Issacharoff & Marotta-Wurgler Paper on Trends Leading to Less State Court Caselaw on Electronic and Shrinkwrap Contracts

Samuel Issacharoff and Florencia Marotta-Wurgler, both of NYU, have written The Hollowed Out Common Law. Here's the abstract:

The electronic marketplace poses novel issues for contract law. Contracts created through browsewrap, clickwrap, and shrinkwrap (contracts whose embedded terms are only available after purchase) poorly fit doctrines that emerged from face-to-face offer and acceptance, the mutual execution of a common set of documents, or the rituals of mass market transactions involving physical fine print. Not surprisingly, these contracts of the new electronic marketplace require doctrinal elaboration.

Our Article asks not about the specific resolution of new doctrinal challenges, but about how the common law of contracts will be elaborated. Specifically, the Article begins with empirical observations about the domain of all electronic and shrinkwrap contract cases and makes four critical findings.

First, we document two shifts: One arises from a steady decline in the number of cases adjudicated in state court relative to federal courts, which by 2015 adjudicate the vast majority of cases. The other stems from a rise in class actions, which is intimately tied to the migration of cases to federal court. The result is that today the vast majority of cases are class actions brought in federal court. The increase in class actions is not surprising given the relatively small stakes of most transactions and the little incentive that creates for individual consumer litigation. The increased dominance of the federal forum is in part likely a reflection of the federalization of class action law under the Class Action Fairness Act (CAFA).

Second, the consequence of the dominance of the federal forum is that the common law is being elaborated in federal court in suits arising under diversity jurisdiction. In turn, those federal courts are largely bereft of any state law moorings as they develop the common law of the electronic marketplace. Erie Railroad v. Tompkins notwithstanding, the common law is driven by federal court decisions, building incrementally on each other rather than state law.

Third, the development of common law in federal court means that there is no apex court that can define conclusively the law of any jurisdiction. Diversity jurisdiction allows federal courts to predict how they believe state common law would develop, but binds no state courts in the affected jurisdiction, and does not even bind federal courts in the same Circuit putatively applying the law of another state. Rather than the law resolving hierarchically, we identify a “tournament effect” in which the law settles on one or a few influential decisions, regardless of the state law that the case may have arisen under. Finally, we conjecture that the use of contractual clauses compelling arbitration and forbidding claim aggregation may have affected the number of cases being adjudicated in court and, consequently, depressed the development of publicly-available law in this area.

Poll finds consumer support for financial regulation

The Philadelphia Tribune report on a new poll that, a decade after the financial crisis, finds that consumers still support financial regulation and related enforcement. Moreover, on payday and car-title lending, "consumer scorn has grown even stronger over the past year for these small-dollar, debt-trap loans that come with triple-digit interest rates."

The full article is here.

CFPB working on regulation to define “abusive” practices

The Dodd-Frank Act prohibits “unfair, deceptive, or abusive” acts and practices by the financial companies regulated under the Act, and gives the Consumer Financial Protection Bureau authority to enforce the prohibition. The Act defines "abusive" as an act or practice that:

(1) Materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or

(2) Takes unreasonable advantage of –

(A) a consumer’s lack of understanding of the material risks, costs, or conditions of the product or service;
(B) a consumer’s inability to protect his or her interests in selecting or using a consumer  financial product or service; or
(C) a consumer’s reasonable reliance on a covered person to act in his or her interests.

The Wall Street Journal reports that, CFPB acting director Mick Mulvaney, speaking at a recent conference of mortgage bankers, said that actions that constitute “unfair” and “deceptive” are well established, but that the meaning of “abusive” is not as clear. Therefore, he said, the CFPB is working on a regulation to define “abusive.”

The article continues: “Addressing the bureau’s enforcement approach is the latest step by Mr. Mulvaney to introduce a more industry-friendly approach to policing financial companies.”

The full article is here. (Subscription may be required.)

The CFPB's 2013 bulletin explaining the prohibition against unfair, deceptive, or abusive acts in the context of debt collection is here.

