Consumer Law & Policy Blog

Public Citizen wins against anti-consumer copyright claim

by Greg Beck

Cross-posted from Citizen Vox

When Seattle resident Tim Vernor put a used copy of software for sale on eBay, the software's maker, Autodesk, demanded that eBay cancel the listing. Although Vernor was selling an authentic, original copy of Autodesk's software, the company pointed to a "license agreement" contained in the software's box that prohibited anyone from selling or giving the software away. Although Vernor had purchased the software at a garage sale and had never agreed to abide by Autodesk's terms, the company argued that violation of the agreement infringed its copyright.

These kinds of abusive licensing terms are increasingly common and are bad for consumers. When a company prohibits resale, it eliminates the secondary market for used copies of the product. And with fewer copies on the market, competition is reduced and prices go up.

Vernor, however, refused to back down, instead repeatedly putting Autodesk's software up for sale on eBay. Each time, Autodesk demanded that the sale be terminated, until its repeated claims of copyright infringement caused eBay to shut down Vernor's account entirely. Vernor then filed suit and, represented by Public Citizen, argued for a ruling that he did not need Autodesk's permission to resell its software.

Today, a federal court agreed with Public Citizen, rejecting Autodesk's expansive claims of copyright infringement and holding that the company cannot prevent Vernor from reselling authentic copies of its software. The decision is good news for consumers and signals that companies cannot use a form contract to restrict competition and curtail consumers' traditional right to resell products that are lawfully theirs.

The court's decision and other documents in the case are available here.

New Poll: Americans Say "No Thanks" To Binding Arbitration

A new national opinion poll shows widespread disapproval of binding arbitration provisions in consumer contracts and overwhelming support for the Arbitration Fairness Act now pending in Congress.

By five to three, Americans said they disapprove rather than approve of consumer contracts with binding arbitration provisions. When consumers who are initially supportive learn that arbitration means that they give up their right to take the case to court and that the company picks the arbitrator, two in three of the initially supportive consumers also disapprove. When the data is combined, a whopping 81percent of Americans express disapproval of mandatory binding arbitration.

The poll also shows broad support for the proposed Arbitration Fairness Act.  Overall, 64 percent of voters favor the legislation, compared with only 26 percent who oppose it.  Perhaps surprisingly, the poll reveals no statistically significant difference in support among Democrats and Republicans. A detailed memo by the pollsters is provided below the jump.  As the memo notes, this poll casts serious doubt on the contrary results reported in a survey recently released by the Chamber of Commerce's Institute for Legal Reform.

Senate Negotiators and Banking Committee Agree on Aid for Those Facing Foreclosure

Today's Times has an article headlined "Senate Leaders Reach Deal on Housing Assistance."  Here's an excerpt:

Senate negotiators on Monday said they had reached a deal on legislation aimed at helping hundreds of thousands of homeowners in danger of foreclosure by expanding the availability of government-insured mortgages.

The Bush administration, which previously said it would oppose legislation to rescue troubled homeowners, suggested that it was willing to consider the Senate deal because lawmakers had found a way to eliminate any direct cost to taxpayers.

The Senate bill would create an affordable housing fund, financed by the government-sponsored mortgage-finance companies, Fannie Mae and Freddie Mac, and that fund would be used in its first year to provide about $500 million for the foreclosure rescue effort.

The Times web site reports here that the Senate Banking Committee approved the resulting bill today by a vote of 19 to 2.

Booming Business in Boat Repos

The New York Times is reporting a rising tide (note the ironic pun) in boat repossessions. --Just one more example of the America's problematic debt culture. Here's the lead:

So many people have so many things they can no longer afford. This is an excellent time to be a repo man. When a boat owner defaults on his loan, the bank hires Jeff Henderson to seize its property. The former Army detective tracks the boat down in a backyard or a marina or a garage and hauls it to his storage area and later auctions it off. After nearly 20 years in the repossession business, Mr. Henderson has never been busier.  ....

New CAFA Decision From Second Circuit

by Brian Wolfman

In Estate of Pew v. Cardarelli, No. 06-5703-mv (May 13, 2008), the Second Circuit resolved a couple issues under the Class Action Fairness Act (CAFA), which greatly expanded federal diversity jurisdiction over class actions. In Pew, an agricultural supply and marketing cooperative issued money market certificates, which were fixed-interest debt instruments. Later, the co-op stopped selling the certificates and ended its practice of repurchasing them prior to maturity. The co-op then filed for bankruptcy. The purchasers were not thrilled and sued the co-op’s officers and auditor in state court under New York’s consumer protection law, asserting, among other things, that the co-op had misrepresented its financial condition. (An earlier suit by the plaintiffs under federal securities law had been dismissed on the merits.)

