Consumer Law & Policy Blog

CPSC Product Safety Recalls for February 2009

Read about February 2009's Consumer Product Safety Commission product safety recalls.

Making Money on Bounced Checks

CNN is reporting here on a program under which county prosecutors turn over bounced check matters to American Corrective Counseling Services (ACCS), which then requires the consumers who wrote the checks to pay to attend ACCS classes.  The articles describes how a bad $14 check ultimately cost a consumer $285, including the $160 class fee.  My co-blogger Deepak Gupta is quoted in the story, and Public Citizen has filed cases charging that the practice violates the Fair Debt Collection Practices Act.  (Hat tip to Kristie Kline).

Update: ProPublica, which co-produced the CNN story, has a more detailed report on their website.  The Consumerist discusses the story here.

Bt Cotton, Multinationals and Indian Farmer Suicides

By Alan White

Farmers in India have lately been succumbing to suicide at an alarming rate, due to a combination of overindebtedness and crop failures.  A compelling paper presented at this week’s International Association of Consumer Law Conference laid part of the blame on regulatory failures that permitted Monsanto Corporation to sell genetically modified cotton seed (Bt Cotton) representing it as disease resistant and high-yielding, when in fact it turned out to be neither.  The paper, presented by Avni Chari, student at NALSAR University Law School (our conference host) is entitled Multinational Corporation’s Ascendancy over the Seed Industry, and was presented with a related paper by student Namrata Sharma entitled Agriculturalist Debtors: A Vulnerable Consumer Group.

Cotton farmers in Andra Pradesh and Tamil Nadu have defaulted on bank debt, and then become further indebted to illegal moneylenders.  According to Ms. Chari’s paper, their precarious situation was aggravated as a result of the aggressive marketing and subsequent disappointing results of Bt Cotton seed.  Like many genetically modified varieties, Bt Cotton is sterile, so that farmers cannot set aside seed from the current crop for the next planting season, but must purchase the expensive seed each and every season.  Thus Indian farmers are being converted from producers of seed to consumers.  The Indian regulator was apparently persuaded to permit large-scale marketing and distribution of Bt Cotton seed at a time when many other countries were still awaiting further testing.  The farmers were left with debts incurred to purchase the seed and to invest in additional irrigation required to grow Bt Cotton, and crop failures leaving them unable to repay the debts.

The Indian government has come up with several responses to the wider problems, including issuance by the Royal Bank of India of credit cards to all farmers, criminal prosecutions of moneylenders, and exploring bank branching at post offices to make credit available in rural areas. 

My astute friend Christine Riefa points out that strictly speaking cotton farmers are not consumers, as defined by most consumer protection statutes aimed at deceptive marketing practices.  Be that as it may, this paper highlights a need for multinational regulation and redress to respond to Multinational misconduct.

Phony Consumer Protection?

by Jeff Sovern 

In a 1973 article, William Whitford raised the possibility that some consumer protection legislation is enacted not to protect consumers, but to create the illusion of that protection.  Legislators thus appear to satisfy the demands of consumers, while in reality serving business interests.  See William Whitford, The Functions of Disclosure Regulation in Consumer Transactions, 1973 Wisconsin Law Review 400.  Some aspects of the New York rent-to-own statute, N.Y. Personal Property Law § 500 et. seq. seem to fit that description. 

First, some background: Rent-to-own transactions are transactions in which consumers pay rent on an item until they have purchased it.  The transactions typically provide that the consumer may return the item without incurring further obligations after the first week.  An FTC study some years back found that RTO customers tend to be poorly-educated and have low-incomes.  Remco Enterprises, Inc. v. Houston, 677 P.2d 567 (Kan. App. 1984) (which appears in our casebook), may present a standard RTO transaction: the customer was described as “a 20-year-old single mother of three who had completed only the ninth grade in school and was dependent upon aid to dependent children welfare payments of $320 per month.”  One of the RTO transactions she had entered into was for a TV set; if she made 104 weekly payments of $17 each, she would own the TV.  That works out to a total of payments of $1,768, for a TV said to have a retail value of $850.  If that $918 markup was treated as a finance charge, she would be paying an APR of 85%. 

RTO transactions are not subject to either the Truth-in-Lending Act or the Consumer Leasing Act; indeed, they are largely unregulated by the federal government, except to the extent that RTO businesses engage in unfair or deceptive practices.  So their regulation has fallen to the states.  It seems to me that state regulation could have several goals.  One would be to help RTO customers understand that the rates they are paying are very high.  For example, state RTO statutes could require RTO businesses to quote customers an APR.  The New York statute does not, however, so require.  See Colon v. Rent-A-Center, Inc., 276 A.D.2d 58, 716 N.Y.S.2d 7 (1st Dept. 2000). 

