My new article: Six Scandals: Why We Need Consumer Protection Laws Instead of Just Markets

by Jeff Sovern

My new article is now up on SSRN: Six Scandals: Why We Need Consumer Protection Laws Instead of Just Markets. Here' is the abstract:

Markets are powerful mechanisms for serving consumers. Some critics of regulation have suggested that markets also provide consumer protection: for example, Nobel Prize-winning economist Milton Friedman said “Consumers don’t have to be hemmed in by rules and regulations. They’re protected by the market itself.” This article tests the claim that the market provides consumer protection by examining several recent incidents in which companies mistreated consumers and then exploring how the companies’ sales to consumers fared. The issue also has normative implications because if markets consistently protected consumers, society would need fewer regulations and regulators, as Friedman suggested.

The article finds a more nuanced situation than Friedman and other critics theorized. In three--possibly four--instances, businesses’ sales actually increased after their misconduct became public, despite the fact that, in at least two cases, consumers had told pollsters they would avoid patronizing the company. In two or perhaps three cases discussed in the article, companies suffered declines in sales after their misbehavior became public, and it seems likely that a scandal was at least partly the cause. In those latter cases, the scandal became known only because of laws and those who enforce them, suggesting that it is the very rules that Friedman decried that led to a market response. In other words, laws helped the market achieve a better outcome by enabling consumers to learn of information that they wished to take into account in making purchasing decisions. Though it is impossible to know what would have happened if the problematic conduct had not occurred, the evidence suggests that markets alone are often not enough to protect consumers, or at least that markets are not a reliable consumer protection mechanism. Indeed, in five of the six scandals discussed in the paper, the strong likelihood is that in the absence of rules, regulators, and consumer attorneys, injured consumers would not have been compensated and the troublesome conduct would not have elicited a response that deterred future misconduct. It thus appears that rules and those who enforce them are sometimes the only source of consumer protection.

The Article also offers hypotheses for when consumers will and will not avoid a company that has misbehaved. Factors that may affect consumer response to misconduct include how the choice to patronize the company is presented to consumers; how difficult it is to switch to other providers (e.g., the cost of switching from one bank to another); whether the company has presented itself as catering to consumer values but failed to deliver; and how many consumers are affected.

Arbel & Becher paper: Contracts in the Age of Smart Readers

Yonathan A. Arbel of Alabama and Shmuel I. Becher of Victoria University of Wellington have written Contracts in the Age of Smart Readers. Here's the abstract:

What does it mean to have machines that can read, explain, and evaluate contracts? Recent advances in machine learning have led to a fundamental breakthrough in machine language models, auguring a profound shift in the ability of machines to process text. Such a shift has far-reaching consequences for contract and consumer law, where information barriers have long been the driving force behind a large body of regulation. Our object here is to provide a general framework for evaluating the legal and policy implications of using language models as ‘Smart Readers’—tools that read, analyze, and assess contracts.

Synthesizing state of the art developments, we identify four core capabilities of smart readers. Based on real-world examples produced by new machine-learning models, we demonstrate that smart readers can: (1) simplify complex legal language; (2) personalize the contractual presentation to the user’s specific socio-cultural identity; (3) interpret the meaning of contractual terms; and (4) benchmark and rank contracts based on their quality.

Nevertheless, the implications of smart readers are more complex than initially meets the eye. While smart readers can overcome traditional information barriers and empower parties, they rely on black-box models that sophisticated parties can exploit. Smart readers can close some of the gaps in access to justice, but they also introduce concerns about contractual bias and discrimination. While smart readers can also improve term transparency, they might also lead judges and policymakers to relax their guard prematurely.

The current body of contract doctrine and scholarship is ill-equipped to deal with both the prospects and risks of smart reader technology. This Article narrows this gap. It maps the necessary theoretical, policy, and doctrinal adaptations to the age when machines can automate the reading of contracts.

 

Biden Extends Federal Student Loan Moratorium

On Wednesday, just hours after being sworn in, President Biden ordered the Education Department to extend the current COVID-19 suspension of all federal student loan payments and interest until at least October 1st.

