Consumer Law & Policy Blog

Ronald Mann and Travis Siebeneicher on Internet Contracting

Ronald J. Mann and Travis Siebeneicher's Working Paper,  "Just One Click: The Reality of Internet Retail Contracting," can be read at:  http://ssrn.com/abstract=988788.  Here's the abstract:

Scholars for decades have noted the possibility that
standard-form contracts disadvantage consumers. For many years,
that literature focused on the idea that sellers with market
power draft contracts that are disadvantageous to consumers. Law
and economics scholars, however, have been skeptical about that
hypothesis, pointing out that a strategy of inefficient terms
rarely would be the optimal technique for exploiting market
power. In recent years, however, the debate has shifted as new
product distribution channels have changed the technology of
contracting. Now, even firms without market power can exploit the
cognitive failures of their customers through ?shrouding? of
terms and similar techniques.

That concern has become more prominent with the rise of Internet
retailing, where electronic standard-form contracts are used
extensively, often undermining the notion of assent on which the
contract paradigm traditionally depends. Scholars have worried
that Internet retailers obscure one-sided terms so that customers
will continue to shop at their sites, and do so more effectively
than their brick-and-mortar counterparts. This, among other
concerns, has led many to argue for a new contracting regime that
deals with electronic contracting. Indeed, because software is
often distributed online, this is a major topic in the ALI's
current project on Principles of the Law of Software Contracts.

Poisoned Products Imported From China

Against a background of recent reports of poisoned medicine exported from Chinese companies to Panama and Chinese-made toothpaste containing poison imported into the U.S., the lead story in today's Times, headlined "As F.D.A. Tracked Poisoned Drugs, A Winding Trail Went Cold in China," describes a similar poisoning incident in Haiti ten years ago and attempts to figure out how the poison was mislabeled.  The article leaves the impression that the Chinese were stonewalling. 

Mandatory Arbitration of Investor Disputes

by Brian Wolfman

Michele Singletary reports in today's Washington Post about a study of securities arbitrations conducted mainly under the auspices of the National Association of Securities Dealers (NASD).  The study looked at arbitrations from 1995 to 2004.  (Most investors are subject to mandatory arbitration and cannot go to court to litigate their individual securities claims.)  During that 10-year period, both the win rate for investors and the amounts recovered as a percentage of the claim dropped fairly dramatically.  The entire study is available here.

The Post article discusses a number of possible reasons for these results, including most prominently that three-person NASD arbitration panels include someone who is working for or has ties with the securities industry.  One of the authors of the study, Daniel R. Solin, a securities arbitration attorney and registered investment adviser, is quoted as saying that "[t]his study paints an alarming picture of a steadily worsening situation for investors who have no alternative to securities arbitration administered by the very industry that they are suing."

Here's a synopsis of the study's findings from the Post article:

[T]he win rate for investors in securities arbitration cases dropped to 44 percent in 2004 from a high of 59 percent in 1999.  When it came to their claims for damages, investors were awarded 22 cents on the dollar in 2004, as a percentage of the amount claimed, compared with a high of 38 cents in 1998. (Ninety percent of the cases reviewed went through the NASD arbitration process.)  The recovery percentage plunged to 12 percent for claims of more than $250,000. The larger the award and the bigger the brokerage firm, the smaller the recovery . . ..

Other news reports on the study are available here, here, here, and here.  And here's a column by Solin from the Huffington Post.

More on Proposed Military Predatory Lending Regs

We've previously blogged several times (including here, here, here and here) about the new federal legislation regulating predatory lending to the military, known as the Military Lending Act or MLA (10 U.S.C. 987).  Comments to the Defense Department's proposed regulations implementing the statute were due this week, and the docket is now overflowing with views from the entire gamut of the consumer credit industry, from banks to pawnshops, all seeking various carve-outs for their business.  Here's a sampling of some of the other views:

• The other day, Jon Sheldon posted about the comments of the Center for Responsible Lending, National Consumer Law Center, and Consumer Federation of America, and other consumer groups.
• Public Citizen's comments, which you can read here, echo some of the policy arguments made in considerable depth in the NCLC/CRL/CFA comments, but emphasize an administrative-law approach, arguing that proposed regulations would be arbitrary and capricious and contrary to the MLA.
• Yesterday, I learned that the Federal Trade Commission has also filed comments that largely endorse the narrow scope of the proposed regulations.  On the bright side, FTC specifically rejects the suggestion that the DOD should carve out banks from the regulations' coverage, noting that banks offer many of the same products that are covered by the regulations and that exempting them would create an enormous loophole in the law.  The FTC specifically points to "the absence of market studies or other evidence that military consumers benefit when banks and similar entities engage in the practices that Congress generally found harmful."
• Our co-blogger Christopher Peterson, whose research informed the report that led to the legislation and who testified before Congress on the subject, filed comments that are accessible here.

Home Foreclosure Rate Hits 50-Year High

The Washington Post reports here this morning that, according to none other than the Mortgage Bankers Association, the percentage of home mortgage foreclosures in the first three months of this year hit a 50-year high.  As the Post article explains, this tragic problem is most acute in the sub-prime market:

The most dramatic fallout took place in the subprime market, which caters to people with blemished credit or other factors that make them a risk to lenders.  Those borrowers entered foreclosure at a rate of 2.43 percent, up from 2 percent the previous quarter.