Survey Finds About Half of Surveyed Metastatic Breast Cancer Patients Pursued by Debt Collectors

by Jeff Sovern

A number of sources have reported on a survey of more than one thousand metastatic breast cancer patients presented recently at an American Society of Clinical Oncology (ASCO) symposium that found that debt collectors had contacted about half about cancer care bills. HCP said that 49% had heard from debt collectors while AccountRecovery.net put the percentage at 54. It's unclear how representative the sample is; according to HSN: 

All of the patients who participated were members of the Metastatic Breast Cancer Network advocacy organization. They responded to an email invitation to take the 20-minute online survey. Respondents received a $10 Amazon gift card.

The figures probably say more about the state of health insurance in this country than debt collection.  Nearly all of those surveyed who lacked insurance said they had foregone medical care because of cost.

NerdWallet Report on Disturbing Gaps in CFPB Public Complaint Database

Here, by Brad Wolverton & Alex Richards. I don't want to quote too much, so here is an incomplete excerpt:

The federal watchdog agency created to protect consumers is not regulating two of the country’s fastest-growing financial institutions despite receiving voluminous complaints about them, NerdWallet has found.

Escaping scrutiny are Green Dot Corp. — which partners with Walmart, Apple, Intuit and more than 100,000 retailers — and Credit One Bank, which issues NASCAR credit cards.

A NerdWallet investigation found that many other businesses also are not subject to oversight by the Consumer Financial Protection Bureau despite being the subjects of many complaints.

The lack of supervision means that consumer grievances about the companies do not appear on a public complaint database the bureau set up to help guide consumer decisions.

The absence prevents the CFPB from defending consumers in tens of thousands of disputes and gives the companies an advantage over competitors that are subject to bureau oversight. It also falsely assures consumers about the integrity and service the companies provide.

* * * 

[T]hose disputes are kept on what amounts to a shadow list of complaints that aren’t on the public portal. NerdWallet obtained the list through a Freedom of Information Act request to the government. * * * 

California-based Green Dot Corp. has at least 1,580 complaints across its products. Out of the roughly 5,000 businesses that appear on the public portal, this would place it among the top 2% of companies consumers have complained about the most, NerdWallet’s analysis found.

* * * 

But only five complaints that mention Green Dot show up on the CFPB’s public complaint portal, all filed under different companies’ names.

 

Bloomberg: CFPB Enforcement Actions Down Sharply Under Mulvaney

Here.  Excerpt from Jeff Bater's report:

The Consumer Financial Protection Bureau took only three enforcement actions in the third quarter of 2018 and is on pace for the lowest yearly total in its seven years of existence.

The bureau levied $1.6 million in penalties in the three-month period ending in September, compared to $7.3 million on eight actions during the third quarter of 2017, according to Bloomberg Law’s CFPB Enforcement Tracker.

Is Mulvaney Pushing the Envelope to Aid Fintech Providers?

by Jeff Sovern

Acting CFPB director Mick Mulvaney famously wrote that he would not push the envelope. He explained:

That entire governing philosophy of pushing the envelope frightens me a little. We are government employees, and we work for the people. That means everyone: those who use credit cards and those who provide the credit; those who take out loans and those who make them * * * 

* * *

It is not appropriate for any government entity to “push the envelope” when it comes into conflict with our citizens. We have the power to do damage to people that could linger for years and cost them their jobs, their savings and their homes.

But if you look at what 50 public interest groups say, it seems as if Mulvaney is indeed pushing the envelope, and not to help consumers.  Here's an excerpt from their statement:

A coalition of 50 public interest groups today sharply criticized the Consumer Financial Protection Bureau’s proposal to gut important consumer protection rules, especially for fintech companies, arguing the agency does not have the authority to create potentially unlimited exemptions from the very regulations that the CFPB is obligated to enforce.