The CARES Act — Congress' third coronavirus relief bill, which passed in March 2020 — directed the Education Department to suspend payments, stop collections, and set interest rates to 0% on all federally held loans. Former President Trump later extended those measures until January 31, 2021. Biden's order will automatically extend these measures for at least eight months. Borrowers will have no obligation to make payments, loans will not accrue interest, and the Education Department will stop collections on the one in five student borrowers who were in default even before the COVID-19 crisis. The student loan suspension applies to federally-held student loans which, according to CNN, include about 85% of total federal student loans, including direct federal loans and PLUS loans.

The move comes as Biden faces heavy pressure to cancel student loan debt altogether. Although Biden called for cancelling $10,000 in loans per borrower on the campaign trails, student loans were not included in the $1.9 trillion relief plan which the Biden team released last week. 

You can read the Education Department's announcement here and more about Biden's student loan suspension here.

FTC Commissioner and CFPB Director-Nominee Rohit Chopra Discussing the FTC's Remedial Authority

by Jeff Sovern

If you are curious to learn more about FTC Commissioner and CFPB Director-Nominee Rohit Chopra, here is a video of him discussing the FTC's remedial authority a couple days before the Supreme Court heard oral argument earlier this month in AMG v. FTC. The event was hosted by Truth-in-Advertising.org (TINA.org).

District Court Denies Request for Injunction Compelling Amazon to Host Parler

by Paul Alan Levy

In a decision issued his afternoon, Judge Barbara Rothstein has denied a motion by the infamous web site Parler seeking a preliminary injunction compelling Amazon to reverse its decision to terminate its hosting of Parler's web site. The judge agreed with Amazon that, under its hosting contract, Parler was subject to suspension, and to termination without notice, if it allowed contents that are “illegal, that violate the rights of others, or that may be harmful to others,” including “content that is defamatory, obscene, abusive, invasive of privacy, or otherwise objectionable.” The judge noted further that Parler had never denied that content on its platform violated the terms to which it had agreed, and that, regardless of Parler’s claimed effort to improve its content moderation system, both at the time of its suspension, and during the litigation, Parler was demonstrably unable to implement moderation sufficient to protect the public from the dire consequences of its users’ violent rhetoric.

The judge rejected, on the merits, the conclusory allegation that Amazon was engaged in some sort of antitrust conspiracy with Twitter to disadvantage Parler as a competitor to Twitter. She thus did not reach (or even discuss) some of the broader (and disturbing) arguments in Amazon’s brief suggesting that section 230 could be a basis for denying antitrust claims based on the deliberate removal or obscuring of content with the (alleged) objective of harming competition.

Biden names Dave Ueijo as CFPB acting director

President Biden has named Dave Ueijo, the chief strategy officer at the Consumer Financial Protection Bureau as the Bureau's acting director. Kate Berry's American Banker story here (may be behind paywall). Excerpt:

“He’s a great interim pick and he doesn’t regard the role as simply a caretaker," said [former CFPB Director Richard] Cordray. "He knows there are important things they need to be doing including focusing on the needs of people affected by the pandemic.”

* * *

Ueijo plans to focus on ways the CFPB can address racial and economic inequality.

“Black, Brown, and Native American communities in particular have borne a disproportionate share of the impacts of COVID,” Ueijo said in the memo [to CFPB staff].

Biden designates FTC Commissioner Rebecca Kelly Slaughter as Acting Chair

FTC release here.

Bloomberg's Evan Weinberger Surveys Kraninger's Tenure as CFPB Director

Here. I think it's not behind a paywall.

Kraninger resigns as CFPB director

by Jeff Sovern

The American Banker's Kate Berry has the report here. Meanwhile, CQ Roll Call's Steven Harass reports that House Financial Services ranking member Patrick McHenry is critical of the selection of Rohit Chopra as the new CFPB Director, saying "the selection will foster a culture of “overregulation” at the agency." The article continues: 

”This is proof that the Biden team is pandering to members of the far-left who want to weaponize the CFPB to go after financial services companies they simply don’t like,” McHenry said in a statement. “Mr. Chopra has made it clear his agenda includes limiting consumer choice, driving up cost of credit for everyone through restrictive policies, and hamstringing job creators through overregulation. If the Biden Administration is looking to foster common ground between Republicans and Democrats, Mr. Chopra is the wrong pick.”

