Consumer Law & Policy Blog

CPSC and NHTSA Recalls for August 2008

The Consumer Product Safety Commission's product safety recalls for August 2008 can be found here, and the National Highway Traffic Safety Administration's vehicle and related recalls for the same month can be found here.

Eighth Circuit Finds Class Action Aribtration Ban Not Unconscionable

by Brian Wolfman

In Pleasants v. American Express, No. 07-3235 (Sept. 8, 2008), the Eighth Circuit has upheld an adhesion contract requiring pre-dispute mandatory arbitration and banning class actions in arbitration. The case involved a dispute over pre-loaded store cards (or gift cards). Applying Missouri law on unconscionability, the Eighth Circuit held that the contract was not procedurally unconscionable because the relevant contractual provisions were conspicuous (although it appears that they would not have been seen by the consumer until after he or she had purchased the card) and was not substantively unconscionable because the contract did not waive the damages and fees available to consumers under applicable substantive law. The Eighth Circuit distinguished a Missouri Court of Appeals case finding a class action ban unconscionable (read the decision and decide for yourself whether the Missouri case was properly distinguished). The Eighth Circuit also noted that in deciding questions of state law it was not bound by the decisions of intermediate state appellate courts (as opposed to state high courts).

Supreme Court of Virginia Strikes Down Anti-Spam Law on First Amendment Grounds

Yesterday, in Jaynes v. Commonwealth, No. 06-2388 (Sept. 12, 2008), the Supreme Court of Virginia struck down a state statute that criminalized the sending of unsolicited bulk email to consumers. The defendant in question had been sentenced to 9 years in prison. Noting our long tradition protecting anonymous speech, the Viriginia high court struck down the statute because it included all spam, including non-commercial spam addressing political and religious matters at the core of the First Amendment.  The court's website synopsizes the opinion as follows:

In a prosecution for violations of Code § 18.2-152.3:1, the unsolicited bulk electronic mail provision of the Virginia Computer Crimes Act, the circuit court had jurisdiction over the person of the defendant, and defendant had standing to raise a First Amendment overbreadth claim as to the statute. Because Code § 18.2-152.3:1 is overbroad on its face, prohibiting the anonymous transmission of all unsolicited bulk e-mails – including those containing political, religious or other protected speech – the judgment of the Court of Appeals upholding the defendant's convictions is reversed and those convictions are vacated.

Today's Washington Post has this informative article on the decision. The Virginia attorney general has vowed to take the case to the U.S. Supreme Court.

Trademark Abuse by Jones Day to Suppress Free Speech

by Paul Alan Levy

A new entry in the contest for “grossest abuse of trademark law to suppress speech the plaintiff doesn’t like” comes from Chicago, where the giant law firm Jones Day has sued BlockShopper.com, a web site that reports on real estate purchases in two upscale specific Chicago neighborhoods, as well as in Las Vegas, Palm Beach, and St. Louis.  The defendant’s crime?  In discussing condo purchases by Jones Day associates Dan Malone and Jacob Tiedt here and here, BlockShopper used the name “Jones Day” to identify the employer of each of the two associates, and linked from each associate’s name to Jones Day’s own web site here and here. 

According to Jones Day, linking to its web site dilutes its trademark and creates a likelihood of confusion.    But that is preposterous.  The link is in connection with a comment on Jones Day; when a trademark is used to comment on the trademark holder, the use reinforces the association with the trademark holder, rather than blurring it, and besides use for commentary is expressly protected as fair use under the Lanham Act as amended in 2006.   Moreover, nobody could visit the BlockShopper web site and think that it is sponsored by or affiliated with Jones Day, even if they follow the links from BlockShopper’s mention of Jones Day associates to Jones Day’s own web site.  That is what web sites do – they link to other web sites (that’s what makes it a “World Wide Web”).   

Indeed, throughout the first paragraph above, I used Jones Day's name (because I am writing about that firm) and linked to Jones Day’s web site and elsewhere.  Is Public Citizen equally liable for trademark infringement and dilution?   If Jones Day is right here, it is hard to see how the Web could survive.

