such in-

stances, the Commission notes, there is “little question either

that a security interest has been given or as to the scope of

the coverage.” 49 Fed. Reg. at 7762.

jla

J.A. at 410 (“It is, beyond doubt, absolutely necessary to

use form contracts in the interests of both creditors and

consumers. Without such aids the consumer credit mar-

ketplace could not function in a reasonably efficient man-

ner.”). Creditors, therefore, do not unfairly take advan-

tage of a market imperfection by imposing upon con-

sumers hidden risks. Discussion by the Commission and

the majority about standard form contracts and fine

print is thus empty rhetoric, completely irrelevant to the

market analysis.

Lacking any evidence of inadequate or undisclosed in-

formation that would distort consumer choice, the Com-

misison alternatively concludes that consumer choice is

restricted because consumers do not have access to stand-

ard form contracts that do not contain the provisions in

question. This conclusion rests on one of two premises—

one factually incorrect, the other theoretically bankrupt.

First, the Commission could mean that consumers gen-

erally do not have access to loan contracts without these

provisions. This is wrong as a matter of fact. Millians

of consumers acquire credit each year without pledging

any collateral. Millions more, forced to do business with

pawnbrokers or loan sharks, do not even have access to

loan contracts with these provisions. It is not simply

common sense and everyday experience, however, that

refutes the Commission’s finding. The Presiding Officer

found that “[{i]t was generally agreed that consumers

shopping among different classes of creditors would find

differences in terms offered by banks as opposed to

finance companies.” J.A. at 404 (emphasis added).

Second, the Commission could mean that high-risk con-

sumers do not have access to loan contracts that do not

contain these provisions. Some consumers, to be sure,

cannot avoid these provisions in loan contracts, so the

provisions may constitute, for those consumers, an “ob-

stacle to the free exercise of consumer decisionmaking.”

Policy Statement at 7. This phenomenon reflects a mar-

72a

ket failure, however, only if one is willing to accept the

proposition that the high-risk consumer should be free

to choose the same credit as the credit-worthy consumer.

Under the Commission’s reasoning, since not every driver

can choose the lowest insurance premium, by selling more

expensive automobile insurance to the high-risk driver,

the insurer takes advantage of an “obstacle to free

choice.” The only obstacle to free choice identified by

the Commission is the level of risk the borrower, like the

insured, brings to the transaction.

The Commission’s analysis of the credit marketplace

mocks the approach to consumer protection outlined in

the Policy Statement. In the Policy Statement, the Com-

mission asserts that the status quo is presumed to be

the product of a well-functioning market. In the Credit

Practices Rule, the Commission turns this presumption

on its head: it proceeds from an e@ priori vision of

the mix of options that would be available in a “well-

functioning market,” and, with little difficulty, concludes

that the existing market, which does not provide that mix,

is “imperfect.” As the majority recognizes, the Statement

prevents the Commission from intervening whenever “it

believes the market is not producing the ‘best deal’ for

consumers.” Maj. op. at 46. Yet this is precisely what

the Commission has done in this case. It simply identifies

a particular class of consumers (those who cannot avoid

loan contracts without security interests in household

goods and future earnings) and concludes that those con-

sumers ought to have access to credit without pledging

household goods—that is, those consumers ought to have

credit at a better price.

This is not to suggest that the credit marketplace re-

sponds perfectly to consumer choice. To justify its in-

tervention, however, the Commission must at least ration-

ally explain how the market fails to respond to con-

sumer choice. Allowing the Commission to intervene

when it does not know the “obstacle to free choice”

73a

essentially reverses the presumption that each person

is the best judge of his or her own needs. Such a pater-

nalistic approach to consumer protection is fundamentally

incompatible with the limits imposed upon the Commis-

sion’s authority in the Policy Statement.

B. The Cost-Benefit Analysis

The Policy Statement’s definition of “unfairness” pro-

vides that for an unavoidable consumer injury to be

unfair, “the injury must not be outweighed by any off-

setting consumer or competitive benefits that the sales

practice also produces.” Policy Statement at 6. Business

practices entail a mixture of costs and benefits for con-

sumers. Purchase money security agreements in auto-

mobiles, for example, can be a great cost to consumers

because, upon default, consumers must forfeit the auto-

mobile, in many circumstances a vital necessity, or face

costly refinancing agreements. The security agreements

cannot be deemed unfair, however, because the benefits

of the trade practice—making credit available to those

who wish to purchase automobiles—clearly outweigh the

costs.