Here's my comment in the article:

[Chopra] has been at the Bureau so he already knows how it works and the challenges it faces. He has experience leading a consumer protection agency from his time at the FTC,” Sovern said Tuesday. “He’s creative and he does his homework. I anticipate that he will build on former director Richard Cordray’s legacy in giving consumers the protections they need.”

I can't find a link to the CQ Roll Call article but it is available on Westlaw, at 2021 WL 163540.

CFPB director Kraninger resigns

Kathy Kraninger has resigned as CFPB director, effective today. Her resignation letter is here.

American Banker's Kate Berry reports Rohit Chopra could be acting CFPB while his confirmation is pending.

Here. Excerpt:

Chopra is expected to be installed as the CFPB’s acting director while he waits for a quick Senate confirmation, experts said. Because Chopra is currently a commissioner at the Federal Trade Commission and therefore is already Senate-confirmed, Biden can install him as the acting director * * *

“He is already Senate-confirmed so they can have him installed on day one as interim director without any challenges in order for a smooth transition,” said Jenny Lee, a partner at the law firm Arent Fox and a former CFPB enforcement attorney.

Though CFPB Director Kathy Kraninger’s term expires in 2023, the Supreme Court ruled in June that the president can fire a CFPB director for any reason. It is unclear if Kraninger plans to resign before the inauguration or will be fired.

Some Republicans suggest that the Federal Vacancies Reform Act — which gives presidents latitude to make appointments — does not cover vacancies created by firings.

“Assuming Kraninger does not invoke the Vacancies Act, there’s nothing to stop Rohit from being both acting director and then permanent director,” Lee said.

Democrats are giving little credence to the idea that Biden can fire Kraninger but then not name her replacement.

UPDATE: Ballard Spahr's Chris Willis believes Chopra cannot serve as full-time director after serving as acting director.

FTC Chair Joseph Simons leaves Commission, leaving Biden room to appoint Democratic majority to Commission

Announcement here. Among other departures: Bureau of Consumer Protection director Andrew Smith.

Becher, Feldman and Furth paper on the problem of salespeople's oral promises that are disclaimed in the fine print

Shmuel I. Becher of Victoria University of Wellington, Yuval Feldman of Bar-Ilan University, and Meirav Furth of UCLA have written Seductive Oral Deals. Here's the abstract:

Legal scholars have devoted considerable attention to contractual design that exploits consumers’ vulnerabilities (“the paper deal”). For example, scholars have cautioned against the inclusion of one-sided, exploitative, or unenforceable terms in standard form contracts, and proposed solutions to address these problems. However, scant attention has been given to the role of pre-contractual promises that are disclaimed or qualified in the fine print (“the oral deal”).

This Article uncovers the seductive power of misleading oral deals. Weaving together insights from behavioral ethics and social psychology, we argue that current approaches to such deals are undertheorized and develop a more nuanced approach.

We show that the law underestimates, and thus does not properly respond to, the harm of seductive oral deals. Seductive oral deals are both more potent and more ubiquitous than previously assumed. They are more potent because consumers’ contracting reality and tendency to trust others lead them to rely on salespeople’s oral assertions even when they are false. They are ubiquitous because even ordinary, law-abiding people, when operating as salespeople, find ways to justify mundane unethical behavior, such as lying to customers.

Seductive oral deals can harm both consumers and scrupulous competitors, erode important societal values, and undermine market efficiency. At the same time, consumers face substantial psychological, financial, evidentiary, and doctrinal hurdles should they wish to rely on precontractual oral interactions when the written contract disclaims what they were told. Against this background, the Article makes several recommendations that tackle the root causes that facilitate seductive oral deals.

 

 

CJ&D Report on lawsuits that save lives

Here's the press release:

STUDY SHOWS HOW LAWSUITS SAVE LIVES AND 
CAN MITIGATE OUR NATION’S MOST SERIOUS CRISES

NEW YORK — The Center for Justice & Democracy at New York Law School (CJ&D) released today Lifesavers 2021: CJ&D’s Guide to Lawsuits that Protect Us All. The study describes over 125 lawsuits that have led to major safety improvements benefiting large numbers of people, spanning well over 50 years. According to co-author Emily Gottlieb, CJ&D’s Deputy Director for Law & Policy, “Lifesavers shows how lawsuits serve an invaluable purpose by causing manufacturers, employers, polluters, hospitals, law enforcement and other entities to stop their dangerous or negligent behavior, and gives them the proper economic incentive to become more safe and responsible. These cases protect us all, whether or not we ever go to court.” 

