Consumer Law & Policy Blog

CPSC and NHTSA Recalls for September 2008

Here are the September 2008 product recalls for the Consumer Product Safety Commission and the National Highway Traffic Safety Administration.

Presidential Campaigns Use Keyword Advertising in Ways that IP Owners Seek to Quash

by Paul Alan Levy

I have previously discussed the importance of keyword advertising as a source of exposure for comparative and critical advertising about corporations and their products, and warned about the efforts of the IP ownership bar to suppress such advertising in order to protect their clients against competition and criticism. 

The Washington Post carries a story this morning on the ways in which the Presidential campaigns are using keyword advertising to bring their campaign messages to the attention of the voters.  Among other things, the campaigns are buying ads keyed to each other's names.  If the IP owners had their way, these uses of keywords to run comparative advertising would all be illegal.  After all, the argument goes, the candidates have trademark rights in their own names, and using a trademark as a keyword to buy advertising for a competitor infringes the mark. 

Google has not acceded to this argument, but allows keyword advertising based on trademarks.  It has had to defend its right to allow such keyword advertising in many cases across the country.

But even Google allows the trademark holder to object to the use of the trademarked term in the keyword ad.  So, for example, if Obama objects, McCain would not be allowed to buy a keyword ad based on the search term "Obama health plan" and run a keyword ad asking the question, "Would Obama's health plan cost you more?  Click here to find out."  Yet the inclusion of the trademark in the ad can actually reduce the risk of consumer confusion, by clearly communicating that the ad is a comparative or critical one. 

In this regard, the changes in IP takedown procedures that I proposed earlier today could help protect Google against liability for the contents of keyword advertising, and hence allow it to relax its rules against putting trademarks in the contents of the keyword ads.

In order to show how keyword advertising is being used by the Presidential campaigns, I ran test searches for the terms  “McCain Maverick”  and “Obama Muslim” – the latter example was mentioned by the Post article.

Abusive Copyright Takedowns Aimed at McCain and Obama Show the Need to Amend the DMCA

by Paul Alan Levy

In the last couple of weeks, both the Obama campaign and the McCain campaign have experienced the sort of abusive use of the intellectual property laws that Greg Beck and I have previously discussed here – the invocation of phony copyright or trademark claims to suppress their free speech.  In the recent cases, TV networks complained to YouTube about the use of footage from news reports in their campaign advertisements, invoking the takedown provisions, in section 512  of the Digital Millennium Copyright Act or “DMCA.”   And if IP owners can get away with suppressing the speech of the presidential candidates from our two major parties when they criticize each other, that just shows how vulnerable the rest of us are when we use the Internet to criticize companies.

Fred von Lohmann points out on the EFF Deeplinks Blog, seconded by a letter from Zahavah Levine at YouTube, that the DMCA provides tools that a suppressed speaker can use to fight back, including shaming the taker-downer, suing for wrongful take down, and the like (one might also consider shaming the ISP’s who give in too easily to takedowns.   But as we point out today in an open letter to Senators McCain and Obama, these protections are largely illusory, not only because not enough lawyers will do these case pro bono, but also because lawsuits are a needless distraction to political campaigns that have more immediate tasks, and because many senders of takedown notices have no shame, but cynically make IP claims knowing that ISP’s will give in to protect themselves against infringement liability (or the cost of litigation). 

The better approach would be to reform the DMCA and other intellectual property laws that have been expanded in the past several years to give too much power to IP owners and not enough balance for the right of free speech.  Next year, one of these candidates will be president, and the other can help lead a bipartisan effort in the Senate to protect free speech against rampant IP claims.

In our letter, we propose several specific changes in the law:

Mortgage restructuring and moral hazard

By Alan White

Although moral hazard concerns for banks and securities investors went out the window with the various bailouts and government guarantee schemes, homeowners are not getting their debt written down, paid, insured or assumed by the Treasury. My review of August and September remittance reports found about 7% of mortgage modifications reduced principal, compared with 34% increasing principal and 59% leaving principal the same. The mortgage modification machine is increasing overall mortgage debt for homeowners, not reducing it.

One excuse we hear from mortgage servicers is their worry about moral hazard. Countrywide, for example, included a provision in its deal with state attorneys general giving it an out from loan modification requirements if it detects "material levels of intentional nonperformance by borrowers that appears to be attributable to the introduction (!) of the loan modification program."