The defendants removed the case to federal court under CAFA. The parties agreed that the case was removable unless it came under a particular CAFA exception, 28 U.S.C. 1332(d)(9)(C), which carves out any claim that “relates to the rights, duties (including fiduciary duties), and obligations relating to or created by or pursuant to any security (as defined under . . . the Securities Act of 1933).” The parties also agreed that the money market certificates were “securities” within the meaning of this exception. The district court held that the plaintiffs’ claims fell within the section 1332(d)(9)(C) exception and remanded the case to state court.

The Second Circuit reversed. The court held that the plaintiffs’ claims did not “‘relate[] to the rights . . . and obligations’ . . . ‘created by or pursuant to’ a security [because they were not] claims grounded in the terms of the security itself.” A claim “grounded in the terms of the security itself, the court held, “might arise where the interest rate was pegged to a rate set by a bank that later merges into another bank, or where a bond series is discontinued, or where a failure to negotiate replacement credit results in a default on principal.” But, the Second Circuit concluded, “[t]he present claim–-that a debt security was fraudulently marketed by an insolvent enterprise–-does not enforce the rights of the Certificate holders as holders, and therefore it does not fall within § 1332(d)(9)(C).” In so holding, the Second Circuit relied on a Senate Judiciary Committee Report on CAFA, which asserts that section 1332(d)(9)(C) is limited to claims over the terms of securities. The Second Circuit’s reliance on the Senate Report was a bit odd, since earlier in Blockbuster, Inc. v. Galeno, 472 F.3d 53, 58 (2d Cir. 2006), the Second Circuit had dissed the Report’s legitimacy because it was issued 10 days after CAFA’s enactment. (Go to our prior blog entry to read about the Blockbuster decision.)

Judge Pooler dissented, explaining that the majority’s holding was at odds with CAFA’s plain text. She noted that the plaintiffs’ claim was that the co-op had not paid them the principal and interest on their money market certificates. So, she went on, “[i]f this suit therefore does not solely involve a claim ‘that relates to the rights . . . and obligations relating to or created by or pursuant to’ the [money market] Certificates, I am at a loss to understand why.” She also castigated the majority for relying on the Senate Report for a host of reasons, including that the Report’s statement about the scope of section 1332(d)(9)(C) “simply has no relation to the enacted text.” Hard to quarrel with that.

Speaking of “the enacted text,” this case involved a petition for permission to appeal a district court’s remand order, which, CAFA absurdly says, must be filed with the court of appeals “not less than 7 days after entry of the order.” 28 U.S.C. § 1453(c)(1) (emphasis added to actual statutory text). That means that if you seek permission to appeal in 0, 1, 2, 3, 4, 5, or 6 days after entry of the remand order, your request is premature, but, as long as you wait 7 days, you’re golden. Heck, you can file a whole year later, and you’re still good to go. The Second Circuit in Pew joined every other court of appeals to have rewritten this provision, and held that it means the exact opposite of what it says: a party seeking permission to appeal a remand order must do so “not more than 7 days after entry of the order” (emphasis added to non-existent statutory text).

FTC Workshop on Consumer Information and the Mortgage Market

On May 29, the FTC will host what sounds like an important conference on the role of consumer information in the mortgage marketplace.  Here's an excerpt from the FTC's announcement:

* * * The purpose of this conference is to highlight and assess the role of consumer information in the current mortgage crisis from an economic perspective. An economic analysis that includes a historical understanding of developments in the mortgage market, as well as empirical research on consumer use and understanding of mandatory, pre-purchase, information disclosures, can link together disparate elements of the current mortgage policy debate.

Experts from several relevant specialties, including real estate finance and economics, consumer behavior, and information regulation, will be brought together to examine how consumer information, and information regulation, affects consumer choices, mortgage outcomes, and consumer welfare. For example, panelists will discuss the causes and effects of mortgage market product developments, the role of consumer information in the mortgage market and how it relates to the current mortgage crisis, and strategies for ensuring that new consumer protection regulations, especially mandatory information disclosures, will be designed in ways that will provide the greatest possible long-run net benefit to consumers. This exchange may yield concrete ideas for the development and implementation of more cohesive, comprehensive, and effective consumer information policies.

