CL&P Blog

Has the FDIC Kept Savers' Returns Down?

On Saturday, Ron Lieber's "Your Money" column in the Times, headlined F.D.I.C.is Watching as a Bank Sets Rates, raised interesting consumer law issues.  Ally Bank is an online bank owned by GMAC Financial, a recipient of federal bailout funds.  Ally markets itself as a "better kind of bank" with "No minimum deposits,  No monthly fees.  No minimum balance.  No sneaky disclaimers."  Its web site asks what your bank is trying to sneak by you.  Its web site also promises that its rates "will always be among the top."  If that's true, it sounds like a pretty good bank.  But not, apparently, to other bankers.  According to the article, Ed Yingling of the American Bankers Association wrote to the FDIC complaining that Ally's high interest rates on CDs posed a danger to the industry and the FDIC. The claimed fear is that for Ally to make enough money to make good on the CDs, Ally will invest its money (or maybe that should read "the government's money") unwisely or make risky loans and end up not being able to meet its obligations on the CDs.   In any event, the article reported that Ally had lowered its rates twice in the preceding six days, though Ally refuses to say whether that's because of conversations it's had with the FDIC. Leiber, noting that the FDIC's last letter to GMAC expressed concern about its rates, complains that the FDIC's actions "seem a bit arbitrary," apparently because he believes the FDIC hasn't acted against other banks offering high rates. 

It seems strange that the FDIC should intervene to cause a bank to offer worse terms to consumers.  But I suppose that's the "safety and soundness" mission: that is, regulators want to insure that bank actions keep the banks safe and sound so the FDIC doesn't have to pay out on its promise to keep bank depositors whole.  But has the FDIC now forced Ally into false advertising?  It doesn't sound like Ally's rates are among the top any more.  Does that preserve Ally's safety and soundness?

Signs of life at the FTC

by Steve Gardner

Yesterday, the FTC showed significant signs of life, announcing a consent decree against the Kellogg Company for claiming that it had scientific proof that its Frosted Mini-Wheats cereal improved children's attentiveness by 20 percent (!!!).

In terms of sheer gall in marketing food for kids, Kellogg's efforts to promote this sugary cereal as an alternative to ADD medication is surpassed recently only by Coke's claim (in Australia) that  Coca-Cola cannot contribute to weight gain, obesity and tooth decay (!!!!!). The Australian government shut down those claims.

In the FTC action, the most notable thing (aside from Kellogg's aforementioned gall) was this statement by the newly appointed Chair of the FTC, Jon Leibowitz:

We tell consumers that they should deal with trusted national brands. So it’s especially important that America’s leading companies are more ‘attentive’ to the truthfulness of their ads and don’t exaggerate the results of tests or research. In the future, the Commission will certainly be more attentive to national advertisers.

After years of not-so-benign neglect of consumers, it's good to see that the Commission will focus more attention on the companies who are setting the standards for deceptive advertising, rather than just taking action against smaller companies.

Bill on Spam Text Messages

by Jeff Sovern

PC World reports here on a bill aimed at spam sent as text messages to cell phones.  The article quotes from sponsoring Senator Olympia Snowe's press release: "Mobile users in the U.S received about 1.1 million spam text messages in 2007, up 38 percent from 2006, Snowe said in a news release."  Personally, I'm not sure that changing the law will do much to prevent text message spam; existing law already prohibits the use of autodialers to send texts, see Joffe v. Acacia Mortg. Corp., 211 Ariz. 325, 121 P.3d 831 (Ariz. App. 2005), interpreting 47 U.S.C. § 227(b)(1)(A)(iii), and sending texts is a pretty slow process if you're not using an autodialer.  See also 47 C.F.R. § 64.3100 (barring the sending of most unwanted mobile service commercial messages to cell phones with internet domain name on FCC's list of wireless domain names).  So there's a good chance that the spam texts already violate the law.  But maybe there's some exception I'm not aware of, or maybe the bill would enhance enforcement, particularly since the article observes that the bill would "strengthen the [FCC's and FTC's] powers" to stop spam texts.  (Hat tip to my co-author, Dee Pridgen)

Facebook Dumps Binding Mandatory Arbitration

by Greg Beck

As noted in a prior post, Facebook has been considering revisions to its terms of use in response to widespread criticism in the blogosphere. Facebook has now posted a proposed "Statement of Rights and Responsibilities" for its users to review. Instead of an arbitration clause, the agreement now states:

You will resolve any claim, cause of action or dispute (“claim”) you have with us arising out of or relating to this Statement or Facebook in a state or federal court located in Santa Clara County. The laws of the State of California will govern this Statement, as well as any claim that might arise between you and us, without regard to conflict of law provisions. You agree to submit to the personal jurisdiction of the courts located in Santa Clara County, California for the purpose of litigating all such claims.