I know of no empirical evidence to support the bizarre idea that homeowners who were current on payments and could afford them have decided or will decide to stop paying and risk foreclosure, solely because they thought they could or should get a loan modification. Given the demonstrated psychological importance of homeownership and the ridiculous lengths to which many homeowners in bankruptcy will go to maintain mortgage payments even when they have serious negative equity, this version of moral hazard for mortgage payers seems far-fetched, to say the least.

Consider also that according to the New York Federal Reserve's data, by the end of August, only 57% of subprime mortgage borrowers were still paying on time. The other 43% are already delinquent or in foreclosure. The number of homeowners who could be infected by moral hazard is rapidly dwindling. Consider also the competing moral hazard: the longer we refuse to write down mortgage principal for homeowners who are behind and owe more than their homes are now worth, the greater the chances they will just give up and walk away. At some point, even the most dedicated mortgage payers will realize that their home values will never catch up to their 2006 and 2007 mortgage debts, and they will cease payments. The real moral hazard is that we allow millions of families to be evicted from their homes for the sake of a theoretical construct.

Documents Detail Bush Preemption Strategy

by Deepak Gupta

The American Association for Justice (AAJ) has just released a fascinating new report, based in part on documents they obtained through FOIA, detailing the Bush administration's use of preemption as a deregulatory strategy.  In a stealth effort coordinated at the highest levels of the administration, according to the documents, multiple federal agencies were repeatedly ordered to usurp state law and undermine consumer protections.

The documents show that helping corporations escape accountability for dangerous products has been a top Bush administration priority.  AAJ's report explains how the administration's first attempts to preempt state-law protections consisted of amicus briefs on behalf of corporations in civil justice cases. After only mixed success, the administration then shifted strategies, targeting regulatory agencies in charge of product safety oversight. Beginning in 2005, carbon copy statements claiming that federal agency rules preempt state law began surfacing in the preambles of agency regs, and in some cases in the body of the final rules themselves. Because the courts have not yet conclusively determined whether preambles carry the full weight of law, corporations have a new legal theory on which they can argue in product liability cases.

Relatedly, the Wall Street Journal has a new story about how "Bush administration officials, in their last weeks in office, are pushing to rewrite a wide array of federal rules with changes or additions that could block product-safety lawsuits by consumers and states."

Why Consumer Reports Should Rate Law Schools (and Probably Other Graduate Schools Too)

Consumer Reports should rate law schools, and perhaps other schools too, for the following four reasons:

First, the existing U.S. News rankings do not adequately measure law schools from the perspective of consumers, which in the case of law schools consists of law students and applicants to law schools.  The U.S. News rankings take into account information that has little bearing on the quality of education students receive.  For example, the criterion assigned the most weight in the rankings—the reputation schools have among law professors—undoubtedly has much more to do with the quality of scholarship than the quality of teaching.  This problem may have at its root the fact that the U.S. News ratings serve too many masters.  Applicants use them to decide what school to attend; employers use them to decide where to interview; faculty candidates use them to decide where to work; and authors use them to decide in which law review to publish.  The rankings are based on criteria which are relevant to all those purposes, and so do not serve any of them satisfactorily. 

Law school consumers would be better served by a system that employed only criteria relevant to students.  That would include some criteria U.S. News already takes into account.  Thus, a ranking system useful to applicants would continue to use measures of outputs, such as bar pass rates, and rates of employment; measures of the quality of students, such as the LSAT and GPA (because the quality of the students affects the quality of the classes); and measures of the resources devoted to educating students.  It might also take into account other measures of the quality of the education that U.S. News does not currently use, such as evaluations of curricula and availability of skills courses. 

Second, Consumer Reports has the credibility needed to challenge U.S. News’s hegemony in rating schools.  While other entities rate law schools, none commands the attention that U.S. News does.  But Consumer Reports has a long history of rating products impartially, as well as a large readership, and because of that it ratings would draw instant credibility.

Third, Consumer Reports could use the money.  U.S. News’s best-selling issue is reportedly its school ratings issue.  Presumably, if Consumer Reports started rating schools, copies of its school ratings issue would also sell well.  The non-profit Consumer Reports could expect to plow the receipts back into its other product rating activities, which would benefit consumers.  In addition, some students and applicants might purchase the school ratings issue and be drawn to subscribe to Consumer Reports thereafter, also expanding resources available to Consumer Reports.

