Unfair Trade Practice: Definition, Deceptive Methods and Examples

Will Kenton is an expert on the economy and investing laws and regulations. He previously held senior editorial roles at Investopedia and Kapitall Wire and holds a MA in Economics from The New School for Social Research and Doctor of Philosophy in English literature from NYU.

What Is an Unfair Trade Practice?

Unfair trade practices refer to the use of various deceptive, fraudulent, or unethical methods to obtain business. Unfair business practices include misrepresentation, false advertising or representation of a good or service, tied selling, false free prize or gift offers, deceptive pricing, and noncompliance with manufacturing standards. Such acts are considered unlawful by statute through the Consumer Protection Law, which opens up recourse for consumers by way of compensatory or punitive damages. An unfair trade practice is sometimes referred to as “deceptive trade practices” or “unfair business practices.”

Key Takeaways

• Unfair trade practices refer to businesses using deceptive, fraudulent, or otherwise unethical methods to gain an advantage or turn a profit.
• Consumer Protection Law, as well as Section 5(a) of the Federal Trade Commission Act, protects consumers from unfair business practices.

Understanding Unfair Trade Practices

Unfair trade practices are commonly seen in the purchase of goods and services by consumers, tenancy, insurance claims and settlements, and debt collection. Most states’ unfair trade practices statutes were originally enacted between the 1960s and 1970s. Since then, many states have adopted these laws to prevent unfair trade practices. Consumers who have been victimized should examine the unfair trade practice statute in their state to determine whether they have a cause of action.

Unfair trade practices are commonly seen in the purchase of goods and services by consumers, tenancy, insurance claims and settlements, and debt collection.

In the United States, unfair trade practices are addressed in Section 5(a) of the Federal Trade Commission Act, which prohibits “unfair or deceptive acts or practices in or affecting commerce.” It applies to all individuals engaged in commerce, including banks, and sets the legal standard for unfair trade practices, which may be deemed unfair, deceptive, or both. Below are lists of unfair and deceptive practices as per the rule:

Unfair Practices

An act is unfair when it meets the following criteria:

• It causes or is likely to cause substantial injury to consumers.
• It cannot be reasonably avoided by consumers.
• It is not outweighed by countervailing benefits to consumers or to the competition.

Deceptive Practices

An act or practice is deceptive when it meets the following criteria:

• A representation, omission, or practice misleads or is likely to mislead the consumer.
• A consumer’s interpretation of the representation, omission, or practice is considered reasonable under the circumstances.
• The misleading representation, omission, or practice is material.

Examples of Unfair Trade Practices in Insurance

Unfair trade practices can happen in any industry but are significant enough to prompt the National Association of Insurance Commissioners (NAIC) to issue guidance related to the sale of insurance products. The NAIC defines unfair trade practices in the following ways:

• It misrepresents the benefits, advantages, conditions, or terms of any policy.
• It misrepresents the dividends or share of the surplus to be received on any policy.
• It makes a false or misleading statement as to the dividends or share of surplus previously paid on any policy.
• It is misleading or is a misrepresentation as to the financial condition of any insurer, or as to the legal reserve system upon which any life insurer operates.
• It uses any name or title of any policy or class of policies misrepresenting the true nature thereof.
• It is a misrepresentation, including any intentional misquote of the premium rate, for the purpose of inducing or tending to induce the purchase, lapse, forfeiture, exchange, conversion, or surrender of any policy.
• It is a misrepresentation for the purpose of effecting a pledge or assignment of or effecting a loan against any policy.
• It misrepresents any policy as being shares of stock.

The NAIC considers a deceptive trade practice to be any of the above acts coupled with the conditions below:

• It is committed flagrantly and in conscious disregard of the act or of any rules promulgated hereunder.
• It has been committed with such frequency to indicate a general business practice to engage in that type of conduct.

1. U.S. Department of Justice. "Consumer Actions Against Unfair or Deceptive Acts or Practices The Private Uses of Federal Trade Commission Jurisprudence."

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