DOJ Disgraces Itself in Support of Nursing Homes

by Paul Bland

The United States Justice Department has completely disgraced itself. On July 30, 2008, Keith Nelson, Principal Deputy Assistant Attorney General of the United States, wrote a letter to the U.S. Senate Judiciary Committee in which he attacked S. 2838, a bill that would ban the use of pre-dispute mandatory arbitration clauses in nursing home contracts.

[Update: Yesterday, a coalition of consumer groups sent this response letter.]

Why does the United States of America oppose the idea that nursing home patients – perhaps the most vulnerable segment of our entire nation – should be given a choice of whether or not to take disputes (many of which involve medical neglect like untreated bed sores that become severely infected leading to serious disease or death, or elder abuse such as rape or murder of very old people) to court or arbitration?

Well, first Mr. Nelson argues that arbitration is better than the court system for nursing home residents. In his happy imaginary world, nursing homes insist that their patients submit to these contracts before they can receive medical treatment because the nursing homes WANT their patients to be able to get more money if the nursing home mistreats them. Mr. Nelson’s assertions on this point are actually contradicted by the nursing home industry itself – nursing home lobbyists and lawyers openly acknowledge that the entire POINT of their mandatory arbitration clauses is to reduce their liabilities (no matter what they have done).

The second point that Mr. Nelson makes is the really troubling one, though. According to Mr. Nelson, the United States Congress does not even have the POWER to regulate the contracts of nursing home residents, because nursing homes are supposedly not within the scope of the interstate commerce clause. This is not just misguided federalism, this is nonsense on stilts.

At the outset, his statement would only be true IF:

• Every patient in a nursing home had been born and raised in the state where the nursing home was based. (It’s like the U.S. hasn’t noticed that lots of retirees MOVE to states like Florida and Arizona.)
• All the employees in the nursing home would have to have been born and raised in that state. (A ridiculous assumption.)
• All the food, all the medicine, all the furniture, all the equipment in the nursing home would have to have been grown, manufactured, etc., in that state. (A ridiculous assumption.)

If a nursing home patient went into court and told a judge "the Federal Arbitration Act doesn’t apply to this nursing home’s arbitration clause, because nursing homes are not part of interstate commerce," the lawyer would run a serious risk of being sanctioned for making a frivolous argument. The U.S. Supreme Court has twice rejected this kind of argument (in the Allied Bruce v. Terminix and Alafabco cases).

What’s even more troubling, is consider the implications of Mr. Nelson’s argument. If the position taken in the name of the United States to the Senate was true, then the federal government could not regulate ANYTHING that the nursing home does. So, under Mr. Nelson’s slipped-cog claims:

• nursing homes could refuse to hire, or treat, African-Americans, Latinos, or any other group, and none of the federal civil rights laws would apply. This is the official position of the United States in 2008? It’s almost as if Trent Lott got his wish and Strom Thurmond HAD won the 1948 Presidential election. It’s unbelievable that the United States of America would take this position today.
• nursing homes could pollute and be exempt from the environmental laws. A nursing home could take all of the sewage from its facility and dump it in a river just upstream from a school, and not be subject to the Clean Water Act.

It’s a pretty sad day when the official representatives of the United States will say pretty much anything in order to help the nursing home industry limit its liability, even in the ugliest cases. And these cases are ugly – we’ve helped families of nursing home patients who died after thousands of ANT BITES, we’ve helped families of women in their nineties who were trusted to a nursing home by their families, and then were RAPED by "caregivers" who never should have been trusted with such a position.

But it’s even sadder when the United States will go so far as to advance a theory which is not only demonstrably, obviously untrue as a matter of fact and completely unsupported as a matter of law, but that if it was true, would wind the clock back to the 1930s (or earlier).

The Justice Department disgraced itself when it let this letter out the door.

CPSC Establishes Web Page on Consumer Product Safety Improvement Act

The Consumer Product Safety Commission has established a new web page devoted to informing the public about the Consumer Product Safety Improvement Act recently passed by Congress and signed by President Bush. See our earlier post for a synopsis of this important legislation. Thanks to U.S. PIRG's Consumer Blog for bringing the new CPSC web page to our attention.