Fourth, it would improve legal education.  Commentators have reported that some law schools devote resources to enhancing the schools’ ratings rather than to provide a better education.  Indeed, I wrote a fifteen-minute play about just that (there’s still time to obtain a license for its first production).  If Consumer Reports’ rankings were to use different criteria from U.S. News, and if they have the credibility I predict above, the incentive to engage in such behaviors would diminish, which would enhance legal education.

Many law professors oppose rating law schools: we tend to believe that the goal of applicants to law schools should be to find the school that is the best fit for the particular applicant, and that ratings replace the search for the best fit with a search for the highest-rated school that will admit the applicant.  But the fact is that U.S. News does rate law schools and that in our market economy students are free to choose a higher-rated school over one that might be a better fit.  Law schools and students would be better off, though, if U.S. News did not have a monopoly on ranking law schools, and Consumer Reports is one publication that could challenge that monopoly.

Amanda E. Quester and Kathleen E. Keest on Watters v. Wachovia

Amanda E. Quester of the Center for Responsible Lending and consumer advocate and writer Kathleen E. Keest have coauthored Looking Ahead after Watters v. Wachovia Bank: Challenges for the Lower Courts, Congress, and the Comptroller of the Currency, 27 Review of Banking and Financial Law, No. 187 (2008).  Here's the abstract:

The Supreme Court's recent decision in Watters v. Wachovia Bank, 127 S. Ct. 1559 (2007), shields operating subsidiaries of national banks from the reach of state banking officials. This article argues that lower courts must take care not to read more into the decision than it held or to overlook the majority's silence on key matters. The primary question on which the Court granted certiorari was whether it should defer to a federal agency's interpretation of that agency's own preemptive authority. The authors contend that the majority's evasion of this issue, combined with language from the dissent and earlier Court opinions, suggests that Chevron deference would not apply.

The article also discusses a number of key preemption and visitation issues that the Watters Court left open in interpreting the National Bank Act. Although Watters held that operating subsidiaries of national banks may use the NBA to shield themselves from state visitorial laws, the authors argue that the Court's emphasis on certain unique features of operating subsidiaries suggests that other entities should not be allowed to invoke the NBA's protections. The article also points out that Watters reiterated the established test for what substantive laws are preempted under the NBA and did not resolve what the term visitorial powers means in the NBA.

The article argues that in the wake of Watters Congress should pass legislation that rolls back the federal banking regulators' unprecedented preemption efforts. The authors also contend that the Office of the Comptroller of the Currency has an obligation to greatly step up its efforts to protect consumers.

The Irrelevant Increase in the FDIC Insurance Cap

Adam Levitin over at Credit Slips has this nice post about the irrelevancy of raising the FDIC insurance on bank deposits from $100,000 to $250,000 as part of the bailout bill. Sure, 250K in insurance might help in the rare instance where someone mistakenly leaves more than 100K in one failing bank (rather than spreading his or her money among several institutions), but the increase will (obviously) affect almost no one, and, besides, it will do nothing to ameliorate the current credit crisis.

Times Reports on Credit Card Suits, Modification of Mortgages, Evictions in Chicago and More

Yesterday's Times included "When Plastic Seduces, A Reckoning Awaits," about cases in the New York City Civil Court against consumers on credit cards.  An excerpt:

As the final stop on the subprime lending train, the Civil Court has become the 21st-century debtors’ court. Filings have nearly tripled since 2000. Of these, court officials project that about 350,000 this year will involve debt on credit cards. * * *

* * *

[The article then describes how Juan Vega, a security guard making $11 an hour, had obtained a credit card on which the lender claimed he owed $1,400.]

“They gave me a $500 spending limit,” he said. “So it was less than that. The rest to get it to $1,400 was interest, fees.”

The negotiations had been two sentences long.

“The lawyer said, ‘We can finish this for $900,’ and I said, ‘O.K.,’ ” Mr. Vega said. * * *

The lawyers for the banks had virtually no documents on the cases, just printouts with names, account numbers and the amount that was supposedly owed. When it was Miranda Gee’s turn, she produced papers showing that she held a different account with Capital One than the one listed on the printout, which claimed that she owed about $1,000.

