Consumer Law & Policy Blog

CSPI’s Litigation Project Forces Change By Two Major Food Companies

By Steve Gardner

    Consumers can breathe, or at least eat, a little easier. This past week two major food companies stopped a deceptive practice — claiming that their drinks were “natural” when they were sweetened with high-fructose corn syrup (HFCS). Both companies acted after legal action by the DC-based nutrition and health advocacy group Center for Science in the Public Interest (CSPI).  I’m Litigation Director for CSPI.

    On Monday, January 8, CSPI sued Kraft Foods for claiming that Capri Sun drinks were “natural,” when in fact HFCS was the second ingredient after water. The company immediately announced that it was completely getting rid of the “natural” claim.  The same day, Kraft announced that it was getting rid of the “natural” claim.

    Then, on Friday, January 12, Cadbury Schweppes announced that it, too, would stop calling HFCS-filled 7UP “all natural.”  This announcement culminated several months of negotiations between Cadbury and CSPI.

Court Grants Federal Officer Removal Case

This afternoon, the Supreme Court announced that it has agreed--contrary the Solicitor General's recommendation--to review the Eighth Circuit's decision concluding that tobacco giant Philip Morris could remove a case to federal court on the basis of the federal officer removal statute. On Wednesday, I previewed the case (Watson v. Philip Morris) in a post you can access here, and explained why I thought the Court should take the case. Needless to say, this is one of those cases in which getting cert granted was more than half the battle. This one is exceedingly easy to predict: the Court will reverse the Eighth Circuit. Period.

Update: Ted Frank of the conservative American Enterprise Institute, who's much more sympathetic to the plight of the downtrodden tobacco companies than I am, discusses the case here and reacts to the grant here.

A Haunted Case and a Comedic Court

by Orly Lobel

I am preparing for my first consumer law class next week and one of the first cases keeps cracking me up. It is one of the cases where a guy comes to a small town, buys a house, and finds out the house is haunted; in fact, the house had been haunted for years, as the seller enjoyed bragging about to the neighbors. Yet the seller failed to mention the fact to the buyer and the court holds that the buyer is entitled to the equitable remedy of rescission. What makes me laugh is obvious delight the court is experiencing with a case about ghosts before it.  Here is a taste of the court's analysis of the problem of paranormal discovery:

While I agree with Supreme Court that the real estate broker, as agent for the seller, is under no duty to disclose to a potential buyer the phantasmal reputation of the premises and that, in his pursuit of a legal remedy for fraudulent misrepresentation against the seller, plaintiff hasn't a ghost of a chance, I am nevertheless moved by the spirit of equity to allow the buyer to seek rescission of the contract of sale and recovery of his downpayment. New York law fails to recognize any remedy for damages incurred as a result of the seller's mere silence, applying instead the strict rule of caveat emptor. Therefore, the theoretical basis for granting relief, even under the extraordinary facts of this case, is elusive if not ephemeral.

"Pity me not but lend thy serious hearing to what I shall unfold" (William Shakespeare, Hamlet, Act I, Scene V [Ghost] ).

From the perspective of a person in the position of plaintiff herein, a very practical problem arises with respect to the discovery of a paranormal phenomenon: "Who you gonna' call?" as the title song to the movie "Ghostbusters" asks. Applying the strict rule of caveat emptor to a contract involving a house possessed by poltergeists conjures up visions of a psychic or medium routinely accompanying the structural engineer and Terminix man on an inspection of every home subject to a contract of sale. It portends that the prudent attorney will establish an escrow account lest the subject of the transaction come back to haunt him and his client — or pray that his malpractice insurance coverage extends to supernatural disasters. In the interest of avoiding such untenable consequences, the notion that a haunting is a condition which can and should be ascertained upon reasonable inspection of the premises is a hobgoblin which should be exorcised from the body of legal precedent and laid quietly to rest.