Said co-author Joanne Doroshow, CJ&D Executive Director, “The report’s release coincides with several national crises: the COVID-19 pandemic, the rise of violent hate groups and the use of excessive force by some law enforcement. It shows how civil lawsuits have helped mitigate each one of these crises by holding wrongdoers legally and financially accountable. Its release also comes as a time when special interest lobbyists are pushing for legal immunity laws in states around the country. Lifesavers stands as irrefutable evidence that immunity laws are dangerous. Lawsuits save lives, and we as a society would suffer tremendously if our civil justice system were weakened in any significant respect.”

According to the report, “The study includes some cases recently brought against COVID-19 super-spreader establishments,” which led to safer workplaces. Other cases have resulted in “the redesign or recall of a product, a changed hospital procedure, safer law enforcement, a more secure public area, the bankruptcy of a hate group, the protection of sexually-abused children or a cleaner environment.” 

The study explains that when it comes to the recent rise of violent hate groups, “it is everyone’s hope that the criminal justice system will function properly to hold accountable those responsible for current violence and insurrection. However, it should be noted that in the past, more was needed than criminal prosecutions to weaken hate groups. Particularly in the 1980s and 1990s, civil lawsuits by hate crime victims were used effectively to bankrupt several white supremacists and Nazi organizations, while also directly responding to the financial needs of victims. These cases demonstrate that civil lawsuits can sometimes provide the only effective means to put dangerous hate groups out of business.”

Said Doroshow, “The civil justice system is one of the great achievements of American democracy and an important safeguard of freedom. Unlike other, weaker democracies which have abolished the civil jury, our system, thus far, has largely withstood the assaults. The jury’s roots are deeper here. The American colonists fought the Revolutionary War in significant part over England’s repeated attempts to restrict jury trials. Over the last 40 years, the civil justice system has been battered. But as Lifesavers shows, after 245 years and just as the nation’s founders had hoped, the system still works.”

A copy of the study can be found here: http://centerjd.org/content/lifesavers-2021

Ballard Spahr announces Diversity Fellowship Program for 2Ls

From the announcement:

Ballard Spahr is excited to host a 2L Diversity Fellowship Program in partnership with our Consumer Financial Services (CFS) group. Through this program, we will select an outstanding 2L student who will be employed by Ballard Spahr as a 2021 summer associate in the CFS group. The student will spend time during the summer working with both litigation and regulatory lawyers across the firm to learn the ins and outs of CFS work, and will be mentored by the group’s leadership.

The recipient will receive from Ballard Spahr a one-time $5,000 scholarship and the Ballard Spahr summer associate program weekly salary.

Our application process is now open and will close on February 15, 2021 at 11:59 PM EST. Students are encouraged to apply as soon as possible, as we will review applications on a rolling basis.

More here.

More on Biden's pick to head the CFPB, Rohit Chopra

Following up on Jeff's post about prez-elect Biden's plans to nominate Rohit Chopra to direct the Consumer Financial Protection Bureau, take a look at reporting that is not behind a paywall: here, here, here, and here. For an large aggregation of Chopra's testimony, speeches, and articles at the Federal Trade Commission, go here.

WSJ: Biden to nominate FTC Commissioner Rohit Chopra to be CFPB Director

by Jeff Sovern

Report here (may be behind a paywall). FTC bio here. My first reaction is that he's an excellent choice.

UPDATE: Blog co-founder and prominent Supreme Court consumer advocate Deepak Gupta on the choice: "This is a home run. There's nobody better than Rohit to take the helm of the CFPB at this critical moment, when Americans are hurting from overlapping crises. Rohit was there at the beginning and will keep the agency true to its founding mission."

Recent activity at the Dept of Education

Although the Betsy DeVos resigned as Secretary of Education last week, the Department has continued to push ahead in the rush to the Trump Administration finish line.

On Friday, ED's Office of the General Counsel published a memorandum stating that LGBTQ students are not expressly included in protections under Title IX, the law that prohibits sex discrimination at federally funded institutions. Last June, the Supreme Court held that "sex" under Title VII, which prohibits workplace discrimination based on race, sex, religion or national origin, protects LGBTQ people from workplace discrimination. Nonetheless, ED's memo maintains that its Office of Civil Rights should only consider certain forms of discrimination based on LGBTQ identity as discrimination under Title IX and that “sex” should be interpreted to mean “biological sex, male and female.”