There are still grounds to complain about requiring users to submit to jurisdiction in California, but Facebook deserves credit for doing away with binding mandatory arbitration. Hopefully other companies will learn a lesson from Facebook and realize that consumers don't appreciate being required to give up all their rights.

Standing Up to Facebook's Terms of Use

How do companies get away with slipping arbitration clauses and other abusive terms into their contracts? For one thing, they rely on the fact that most people do not have the time or motivation to read all the fine print, and that many of those who do will not understand the implications of what they are agreeing to, or will not care enough to object. Even those who do complain will not likely get far because consumer contracts are typically offered in a take-it-or-leave it manner.

This week, however, Facebook's attempt to take advantage of the usual ignorance and apathy backfired in a big way. A couple weeks ago, Facebook revised its terms of use in a way one would not expect to lead to a major controversy. Specifically, it deleted this language from its terms of use:

You may remove your User Content from the Site at any time. If you choose to remove your User Content, the license granted above will automatically expire, however you acknowledge that the Company may retain archived copies of your User Content.

The removal of this language wouldn't have meant much to most users, and it doesn't seem to have attracted a lot of attention at first. But as time went on, a few began to figure out the implications of the change and to write about it on Facebook and on their blogs. Basically, Facebook was saying that the perpetual license that it had granted itself to the contents of users' profiles would no longer expire when those users shut down their accounts. Translation: "We Can Do Anything We Want With Your Content. Forever."

Outrage grew and spread, leaping from the blogosphere to the mainstream media. People began to look to other problems with the agreement, including an arbitration clause, and the requirement of using a single arbitrator in Santa Clara County, California.

Eventually, the controversy became big enough that Facebook could not ignore it, and last night in a late-night blog post the company's CEO, Mark Zuckerberg, announced that the terms of use would be rolled back to the previous version. Facebook's license to its users' content will expire once again. Arbitration remains as it was in the old agreement, but is no longer limited to Santa Clara County. Moreover, the company says this is just a temporary step. The old terms will remain until the company can draft new terms that are responsive to users' complaints. Zuckerberg promises that the new terms will be "written clearly in language that everyone can understand" and that "Facebook users will have a lot of input in crafting these terms." A new Facebook group, Facebook Bill of Rights and Responsibilities, was created for this purpose.

The Facebook incident raises the question whether the Internet is changing the balance of power between the drafters of one-sided terms of use and their customers. Even if most of a company's users don't read revised terms of use, it's pretty likely that at least a few will. Those few who take the time to understand the legalese can communicate with others on Facebook, on their blogs, and in the countless other forums the Internet provides. And the company can no longer easily ignore attempts to renegotiate abusive terms when it's not just one or two customers, but thousands, that are complaining.

Rebecca Tushnet on Commercial Speech Regulation and the First Amendment

Rebecca Tushnet of Georgetown has written "It Depends on What the Meaning of 'False' is: Falsity and Misleadingness in Commercial Speech Doctrine," 41 Loyola L.A. L. Rev.  Here's the abstract:

While scholarship regarding the Supreme Court's noncommercial speech doctrine has often focused on the level of protection for truthful, nonmisleading commercial speech, scholars have paid little attention to the exclusion of false or misleading commercial speech from all First Amendment protection. Examining the underpinnings of the false and misleading speech exclusion illuminates the practical difficulties that abolishing the commercial speech doctrine would pose. Through a series of fact patterns in trademark and false advertising cases, this piece demonstrates that defining what is false or misleading is often debatable. If commercial speech were given First Amendment protection, consumer protection and First Amendment protection would be at odds. Rebutting the idea that constitutionally protected commercial speech could effectively address consumer abuses through fraud statues and would not be offensive to the First Amendment, the piece explains that subjecting commercial speech to First Amendment scrutiny would almost completely contract the scope of false advertising law and erode consumer protection. The piece concludes that while excluding commercial speech from constitutional protection has real costs, we are better off in a system that regulates false and misleading commercial speech without heightened First Amendment scrutiny.

The new iPhone—when half-price costs 40% more

by Richard Alderman

I just bought a new iPhone 3G.  Great device, no complaints about the phone. But the signs at the store boast “Twice as Fast—Half the Price.” This claim is based on the fact that the new 3G iPhone has faster connection times (a claim I cannot verify or dispute) and costs $199. The prior iPhone cost $399. Simple math—half the price. I had previously purchased the more costly phone and agreed, this was a great deal. Until you actually pay.