The case is Stambovsky v. Ackley, 572 N.Y.S.2d 672 (N.Y. Sup. Ct. App. Div. 1991) and can be found in forthcoming Third Edition of Consumer Law Cases and Materials, by John A. Spanogle, Ralph J. Rohner, Dee Pridgen, and Jeff Sovern, Thomson/West 2007.

U.S. Agrees: Tobacco Companies Aren't Federal Officers

by Deepak Gupta

Several months ago, I posted an overview of consumer cases with a reasonable chance of being granted for review by the U.S. Supreme Court.  Among them was Watson v. Philip Morris, a truly remarkable case in which the Eighth Circuit held that a tobacco company was entitled to remove a case to federal court under the federal officer removal statute--a statute designed to protect federal officers and employees.   The Justices will take up the matter at their private conference this Friday.

Watson may be one of those relatively rare cases in which a federal appellate court's decision on an important and recurring issue is so outrageously wrong that the Court concludes it can't be allowed to stand, regardless of how long the issue has percolated in the courts below.  The court's reasoning--that Philip Morris was heavily regulated by the Federal Trade Commission such that it was effectively "acting under" federal officials when it promoted and sold its "light cigarettes"--is simply indefensible.  Indeed, the absurdity of the decision is heightened when you consider that the federal government actually sued Philip Morris for the very same conduct that the Eighth Circuit concluded was carried out "under" federal direction.

Last May, the Supreme Court invited the Solicitor General to present the views of the United States. That's usually a very strong sign that the Court is interested in a case.  And in Watson, it was particularly welcome news becuase it was hard to see how the government could defend the decision.  Well, the SG's recently-filed amicus brief takes the view that the Eighth Circuit's decision was not only wrong, but fell "substantially wide of the mark."  The SG nevertheless recommends denying cert because a sufficient split of authority hasn't developed.

Court Turns Down New Jersey Rent-to-Own Challenge

by Deepak Gupta

On Monday, the Supreme Court turned down a request by former Solicitor General Ted Olson to hear a challenge to New Jersey's consumer protection and usury laws filed by the nation's largest "rent-to-own" company, Rent-A-Center, which operates 43 such stores in New Jersey.  (06-657, Rent-A-Center v. Perez).   

The Supreme Court's order leaves in place an important victory for consumers.  In an opinion you can access here, the New Jersey Supreme Court had ruled last year that Rent-A-Center is subject to a 30% annual interest-rate cap that applies to other retailers who allow customers to pay for their purchases in installments.   Specifically, the Court held that (1) rent-to-own transactions are "installment sales" within the meaning of the state's Retail Installment Sales Act and (2) the interest-rate limitations of the state's criminal usury laws apply to such transactions.  (You can listen to the oral argument here.  For some background on "rent-to-own" and how it harms low-income consumers, visit this page at U.S. PIRG's website.)

The question in Ted Olson's petition was whether the New Jersey court's decision to apply those holdings to a pending class action against Rent-A-Center was an impermissible retroactive ruling that violated Rent-A-Center's right to constitutional due process.   As is so often the case in cert-stage proceedings, however, the killer arguments in the brief in opposition had less to do with the merits of Olson's creative constitutional argument than with jurisdictional niceties and the procedural posture of the case.   Because the case was coming from a state court, it would have to meet the finality requirement of 28 U.S.C. 1257(a), the statute that allows the Court to review state-court judgments.  But the New Jersey court's decision was interlocutory and none of the established exceptions to the finality rule applied, and accordingly, the Supreme Court lacked jurisdiction.  And because Ted Olson's federal constitutional due process theory hadn't even been raised in the New Jersey courts, Rent-A-Center had waived the issue it was asking the Court to decide.

Update: The same constitutional retroactivity argument has also been raised in the pending cert petition in 06-907, County Bank of Rehoboth Beach, Del v. Muhammad.  In Muhammad -- as Mike Quirk discussed in this previous post -- the New Jersey Supreme Court held that a class arbitration ban in an adhesive consumer contract for high-interest payday loans was unconscionable under state law.

