Consumer Law & Policy Blog

Paper on Behavioral Economics and Consent to Tracking Internet Use

Frederik J. Zuiderveen Borgesius of the Institute for Information Law (University of Amsterdam) has written Consent to Behavioural Targeting in European Law - What are the Policy Implications of Insights from Behavioural Economics?  Here is the abstract:

Behavioural targeting is the monitoring of people’s online behaviour to target advertisements to specific individuals. European law requires companies to obtain informed consent of the internet user before they use tracking technologies for behavioural targeting. Other jurisdictions also emphasise the importance of choice for internet users. But many people click ‘I agree’ to any statement that is presented to them. This paper discusses insights from behavioural economics to analyse problems with informed consent to behavioural targeting from a regulatory perspective. What are the policy implications of insights from behavioural economics in the context of behavioural targeting? Two approaches to improve regulation are explored. The first focuses on empowering the individual, for example by making informed consent more meaningful. The second approach focuses on protecting the individual. If aiming to empower people is not the right tactic to protect privacy, maybe specific prohibitions should be introduced.

"No Correlation: Continued Decrease in Medical Malpractice Payments Debunks Theory That Litigation Is to Blame for Soaring Medical Costs"

That's the name of this new report Public Citizen. Here's Public Citizen's description of the report:

A decade after reaching their peak, the quantity and cumulative value of medical malpractice payments made on behalf of doctors were at their lowest level on record in 2012, according to a new Public Citizen analyzing data from the federal government’s National Practitioner Data Bank (NPDB). The facts surrounding the prevalence of medical malpractice litigation are important for several reasons, the report contends. Medical malpractice has been singled out by many in Congress as the culprit for rising health care costs. Meanwhile, Republicans in Congress have made it a perennial priority to pass legislation what would restrict patients’ ability to seek redress in court. The facts clearly contradict contentions that malpractice litigation significantly influences health care costs. Since 2003, medical malpractice payments have fallen 28.8 percent, yet national health care costs are up 58.2 percent. Lawmakers intent on serving their constituents should focus on reducing the errors that lead to litigation, not reducing accountability for the errors.

The press release provides further highlights.

U.S. Sues BofA over Sale of Mortgage-backed Securities

The Washington Post reports today: Traders at Bank of America willfully misled investors about the quality of the residential mortgages tucked into the securities the bank sold at the start of the financial crisis, according to separate lawsuits filed Tuesday by the Justice Department and the Securities and Exchange Commission. . . . Justice claims the bank knew that more than 40 percent of the 1,191 mortgages it bundled into securities did not meet underwriting guidelines and sold them anyway. Prosecutors estimate that the total losses sustained by investors will exceed $100 million.

Another Story on Car Repair Cheats

From time to time, news media run a story on car repair outfits that cheat consumers.  Unfortunately, there seems to be an inexhaustible supply of such businesses, perhaps because most consumers lack the ability to determine if they are being ripped off by their mechanics.  You can find another such story here.

 

Paper Comparing Foreclosure Procedures and the Number of Mortgage Originations

Quinn Curtis of Virginia has written State Foreclosure Laws and Mortgage Origination in the Subprime Market, forthcoming in the Journal of Real Estate Finance and Economics. Here's the abstract:

Foreclosure procedures in some states are considerably swifter and less costly for lenders than in others. In light of the foreclosure crisis, an empirical understanding of the effect of foreclosure procedures on the mortgage market is critical. This study finds that lender-favorable foreclosure procedures are associated with more lending activity in the subprime market. The study uses hand-coded state foreclosure law variables to construct a numerical index measuring the favorability of state foreclosure laws to lenders. Mortgage origination data from state-border areas shows that lender-friendly foreclosure is associated with an increase in subprime originations, but has less effect on the prime market.

