Consumer Law & Policy Blog

Kirgis on the CFPB Monitor Post on the St. John's Arbitration Study

by Jeff Sovern

My coauthor, Paul Kirgis, has posted an excellent response to Alan S. Kaplinsky and Mark J. Levin's comments on the CFPB Monitor on our arbitration study. His response also has the virtue of being briefer than mine.  While Paul's post is worth reading in full, here is my favorite part:

 Citizens cannot be forced into alternative processes simply because someone has made a determination that they would in fact be better served by the alternatives. It is certainly true that citizens can choose to give up their adjudicative rights, but those choices have legitimacy only if they are knowing and voluntary. Our research suggests that consent to arbitration is seldom knowing and voluntary.

St. John's Arbitration Study Suggests Opt-Outs Are Not the Answer to Arbitration Clauses

by Jeff Sovern

Alan S. Kaplinsky and Mark J. Levin, in their comments at the CFPB Monitor, wrote about the contract we showed the survey respondents: "The hypothetical card agreement used in the St. John’s study did not even contain an opt-out provision, although a substantial number of arbitration clauses in use today contain such a provision."

Absolutely correct.  We considered using an arbitration clause with an opt-out clause.  But the CFPB Study found that only about a quarter of arbitration clauses included such opt-outs.  In addition, including an opt-out would have made the survey questions more complex than we wanted. Nevertheless, our study suggests that opt-outs are not the answer to arbitration clauses that confuse consumers for two reasons. Quoting now from the study:

First, our study strongly suggests that consumers are not aware of the rights they waive in arbitration clauses. It thus seems unlikely that they are aware of the rights included in arbitration clauses, such as the right to opt out.  If consumers do not know of their right to opt out, they are unlikely to assert it.  Second, even consumers who notice that the contract permits an arbitration opt-out are unlikely to avail themselves of that option if they fail to appreciate that the arbitration clause strips them of any rights.  Many of the respondents seemed to believe arbitration supplements court litigation, rather than supplanting it. Accordingly, it is difficult to see why consumers would bother to prepare and send a letter opting out of arbitration.  But all of this is speculation on our part.  Credit card companies offering opt-outs undoubtedly know how many consumers have opted out. We hope that they will make that information available.

I'm not sure what point Alan and Mark were making by noting that our sample contract did not include an opt-out provision.  But if their point was that consumers protect themselves from arbitration clauses by opting-out, I hope they will prevail upon their clients to let the world know just how many consumers actually do so. If their clients refuse to do so, it seems fair to infer that that is because opt-out rates are so low that opt-outs are not a plausible mechanism for consumer protection, as has turned out to be true in other circumstances.  

ABA Issues Formal Ethics Opinion on Prosecutors Who Rent Out their Letterhead to Debt Collectors

by Deepak Gupta

Since its inception, this blog has covered the pernicious practice of prosecutors who rent out their name and authority to private for-profit debt collectors. As readers may recall, these debt collectors use official-looking letterhead to threaten consumers who have accidentally bounced checks for household purchases  -- consumers are told they'll face criminal prosection and even jail unless they pay exorbitant collection fees.  Our law firm recently filed a class-action lawsuit aimed at one such debt collector, known as Bounceback, Inc., under the Fair Debt Collection Practices Act and Washington state law.

Yesterday, the American Bar Association stepped into the fray. It's about time.

The association's Standing Committee on Ethics and Professional Responsibility issued ABA Formal Ethics Opinion 469, which concludes in no uncertain terms that the so-called "check diversion" programs violate basic standards of professional conduct.

In particular, the opinion shines a spotlight on the misuse of the lawyer's name and authority in facilitating these arrangements. The demand letters are effective at scaring consumers because they are sent on prosecutor letterhead and contain threats of criminal prosecution -- threats that no other debt collector could make.

But those threats are false. "Typically," the ABA's opinion explains, "no lawyer in the prosecutor's office reviews the case file to determine whether a crime has been committed and prosecution is warranted or reviews the letter to ensure it complies with the Rules of Professional Conduct prior to the mailing."

The opinion also rightly emphasizes that the demand letters at issue are especially deceptive "because they misuse the criminal justice system by deploying the apparent authority of a prosecutor to intimidate an individual." And, in addition to making misrepresentations, the letters involve prosecutors in aiding and abetting the unauthorized practice of law by private, for-profit collection collectors.