The CFPB is exceeding its authority under the law that created the agency and would set a dangerous precedent with its “disclosure sandbox” policy, its label for granting companies exemptions from disclosure rules. Instead of conducting limited, carefully drawn trials of model disclosures that could improve consumer understanding, the CFPB would allow firms to obfuscate or eliminate important information in the name of “financial innovation,” a label that was often applied to defend practices in mortgage lending that led to the 2008 crisis.

“The reckless and unlawful scope of the CFPB's proposal is breathtaking,” said Lauren Saunders, associate director of the National Consumer Law Center. “The CFPB has no authority to allow ‘trials’ that go on for years and years and that allow entire industries to skip important consumer disclosures, such as the total cost of a loan or the required notice that the loan price was marked up due to information on the consumer's credit report. The CFPB’s proposal would not be confined to consumer testing, which recruits consumers to review and react to sample disclosures as if they were entering into a transaction. Instead, it would allow companies to experiment with or dispense with disclosures in real transactions with real consumers.”

 

Citigroup may face fair lending penalty

Reuters reports that the Office of the Comptroller of the Currency is considering sanctions against Citigroup for denying minority customers the kinds of mortgage discounts that the bank offered to many other borrowers. Citigroup, while performing a review to ensure it adhered to fair lending standards, reportedly found that some minority borrowers were not getting the discounts they were due under a program that gives a break on mortgage rates to customers who have large deposits or wealth in the hands of the bank. According to the article, Citigroup flagged the "relationship pricing" problems last year to the OCC.

The article is here.

Trump's mutually reinforcing wars on science and regulation

Law prof Albert Lin has written President Trump's War on Regulatory Science. Here is the abstract:

The Trump administration has taken numerous actions that appear hostile to scientists, scientific research, and scientific data, leading some observers to assert that a war on science is underway. A more precise characterization is that the Trump administration is engaging in a war on regulatory science, as these actions take aim specifically at regulatory science — i.e., knowledge production and synthesis carried out by the Environmental Protection Agency and other government agencies in the course of developing government regulations. The Administrative Procedure Act and other laws may constrain some aspects of the war on regulatory science, provided that they are subject to judicial review. Internal administrative law and agency norms also can promote rule of law values, but their success depends largely on the good faith of executive branch actors and the willingness of Congress and the public to push back when norms of administrative legality are ignored. Absent such pushback, the Trump administration’s war on regulatory science could lead to irrational policies and threaten democratic governance.

 

Kentucky Supreme Court: state law prohibiting employers from conditioning employment on an agreement to arbitrate is not preempted by the Federal Arbitration Act

The Kentucky Supreme Court's unanimous decision is Northern Kentucky Area Development District v. Snyder. The first two paragraphs of the court's opinion summarizes its reasoning:

Kentucky Revised Statute (“KRS”) 336.700(2) prohibits employers from conditioning employment on an existing employee’s or prospective employee’s agreement to “waive, arbitrate, or otherwise diminish any existing or future claim, right, or benefit to which the employee or person seeking employment would otherwise be entitled . . . .” When Northern Kentucky Area Development District (“NKADD”) conditioned Danielle Snyder’s continued employment on her agreement to arbitrate any dispute that may arise between them, that agreement violated KRS 336.700(2). As a result, the arbitration agreement between NKADD and Snyder—the enforcement of which is the basis of the case before us today—is unenforceable as a matter of state statutory law.

NKADD correctly asserts that the Federal Arbitration Act (“FAA”)’ broadly prohibits discrimination against arbitration agreements. It then argues that the FAA preempts the operation of KRS 336.700(2) under the facts of this case. But, rejecting NKADD’s argument, we hold that no such discrimination occurred here because KRS 336.700(2) does not prohibit arbitration agreements, limit the power of persons to enter voluntarily into arbitration agreements, or single out arbitration agreements in any way. Correctly viewed, KRS 336.700(2) is an anti-discrimination statute that prohibits employers from conditioning employment on an agreement to, not only arbitration, but also any waiver or diminution of the employee’s existing or future rights or claims for benefits arising out of employment. So, on discretionary review, we affirm for different reasons the Court of Appeals’ decision that affirmed the trial court’s order denying NKADD’s motion to compel enforcement of the arbitration agreement. And we remand this case to the trial court for further proceedings consistent with this opinion