The Commission makes two fatal errors in its cost-

benefit analysis of security interests in household goods.*

First, in measuring the costs of these security interests,

the Comuinission fails to separate the injury caused by

these creditor practices from the financial and emotional

hardships that inevitably accompany default. Second, in

evaluating the offsetting benefits of these provisions, the

Commission never squarely addresses the single critical

question: the extent to which the intended beneficiaries

* Much of the criticism leveled at the cost-benefit analysis of

household goods security interests also applies to the Com-

mission’s cost-benefit analysis of security interests in future

earnings. I do not specifically address the latter, however,

because the practice is already thoroughly regulated in the

states where it is commonplace. See 49 Fed. Reg. at 7756.

74a

of the Rule depend upon the ability to pledge b usehold

goods and future earnings to acquire credit.

1. Injury Caused by the Credit Practices

The Commission identifies several harms supposedly

“caused by” security interests in household goods. First,

household goods are necessities and forfeit of these neces-

sities causes harm to the consumer and his family. This

consequence of default, however, is not unique to secu-

rity interests in household goods. Household goods—

indeed houses themselves—can and will still be seized

under other permissible credit remedies, such as a home

mortgage or a purchase money security interest. More-

over, the Commission found that relinquishing household

possessions to a pawnbroker in exchange for credit is

not, in fact, “consumer injury.”* Thus, a lender may

hold a borrower’s television set from the time a loan is

made and keep it if the borrower defaults. According

to the Commission, this is not a consumer injury. If

the lender allows the borrower to use the television from

the time the loan is made and, in extremely rare cir-

cumstances,’ picks it up when the borrower defaults, he

engages in an “unfair” trade practice.

Second, the Commission states that the threat of losing

household goods increases the likelihood that debtors will

forego valid defenses. The credit practices still available

to creditors, particularly purchase money security inter-

ests, however, pose a far greater risk that debtors will

forego valid legal defenses. The creditor who sells defec-

tive household goods, for example, is subject to a much

5349 Fed. Reg. at 7767 (“[t]he record furnishes no evidence”

that giving a pawnbroker a possessory security interest

“cause[s} any injury’).

* As the Commission recognizes, defaults occur in only a

fraction of transactions, and actual seizure occurs in but a

“tiny fraction” of defaults. Brief for Respondent at 21; 49

Fed. Reg. at 7768.

75a

greater array of defenses than is the creditor who simply

loans money.

Third, the Commission states that the threat of repos-

session may cause the consumer to default improvidently

on other loans to avoid repossession of his household

goods. Defaulting on another loan, however, could only

be “improvident” if the creditor remedies of that other

loan were more onerous than the remedies threatened

by the creditor. If this other loan has more onerous

credit_. remedies, it is difficult to see the marginal cost

of these less onerous creditor provisions. If, on the other

hand, the creditor remedies under this other loan are

less onerous (a much more likely situation), it is not

unwise to default. Moreover, the recognition that the

threat of repossession may cause the debtor to choose to

default on another loan is fundamentally inconsistent

with the Commission’s entire notion of the causes of

consumer default. In determining whether the trade

practice is unavoidable, the Commission states that de

fault is beyond the debtor’s control. On the other hand,

in assessing the marginal cost of the trade practice, the

Commission assumes that consumers faced with repos-

session will deliberately default on a loan not so secured

to minimize their losses. The Commission cannot have

ic both ways.

Finally, the Commission states that the “unique”

threat of repossession of household goods causes con-

sumers to enter into costly refinance arrangements. The

Commission contends that these horrible agreements

“may reduce or defer monthly payments on a short-term

basis . . . at the cost of increasing the consumer’s total

long-term debt obligation.” Maj. op. at 29. See 49 Fed.

Reg. at 7764-65. A creditor, therefore. unfairly takes

advantage of a market imperfection by refusing to dis-

charge debtors’ contractual obligations unilaterally or by

refusing to lend more money free of charge. Until the

Commission can wish into being a world in which debtors

76a

do not owe money and the use of money is free, the

courts should require, I think, a less fatuous approach

to consumer protection.