The prosecutor-debt collector arrangements are also "abusive" because they convey "the impression that the machinery of the criminal justice system has been mobilized" against the consumer, who is led to believe that he or she may face jail time unless the collector gets paid.

Why didn't the bank that issued my credit card tell the credit reporting companies that my credit-card debt was discharged in bankruptcy?

Please read this Deal Book article by Jessica Silver-Greenberg. Here's a bit of it:

In the netherworld of consumer debt, there are zombies: bills that cannot be killed even by declaring personal bankruptcy. Tens of thousands of Americans who went through bankruptcy are still haunted by debts long after — sometimes as long as a decade after — federal judges have extinguished the bills in court. The problem, state and federal officials suspect, is that some of the nation’s biggest banks ignore bankruptcy court discharges, which render the debts void. Paying no heed to the courts, the banks keep the debts alive on credit reports, essentially forcing borrowers to make payments on bills that they do not legally owe.

HT to Ted Mermin.

A Reply to the CFPB Monitor Comments on the St. John's Arbitration Study

by Jeff Sovern

I am pleased to report that Ballard Spahr’s Alan Kaplinsky and Mark Levin have commented on our arbitration study  at their very informative and useful blog, CFPB Monitor  (We’re still in the stage of soliciting comments and hoping to receive useful feedback which we can use to improve the draft, so if others have comments, please let me know). In this post, I want to respond to four of the Monitor’s claims.

1. The Monitor states:

[G]iven the great care that most drafters make to ensure that the arbitration clause is understandable and clearly and conspicuously disclosed, the arbitration clause is likely one of the most comprehensible parts of a modern-day financial contract.

Well, no.  The Consumer Financial Protection Bureau Study  found that the mean Flesch-Kincaid grade level for credit card arbitration clauses was 14.2 and the median grade level was 14.7. It also reported that the mean Flesch-Kincaid grade level for the non-arbitration term portions of credit card contracts with arbitration clauses was 10.8 with a median of 11. In other words, you need about three and a half more years of education to understand arbitration clauses than to understand the non-arbitration clause part of the same contracts. 

But let’s assume that the Monitor claim is true.   (I want to be clear that I have no trouble believing the statement that most drafters take great care to ensure arbitration clauses are understandable.  Probably the poor reading scores are the result of the difficulty of writing understandable arbitration clauses.)  The arbitration clause we used was conspicuous.  It was referred to in bold on the contract’s second page, and appeared in bold on the sixth and seventh pages, meaning that it was referred to on three of the seven contract pages in bold, with some parts in italics and ALLCAPS.  The contract’s second page even directed consumers to read the arbitration clause carefully.  In addition, it was slightly more readable than the average arbitration clause, and was shorter, meaning that it would have taken less time to read it.  With all that, respondents still couldn’t understand it.  So we are still left with the question: should contracts that consumers can’t understand strip them of constitutional and other key rights?  I address that issue below.

Obama pushes for net neutrality, unlikely ally in Justice Scalia, predictable foe in Sen. Cruz, resistance from FCC

Wading into the the net neutrality debate this week, President Obama came out strongly for it, urging the FCC to reject its proposed "fast lane" approach to regulating the internet (which we've previously discussed here) and to ensure equal access.

Yesterday, the National Law Journal looked back and found support for the President's position in a 2005 Justice Scalia dissent.

Back in the present, Engaget covers FCC chair Tom Wheeler's resistance to Obama's overtures on the issue: "I am an independent agency," the chair declared. The same story notes that Sen. Ted Cruz calls net neutrality "Obamacare for the internet." (Really? Net neutrality is going to increase health insurance coverage? Amazing!)

Apps tracking kids

Check out PrivacyGrade.org, which analyzed over 1 million applications and ranked them based on how the extent of an application's collection of information about the user matched up with the user's expectations.

A key finding from the site, reports CNN Money, is that some of the worst apps in terms of privacy are apps aimed at kids. Some examples cited by CNN:

My Talking Tom is a game where you raise a virtual cat. The gimmick: You speak to him, and he repeats everything you say. But the app takes your voice recordings, and shares that data with advertisers. And if you connect your phone to a computer, it can delete or modify files on that computer -- for a reason CMU researchers can't yet figure out.

Fruit Ninja is a game of sword-wielding, vegetarian carnage. But the app insists on knowing your precise location, carrier and phone number -- sharing that with advertisers.