The Problem with the GSE Nationalization

By Alan White

Once again the Treasury Department has stepped in to protect investors in mortgage-backed securities (this time those of Fannie Mae and Freddie Mac) but has not addressed the underlying problem. Now that the US taxpayer will become both a creditor and shareholder of the GSE's, it becomes all the more urgent for the government to address the foreclosure crisis itself.

Fannie and Freddie have seen their capital base erode as a direct result of the losses on subprime and Alt-A mortgages, losses which continue to mount and could be reduced considerably with appropriate intervention. The GSE's fates are tied to subprime and Alt-A loans in at least two ways. First, they were among the biggest purchasers of subprime mortgage-backed securities. While CDOs and hedge funds bought the riskiest tranches of the horribly underwritten subprime and alt-A loans of 2006 and 2007, the GSE's were snapping up the senior tranches. As a result, the capital of the GSE's, the thin slice that is supposed to support their debt obligations if their assets lose value, depends on the performance of subprime mortgages. Freddie Mac in particular has been overstating its capital by not marking down its (formerly) triple-A subprime securities, on the weak premise that by holding the securities to maturity it would recover 100% of their value. Rating agencies are predicting losses as high as 25% on 06/07 subprime loans, which implies big losses in senior subprime securities.

The second link between subprime foreclosures and the GSE's continued viability (or the extent of taxpayer money needed to prop them up) is the impact of subprime and alt-A foreclosures on the continuing decline of home values. Until the steady increase of monthly foreclosure filings is stopped, foreclosed homes will continue being added to the REO inventory, putting additional downward pressure on markets that are already dominated by vacant, lender-owned homes.

Now that the investors, for whom mortgage servicers are ostensibly working, are US, we should insist on a halt to new foreclosure sales until a systematic and effective mortgage restructuring program is put in place and implemented.

P.S. - in most other countries, when the government replaces the management and acquires the right to own 80% of the stock of a company, it is called nationalization. In the U.S. we don't like to use that word.

Read the Complete Details on the Freddie/Fannie Takeover

Today's Washington Post has a terrific set of stories on the Freddie/Fannie takeover. Start with this lead story and then click on "view all items in this story" for a drop down menu with about 10 other stories. Read about why Secretary Paulson decided on the takeover, what the takeover will mean for mortgage interest rates (they will go down soon it seems), and the mortgage giants new CEOs (the former heads of Fannie and Freddie have been fired). For a video of Secretary Paulson announcing the takeover go here.

Times Reports on Responses to the Subprime Crisis, Student Loan Issues, Unauthorized Bank Account Transfers, and More

Bob Tedeschi's Mortgages column in today's Times, "Shying Away From N.Y. Loans," reports on a consequence of the new New York subprime law: making it even harder for subprime borrowers to obtain loans.  An excerpt:

Among other things, borrowers with high-cost loans can block being foreclosed on if they can prove they should not have been offered the loans in the first place.

Fannie Mae and Freddie Mac, the two government-sponsored companies that back most of the nation’s mortgages, have said that as of September they would not buy subprime loans from New York because the new law exposes them to too much risk and cost. “We’re simply not in position to monitor and enforce compliance with all these requirements,” said Brad German, a Freddie Mac spokesman.

Freddie Mac and Fannie Mae back few subprime loans anyway, mortgage industry executives and regulators said, but the announcement left mortgage brokers wondering whether any lenders would touch such mortgages — even community banks that tend to keep loans on their books, rather than sell them to Fannie or Freddie.

On the other hand, Ginnie Mae said it would continue to support such loans. 

Yesterday's Times included "Counseling Students on Loans," about the Education Department requirement for counseling of students when they first apply for a federal loan and what such counseling should entail.  It only we'd had a similar requirement for subprime lending.  It also contained an interview with Asheesh Advani, the president and CEO of Virgin Money, in "Making a Business of Family Loans."  Virgin has originated $350 million in loans since 2001--among family, friends, and business associates.  If a parent, say, wants to lend money to a child as a mortgage, Virgin, for a fee, sets up and administers the loan.  They do the same thing with reverse mortgages so that families can keep the home within the family and avoid paying bank fees.

