Consumer Law & Policy Blog

How should the FDA regulate misleading food labels?

Do you think that some food marketers (mis)label junky foods to try to make them seem healthy? Jennifer Pomeranz does, and she's written A Comprehensive Strategy to Overhaul FDA Authority for Misleading Food Labels to explain how, in her view, the Food and Drug Administration can make food labels less misleading, consistent with the First Amendment. Here is the abstract:

The modern food environment is considered a primary driver of obesity and other nutrition-related chronic diseases. A significant contribution to this environment is the proliferation of claims on food packaging that provides a misleading picture of a product’s healthfulness. The Food and Drug Administration (FDA) is the agency responsible for food labels but it lacks the regulatory authority and adequate resources to address the majority of questionable labeling practices. The FDA's current system of enforcement is thus essentially based on voluntary compliance. Consumer- and manufacturer-initiated litigation has not successfully filled the regulatory gap. This manuscript reviews the current state of food labeling claims and the FDA's inadequate authority over misbranded food products. It analyzes competing views on regulatory compliance strategies and argues that a regulatory overhaul consistent with the best science and the First Amendment is necessary. It argues for a regulatory overhaul and increased resources to the agency through user fees. With increased resources and authority, the FDA can meet current public health challenges and adequately ensure that labels are clear and consumers are properly informed and protected.

 

Protecting your financial identity via a security freeze

We've  posted here and here about how consumers can try to avoid harm from the Target (and similar) data breaches. Perhaps the best medicine is putting a security freeze on your credit report. Here, Michelle Singletary describes that process in some detail.

Mother Jones: The Obama Administration Wants to End Racial Discrimination by Car Dealers. Why Are 35 Dems Getting in the Way?

Here.  An excerpt:

In late March, the Consumer Financial Protection Bureau—the consumer watchdog agency dreamt up by Sen. Elizabeth Warren (D-Mass.)—issued new, voluntary guidelines aimed at ensuring car dealerships are not illegally ripping off minorities. Since then, 13 Senate Democrats, including Sens. Heidi Heitkamp (D-N.D.) and Mary Landrieu (D-La.); and 22 House Dems, including Reps. Debbie Wasserman-Schultz (D-Florida) and Terri Sewell (D-Ala.), have joined 19 House and Senate Republicans in signing letters to the agency objecting to the anti-discrimination measure. Consumer advocates and congressional aides say the lawmakers' backlash against the anti-discrimination rules is unjustified, and that Dems have backtracked on civil rights in this instance because of the colossal power of the car dealership lobby, which has spent millions lobbying Congress in the months since the CFPB issued these new guidelines.

How should agencies do cost-benefit review of financial regulation, and how should courts scrutinize that review?

Those are the subjects of Cost-Benefit Analysis of Financial Regulation: Case Studies and Implications, by law professor John Coates. Here is the abstract:

Some members of Congress, the D.C. Circuit, and legal academia are promoting a particular, abstract form of cost-benefit analysis for financial regulation: judicially enforced quantification. How would CBA work in practice, if applied to specific, important, representative rules, and what is the alternative? Detailed case studies of six rules – (1) disclosure rules under Sarbanes-Oxley Section 404, (2) the SEC’s mutual fund governance reforms, (3) Basel III’s heightened capital requirements for banks, (4) the Volcker Rule, (5) the SEC’s cross-border swap proposals and (6) the FSA’s mortgage reforms – finds that precise, reliable, quantified CBA remains unfeasible. Quantified CBA of such rules can be no more than “guesstimated,” as it entails (a) causal inferences that are unreliable under standard regulatory conditions; (b) using problematic data, and/or (c) the same contestable, assumption-sensitive macroeconomic and/or political modeling used to make monetary policy, which even CBA advocates would exempt from CBA law. Expert judgment remains an inevitable part even of what advocates label “gold-standard” quantified CBA, because finance is central to the economy, is social and political, and is non-stationary. Judicial review of quantified CBA can be expected to do more to camouflage discretionary choices than to discipline agencies or promote democracy.