U.S. SAFE WEB Act of 2006

On December 22, the President signed into law the U.S. SAFE WEB Act of 2006, Pub. L. 109-455.  The acronym stands for the "Undertaking Spam, Spyware, And Fraud Enforcement With Enforcers beyond Borders" Act.  The statute, which amends the FTC Act, seems largely intended to facilitate cooperation between the FTC and its international counterparts in addressing global Internet problems like spam and spyware.

Should Data On Complaints About Auto Safety and Defects Be Publicly Available?

David Lazarus of the San Francisco Chronicle has a column here about proposed regulations that would bar public access to data about consumer complaints and warranty payments involving automobiles.  Consumer advocates (including Public Citizen, which is quoted in the column) oppose the regulations while the National Highway Transportation Safety Administration claims making the information available would put manufacturers at a competitive disadvantage.

En Banc Ninth Circuit Court Strikes a Blow for Fairness and Common Sense in Dispute Resolution

by Michael J. Quirk and Kate Gordon

Nearly two years after a Ninth Circuit panel wrongly held that arbitrators, not courts, should decide whether arbitration clauses are unfair and invalid under state law, the en banc Court came out with a decision firmly bringing the law back on track. In the case of Nagrampa v. MailCoups, Inc., No. 03-15955 (9th Cir. Dec. 4, 2006) (en banc), the U.S. Court of Appeals for the Ninth Circuit restored the rights of parties to challenge contracts that unfairly strip them of access to the civil justice system. In doing so, the en banc court overturned the earlier three-judge panel, whose misapplication of federal law would have allowed companies to enforce one-sided and abusive mandatory arbitration clause terms against workers, consumers, and small-business franchise operators like Connie Nagrampa.

Ms. Nagrampa’s victory comes after a long and complicated saga. She first attempted to open her own business in 1998 as a direct mail coupon advertising franchise operator. When Nagrampa contracted for this franchise with Mailcoups, Inc., a Massachusetts corporation, the company’s sales representative told her she would receive a 41% profit return on her investment. Instead, she incurred over $180,000 in personal debt, while paying Mailcoups over $400,000 in fees. Backed into a financial corner, she terminated the franchise after just two years.

Not content with the fees it had already collected from Nagrampa before she terminated the franchise, Mailcoups filed an arbitration action against her seeking another $80,000 in fees. Mailcoups filed this action pursuant to a standard-form mandatory arbitration clause in its franchise contract – a clause that it requires all franchise operators to accept. The arbitration was originally filed in Los Angeles. Nagrampa objected, requesting that the arbitration be moved nearer to her home and work in the San Francisco Bay area; she also objected to the burdensome cost of arbitration. The American Arbitration Association instead transferred the arbitration even further away, to Boston, the venue designated by Mailcoups in its arbitration clause. Nagrampa again objected to the venue and costs, arguing that these conditions effectively barred her from participating and putting forth her claims in the arbitration, but the arbitration proceeded without her. The arbitrator ultimately entered an order requiring Nagrampa to pay Mailcoups over $160,000.

Hearings on Credit Report Errors

The Boston Globe reports here that the incoming chair of the House Financial Services Committee, Barney Frank, plans to hold hearings on procedures at credit bureaus.  The article suggests that Representative Frank is concerned about problems in correcting errors in credit reports and that he feels the 2003 FACTA Act, which amended the Fair Credit Reporting Act, may not have gone far enough in addressing the problem. 

Net Neutrality News

First, William Barr, Executive Vice President and General Counsel of Verizon and former Attorney General of the United States will speak about net neutrality in the inaugural Law and Information Society Lecture at Fordham Law School on Tuesday, January 16 at 6:00 p.m.  You can register here.  Second, The New York Times editorializes in favor of net neutrality here.  As for the FCC's position, the Times editorial notes that "As a condition of approving the AT&T-BellSouth merger, the Federal Communications Commission required AT&T to guarantee net neutrality on its broadband service for the next two years."  The Times also mentions that Congressional Democrats hope to pass net neutrality legislation.