President Obama insists that prospective homeowners be offered 30-year mortgages

Banks don't like to offer 30-year mortages unless someone else is left holding the bag if the homeowner can't pay. That's just too long a period to depend on repayment and market stability. But a 30-year payback period, all other things equal, helps many non-wealthy consumers buy homes. Banks will make 30-year loans if the government, or government-backed entities like Fannie and Freddie, gurantee the loan when a consumer defaults. The president has called for an end to Fannie and Freddie, but, at the same time, he insists that consumers have a 30-year-loan option. Read about it in this article by Zachary Goldfarb.

Ray Bresica on Public Interest Law Jobs and the Value of the JD

Here. 

"The Payday Playbook: How High Cost Lenders Fight to Stay Legal"

That's the name of this lengthy piece by Paul Kiel of ProPublica. It focuses on an effort in Missouri to cap the rates on payday loans. Here's a short excerpt:

Outrage over payday loans, which trap millions of Americans in debt and are the best-known type of high-cost loans, has led to dozens of state laws aimed at stamping out abuses. But the industry has proved extremely resilient. In at least 39 states, lenders offering payday or other loans still charge annual rates of 100 percent or more. Sometimes, rates exceed 1,000 percent. Last year, activists in Missouri launched a ballot initiative to cap the rate for loans at 36 percent. The story of the ensuing fight illuminates the industry’s tactics, which included lobbying state legislators and contributing lavishly to their campaigns; a vigorous and, opponents charge, underhanded campaign to derail the ballot initiative; and a sophisticated and well-funded outreach effort designed to convince African-Americans to support high-cost lending. Industry representatives say they are compelled to oppose initiatives like the one in Missouri. Such efforts, they say, would deny consumers what may be their best or even only option for a loan. Missouri is fertile soil for high-cost lenders. Together, payday, installment and auto-title lenders have more than 1,400 locations in the state — about one store for every 4,100 Missourians. The average two-week payday loan, which is secured by the borrower’s next paycheck, carries an annual percentage rate of 455 percent in Missouri. That’s more than 100 percentage points higher than the national average, according to a recent survey by the Consumer Financial Protection Bureau. The annual percentage rate, or APR, accounts for both interest and fees. ... The problem was the legislature. During the 2010 election cycle alone, payday lenders contributed $371,000 to lawmakers and political committees, according to a report by the nonpartisan and nonprofit Public Campaign, which focuses on campaign reform. The lenders hired high-profile lobbyists, and [Missouri Democratic Representative Mary] Still became accustomed to their visits. But they hardly needed to worry about the House Financial Institutions Committee, through which a reform bill would need to pass. One of the lawmakers leading the committee, Don Wells, owned a payday loan store, Kwik Kash. He could not be reached for comment.

More on the 6th circuit's decision in Greenberg v. Proctor & Gamble: "incentive" awards

by Brian Wolfman

Last week, I posted on Greenberg v. Proctor & Gamble, where the 6th circuit threw out a class-action settlement on the ground that (1) it provided virtually nothing of value to the class members while the named representatives got significant "incentive" payments ($1,000 times the number of their diaper-using kids), and the class lawyers received a large fee, and (2) the named representatives were inadequate representatives of the class. The class alleged that certain diapers sold by the defendant caused severe diaper rash.

My earlier post centered on why the 6th circuit thought that the settlement provided almost nothing to the class. This post concerns how the 6th circuit dealt with the bonuses that the settlement would have paid to the named plaintiffs and the relationship between those bonuses and the named plaintiffs' duty to adequately represent the class. (These type of bonuses are often referred to as "incentive" awards.)

What roles do class representatives (or “named plaintiffs”) play in class actions?

In some cases, the named plaintiffs are inactive. They serve because they are people affected by the alleged classwide illegality and thus have standing to assert the class members’ claims as well as their own. But they expend little time or effort on the case. In other cases, though, the named plaintiffs are also experts about the problem(s) in the case, providing on-going advice and consultation to the class lawyers. Often, the named plaintiffs also must expend significant time and effort, such as when they are deposed or must attend court hearings.

Even when they play an active role, from the class lawyer’s perspective, named plaintiffs are (and should be) different from other clients in non-class litigation. Though the lawyers must communicate with the named plaintiffs and listen to them carefully, the lawyers’ duties to the named plaintiffs must take a back seat at times, particularly when a class settlement is proposed.