Friday brought "New York Plans to Sue Student Loan Company."    An excerpt:

The attorney general of New York is preparing a lawsuit against a student loan company, Goal Financial, charging that the lender broke state and federal laws by luring borrowers with iPods, cash and other gifts and that it misled consumers about loan terms and benefits, The New York Times’s Jonathan D. Glater reported, citing a senior official in the office.

Last Saturday, August 30, the Times published "The Bank Account That Sprang a Leak," about $300,000 in unauthorized withdrawals from the JPMorgan Chase elite private banking operation account of Wall Street activist investor Guy Wyser-Pratte.  An accompanying article, "Making Automated Bill Payments is a Cinch (Wait, Not So Fast)," discusses the downside of such automated payments.  An excerpt about the frequency of errors in such payments:

* * * Nacha — the Electronic Payments Association, a nonprofit association that oversees the network that automated payments travel on, says the error rate is 38 for every 100,000 bill payments. This figure counts mistakes that banks report but doesn’t include problems that consumers solve directly through the billers.

And another excerpt about identity theft risks:

Are you risking identity theft or other problems by giving so many companies access to your credit card numbers or bank accounts each month? Some people still think so.

But Bruce Cundiff, director of payments research and consulting for Javelin Strategy and Research, says the nonautomated approach is more problematic. If you’re paying bills one by one each month via your bank’s Web site, you need to worry about whether anyone has installed software on your computer that would capture user names and passwords. And not having paper statements and checks floating around that could be stolen from the mail is a plus as well.

On August 26, the Times reported on another solution to the subprime crisis in "Hoping to Prevent Decay, Communities Are Becoming Home Buyers."  August 24 included a depressing article, Ruins of an American Dream," about Merced, California, which has one of the highest foreclosure rates in the country.  The article explores some of the consequences of the crisis:

In the three years since housing peaked here, the median sales price has fallen by 50 percent. There are thousands of foreclosures on the market. The asking prices on those properties are so low that competitive bidding, a hallmark of the boom, is back.

But almost no homeowner can afford to sell. If you cannot go as low as “the foreclosure price” — the cost of a comparable bank-owned house — real estate agents say you might as well not even bother listing your home.

* * *

Businesses in Merced are struggling. Downtown buildings are festooned with “for lease” signs. Unemployment, consistently high here, rose to 12.1 percent in July.

* * *

Another article published the same day, "That Student Loan, So Hard to Shake," covers some of the consequences of rules making it difficult to discharge student loans in bankruptcy.   Some excerpts:

Without a court order, lenders — or, more likely, collection agents — can garnish up to 15 percent of wages of borrowers who have defaulted on federally guaranteed loans, said Deanne Loonin, a lawyer at the National Consumer Law Center in Boston. Lenders and collection agents can also intercept tax refunds, Social Security payments and even this year’s stimulus checks from the government.

“It’s really unbelievable,” Ms. Loonin said.

DEBTORS can shed credit card debt and other unsecured obligations through bankruptcy but can get out of student loans only if they can show “undue hardship.” That term is not defined by the bankruptcy code and, lawyers said, judges often take a narrow view of its meaning.

* * *

There are some compelling reasons to make it difficult for student borrowers to get out of their debts. Lenders have no collateral, like a house or car, to seize. That makes them riskier.

* * *

“At the time that people graduate from school, almost everybody is technically eligible for bankruptcy because they have debts that exceed their assets,” said Shelly Repp, general counsel at the National Council for Higher Education Loan Programs, whose members include lenders, collection agencies and guarantors. “Why would anyone lend you money if you had the option to walk away?”

But even Sallie Mae, a major source of private loans, is not opposed to modifying the bankruptcy code’s treatment of them, said Mr. Joyce, perhaps by making it possible for students to dump debts in bankruptcy after trying for a specified number of years to pay them off.

The Government Takes Over Fannie and Freddie

The takeover is happening.