The Rent to Own industry has been a frequent target of Federal Trade Commission (FTC or Commission) action. While the industry notes that it provides an ownership option for consumers who are unable to pay up front and who may not qualify for traditional credit, critics point to the fact that the final cost of a rent to own transaction is often far in excess of what a consumer would have paid even had she financed the purchase over time at traditional credit card interest rates. While a few states have begun strictly regulating the industry, many others have not – such that these industries continue to operate without some of the same requirements imposed on traditional credit arrangements. However, Section 5’s requirements regarding deceptive advertising and marketing still apply, and that’s where our story begins.
The FTC’s latest target is a company called Progressive Leasing. While companies in the Rent to Own industry have typically operated their own retail locations where consumers can shop, select merchandise and enter into a transaction, Progressive operates in numerous third-party big box stores, and through contractual arrangements, its rent to own program can be offered to consumers as an additional financing option.
Progressive’s program mimics many traditional credit card financing programs where a consumer can pay no interest for a period of months and then, at the end of that period, pay off the remaining balance with no penalty or added interest. Should the consumer not pay off the balance at the end of that period, interest charges begin to accrue, and she may also be subject to a charge for the deferred interest during the initial interest-free period. Often these credit programs go by names such as “90 days same as cash.”
Progressive and its retail partners offered a similar “90 days same as cash” program. The problem, however, was that consumers paid a nonrefundable fee at the beginning of the contract, so that even if they paid for the product in full at the end of the 90 days, they would pay the actual purchase price plus the initial fee. The FTC alleged that this additional fee was not adequately disclosed in numerous advertising materials, including marketing materials prepared by 18% of Progressive’s retail partners, which were subject to review and approval by Progressive. The FTC also complained about several other practices, including stating to consumers that there was no interest; the FTC argued that such statement, while perhaps expressly true since the transaction was “rent to own,” implied that the ultimate cost to the consumer was no different from the initial purchase price. The FTC also alleged that this implication was reinforced by the failure of the defendant to adequately disclose the final full cost of the transaction should the consumer complete all of her “rent” payments and own the product. The FTC alleged that often the cost of the product through the rent to own program was double the cost to have simply purchased the product outright – that, for example, a $1,000 mattress would cost $2,000 for a consumer who enrolled in a 12-month rent to own program.
Progressive entered into a settlement with the FTC, which in addition to injunctive relief included $175 million in consumer redress. So far so good, but this is where the disagreements began. As regular readers of this blog know, the current Commission has not been shy about airing its differences in dissenting or concurring statements or on social media outlets such as Twitter. The current settlement generated a dissent by Commissioner Slaughter and a responding concurrence by Commissioner Wilson. As a general matter, it’s fair to say that Commissioner Slaughter focused on the criticisms of the Rent to Own industry as exploitive of vulnerable consumers while Commissioner Wilson focused on the benefits of rent to own arrangements for consumers who might otherwise not be able to purchase necessary items. At a more granular level, however, the two statements focused on the issues of redress, individual liability and the Restore Online Shoppers’ Confidence Act (ROSCA). Particularly with a presidential election looming later this year and a possible change to the Commission majority, the debate between the two commissioners on these two issues is of particular relevance.
First, the bad news. Both commissioners agreed that the starting point for any redress calculation is total net revenues from the relevant products or services; in this case, more than $1 billion. Commissioner Slaughter put it in terms of the burden shifting to the defendant to show that total net revenues are not the appropriate amount, while Commissioner Wilson noted that total net revenues are often a “reasonable approximation” of ill-gotten gains.
The news gets somewhat better, however. Commissioner Wilson argued that the actual redress amount should be tied to proven consumer injury. She listed several factors that the Commission’s Bureau of Economics tries to assess: number of affected consumers, whether consumers were deceived, type of alleged violations and the harm from those violations. In this case, of course, one clear setoff would be that many consumers got the consumer good they wanted but may have overpaid by some amount so their actual injury would be the overpayment, not the total value of the transaction. Commissioner Wilson argued that the redress obtained by the Commission was in line with the analysis done by the Bureau of Economics using the factors listed above. Commissioner Slaughter, however, did not address consumer injury at all but rather adopted the view that redress should also serve a deterrence or punitive value and that if the redress departs significantly from net revenues, it may not adequately deter companies from wrongdoing.
Both commissioners agreed on the relevant standard to hold an individual liable for a company’s violations; essentially, that the individual defendant participated directly in the illegal practices or had authority to control them. As Commissioner Wilson noted, this broad standard essentially gives the FTC leeway to always individually charge a CEO since even if the CEO did not participate directly, she would have had authority to control the practice. However, Commissioner Wilson noted that the Commission has exercised its discretion based on a number of factors. Perhaps the most familiar one is whether the company is small and privately held such that, in Commissioner Wilson’s words, the CEO is the company. Commissioner Wilson focused on the question of participation, noting that CEOs, particularly of large companies, may have many things cross their desks, some of which they may barely notice. She also emphasized the importance of looking at whether the CEO has overall helped to foster a culture of compliance at the company. To the extent a CEO may have attempted, however imperfectly, to organize compliance efforts around the practice in question, Commissioner Wilson worried that holding the CEO individually accountable based on the CEO’s awareness of the deceptive practice might have the negative effect of encouraging CEOs to remain more aloof.
In her dissent, Commissioner Slaughter focused on the question of whether the deceptive practices “permeate” the business and argued that in this case they did, and therefore it is important to hold senior management individually responsible. She also dismissed the idea that compliance efforts should be given much credit if they do not yield appreciable results and suggested that CEOs who then choose to simply look the other way can be held liable on other grounds such as reckless indifference.
The discussion on this issue, coupled with the Commission’s disagreement over individual liability in a prior FTC consent order, suggests that the long-standing reluctance to hold individuals personally liable when the offending party is a large corporation may be waning.
Finally, the two commissioners disagreed over whether the conduct at issue violates ROSCA, which imposes disclosure and other requirements on transactions “effected through the internet” that utilize a negative option feature. Commissioner Slaughter argued that as a general rule, the Commission should include in its complaint all applicable violations so as to send a clear signal to the marketplace as a whole as to its view of the laws it is charged with enforcing. In this case, although the “purchase” of the good occurred at a brick-and-mortar location, the “rent to own” aspect of the transaction takes place at the store over an internet connection. Thus, Commissioner Slaughter argued that the first prong of ROSCA is satisfied. With respect to the second requirement, the consumer continues to pay the monthly rental for the duration of the rent to own period unless she cancels the transaction and returns the good or pays off the remaining balance early.
Commissioner Wilson took issue with ROSCA’s applicability here. She noted that the primary purpose of ROSCA is to prevent misleading online sales tactics involving recurring payments for goods or services that result in consumers paying for goods or services they do not expect or want. She argued that the mere fact the “paperwork” is completed online does not make ROSCA applicable, noting that such a rule would expand the scope of ROSCA dramatically. Commissioner Wilson also characterized the transaction as a fixed-term lease with recurring payments rather than a monthly payment obligation that automatically renews each month until the end of the lease period. Apart from this disagreement, Commissioner Wilson also urged restraint in pleading additional violations of law in instances such as this where she believes the additional pleadings provide no added benefit to consumers.
ROSCA has already provided a powerful enforcement tool for the Commission, and Commissioner Slaughter’s dissent suggests that it could become an even more powerful tool should her views garner majority support at some point in the future.