Let’s say there’s a certified class, and the defendant proposes a classwide settlement. If the class lawyer believes that a settlement offer is a good one for everyone in the class, she should accept it, even if, say, some of the named plaintiffs disagree. Or, the other way around, when a named plaintiff wants to accept a classwide settlement offer that the class lawyer believes is bad for the class, the named plaintiff’s wishes don’t control.

The same is true of the court. A court should listen carefully to the named plaintiffs’ views because they may be a good source of information about the settlement, but the court must decide independently, under Rule 23(e), whether the settlement is fair, reasonable, and adequate. In this regard, it is sometimes said that a court, like the named plaintiffs and their lawyers, must act as a fiduciary for the class.

Again, even though their views cannot always control, named plaintiffs should not be ignored. If the named plaintiffs think a proposed settlement is bad, that may signal that the settlement is, in fact, bad. After all, the named plaintiffs are often the only plaintiffs with knowledge of the case, and sometimes they can act as a check on lawyers who have forgotten about their duties to the class (because, for instance, their interest in attorney fees has clouded their judgment).

That brings me to so-called incentive awards. One concern with incentive awards is that the named plaintiffs’ views may be influenced improperly. If, under a proposed settlement, the class members are slated to receive, say, $10 each, while the named plaintiffs are slated to receive the $10 plus an “incentive” award of $3,000, it’s possible that the named plaintiffs won’t be objective when asked whether they think the proposed settlement is a good deal. (The prospect of an extra award is supposed to incentivize people to handle the rigors of litigation not to sell out the class.)

So, with this in mind, here’s the Sixth Circuit’s discussion of incentive awards in Greenberg v. Proctor & Gamble:

The parties and their counsel negotiated a settlement that awards each of the named plaintiffs $1000 per “affected child,” awards class counsel $2.73 million, and providesthe unnamed class members with nothing but nearly worthless injunctive relief. The agreement treats named plaintiffs differently than other class members. * * *

Named plaintiffs release all of their Pampers-related claims against P&G and receive an “award” of $1000 “per affected child.” (Thus, for example, a named plaintiff with two “affected children” would receive $2000.) Unnamed class members do not receive any award, and benefit only from the labeling and website changes and the one-box refund program (to the extent they have not done so already and have their original receipts and UPC codes). * * *

We briefly address Greenberg’s argument that the named plaintiffs are inadequate representatives of the class under Rule 23(a)(4).  … So we consider the alignment of interests and incentives here. They can be summarized as follows: The named plaintiffs (i.e., the class representatives) exercise their Rule 23 rights and receive an award of $1000 per child in return; the unnamed members are barred from exercising those same rights and receive nothing but illusory injunctive relief. Therein lies the conflict. There is no overlap between these deals: they are two separate settlement agreements folded into one. Moreover, there is every reason to think—and again the parties have not attempted to show otherwise—that an award of $1000 per child more than compensates the class representatives for any actual damages they might have incurred as a result of buying Dry Max diapers. And thus, having been promised the award, the class representatives had “no interest in vigorously prosecuting the [interests of] unnamed class members[.]’” [citation omitted]

Class counsel responds that the $1000 per child payments are merely “incentive” awards, and that incentive awards are common in class litigation. But neither point provides much comfort. Our court has never approved the practice of incentive payments to class representatives, though in fairness we have not disapproved the practice either. [citation omitted] Thus, to the extent that incentive awards are common, they are like dandelions on an unmowed lawn—present more by inattention than by design. And we have expressed a “sensibl[e] fear that incentive awards may lead named plaintiffs to expect a bounty for bringing suit or to compromise the interest of the class for personal gain.” Hadix v. Johnson, 322 F.3d 895, 897 (6^th Cir. 2003).

