Consumer Law & Policy Blog

David Adam Friedman Article on Free Offers

David Adam Friedman's article, Free Offers: A New Look, to appear in the New Mexico Law Review, is available at http://ssrn.com/abstract=1010238.  Here's the abstract:

Free offers - the practice wherein firms market goods and services by claiming that they are free - have been overlooked for too long from a structural regulatory perspective. These offers have become so ingrained into our consumer culture that they often go unnoticed, viewed as part of the natural commercial landscape. The courts and the FTC have effectively left free offer regulation untouched since the 1950s. Even legal scholarship has largely ignored free offers. I argue that advances in the study of human behavior require a new look and a new approach to the half-century-old free offer regulatory regime.

A truly free offer would be a gift. In contrast, a free offer attached to another definite commercial commitment is not free under our common understanding of the word. Under the legal standard, however, the use of the word free is lawful, provided there is adequate disclosure of the attached commercial commitment.

Free offers can be perceived as merely harmless exaggerations or simple puffery. In fact, why wouldn't consumers want free goods and services? Rational consumers should want truly free goods and services. However, free offers subvert rationality. Cognitive psychology and reciprocity theory demonstrate that the power of a free offer induces consumers to behave differently, making them more likely to engage in certain transactions. The powerful expressive function of the word free tactically puts consumers at a disadvantage even in the situations where the conditions of our laws and regulations are satisfied.

I argue that current law and regulations require wholesale reevaluation, especially given the date of their original formation and the advances in our understanding of human behavior. This ubiquitous practice should be reexamined. Moreover, policymakers should go even as far as banning the practice of the free offer in certain contexts and seeking other appropriate means to even the playing field.

Senate Passes Consumer Product Safety Bill

This Washington Post article reports that S. 2663, The CPSC Reform Act, was passed by the U.S. Senate  by an overwhelming 79 to 13 margin. The beginning of the Post article provides a synopsis:

The Senate yesterday approved the most far-reaching changes to the nation's product safety system in a generation, responding to recalls of millions of lead-laced toys that rattled consumers last year.

Lawmakers still have to resolve key differences between the Senate bill and a similar measure that passed the House in December. While the Senate version is considered by consumer advocates to be tougher, both contain provisions that would require retailers and manufacturers to be more vigilant about product safety.

Our most recent post on the legislation -- here -- contains links to lots of relevant information.

Fed Credit Card Rule update

At today's Consumer Advisory Council meeting, Federal Reserve Board staff provided a bit more information on the news that the Fed will regulate abusive credit card practices. A proposed rulemaking will be published in the Federal Register, perhaps in April or May, and may include rules on prompt posting of payments, double-cycle billing, retroactive application of rate increases, and other practices. The Fed is working separately on a credit card disclosure rule, and plans to combine the pending rule and the new proposal into a final credit card regulation by the end of the year.

Mortgage standards improving?

Has the mortgage market self-corrected by tightening up underwriting? Not according to blownmortgage.com. In this post, the author describes lender junk mail aimed at brokers, touting aggressive undewriting, no-doc loans and other questionable practices.

Consumer Product Safety Commission Legislation Moves Toward Senate Vote

Over at U.S. PIRG's consumer blog, there's a running description of the progress of a consumer product safety bill pending before the Senate. That bill -- S. 2663, the CPSC Reform Act -- would, among many other things, provide more funding for the Consumer Product Safety Commission and create a public database of product safety complaints, both things that the House bill does not do. PIRG explains that last night the Senate defeated, by a vote of 57 to 39, an amendment that would have substituted the House bill. To get all the information on the legislation, including the differences between the House and Senate bills, see PIRG's posts here, here, and here. The Senate will continue to debate the bill and various amendments today, and a vote on the Senate bill is expected tonight or Thursday.

Last Friday, in an item cross-posted from the Watchdog Blog, David Arkush and Graham Steele provided a detailed description of industry efforts to weaken the Senate bill.

Important NCLC Report on Student Loans

The National Consumer Law Center has just issued this comprehensive 48-page report on private student loans entitled  “Paying the Price: The High Cost of Private Student Loans and the Dangers for Student Borrowers.” The report finds "that private student loans are almost always more expensive than federal loans, especially for borrowers with lower credit scores or limited credit histories. Private loans also do not have the same range of protections for borrowers that government loans have." NCLC's detailed press release is here.

Desparately Seeking Data

By Alan White

Unlike many other economic indicators, foreclosures are not surveyed or reported by the Federal Reserve, the Bureau of Labor Statistics, or any government agency. Trying to measure the extent of the problem requires Google skills and detective work. Two recent reports from HOPE NOW and the states' Foreclosure Prevention Working Group offer some clues but leave many important questions unanswered. For example, many investors around the world would like to know not only how many homes are foreclosed and how many mortgage loans have been modified but also the loss severities, i.e. just how much less than the mortgage balance is recovered on foreclosure sales. These data are available only in hard-to-get monthly remittance reports for individual pools of mortgages.

The two available reports on foreclosure outcomes tell somewhat different stories. HOPE NOW tells us seemingly good news, that in the fourth quarter of 2007 nearly as many mortgage loans were modified (141,000) as were terminated with a foreclosure sale (147,000). The state regulators, on the other hand, tell us that for the month of October 2007, 126,000 foreclosure sales were completed and only 27,300 mortgages were modified. The Fed yesterday sent a letter encouraging banks to report their foreclosure prevention efforts voluntarily in a uniform manner, but has not yet taken on responsibility for compiling and reporting this critical information.

Should Congress step in with federal aid to purchase or refinance mortgages? How deep will the losses ultimately be? Should foreclosures be delayed to permit more time for workouts? A well-designed, objective and timely (preferably monthly) government survey of foreclosure activity and losses would be extremely helpful in answering these important questions.

ISP's Standing Up for Their Customers -- or Not

by Paul Alan Levy

Last week I posted about the problem of an Internet Provider, Dynadot, that rolled over when the target of postings on the web site of one of its clients filed suit (in the now-notorious Wikileaks case).  Several readers have asked, including one public comment, so where do we go to find the right ISP?

Last year, Declan McCullagh published a survey of ISP answers to questions that he posed to them about the circumstances in which they would consider suspending domain names in the absence of a court order.  This is not precisely responsive to the question here given that Dynadot suspended only after a court order -- a court order to which it consented!  Moreover, policies are one thing but actual practices may be something else.  Still the survey may provide some useful information.

On a related issue, I noted in last week's post that Go Daddy and Domains by Proxy are a mixed bag with respect to protecting their customers' anonymity.  Over the course of defending against subpoenas over the years, I have noticed that Yahoo! and Google have consistently insisted on the opportunity to give notice to their customers and to allow customers some amount of time to seek to quash the subpoena, although neither ISP is generally willing to oppose subpoenas on the merits (they leave it to the customer to find counsel and move to quash if they desire to do so).  Cable providers may be a good choice for this purpose because they are under a statutory duty to provide notice before disclosing.  There are occasional ISP's that have felt so strongly about protecting their users that they have gone out and found counsel to protect their users -- that is how we came to represent Network 54 in opposing a subpoena to identify posters on one of its message boards, and to represent infomercialscams.com in opposing a subpoena from Video Professor.  But these cases may be sui generis.

Of course, "past performance is no guarantee of future results."  :-)