After I purchased my new phone, I had to enroll for AT&T service at the store. I asked why I couldn’t do it myself online as I had before, and the salesperson replied, “You need to sign up for the AT&T two-year contract now because they subsidize the cost of the phone.” How, you ask, do they do this? By charging $15 a month more than they charged for the same two-year service agreement with the more expensive phone. In other words, over the length of the two-year contract, the new half-price phone costs $360 more in service fees. Subtract the $200 “savings” in the cost of the phone and the net result is the new “half-price” iPhone actually costs $160 more than the more expensive one ($559). My math may be wrong, but I believe that is about a 40% price increase over the old price or $399. Apple may be a great company with a great product, but they either can’t do math or are deceptively advertising.

Times Articles on the Tort War, Illinois' Suit Against Countrywide, and Google's Marketing

Recent articles from the Times of interest:

Yesterday's edition contains "Google Tries Tighter Aim for Web Ads" about how Google uses what a consumer searched for a few minutes ago to target ads for that user.  Another article, "Post-Spitzer, A New Breed of Reformer," explores the differences between former New York Attorney General Eliott Spitzer's and the current New York Attorney General Andrew M. Cuomo's approaches to bringing cases against the financial industry.

Here is Wednesday's report on the Illinois case against Countrywide, a case Alan White reported on yesterday.

Last Sunday's issue brought "To the Trenches: The Tort War is Raging On," about business's attempts to take on the trial bar.  Some excerpts:

Businesses count among the victories federal legislation passed in 2005 that made it harder to file class-action lawsuits in state courts, where judges and juries were often perceived as hostile to business. In state courts, where most civil litigation plays out, the number of suits involving auto accidents, allegations of medical malpractice and the like fell steadily from 1995 to 2005, according to the National Center for State Courts. The Chamber of Commerce says the number of megaverdicts for more than $100 million dropped to 2 last year, from 27 in 2000.

NEVERTHELESS, there are battles in individual states over judicial campaigns and legislative initiatives.  * * *

Strikingly absent from debates over who should be able to sue whom, when and for how much is any discussion of the fairest and most effective way to make sure that true victims are appropriately compensated for injuries and that people without authentic injury are not compensated.

“That’s not the conversation we’re having,” because the only voices heard belong to advocates of one side or the other, said Robert L. Rabin, a law professor at Stanford. “Those advocates reflect advocacy interests — that is, either defense-side interests or plaintiff-side interests — rather than some overview of global fairness.”

Ninth Circuit Allows Claims of Deceptive Food Marketing to Go Forward

by Brian Wolfman

In Williams v. Gerber Products Company, No. 06-55921 (Apr. 21, 2008), the plaintiff class pleaded common-law misrepresentation and breach of warranty claims, as well as claims under California’s Unfair Competition Law, Cal. Bus. & Prof. Code § 17200 et seq., and California’s Consumer Legal Remedies Act, Cal. Civil Code § 1750 et seq.  The class challenged five features of the packaging used by Gerber to sell its Fruit Juice Snacks, including use of the words “Fruit Juice” alongside pictures of oranges, peaches, strawberries, and cherries. The plaintiffs claimed that this advertising was deceptive because the product contained no fruit juice from any of the fruits pictured on the packaging. The plaintiffs’ other claims were similar — such as their challenge to Gerber’s claim that its product is made “with real fruit juice and other all natural ingredients,” even though the two biggest ingredients are corn syrup and sugar. The district court granted Gerber’s motion to dismiss on the ground that its statements were not likely to deceive a reasonable consumer and that at least one of the statements was non-actionable puffery. The Ninth Circuit reversed. Here’s a key part of the Ninth Circuit’s reasoning:

Federal Reserve Proposing New Protections for Credit Card Consumers

The top story in the Washington Post this morning is this story entitled "Fed to Pursue Aggressive Checks on Credit Cards." The Federal Reserve, along with the Office of Thrift Supervision and the National Credit Union Administration, will issue proposed regulations today that seek to put a halt to certain credit card practices. This excerpt from the Post story provides an overview:

The proposed regulations, which could be finalized by year's end, would label as "unfair or deceptive" practices that consumers have long complained about. That includes charging interest on debt that has been repaid and assessing late fees when consumers are not given a reasonable amount of time to make a payment. When different interest rates apply to different balances on one card, companies would be prohibited from applying a payment first to the balance with the lowest rate.

We will post the proposal itself when it becomes available.