We have no occasion in this case to lay down a categorical rule one way or the other as to whether incentive payments are permissible. But we do have occasion to make some observations relevant to our decision here. The propriety of incentive payments is arguably at its height when the award represents a fraction of a class representative’s likely damages; for in that case the class representative is left to recover the remainder of his damages by means of the same mechanisms that unnamed class members must recover theirs. The members’ incentives are thus aligned. But we should be most dubious of incentive payments when they make the class representatives whole, or (as here) even more than whole; for in that case the class representatives have no reason to care whether the mechanisms available to unnamed class members can provide adequate relief. Accord Radcliffe v. Experian Info. Solutions, 715 F.3d 1157, 1161 (9th Cir. 2013) (holding that the “incentive awards significantly exceeded in amount what absent class members could expect upon settlement approval” and thus “created a patent divergence of interests between the named representatives and the class”).

This case falls into the latter scenario. The $1000-per-child payments provided a disincentive for the class members to care about the adequacy of relief afforded unnamed class members, and instead encouraged the class representatives “to compromise the interest of the class for personal gain.” Hadix, 322 F.3d at 897. The result is the settlement agreement in this case. The named plaintiffs are inadequate representatives under Rule 23(a)(4), and the district court abused its discretion in finding the contrary.

6th Circuit throws out baby diapers class-action settlement

by Brian Wolfman

Today, in Greenberg v. Proctor & Gamble, by a 2-1 vote, the 6th circuit threw out a class-action settlement on the ground that (1) it provided virtually nothing of value to the class members while the named representatives got significant "incentive" payments ($1,000 times the number of their diaper-using kids), and the class lawyers received a large fee, and (2) the named representatives were inadequate representatives of the class. The class alleged that certain diapers sold by the defendant caused severe diaper rash.

The majority opinion discusses a number of issues. I'll deal with some highlights here and try to post again on the case in the near future.

The majority opinion's opening two paragraphs give you an overview:

Class-action settlements are different from other settlements. The parties to an ordinary settlement bargain away only their own rights—which is why ordinary settlements do not require court approval. In contrast, class-action settlements affect not only the interests of the parties and counsel who negotiate them, but also the interests of unnamed class members who by definition are not present during the negotiations. And thus there is always the danger that the parties and counsel will bargain away the interests of unnamed class members in order to maximize their own.

This case illustrates these dangers. The class is made up of consumers who purchased certain kinds of Pampers diapers between August 2008 and October 2011. The parties and their counsel negotiated a settlement that awards each of the named plaintiffs $1000 per “affected child,” awards class counsel $2.73 million, and provides the unnamed class members with nothing but nearly worthless injunctive relief. The district court found that the settlement was fair and certified the settlement class. We disagree on both points, and reverse.

Here's the gist of the dissent's rebuttal:

Although the relief offered to the unnamed class members may not be worth much, their claims appear to be worth even less. Nobody disputes that the class’s claims in this case had little to no merit. In the absence of this settlement, class members would almost certainly have gotten nothing. And even with the settlement, unnamed class members remain free to try their luck, as the settlement preserves their right to sue for personal injury and actual damages caused by Dry Max diapers. Thus, the concern that plaintiffs’ counsel “bargained away” some valuable “interest” is misplaced. A very different settlement would likely be before us if the [Consumer Product Safety] Commission’s investigation had not exculpated Dry Max diapers.

One of the forms of "injunctive relief" that class counsel claimed benefitted the class was a program that would allow a refund on one box of diapers. Here's what the court said about that:

We begin with the one-box refund program. Consumers cannot benefit from the program unless they have retained their original receipt and Pampers-box UPC code, in some instances for diapers purchased as long ago as August 2008. [Objector] Greenberg sensibly asks who does this sort of thing. We have no answer. Neither do the parties—or more precisely they have offered none. The omission is conspicuous, for the refund program here is merely a rerun of the very same program that P&G had already offered to its customers from July 2010 to December 2010. P&G surely has data as to the numbers of consumers who obtained refunds during that time; P&G’s counsel conceded as much at oral argument on appeal. And yet—even after Greenberg called out the parties on this very point in his objections to the district court—P&G chose not to provide that data in arguing that the settlement is fair.