Department of Education will miss the deadline to gut borrower protections this year

In a filing last night, the Department of Education announced that it will miss a November 1 statutory deadline to publish a rule that rolls back protections for student loan borrowers and students defrauded by for-profit colleges. Those protections, part of what’s known as the Obama-era borrower defense rule, were set to go into effect in July 2017 but have been unlawfully delayed by Secretary DeVos.

The Department’s inability to push through the new changes is good news for the public and taxpayers, who were intended to benefit from those protections. Now the Trump Administration’s deregulatory action on these protections can’t possibly take effect until July 2020.

Getting relief to the students who need is an ongoing effort, though. Last month a federal district court held that the delays of the Obama-era rule that were still in force were unlawful. However, it held off on vacating one of those delays until October 12 to give the Department an opportunity to correct the deficiencies of that delay, if it could.

In the meantime, litigation over the rule has heated up in a separate case brought against the Department by a trade association representing for-profit schools. That association has moved to enjoin the Obama-era protections until it can fully litigate its claims. Two borrowers and a group of states are participating in the suit to help defend the rule from industry attack.

You can see the filing here.

California effort to limit forced arbitration of sexual harrassment claims vetoed

Citing the U.S. Supreme Court's precedent in favor of arbitration, California Governor Jerry Brown yesterday vetoed a bill that would end the practice of employers requiring workers to use private arbitration instead of the courts to resolve sexual harassment complaints. The bill would not have barred workers from voluntarily opting for arbitration, only barred predispute agreements requiring arbitration.

An LA Times article is here.

Is California's new net neutrality law preempted by federal law?

California's net neutrality law was just signed into law. The Justice Department says it will sue to invalidate California's law on federal preemption grounds. Read about it here.

Todd Zywicki article attacks Behavioral Law & Economics as applied to consumer finance

Todd J. Zywicki of George Mason has written The Behavioral Economics of Behavioral Law & Economics, Journal of Behavioral Economics (2019, Forthcoming). Here is the abstract:

Behavioral Law & Economics (BLE) has loudly proclaimed its victory over traditional law & economics methodologies. Nowhere has this proclamation been so loud or self-certain as with respect to claims about consumer financial decision-making. Drawing on a set of casual observations styled as empirical proof, BLE scholars have called for a variety of regulatory interventions that are claimed to be necessary to protect consumers. But examining two detailed case studies here, one involving credit card usage by consumers and the other involving claims about consumer behavior in response to cash discounts and credit card surcharges, it is shown that these claims are simply incredible, in the sense that it is literally difficult to believe that unbiased scholars would find those studies to be even slightly persuasive. Possible explanations for this disconnect between the weakness of the underlying science and the widespread social acceptance of the theories by BLE scholars are discussed.

Florida court holds company's non-disparagement clause unlawful

We have from time to time blogged about non-disparagement clauses inserted into consumer contracts to try to prevent consumers from complaining publicly about a product or service. Yesterday, a district court in Florida, in a case brought by the Federal Trade Commission against weight-loss supplement marketer Roca Labs, granted the FTC's summary judgment motion in a case in which the FTC challenged the company’s enforcement of “gag clauses” to stop consumers from posting negative reviews

The court found that the defendants violated the FTC Act by making deceptive weight-loss claims about their dietary supplements, known as Roca Labs Formula or “Gastric Bypass Alternative.” The court also found that the defendants’ threats to sue, and filing of lawsuits against, dissatisfied consumers for violating non-disparagement clauses in their online sales contracts unfairly suppressed negative information about the defendants and their products, to the detriment of subsequent purchasers, in violation of the FTC Act.

The court's opinion is here.

