Consumer Law & Policy Blog

Oren Bar-Gill & Richard A. Epstein Debate Behavioral Economics vs. Neoclassical Economics in the Context of Consumer Contracts

Oren Bar-Gill of NYU and Richard A. Epstein of Chicago and Stanford's Hoover Institute have each contributed a piece to "Consumer Contracts: Behavioral Economics vs. Neoclassical Economics,"  92 Minnesota Law Review (2007-2008).  Here's the abstract:

In the past decade behavioral economics has established itself as a contender to the throne of neoclassical economics in the economic analysis of law. The pros and cons of behavioral as compared to neoclassical economics have been vigorously debated at the general, methodology level. But the success or failure of the behavioral challenge will be judged by its ability to improve upon neoclassical economics - both descriptively and prescriptively - in specific legal applications. Consumer contracts provide an important test case for behavioral economics. In this exchange we offer the first comprehensive debate between the behavioral and neoclassical perspectives as applied to the law and economics of consumer contracts.

New Mexico Supreme Court strikes down class-action ban

by Deepak Gupta

On Friday, New Mexico's highest court unanimously handed consumers an important victory, holding that, "in the context of small consumer claims that would be prohibitively costly to bring on an individual basis, contractual prohibitions on class relief are contrary to New Mexico's fundamental public policy of encouraging the resolution of small consumer claims and are therefore unenforceable in this state."  New Mexico joins a unanimous and growing group of state and federal courts in declaring that the Federal Arbitration Act does not preempt such state-law rulings--a question the U.S. Supreme Court refused to hear last month.

The New Mexico case involved allegations that Dell misrepresented the amount of memory in its computers--a misrepresentation that was widespread, but which cost each customer only $10-$20 each.  The opinion has some great language about the value of the class action device in cases involving small consumer claims.  The court recognized that "the class action functions as a gatekeeper to relief when the cost of bringing a single claim is greater than the damages alleged." Dell's class-action ban had "essentially foreclosed the possibility that Plaintiff may obtain any relief," such that "enforcing the class action ban would be tantamount to allowing Defendant to unilaterally exempt itself from New Mexico consumer protection laws." Congratulations go to Paul Bland and Amy Radon of Public Justice, who argued the unconscionability issue as amicus curiae.

Times Reports that New Housing Bill Will Help Only a Fraction of Borrowers in Distress

  Today's Times reports in "As Housing Bill Evolves, Crisis Grows Deeper," that the bill making its way through Congress will help only about 400,000 of the millions of borrowers in distress.  Some excerpts:

“It’s not enough, even in the best of circumstances,” said Mark Zandi, chief economist of Moody’s Economy.com. The number of people who will be helped “is going to be overwhelmed by the three million that are headed toward default.”

* * *

The effectiveness of the bill will depend to some extent on how it is handled by the F.H.A., an agency created during the Great Depression to insure home loans. It will have several challenges: persuading the lenders who made second mortgages and home equity loans to cooperate; screening loans to make sure borrowers have a good shot at keeping their homes after refinancing; and weeding out those trying to take advantage of the system.

Obama on Consumer Debt

Barack Obama discusses his legislative agenda regarding consumer debt with Michelle Singletary of the Washington Post. Obama notes that until he cashed in on his best-selling books, he and his wife were carrying significant student loan debt. "We were making payments the size of a mortgage every month," Obama said.

House of Representatives Holds Hearing on Credit Card Marketing to Students

Check out this post over at U.S. PIRG's Consumer Blog discussing the hearing last Thursday held by the House Financial Service Committee's Financial Institutions and Consumer Credit subcommittee regarding marketing of credit cards to college students. We have previously blogged on this topic here and here (click on the video).

Legendary Plaintiffs' Lawyer Dickie Scruggs Sentenced to Five Years in Prison for Bribing a Judge

The headline of this post gives you the gist. For the sordid details, see this article from the New York Times.

Times Articles on the Tort War, Illinois' Suit Against Countrywide, and Google's Marketing

Recent articles from the Times of interest:

Yesterday's edition contains "Google Tries Tighter Aim for Web Ads" about how Google uses what a consumer searched for a few minutes ago to target ads for that user.  Another article, "Post-Spitzer, A New Breed of Reformer," explores the differences between former New York Attorney General Eliott Spitzer's and the current New York Attorney General Andrew M. Cuomo's approaches to bringing cases against the financial industry.

Here is Wednesday's report on the Illinois case against Countrywide, a case Alan White reported on yesterday.