Many poor people taking advantage of ACA medicaid expansion

Perhaps sign-ups on the Affordable Care Act's exchanges are lagging, but, as explained in this article by Sabrina Tavernise, in states that have accepted the Act's medicaid expansion, the Act is providing health insurance to many people who previously lacked it. "In West Virginia," for example, "where the Democratic governor agreed to expand Medicaid eligibility, the number of uninsured people in the state has been reduced by about a third."

Did the CFPB Discover a Natural Experiment on the Impact of Arbitration Clauses on the Willingness of Consumers to Bring Claims?

by Jeff Sovern

I'm finally getting around to reading the CFPB's December 12 report, Arbitration Study: Preliminary Results, about which Brian blogged here. Though the Bureau does not make much of it, perhaps because the natural experiment has some flaws (as natural experiments often do), the CFPB Study sheds some light on the impact of arbitration clauses on the willingness of consumers to file claims.  At page 70, the Study states "consumers filed more than four times as many federal court credit card disputes as AAA credit card arbitrations" from 2010 to 2012.  Combine that with two other items noted in the Study. At page 12, the Study reports that "just over 50% of credit card loans outstanding are subject to" arbitration clauses.  The other item is how frequently AAA is identified in credit card contracts as the arbitration provider.  At page 34, the Study explains:

Nearly half (48.5%) of credit card arbitration clauses in the sample listed AAA as the sole option.  Three listed JAMS and three listed NAF as sole options. * * *Counting clauses in which AAA is at least an option yields * * *  83.3% for credit card arbitration clauses . . . .

What does all this mean? To some extent, it allows us to compare the incidence of consumers bringing claims under contracts containing arbitration clauses and under contracts not containing such clauses. If arbitration clauses had no impact on the willingness of consumers to file claims, we would expect to see slightly more consumers filing arbitration claims than consumers filing claims in court, to reflect the fact that slightly more credit card loans are subject to arbitration clauses than aren't.   But we don't: in fact, we see four times as many claims filed in federal court as in AAA arbitrations.  That seems like a huge difference and suggests that arbitration clauses substantially reduce the willingness of consumers to file credit card cases.

But now we get to the flaws. First, we don't know that the people with credit card loans subject to arbitration clauses are similar to those whose credit cards are not subject to arbitration clauses.  For example, if different types of consumers were drawn to different credit card issuers, that could conceivably account for the differences.  Second, not all the arbitration clauses designated the AAA as the provider. While nearly half the credit card contracts with arbitration clauses list AAA as the sole arbitration provider, that still leaves about a third who could choose a different provider and nearly a fifth who, if they opt for arbitration, must go with a different provider.  But that doesn't fully explain the differences  Even if we assume that everyone who has a choice about going to AAA selects an alternative provider, we end up with about half the consumers subject to arbitration clauses filing claims with the AAA (assuming also that the number of consumers filing claims is evenly distributed among those with arbitration clauses)--which explains only half the difference the Bureau found between AAA filings and federal court filings.   And how likely is it that consumers with a choice would consistently reject the AAA?  Finally--and this suggests that the CFPB comparison understates the scope of the effect--the CFPB compared only federal court filings with arbitration filings, and obviously cases are also filed in state courts. Indeed, many arbitration clauses do not bar consumers from filing claims in state small claims courts. 

So it's not a perfect comparison by any means, but it sure suggests that arbitration clauses result in fewer filings than contracts lacking such clauses.  That's not a surprise (after all, many in the industry, which benefits from fewer filings, support arbitration clauses, and consumer advocates oppose them), but still it's interesting to have some support for something that many have long suspected.

Snake oil, the placebo effect, and status quo bias: Should evidence of "satisfied customers" defeat a consumer fraud class action?

by Deepak Gupta

Should a defendant in a consumer fraud class action be able to defeat certification through evidence that its customers say they are "satisfied," even when the the allegation is that the product is snake oil?  Or would that transform the placebo effect into a defense to fraud? That's the question the Ninth Circuit will be asked to answer in Cabral v. Supple, an appeal in which I just filed the opening brief for the plaintiffs.

About 50 million Americans, many of them elderly, suffer from arthritis and joint disease. Joint pain can be very painful, and it has no known cure. Enter dietary supplement manufacturers, who claim that their largely unregulated products can succeed where standard medicine fails. Supple is one such company. Supple tells consumers—through websites, television infomercials, and telemarketing—that spending $114.90 per shipment of the company’s special fruit juice will “completely reverse[] and halt[] the disease process” for joint disease, including arthritis. 