The car loans that never end: borrower is still paying 27 years later, decades after car repossessed

by Jeff Sovern

Years ago, I heard the puppet Lambchop (Shari Lewis) sing The Song That Never Ends:

This is the song that never ends
Yes, it just goes on and on my friends.
Some people started singing it, not knowing what it was.
And they continue singing it forever just because,
This is the song that doesn’t end.

And then it repeats.  I was reminded of that song by Ryan Felton's Jalopnik article, The Car Loans That Never Die about loans like Richard Parker's 1991 subprime auto loan for $9,198.  It's been 27 years and he's still paying it off after he became too ill to work and so defaulted. The car was repossessed in 1994. Here's an excerpt from the article:

On April 22, 2005, the court again sided with the lender, ordering Parker to continue paying back a judgment that had by then grown to $27,315.

Credit Acceptance didn’t let up. In October 2012, it filed another request with the court to garnish Parker’s income taxes. At that point, he’d had $17,575.32 garnished—nearly double the amount of the original loan—but due to the interest costs accrued from the original judgment, records show, he still had $9,781.96 to go.

Actually, on second thought, it's not at all like a cute children's song.

 

The problems of getting and paying for credit for low-income people

That's the topic of this article by consumer reporter Michelle Singletary. It includes this hypothetical underscoring how the cost of credit can differ based on one's credit score:

Let’s look at a person taking out an auto loan who has a subprime credit score below 600 (on a scale of 300 to 850, the highest score being the best). He’s buying a $10,000 used car. The subprime borrower has a FICO credit score between 500 and 589, which qualifies him for an interest rate of 17.548 percent for the 48-month loan. He’ll pay a total of $3,987 in interest. Meanwhile, a prime borrower with a FICO score between 720 and 850 is offered a rate of 4.896 percent. Total interest paid: $1,031. [emphasis added]

Read this story about non-bank mortgage lending (which is more than half of the mortgage lending market)

Here.

Does an FTC commissioner click accept without reading? If practically no one reads these things, why do we hold people to them?

by Jeff Sovern

Regular readers of this blog know that I collect instances of people agreeing to contracts without reading them. Among my examples: Chief Justice Roberts, Judge Posner, Hillary Clinton, and consumer law professors. Now I think we can add FTC Commissioner Noah Phillips to the list, though his remarks are ambiguous enough that I can't be certain. During a July hearing before the House Commerce Committee, about 2:17 in, Commissioner Phillips said, as best I can transcribe it:

I hope in my own life and I hope that everyone in their own lives always make informed decisions. That's not always how we do things. I will admit to you I have repeatedly in the last few weeks clicked on any number of accept, accept, accept online.

It is possible that all Commissioner Phillips meant was that he clicked accept without reading carefully enough to make an informed decision.  But the way he said "accept, accept, accept" makes it sound as if he clicked "accept" without reading anything.  And I certainly don't criticize him for not reading, if indeed he did not. But if even an FTC commissioner charged with protecting consumers doesn't read these things, why do we pretend everyone does?

Free credit freezes and year-long fraud alerts

Starting today, consumers who are concerned about identity theft or data breaches can freeze their credit and place one-year fraud alerts for free.

The Federal Trade Commission explains, here.

American Airlines threatens to bar customers from changing tickets

American Airlines is threatening to prohibit customers from making changes to nonrefundable tickets if Congress makes good on a proposal to crack down on what critics call unreasonable airline fees.

The NYT article is here.

Dee Pridgen Seeks Co-Author for Consumer Law Treatises

Dee Pridgen is seeking a coauthor/collaborator for her two treatises published by Thomson Reuters, Consumer Protection and the Law and Consumer Credit and the Law.  These books have been updated yearly for 30 years and are available both in print and on Westlaw.  Her current coauthor, Richard Alderman, Professor Emeritus of the University of Houston Law Center, will no longer be available after the current update.  Note that these treatises are updated yearly, with a due date typically in early August.  Compensation would be through shared royalties or as agreed.  