Also on the naughty list: The Holy Bible. It surreptitiously grabs your contact list, phone call history, phone number, carrier and tracks your location. Bible for Kids isn't much better: It got a C, because it follows children's movements.

Some versions of the popular Angry Birds game also track your location and find your social media accounts, the CNN story notes.

Read the whole story here.

FCC Order on Faxed Ads

The Federal Communications Commission has in recent years received several petitions concerning the Telephone Consumer Protection Act. Responding to some of them, the FCC last week issued an order confirming that all faxed advertisements must include an opt-out notice. The FCC's notice explains:

The FCC’s rules require that a “facsimile advertisement that is sent to a recipient that has provided prior express invitation or permission to the sender must include an opt-out notice that complies with the requirements” established by the FCC. The rules specify that the opt-out notice contained in fax ads must:

(1) be clear and conspicuous and on the first page of the ad;

(2) state that the recipient may make a request to the sender not to send any future ads and that failure to comply, within 30 days, with such a request is unlawful; and,

(3) contain a domestic contact telephone number and fax number for the recipient to transmit an opt-out request. Fax ads sent pursuant to an established business relationship must also contain this opt-out information.

Even if the fax sender places an opt-out notice on its fax ad, it will not comply with the law unless the opt-out notice satisfies each requirement contained in the rule.

Also today, the Commission recognized that a number of parties who have sent fax ads with the recipient’s prior express permission may have reasonably been uncertain about whether the requirement for an opt-out notice applied to such “solicited” faxes, or erroneously believed that this requirement did not apply to such faxes. As such, the Commission granted retroactive waivers of this requirement to these fax senders to provide them with temporary relief from any past obligation to provide opt-out notices to fax recipients as required by FCC rules. At the same time, the Commission denied several requests for declaratory ruling that sought a ruling that the Commission lacked the statutory authority to require opt-out information on fax ads sent with a consumer’s prior express permission or, alternatively, that section 227(b) of the Communications Act of 1934, as amended (the Act), was not the statutory basis of that requirement. The Commission also confirmed that such faxes must include a fully compliant opt-out notice.

The FCC's full order is available here.

Short essay on tolling (or not) in securities class actions

Law professor Linda Mullenix has written this short essay on the Supreme Court's aborted effort to decide whether the American Pipe tolling rule applies to certain securities class actions. Here is the abstract:

This article analyzes and comments on the Supreme Court appeal in Public Employees’ Retirement System v. IndyMac MBS, Inc., No. 13-640, which was scheduled to be argued to the Court on October 6, 2014. In this case, the Court was to consider whether the filing of a putative class action under Section 13 of the Securities Act of 1933, which contains a three year limitation on bringing actions under that statute, was tolled by the American Pipe rule which suspends time limitations on pursuing the claims of putative class members. In American Pipe & Construction Co. v. Utah (1974), the Supreme Court held that the commencement of a class action suspends the statute of limitations as to all class members. In IndyMac, the Court was to address whether the American Pipe tolling decision applies to suspend the three-year time limit in the Securities Act with regard to the claims of putative class members. The Court received full briefing on the issues involved in tolling in securities and non-securities class litigation. However, in the week before oral argument, the parties settled the litigation. Consequently, the Court requested additional briefing from the parties concerning whether the Court should hear oral argument. The Court subsequently withdrew the case from the Court’s opening-week oral argument docket. Nonetheless, the tolling issue under the Securities Act of 1933 remains an open issue as a consequence of the Court’s decision not to proceed with oral arguments in the case. The briefs on appeal provide a useful primer on the tolling issue and the arguments relating to the applicability - or non-applicability - of the longstanding American Pipe tolling rule for ordinary class actions.

The third edition of the National Association of Consumer Advocates' class-action guidelines

As reported earlier on this blog by Steve Gardner, the National Association of Consumer Advocates (NACA) has published the third edition of its Standards and Guidelines for Litigating and Settling Class Actions. Take a look at Steve's excellent post, which explains why the guidelines are worth reading.

I want to let our readers know that the guidelines have now been published in the Federal Rules Decisions at 299 F.R.D. 160 (2014). One reason to view the guidelines in F.R.D. on Westlaw is that all the class-action case law cited in the guidelines can be viewed immediately by clicking on the hyperlinks.