You can learn more here.  Included at that site is a list of speakers, an agenda, relevant articles by participants, and a link for a web cast.

Update on Adam Levitin Paper

On Friday, we blogged about Adam Levitin's paper here.  Professor Levitin has posted to SSRN a significantly revised version of the piece, titled "A Critique of the American Bankers Association's Study on Credit Card Regulation."

Adam Levitin Responds to ABA Study on Regulation of Credit Cards

Adam Levitin of Georgetown has written "All But Accurate: A Critique of the American Bankers Association's Study on Credit Card Regulation." Here's the abstract:

This review article takes issue with three of the main assertions of the American Bankers Association's Study on Credit Card Regulation.

First, this article addresses the ABA Study's claim that credit card pricing is risk-based, benefiting creditworthy consumers with lower costs of credit and subprime consumers with greater access to credit. This article demonstrates that credit card pricing is only marginally risk-based and that consumer benefits are illusory. To the extent that credit card interest rates have declined over the past two decades, it is attributable to issuers' decreased cost of funds. Increased subprime access to credit cards relates to issuers' ability to pass off risk through securitization, and increased credit card access is hardly a boon absent ability to repay debts.

Second, this article shows that contrary to the ABA Study's claims, credit card debt now supplements, rather than replaces other forms of consumer debt. And third, the article takes issue with the ABA Study's assertion that there is no basis for credit card regulation. Instead, seven of the eight standard independent reasons for government regulation apply squarely to credit cards, making regulatory intervention in the credit card market a question of how, not whether.

Hoofnagle and King on What Californians Understand About Privacy Offline

Chris Jay Hoofnagle, who has  made important contributions on identity theft, has teamed with Jennifer King, both of Berkeley, to produce "Research Report: What Californians Understand About Privacy Offline."  The Report raises disturbing questions about the extent to which consumers understand how data about their transactions is being used.  Here's the abstract:

Many online privacy problems are rooted in the offline world, where businesses are free to sell consumers' personal information unless they voluntarily agree not to or where a specific law prohibits the practice. In order to gauge Californians' understanding of business practices with respect to the selling of customer data, we asked a representative sample of Californians about the default rules for protecting personal information in nine contexts. In six of those contexts (pizza delivery, donations to charities, product warranties, product rebates, phone numbers collected at the register, and catalog sales), a majority either didn't know or falsely believed that opt-in rules protected their personal information from being sold to others. In one context--grocery store club cards--a majority did not know or thought information could be sold when California law prohibited the sale. Only in two contexts--newspaper and magazine subscriptions and sweepstakes competitions--did our sample of Californians understand that personal information collected by a company could be sold to others.

Respondents who shopped online were less likely to say that they didn't know the answer to the nine questions asked than those who never shopped online. In about half of the cases, those who shopped online answered correctly more often than those who do not shop online.

Professor Alan Westin has pioneered a popular "segmentation" to describe Americans as fitting into one of three subgroups concerning privacy: privacy "fundamentalists" (high concern for privacy), "pragmatists" (mid-level concern), and the "unconcerned" (low or no privacy concern). When compared with these segments, Californians are more likely to be privacy pragmatists or fundamentalists, and less likely to be unconcerned about privacy. Fundamentalists were much more likely to be correct in their views of privacy rules. In light of this finding, we question Westin's conclusion that privacy pragmatists are well served by self-regulatory and opt-out approaches, as we found this subgroup of consumers is likely to misunderstand default rules in the marketplace.

Reckless lenders

Today's New York Times reports on a court ruling (Order and Opinion here) allowing a shareholder suit against Countrywide to proceed. The court cited specific allegations in the complaint that company directors ignored numerous red flags alerting them to widespread deviations from undewriting standards at all levels of the company. The allegations are remarkably similar to the story of New Century's demise, in which various officers tried in vain to alert management to the serious problems in underwriting and the rapid rise in early payment defaults in 2005 and 2006.

It is a bit ironic that shareholders are complaining of the underwriting lapses, which after all permitted the rapid growth in loan volume and share prices. In any event, it is clear that the foreclosure crisis was not caused solely by the end of home price appreciation. Inside the major subprime lenders, the battle between underwriting and sales was being lost by the underwriters, despite the latter's appeals to top management.