Supple is facing a consumer class in California alleging that its claims are false and that the supplement has no real efficacy. A district court certified the class and Supple appealed to the Ninth Circuit, which agreed to hear its interlocutory appeal. The company's main argument is that the district court was wrong to ignore evidence that Supple's customers are "satisfied." That evidence takes two forms: customer testimonials and evidence that customers made repeat purchases by failing to cancel automatic subscriptions.

Our brief points out that this evidence, even if admissible, wouldn’t prove that Supple’s customers experienced anything beyond the placebo effect. In fact, testimonials may actually demonstrate that a fraud is succeeding -- that consumers are fooled by false advertising. And consumers' failure to cancel their automatically renewing subscriptions is just evidence of what behaviorial economists call "status quo bias" (or what we might call laziness or inertia). As Richard Thaler and Cass Sunstein point out in their book, Nudge, "[i]f renewal is automatic, many people will subscribe, for a long time, to magazines they don’t read.” They go on: 

Those who are in charge of circulation know that when renewal is automatic, and when people have to make a phone call to cancel, the likelihood of renewal is much higher than it is when people have to indicate that they actually want to continue to receive the [product.] 

That's why default choices are so powerful. Evidence of non-cancellation tells us nothing about whether a product works, especially when that product is what economists call a "credence good" -- a product (like a dietary supplement or pill) whose qualities are difficult or impossible for consumers to properly evaluate on their own. In any event, a product’s efficacy is a question for the merits, not class certification. On the merits, the veracity of the company's claims will be determined on the basis of common proof -- scientific evidence of its efficacy, or lack thereof. Because the veracity of the company's advertising is an objective question, answered from the perspective of a reasonable consumer rather than subjective testimonials, class treatment is particularly appropriate. It will be interesting to see what the Ninth Circuit says. 

Paper Explores How the Amount of Privacy Affects Industry Profits, Consumer Welfare, and Total Welfare

Oz Shy of the Federal Reserve Bank of Boston and Rune Stenbacka of the Swedish School of Economics and Business Administration have written Customer Privacy and Competition.  Here is the abstract:

We analyze how different degrees of privacy protection affect industry profits, consumer welfare and total  welfare. Firms earn higher profits under weak privacy protection compared with strong or no privacy protection. Therefore, the relationship between the degree of privacy protection and equilibrium profits is not monotonic. Consumers monotonically benefit from an increase in the degree of privacy protection. Finally, total welfare  monotonically increases with the degree of privacy protection.

Paper on Formal and Informal Sanctions in Consumer Protection

Scott Baker of Washington University in Saint Louis and Albert H. Choi of Virginia have written Crowding In: How Formal Sanctions Can Facilitate Informal Sanctions. Here's the abstract:

This paper examines the interaction between legal and reputational sanctions in the design of an optimal deterrence regime, particularly in a setting where two parties have a long term relationship.  The paper makes three claims.  First, both legal and reputational sanctions are costly: legal sanctions require spending resources on litigation while reputational sanctions can lead to inefficient failures to trade.  An optimal deterrence regime must make a trade-off between these two types of costs.  Second, in achieving optimal deterrence, the two sanctions function as both substitutes and complements.  As substitutes, relying more on one type of sanction requires less of the other in reaching any desired level of deterrence.  As complements, legal sanctions, through generation of relevant information, can facilitate reputational sanctions.  Especially when fault-based standards (such as “best efforts,” “commercially reasonable efforts,” or “good faith”) are used, if the court’s decision produces information that correlates with the underlying behavior, that information can be used to better tailor reputational sanctions.  Third, the paper argues that the most effective deterrence regime will often combine formal and informal sanctions.  By keeping the formal sanctions low, the optimal regime keeps the litigation costs in check.  Reputational sanctions, then, can make up for any shortfall in deterrence.  Allowing some litigation also enables the parties to take advantage of the informational benefits of litigation.  After establishing these points theoretically, the paper pivots to examine various empirical findings consistent with the theory.

Major Banks Stop Offering Payday Loan-Equivalents: Deposit Advance Loans

The Wall Street Journal has the story here.