Yesterday, ED released a memo that concludes that the agency lacks the power to unilaterally forgive federal student loan debt through executive action. As Politico described it, "The Trump administration on Wednesday sought to throw up a bureaucratic roadblock to progressives’ push for the incoming Biden administration to cancel large swaths of outstanding student loan debt through executive action."

Six days left.

Fostering equality in borrowing

That's addressed by law prof Abbye Atkinson in her article Borrowing Equality. Here is the abstract:

For the last fifty years, Congress has valorized the act of borrowing money as a catalyst for equality, embracing the proposition that equality can be bought with a loan. In a series of bedrock statutes aimed at democratizing access to loans and purchase money for marginalized groups, Congress has evinced a “borrowing-as-equality” policy that has largely focused on the capacity of “credit,” while acoustically separating its treatment of “debt” as though one can meaningfully exist without the other. In taking this approach, Congress has proffered credit as a means of equality without expressly accounting for the countervailing force of debt relative to social subordination. Yet, debt has itself functioned as a mechanism of the very subordination that Congress’s invocation of “credit” aspires to address.

This Article argues that because in articulating a borrowing-as-equality policy Congress is implicitly encouraging debt among marginalized communities, Congress should develop policies that recognize both the potential upside value of borrowing and the particular vulnerabilities that debt creates for socioeconomically marginalized groups. More broadly, any policy that invokes borrowing as a social good must engage more deeply with how credit and debt work in a social context. In other words, credit cannot meaningfully function as a social good without due attention to and a solution for the work of debt as a social ill.

Dee Pridgen'sTribute to Andy Spanogle

Tribute to Andy Spanogle, 1934-2020.

By Dee Pridgen, Professor Emeritus, University of Wyoming College of Law

I was very saddened to learn the news that my dear friend, and coauthor, Andy (John A.) Spanogle, had passed away in December of last year.  He was a towering figure in the law, especially in the fields of consumer law and international business transactions. 

Our paths first crossed in the late 1980’s, when Andy and his coauthor Ralph Rohner (who just left us last summer) asked me to join them on the second edition of their pioneering casebook, Consumer Law:  Cases and Materials.  The casebook was the first of its kind in a then nascent field.  In the preface to that first edition in 1979, Andy and Ralph relayed their rather apt and prophetic assumptions behind the text:

• Consumer protection statutes and caselaw doctrines are pervasive within the legal structure.
• They are growing.
• They are not likely to disappear, but are more likely to increase.
• Even though they concern widely disparate subject-matter, there are likely to be common doctrinal and practical threads running through them, and it is our job to try to discover those threads.

Consumer law was a thread that ran through Andy’s own professional life.  He was an advocate for the core federal consumer credit laws passed by Congress in the 1970’s, including the $50 limit on consumer liability for unauthorized use of credit cards which we still benefit from today.  He remained involved in and was a valued contributor to the 2^nd, 3^rd and 4^th editions of the Consumer Law casebook.  He also generously supported the National Consumer Law Center, especially in the founding of the Spanogle Institute for Consumer Advocacy, which opened in Washington, D.C. in 2017.

In addition to his influential work in the field of consumer law, Andy coauthored groundbreaking casebooks, treatises and articles in International Business Transactions and International Sales Law.  While teaching law at several different law schools, most recently at George Washington University in Washington, D.C., he also traveled the world as a consultant and teacher.  I know he loved teaching because he continued to serve in the law school classroom as a part-time faculty member for years after he “retired.”  His many students appreciated him very much.

Andy was sharp, witty and had an unforgettable deep-voiced laugh which he employed to good effect on many occasions.  He also sang at his church and in community groups, a talent that I wish I had been able to witness myself. 

Although separated by our geographic locations, Andy remained a good mentor, colleague, and friend to me over the years.  He will not be forgotten.