Last Sunday's issue brought "To the Trenches: The Tort War is Raging On," about business's attempts to take on the trial bar.  Some excerpts:

Businesses count among the victories federal legislation passed in 2005 that made it harder to file class-action lawsuits in state courts, where judges and juries were often perceived as hostile to business. In state courts, where most civil litigation plays out, the number of suits involving auto accidents, allegations of medical malpractice and the like fell steadily from 1995 to 2005, according to the National Center for State Courts. The Chamber of Commerce says the number of megaverdicts for more than $100 million dropped to 2 last year, from 27 in 2000.

NEVERTHELESS, there are battles in individual states over judicial campaigns and legislative initiatives.  * * *

Strikingly absent from debates over who should be able to sue whom, when and for how much is any discussion of the fairest and most effective way to make sure that true victims are appropriately compensated for injuries and that people without authentic injury are not compensated.

“That’s not the conversation we’re having,” because the only voices heard belong to advocates of one side or the other, said Robert L. Rabin, a law professor at Stanford. “Those advocates reflect advocacy interests — that is, either defense-side interests or plaintiff-side interests — rather than some overview of global fairness.”

States going after Countrywide

By Alan White

Illinois, California and Washington all filed actions against Countrywide this week alleging a variety of deceptive practices and fair lending violations. The California complaint attacks a variety of origination practices, especially involving negative amortizing mortgages (so-called pay option ARMs) and hybrid ARMs. The Washington DFI's complaint proposes to revoke Countrywide's license to make mortgage loans in the state, based among other things on evidence of race discrimination in mortgage pricing. Illinois Attorney General Lisa Madigan's particularly thorough and well-researched complaint focuses on unreasonable forecosure risk as a violation of consumer fraud and fair lending laws, but also challenges other origination and servicing practices.

North Carolina's Banking Department entered into a consent order with Countrywide last March, and Countrywide has surrendered a number of branch licenses in New York. It seems likely that other states will join, and perhaps organize a multi-state task force, as was done in the Ameriquest and Household Finance cases, among others. If any commenters are aware of other state filings I will be happy to add links to this post. (HT NY Post for the graphic.)

All this on the heels of the shareholders' approval of the merger between Countrywide and BankofAmerica. Approval by the Countrywide shareholders, that is.

UPDATE: The June 30 complaint filed by the FLORIDA attorney general is available here.

Study Finds that Firms That Use Arbitration Clauses in Consumer Contracts Often Do Not Use Such Clauses in Nonconsumer Contracts

In "Arbitration's Summer Soldiers: An Empirical Study of Arbitration Clauses in Consumer and Nonconsumer Contracts," Theodore Eisenberg of Cornell, Geoffrey P. Miller of NYU, and Emily L. Sherwin of Cornell report that firms that use arbitration clauses in consumer contracts often do not use arbitration clauses in nonconsumer contracts.  Here's the abstract:

We provide the first study of varying use of arbitration clauses across contracts within the same firms. Using a sample of 26 consumer contracts and 164 nonconsumer contracts from large public corporations, we compared arbitration clause use in consumer contracts with their use in the same firms' nonconsumer contracts. Over three-quarters of the consumer agreements provided for mandatory arbitration but less than 10% of the firms' material nonconsumer, nonemployment contracts included arbitration clauses. The absence of arbitration provisions in nearly all material contracts suggests that, ex ante, many firms value, even prefer, litigation over arbitration to resolve disputes with peers. The frequent use of arbitration clauses in the same firms' consumer contracts appears to be an effort to preclude aggregate consumer action rather than, as often claimed, an effort to promote fair and efficient dispute resolution. Other common features of civil litigation reform discussion, avoidance of juries and loser-pays attorney fee rules, find little support in the pattern of contractual terms we observe.

Mynutritionstore’s not-so-ingenious theory to evade the CDA’s protection for consumer complaint sites

by Paul Alan Levy

In a recent series of demands, a purveyor of “nutraceuticals” called mynutritionstore.com threatened to sue Julia Forte over consumer criticisms appearing on her web site 800notes.com, a forum for identification and discussion of telemarketers based on their phone numbers.  (The specific dispute is summarized here)  My Nutrition Store’s expressed concern was that the comments about it show up in Google searches.

When Forte replied by citing her protection under the Communications Decency Act, 47 U.S.C. § 230,  which generally immunizes hosts of discussion sites against suit based on what consumers say on their sites, mynutritionstore’s lawyer, Thomas Georgianna, of the law firm of Horwitz & Cron, had what he no doubt thought was an ingenious response – if he couldn’t sue on the merits, he could sue the anonymous commenters, join the web host as a “necessary party,” seek a preliminary injunction, and thus force the web host to spend money on lawyers, driving up its costs.   He apparently hoped that the threat of such expenses would drive Forte to comply with his demands.