Consumer Law & Policy Blog

Cleveland Plain Dealer's Sheryl Harris on the St. John's Arbitration Study

Here.  An excerpt:

Right now, the CFPB is finishing up the second phase of its study, which will hone in on consumers' understanding of arbitration clauses. At that point, it will decide whether it needs to act.

If the bureau's findings are anything like those of the law school study, it must. Being stripped of our rights shouldn't be a cost of doing business.

Jeremy Telman at ContractsProf Blog on the Debate Over "Whimsy Little Contracts"

Here.

NYT: Robo-signing, incredibly, isn't over

"Remember the robo-signers, those mortgage loan automatons who authenticated thousands of foreclosure documents over the years without verifying the information they were swearing to? Well, they’re back, in a manner of speaking," reports the Times.

Read on.

More fracking in D.C.'s backyard?

We mentioned last week that fracking will be permitted in a national forest in Virginia, near the Potomac's headwaters.

Now the outgoing governor of Maryland, Martin O'Malley, says that he will open up lands in the western portion of that state to fracking, although he touts the stringent regulations he intends to impose.

The Washington Post opines that this may be a saavy preemptive move before a new fracking-friendly administration takes over, but that's not a great comfort as compared with the status quo of preventing the practice entirely. Here's the Post's report.

Approval of a $500 million-plus class-action settlement entered on federal-court docket -- and then the court says "oops" and vacates

Here.

Alan Schwartz Article Argues for Assuming Rational Consumers

Alan Schwartz of Yale has written Regulating for Rationality, Forthcoming in the Stanford Law Review. Here's the abstract:

Traditional consumer protection law responds with various forms of disclosure to market imperfections that are the consequence of consumers being imperfectly informed or unsophisticated.  This regulation assumes that consumers can rationally act on the information that it is disclosure’s goal to produce.  Experimental results in psychology and behavorial economics question this rationality premise.  The numerous reasoning defects consumers exhibit in the experiments would vitiate disclosure solutions if those defects also presented in markets.  To assume that consumers behave as badly in markets as they do in the lab implies new regulatory responses.  This Essay sets out the novel and difficult challenges that such “regulating for rationality” -- intervening to cure or to overcome cognitive error --  poses for regulators. Much of the novelty exists because the contracting choices of rational and irrational consumers often are observationally equivalent: both consumer types prefer the same contracts.  Hence, the regulator seldom can infer from contract terms themselves that reasoning errors produced those terms.  Rather, the regulator needs a theory of cognitive function that would permit him to predict when actual consumers would make the mistakes that laboratory subjects make: that is, to know which fraction of observed contracts are the product of bias rather than rational choice. The difficulties exist because the psychologists lack such a theory.  Hence, cognitive based regulatory interventions often are poorly grounded.  A particular concern is that consumers suffer from numerous biases, and not every consumer suffers from the same ones.  Current theory cannot tell how these biases interact within the person and how markets aggregate differing biased consumer preferences.  The Essay then makes three further claims.  First, regulating for rationality should be more evidence based than regulating for traditional market imperfections: in the absence of a theory the regulator needs to see what actual people do.  Second, when the facts are unobtainable or ambiguous regulators should assume that bias did not affect the consumer’s contracting choice because the assumption is autonomy preserving, administerable and coherent. Third, disclosure regulation can ameliorate some reasoning errors.  Hence, abandoning disclosure strategies in favor of substantive regulation sometimes would be premature.

Remarkable gag order in prosecution alleging corporation wrongdoing with fatal consequences

This week, the former CEO of Massey Energy, Don Blankenship, pleaded not guilty to federal charges that he violated mine safety rules and hindered federal safety enforcement in connection with the April 2010 explosion at Massey’s Upper Big Branch Mine, in which 29 miners died. 

Despite the intense public interest in the case -- which implicates issues of corporate accountability, worker safety, and federal regulation (adding a little extra color, the New Yorker this week opined that "[c]artoon corporate villains don’t come more cartoonish than Don Blankenship, a former coal baron of West Virginia") -- the public's ability to learn about the case has been severely curtailed by a gag and sealing order entered by Judge Irene Burger of the U.S. District Court for the Southern District of West Virginia.

Under the order, remarkable in breadth,

neither the parties, their counsel, other representatives or members of their staff, potential witnesses, including actual and alleged victims, investigators, family members of actual and alleged victims as well as of the Defendant, nor any court personnel shall make any statements of any nature, in any form, or release any documents to the media or any other entity regarding the facts or substance of this case.