The Post story goes into considerable detail on the issue, discussing, among other things, the connection between the popularity of adjustable rate mortgages and the increasing foreclosure rate.  The Wall Street Journal reports the same story, and notes that the Mortgage Bankers Association's chief economist predicts that the foreclosure rate will continue to rise into next year.

Supreme Court Ends Philip Morris Farce

  by Scott Nelson   

  Every now and then you read an opinion of a federal court of appeals and realize immediately that if the Supreme Court ever gets its hands on it, it will be reversed.  The only question is whether the Court will take the case. 

  Usually these days that happens when the opinion is from the Court of Appeals for the Ninth Circuit, which has some judges who are, shall we say, sometimes a bit out of step with the Supreme Court's prevailing judicial philosophy.  But sometimes the lower court's error is not that it veered left in a case where the Supreme Court would steer right.  Sometimes a court just issues an opinion that is so appallingly wrong that no Justice, left, right or center, would ever agree with it.

  Such a decision was the Eighth Circuit's ruling in Watson v. Philip Morris.

  The lower court in Watson gave cigarette companies the same right that federal officers, employees, and agencies have to "remove" cases brought against them in state courts to federal courts.  The court of appeals' reasoning, if sustained, would have given many other regulated industries the same ability to take consumer lawsuits filed against them out of the state courts and place them in federal courts.

  Fortunately, sanity prevailed in the Supreme Court.  In a unanimous decision by Justice Breyer, the Court this Monday reversed the Eighth Circuit's decision and held that neither Philip Morris, nor any other cigarette company, nor, for that matter, any business, is entitled to remove cases as if it were a federal officer merely because it is subject to federal regulation.  The Court's decision will help preserve what remaining ability plaintiffs still have to choose to bring lawsuits in the forum of their choice, which for many remains the state courts.

What the Watson Case Was About

  Watson started out as a case brought in an Arkansas state court seeking damages for consumers who bought "light" cigarettes made by Philip Morris -- specifically, Marlboro and Cambridge "Lights."  The theory of the case was that Philip Morris violated state laws against unfair and deceptive business practices by misleadingly marketing its "low-tar" cigarettes as "lights" even though it knew that they were as bad for smokers as regular cigarettes.  Among other things, the suit accused Philip Morris of manipulating the design of the cigarettes so that they would show low tar and nicotine levels when tested in accordance with the "Cambridge method" originally developed by the Federal Trade Commission, even though when actually smoked by human beings they would deliver levels of tar and nicotine comparable to regular cigarettes.

Consumer Comments on DOD Regs Implementing New Military Lending Act

CRL, NCLC, CFA and other consumer groups submitted comments on Monday on the Department of Defense's draft regulations to implement the Talent/Nelson Military Lending Act, which capped loans to military families at 36%.  The groups criticized the regulations for limiting the scope of the law to payday, auto title and refund anticipation loans, and defining even those so narrowly that predatory lenders will be able to restructure their products to escape any restrictions.  The comments are available here.

NCLC/NACA Debt Collection Comments to FTC

The National Consumer Law Center and the National Association of Consumer Advocates submitted extensive comments last week on debt collection practices to the Federal Trade Commission, including an appendix describing 34 examples in 17 states of abusive practices. The FTC solicited comments in anticipation of a workshop it is having in the fall on the 30^th anniversary of the Fair Debt Collection Practices Act. The FTC is still soliciting original research papers, which are due September 7.

NCLC and NACA described widespread problems including abusive lending practices; growth of the debt buyer industry and sale of debt from one collector to the next; abuse of the courts; mandatory arbitration; abuse of electronic collection methods; and persistence of unlawful harassment, phone calls and threats prohibited by the original 1977 Act.

The Comments proposed a prohibition on debt collection activity unless the collector possesses basic information to verify the debt and to resolve disputes; stronger protection from unfettered electronic access to consumer accounts; disclosure that a debt is time-barred; reforms against creditors including payday lenders, mortgage servicers, and banks that freeze exempt funds; and amendments to strengthen the protections and remedies of the FDCPA.

The comments are available here.   The FTC site to comment is here.

House Hearing on Fairness in Consumer Lending and Federal Preemption

    Americans for Fairness in Lending discusses here an important hearing held today before the House Committee on Financial Services.  The topic of the hearing was federal regulation (or the lack thereof) of consumer lending practices and preemption (or not) of relevant state consumer protection law.  Go directly to the Committee's website for full information on today's hearing, including testimony from federal and state regulators.

NCLC Report on Credit Counseling & Bankruptcy

Yesterday, Professor Sovern blogged about a roundtable on credit counseling and bankruptcy.   A new National Consumer Law Center study on the same subject finds that new counseling and financial education requirements imposed on debtors by 2005 changes in the nation’s bankruptcy laws have so far failed to deliver measurable benefits to affected debtors.  New Burdens but Few Benefits:  An Examination of the Bankruptcy Counseling and Education Requirements in Massachusetts questions the value  of making consumers spend time and money on counseling before filing for bankruptcy.  Creditors and agencies have failed to offer flexible and innovative programs that present real choices to those receiving counseling, the report says. “Consumers can be counseled and educated, but at the end of the day, if there are no good alternatives to bankruptcy,there isn’t much value to the effort,” says Deanne Loonin, NCLC staff attorney and coauthor of the study.