Some would argue that RTO legislation should limit RTO charges—sort of a usury statute.  Many economists argue that price limits are undesirable as a general matter.  But the New York statute appears to have rejected that position, at least at first glance.  That is, it does seem to impose a price limit.  Section 503 limits the total RTO charge to twice the cash price of the merchandise.  So, in the Remco case, where the cash price of the TV was $850, the total price would be limited to $1,700, saving the customer $68. 

The statute even defines “cash price” in § 500.2 as “the price at which a merchant, in the ordinary course of business, would offer to sell the merchandise to the consumer for cash . . . .”  So it looks like the RTO business can’t just raise its cash price to permit higher RTO charges.  But not so fast.  “Merchant” is defined in § 500.5 as “a person who, in the ordinary course of business, regularly leases, offers to lease, or acts as an agent for the leasing of merchandise under a rental-purchase agreement.”  In other words, an RTO business.  So it doesn’t matter what a normal appliance retailer charges; the limit is twice what an RTO business would charge in cash.  And since RTO businesses have an incentive to inflate their cash prices to collect more in RTO charges, the result is that the limit is an illusion.  If my impression is correct that RTO businesses normally do the vast bulk of their business in RTO transactions rather than cash sales, it means that the possibility of a cash sale wouldn’t restrain RTO businesses from having high cash prices—because they seldom make cash sales.  That’s not their business.  So the New York statute creates the illusion of a limit, but not much of a reality.  You could argue that such limits are bad policy, but setting an illusory limit seems to be even worse policy. 

I also love § 502, which requires rental purchase agreements to state that the consumer has the option of reviewing the completed form for up to 24 hours—upon written request.  First of all, how many times have you heard of a consumer making a written request of any kind at an appliance store?  But maybe that doesn’t matter since the right to make the request is on the form itself.  Except that § 502’s notice is not required to be conspicuous, while other disclosures—see § 501.7—are.  So this notice is likely to be obscured by the provisions that, under the statute itself, are required to be conspicuous. Maybe other provisions of the RTO statute are helpful to consumers.  But the sections I’ve just described are either designed to create the illusion but not the reality of consumer protection, or else were poorly done.  You be the judge.

Important First Circuit Arbitration Ruling

Check out Awuah v. Coverall North America, Inc., 554 F.3d 7 (1st Cir. 2009). In this case, franchisees were subject to an arbitration clause in their franchise agreements that, among other things, barred class actions and eliminated punitive damages. The agreements also said that the question of the validity of the aribtration clause was a question for the arbitrator, not the court. The franchisees brought a class action in court. The First Circuit acknowledged that the rule in that circuit was that if the agreement says the question of the validity of the arbitration clause is one for the the arbitrator, then (ordinarily) the issue is sent to the arbitrator. But -- and this is a big but -- the First Circuit sent the issue to the court, not the aribitrator -- on the question whether the costs of aribitration would be so high that they would render an arbitral remedy illusory. The First Circuit pointed to evidence concerning the high cost of arbitration compared to the relatively small claims of each franchisee. Note the similarity of the analysis in the First Circuit's decision to the analysis of the Second Circuit in In re American Express Merchants Litigation, which we blogged about last month. There, the Second Circuit struck down a class action ban as unconscionable because pursuing the case on an individual basis would have been far more costly than the value of any individual's claim. Different issue, but similar analysis.

NCLC and CFA Issue 2009 Report on Tax Refund Anticipation Loans

On Friday, the National Consumer Law Center and the Consumer Federation of America issued their 2009 Report on tax refund anticipation loans (RALs). RALs are very short-term, high-interest loans provided to people in anticipation of their tax refunds. The basic message is this: If you can avoid taking out one of these loans, do so. If not, shop around because not all the deals are the same. Read the comprehensive joint NCLC-CFA Report, or if you want a synposis check out the detailed press release.

Senator Durbin Introduces Federal Usury Bill

This post over at US PIRG's Consumer Blog explains that Sen. Dick Durbin of Illinois has introduced a federal usury statute that would cap consumer loan interest rates at 36%. The post links to a supporting letter from about 100 consumer groups and a statement from Sen. Durbin. The bill has not yet be uploaded to Thomas, but it can be found at this page of the Federal Register.