So not only are the parties and their counsel restricted but so are victims and their family members –- none of whom is even before the court. Also muzzled are "potential witnesses" -- but how is a person to know, and how certain does a person have to be, that she is a “potential witness,” so as to fall under this order? In the face of such uncertainty, the chilling effect of the order is likely to be broad.

And the order goes on to cut off public access to documents filed in the case by directing that the documents “be restricted to the case participants and court personnel.”

The full order is here.

As reported by the Charleston Gazette, no party requested the order.

It should be noted that this district court is under the jurisdiction of the Fourth Circuit, which earlier this year issued a strong decision in Company Doe v. Public Citizen admonishing trial courts to preserve judicial transparency. The interests that supported transparency there –- where the court emphasized that “the right protects the public’s ability to oversee and monitor the workings of the Judicial Branch,” and that “public access to the courts promotes the institutional integrity of the Judicial Branch” –- are even stronger here, as this case not only involves issues of public safety and the working of the courts (as Company Doe did) but also a criminal defendant’s liberty.

A coalition of West Virginia media groups is preparing to fight the gag order. For the sake of free speech and the transparency of the judicial process, let's hope they succeed.

Did GM's failure promptly to recall defective cars constitute state-law consumer fraud?

The Arizona attorney general sued GM today saying just that. Read about the suit here. An excerpt:

Arizona's attorney general has sued General Motors Co. for failing to recall millions of cars and trucks with safety defects the auto giant did not disclose for years. The lawsuit seeks potentially billions of dollars in fines. Attorney General Tom Horne said Thursday that he sued under the state's consumer fraud statutes and is seeking a $10,000 fine for each of hundreds of thousands of defective vehicles sold in the state. The lawsuit filed in Maricopa County Superior Court in Phoenix also seeks an injunction barring GM from similar actions and an order that it hand over profits it made from selling defective vehicles.

Read another article here.

The Real Problem With Forced Arbitration

I have found the discussions of the arbitration study, ‘Whimsy Little Contracts' with Unexpected Consequences: An Empirical Analysis of Consumer Understanding of Arbitration Agreements,interesting, see, e.g., here, here and here.I wonder, however, whether everyone is missing a major point about forced consumer arbitration. Whether consumers are better off, worse-off or the same, and regardless of whether consumers understand what they were forced to sign or have a right to “opt out,” an industry or profession should not have the ability to divorce itself from our civil justice system. 

One point on which there is no disagreement is that consumer arbitration is unilaterally imposed on the consumer through a contract of adhesion. (Even the Supreme Court has recognized this in Concepcion). This allows an industry such as car dealers, homebuilders, banks or credit card companies, to “opt-out” of our civil justice system simply by including a few sentences in a form contract. See, e.g., W. Scott Simpson, Stephen J. Ware, and Vickie M. Willard, The Source of Alabama’s Abundance of Arbitration Cases: Alabama’s Bizarre Law of Damages for Mental Anguish, 28 AM. J. TRIAL ADVOC. 135 (2004) (These industries [auto and home builders] have effectively divorced themselves from the Alabama civil justice system.) The result for the consumer is no jury, no appeal, and no class action. But more importantly, the consequence for society is no precedent, no certainty of results, and no ability to affect the common law.

We need three branches of government. We rely on the judicial branch to do more than just resolve individual disputes— it creates and modifies the common law, interprets statutory law, and establishes precedent that guides others in dispute resolution. Arbitration, as a form of alternative dispute resolution can be, and often is, valuable.  I have served as an arbitrator, and testified in arbitrations, and I support this system of ADR. But arbitration must be an “alternative,” and it must be voluntary. It cannot serve the role of the third branch of government.

15 state attorneys general call on CFPB to protect consumers from forced arbitration clauses

In a letter today to the head of the Consumer Financial Protection Bureau, 15 state attorneys general asked the agency to adopt rules to protect consumers from mandatory arbitration clauses in consumer contracts.

"The letter, which was organized by Delaware Attorney General Beau Biden, Massachusetts Attorney General Martha Coakley and Kentucky Attorney General Jack Conway, was sent to the CFPB as part of the agency’s research into mandatory arbitration clauses. The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act requires the agency to conduct extensive research before determining whether mandatory arbitration clauses are harmful to consumers before issuing any regulations," explains a press release issued by Delaware.

The attorneys' general's letter is available here.