She would prefer someone who is currently a law school academic professor with a good publication record, preferably in consumer law or related subjects.   However, she would consider anyone with excellent research and writing skills, relevant legal/academic experience, and a willingness to consider a long term commitment to this project.  

Please contact her at pridgen@uwyo.edu if you are interested in being considered.

The FAA and independent contractors (and the Supreme Court's upcoming decision in New Prime v. Oliveira)

Law prof Richard Frankel has written The Federal Arbitration Act and Independent Contractors, which takes up an issue before the Supreme Court in New Prime v. Oliveira. Here's the abstract of Frankel's article:

The misclassification of employees as independent contractors is one of the most serious problems affecting the American workforce. Wrongly labeling workers as independent contractors deprives them of important employee benefits, civil rights, and wage and hour protections. It deprives the federal and state governments of billions of dollars in tax revenue annually. While workers can seek redress in the courts, businesses are trying to take that right away as well by forcing workers to submit their disputes to binding mandatory arbitration under the Federal Arbitration Act (FAA). Section 1 of the FAA, however, creates an exemption for transportation workers, as it states “nothing herein contained shall apply to contracts of employment of seamen, railroad employees or any other class of workers engaged in interstate commerce.” 

This term, the Supreme Court is poised to decide whether businesses can evade this exemption by labeling their workers as independent contractors. In other words, it will consider whether the phrase “contracts of employment” is limited to contracts with workers who satisfy the legal definition of employee, or whether it was intended to apply to all transportation workers, including independent contractors. Although the Court’s recent history of consistently issuing pro-arbitration decisions may suggest that it is inclined to limit the exemption to employees, this essay argues that would be a mistake. The commonly-understood meaning of “contracts of employment” at the time of the FAA’s adoption in 1925, the Act’s legislative history, and policy concerns of preventing companies from intentionally mislabeling employees as independent contractors all favor interpreting Section 1 to apply to all transportation workers, regardless of their status. Such a result is both consistent with the FAA and can mitigate the ongoing exploitation of workers by their employers.

Read the Supreme Court briefs here. 

 

CFPB announces new CAB members; former members comment

by Jeff Sovern

The CFPB has announced the new members of its Consumer Advisory Board: the new board has fewer members than the old one--meaning fewer viewpoints are represented--and the members will serve for shorter terms, making it harder for them to accumulate relevant experience with board service. I wonder if this is just an attempt to comply with the letter of the statute rather than to have an entity that provides advice that is actually useful and followed.  Some of the former members commented on the CFPB action, and here is the first paragraph of the comment:

“We are disappointed that the current administration of the Consumer Financial Protection Bureau (CFPB) chose to only appoint nine members to this new CAB. While each of the individual members is qualified in her or his own right, the fact that there are so few of them means that Acting Director Mulvaney’s CAB lacks sufficient diversity and depth of perspective. There are only 2 consumer advocates, whereas there were at least 8 advocates on the former 25 member CAB. Ironically, there are no large financial institutions, major credit card providers, or debt collectors on this new CAB. While these sectors probably have other opportunities for access with the CFPB, one of the most valuable aspects of the recently disbanded CAB was that it provided a forum for fruitful and productive conversations among a variety of stakeholders in consumer finance, which often generated valuable insights for the Bureau and the CAB members. This will be missing from the new CAB. The lack of a multitude of perspectives is ironic given that a stated reason for disbanding the former CAB was to increase the diversity of viewpoints on the Board.

Trump Administration's Student Loan Policy

Student loan debt has jumped from $1 trillion to $1.5 trillion in the last 5 years. The Education Department's official default rates

voanews

seriously understate the share of young borrowers who default, or are not able to repay their loans. In the face of the growing student loan debt crisis, the Administration's corrupt policy is to undo the Obama administration's gainful employment rule for colleges, grease the wheels for fraudulent for-profit schools, curb loan relief to victims of school fraud, and sabotage consumer protection enforcement by the CFPB and state regulators (by asserting preemption) against student loan servicers who mislead and abuse borrowers. This article sums it up nicely.