Sad News: Consumer Law Professor John "Andy" Spanogle Dies

by Jeff Sovern

Obituary here. Andy was one of the original co-authors of our casebook and I met him when I worked on the third edition of the book. Andy was larger than life, so filled with bonhomie that you almost didn't realize how brilliant he was. One way Andy will live on is through his influence on consumer law. For example, for the third edition of the casebook, he came up with a single extended story for the introduction that raised questions about every consumer law topic explored in the book. The story makes the subject come more alive for students, helps them understand the variety of consumer law issues that can arise, and pulls them into the course. Law students will continue to learn consumer law using the clever problems he devised, as well as through the techniques for writing the casebook that he taught Dee Pridgen and me that we employed when producing more recent editions. It is not by happenstance that the Washington D.C. office of the National Consumer Law Center is named for him. Andy had been less involved with consumer law in recent years, and so younger consumer law scholars may know little of him, but he was a giant.

Please keep Katie Porter on the House Financial Services Committee

by Jeff Sovern

The Wall Street Journal is reporting that Representative Katie Porter may be dropped from the House Financial Services Committee.  As someone who has regularly listened to House Financial Services Committee hearings on consumer matters for years, I believe that would be a huge loss. I cannot think of anyone who has been a more effective questioner of witnesses. And Katie may know her stuff better than any other committee member. She has taught courses on subjects within the committee's jurisdiction, she wrote a consumer law casebook (as someone who co-authored a competing casebook, I can say that writing a casebook forces you to learn a great deal about the subject), she has written important articles on the topics within the committee's bailiwick, and she has practical experience, such as when she served as the independent monitor for compliance in California with the mortgage settlement. I could go on, but you get the point. The country needs Katie Porter on this committee. If you agree, please let your representative in the House know.

8 states sue to block the OCC's 'True Lender' Rule

From the States' press release:

Attorneys general from New York, California and several other states sued on Tuesday to block the Office of the Comptroller of the Currency's recently finalized "true lender" rule, a measure that the states argue is unlawful and stands to facilitate predatory lending.

In a complaint filed in New York federal court, the coalition of state attorneys general says the OCC had overreached by issuing the "unprecedented and ill-conceived" rule, which adopted a two-prong test for determining who the "true lender" of a loan is, a status that in turn controls what interest rate limits and other laws might apply to the transaction.

Under the OCC's test, which was finalized in May, a loan offered through a partnership between a federally chartered bank and nonbank would be considered to have been made by the bank, so long as the bank either is named as the lender in the loan's documentation or funds the loan at origination.

That's significant because the bank in such an arrangement may not be bound by the local interest rate caps that would otherwise apply to the nonbank, so the rule effectively gives legal cover to nonbanks that would use bank partners essentially as fronts to get around these caps and make high-cost loans, according to the state AGs.

The complaint is here. The full press release is here.

CFPB Taskforce on Federal Consumer Financial Law Issued its Report

by Jeff Sovern

The report is here. I played hooky from the AALS Financial Serices & Consumer Financial Services program to listen to the Bureau's simultaneous event to release the report (don't tell Rory Van Loo). I haven't read the voluminous report but some comments on the remarks at the event: I learned that when Director Kraninger convened the Taskforce, she identified as one of her principal goals that the Taskforce members reach consensus. That may explain why the members don't appear to be diverse, ideologically or otherwise. It also may explain why the Taskforce wrote in its Small Dollar Credit section that "[I]nterest rate caps should be eliminated entirely" and "States should reconsider, update, or eliminate usury laws as appropriate, recognizing the high costs they impose by denying valuable services to consumers who need them." Volume 2, Recommendations p. 94. Plenty of consumer advocates disagree. The Taskforce members emphasized during the event the importance of competition among financial services providers, which makes it even more ironic that there doesn't seem (at least from the outside) to have been competition from competing views within the Taskforce. Don't get me wrong: I agree that competition among financial service providers is valuable, and I agree with some of the other ideas expressed during the event, such as the call for faster check-clearing. But a Taskforce that better reflected America and its diverse viewpoints, and included consumer advocate members, would have been preferable. For one thing, a consensus reached among a more diverse Taskforce would have more support for consequent changes in the law. And I see nothing wrong with a Taskforce that expresses different perspectives, because the airing of differences helps people to understand different arguments and their relative strength. In any event, I look forward to reading the report; I hope to learn from it; I am curious to see what the Taskforce came up with; and I congratulate its members on the timely production of their report, during a pandemic, no less.

Take this quiz to see if you are a reasonable consumer

Here. (H/T: Matt Bruckner).