The economic hardships that inevitably accompany in-

debtedness and default will remain despite the prohibi-

tion of these creditor remedies. The Commission, there-

fore, grossly exaggerates the beneficial impact of the

Rule. The Rule does not eliminate the need for credit,

does not provide debtors with any more cash with which

to discharge obligations, does not make default a less

likely occurrence, does not relieve the financial and

emotional hardships that accompany default, does not

insulate household necessities from forfeit, does not pro-

tect consumers from unscrupulous lenders intent in any

event upon breaking the law, and does not lessen the

compounding burden unpaid debts place upon debtors.

2. Offsetting Benefits

Security interests in household goods benefit consumers

to the extent that they enable consumers to acquire credit

without resorting to the pawnbroker or the loan shark.

The Commission, however, never squarely addresses

whether any consumers’ access to credit depends upon

their ability to pledge household goods as collateral.’

7 The majority seems to place great weight on the econo-

metric analysis conducted by various participants in the rule-

makings, evidence which “by all accounts, contains deficiencies

which prevent definitive answers.” Maj. op. at 57. In spite of °

these deficiencies, however, the majority insists that the evi-

dence revea!s that the Credit Practices Rule “would have only

a marginal impact on the cost or availability of credit.” Jd.

at 33. What is “marginal” apparently is in the eyes of the

beholder. The econometric studies revealed that the Credit

Practices Rule would cost in 1979 between $623 million and

$10.6 billion in increased interest rates. J.A. at 1528. I would

agree, however, that the Rule has a “marginal” impact on

credit availability: that is, those consumers currently at the

margin will be forced out of the credit marketplace.

77a

Instead, it evaluates the impact of the Rule—not upon

the high-risk consumer it purports to protect—but upon

the credit-worthy consumer who needs no protection from

these “abusive” credit practices in the first instance.

The Presiding Officer considered this question and

came to the following conclusion:

However, this record does support the conclusion

that the ability to take household goods as security

is of very great importance to finance company cred-

itors and that loss of this right would undoubtedly

have a very considerable impact on their operations

and upon the availability of credit to consumers.

Presiding Officer’s Report at 162, J.A. at 494 (emphasis

added). In a feeble attempt to weaken the force of the

Presiding Officer’s conclusions, the Commission states that

the definition of “household goods,” narrowed since the

Officer’s report, would address the problems of availabil-

ity. Thus, the Commission notes, under the new definition

of “household goods,” consumers may still pledge works

of art, antiques, jewelry, video tape recorders, home com-

puters, and the like. Similarly, the Commission puts

great stock in the finding that forty percent of finance

company clients are homeowners and therefore have other

assets to pledge. Furthermore, the Commission states,

banks, which seldom take security interests in household

goods or future earnings, remain available to the ecnsumer.

What happened to the high-risk consumer the Com-

mission so vividly describes when assessing the hardships

caused by the creditor remedies? That consumer owned

household goods of “little or no value.” He had no cash

with which to pay back the loan, no assets to liquidate

to prevent the forfeiture of household necessities or the

imposition of “costly refinancing arrangements.” In as-

sessing the impact of the Rule upon the availability of

credit, the Commission converts the distraught debtor into

a homeowner, able to acquire credit without pledging his

78a

household goods because he can always visit his suburban

bank or pledge his handy Matisse. The problem with the

Commission’s analysis is that the Rule unfortunately does

not make the poor rich, or the high-risk consumer credit

worthy. The Commission proves only that security in-

terests in household goods cost the high-risk consumer

more than they benefit the credit-worthy consumer.

Rather than address the Presiding Officer’s conclusions,

the Commission wishfuily insists that creditors should ex-

tend credit to low-income, high-risk consumers without

requiring from them security interests in household goods.

49 Fed. Reg. at 7766. Such security interests are of no

real value to the creditor, the Commission reasons, be-

cause they do not deter default. Default cannot be de-

terred by security interests because it flows from circum-

stances beyond the debtor’s control. This is nonsense on

stilts. First, according to the record, twenty-five to thirty

percent of defaulting debtors do s

This text is long and has been trimmed here. Open the source document for the complete record.

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