“They brought me here, but it wasn’t my account at all,” Ms. Gee, 43, said. “They put a hold on my bank accounts with Chase for twice the amount they claimed.”

The judge agreed to sign an order unfreezing her savings with Chase while Capital One investigated to make sure it had the right account. Since Mr. Funk, the bank’s lawyer, had no paperwork, he asked Ms. Gee if he could copy her file. She said yes.

Reports like these in which it appears that creditors are obtaining judgments without being able to prove that the money is indeed owed make me wonder how many of these claims, many of which sound like they end up in default judgments, are in fact owed, or if the consumer did indeed take on the debt, whether the claimed amount is inflated. 

Friday's Times brought an op-ed piece by Harvard Law Student Eric S. Nguyen, titled "Fight for the Family Home."  Nguyen argues that Congress should modify bankruptcy laws to permit modification of terms in mortgages on primary residences.  A pretty persuasive excerpt:

Consider two different couples facing foreclosure. The first rents a penthouse apartment to live in and then takes out a loan to purchase a house to rent out as an investment property. After racking up a mountain of credit card charges, the couple files for bankruptcy.

The second couple has two young children and buys a home to live in. When illness keeps the mother from working for six months, the family falls behind on bills and files for bankruptcy. Which family should have a chance to keep its home?

If you said the family with children living in their own home, you might be surprised to learn that Congress disagrees. * * *

On Thursday, the Times published "Sheriff in Chicago Ends Evictions in Foreclosures."  The article explains:

Sheriff Dart said he took the measure because an increasing number of the residents being evicted were renters who might have been dutifully paying their rent, and might have had no knowledge that the owner was behind on the mortgage.

On Wednesday, the coverage shifted to online selling in Europe with "Europe Prepares Consumer Rights Plan."  The new proposal would provide for a 14-day cooling off period, among other changes.  I don't know about European sales laws, but that would be an extraordinary length of time for a cooling off period in this country.

How Do We Know Consumers Don't Read Small Print?

Everybody "knows" consumers don't read fine print.  But the empirical evidence I've found to support this claim is surprisingly sparse.  Here's what I've come across:  From my article, "Towards a New Model of Consumer Protection: The Problem of Inflated Transaction Costs, 47 Wm. & Mary L. Rev. 1635, 1659-60 (2006):

When PC Pitstop, a marketer of anti-spyware services, surveyed 7260 computer users with Gator or GAIN (Gator Advertising Information Network) applications installed on their computers, it found that 74.2% did not recall installing Gator or a GAIN application; 14.9% had not read the license agreement; 8.5% had read the license agreement for no more than five minutes; and fewer than 3% had spent more than five minutes reading the license agreement, a document that PC Pitstop estimated would take the average reader at least twenty minutes to read

Footnote 84 cites  PC Pitstop, Survey Says: Gator Users Didn’t Know, http://www.pcpitstop.com/gator/Survey.asp.

That's better than nothing, but I'm not sure how reliable it is, since it's based on memory, and applies to end user license agreements, rather than fine print in a written contract.

Years ago, I ran across an account of an experiment which I later referred to in a letter published in the New York Times on July 17, 1997 in the following words (but not the formatting, which on my computer looks like blank verse for some reason--the closest I'll ever come to writing poetry): "

    Some years ago a bank mailed its depositors a brochure explaining their
    obligations in electronic transfers. Included in 100 of the brochures
    was a statement that the bank would pay $10 to depositors who sent in
    their name and address on a piece of paper with the word ''regulation.''
    Not one person did.

I can't remember anything about the source of that report except that it appeared in a commercial transactions casebook.  But again, it's not dispositive, because depositors may not have believed the statement or may have felt it wasn't worth it to write in to collect $10 (just as consumers often don't bother to collect rebates). 

Then there's evidence from which one can infer that consumers haven't read fine print when they had the opportunity, like Chris Hoofnagle's and Jennifer King's paper, "What Californians Understand About Privacy Online,"  which indicates that many Californians don't know the contents of privacy policies.  The problem is that that ignorance could be because the survey respondents didn't read the policies, didn't understand them, didn't retain the information, or for some other reason.

Anybody know of any other empirical evidence to show that consumers do or don't read fine print?